Construction contract law - Essay Example

Construction contract law The case of Clarke & sons v ACT (2002) has to be analyzed critically before drawing conclusions. This needs thorough discussion on creation of contracts, expression of terms, implied terms, quantum meruit, dispute resolution, payment provisions and final adjudication relating to this case. Analysis of actual case Clark initiated a successful coach operating business from a depot in south east London. However, later it was operating about 20 coaches from that depot. But by the end of the decade the fleet had doubled and it was becoming difficult to manage properly the maintenance, servicing and cleaning of these coaches from the depot due to its maller size. In September 1990 Clarke came to know that the nearby site of a disused cold store was available for purchase. Planning permission would be needed for the refurbishment work. Moreover, considerable structural demolition and reconstruction work would be required. Even then, Clarke agreed to buy the site, subject to planning permission, for approximately £840,000. Clarke entered into discussions with representatives of ACT, with the intention that ACT would embark upon the necessary work to obtain planning permission, undertake design and carry out the redevelopment. By this stage, the job had become quite extensive. It involved the demolition of the cold store and other buildings, and the construction of a workshop, a double inspection pit and a covered parking area. The overall job would require a great deal of demolition and drilling out of concrete and excavations, the construction of structural steel framing, cladding, extensive roofing and paving, the installation of equipment purchased by Clarke and the partial demolition, rebuilding and refurbishment of the office accommodation. Works progressed on a piecemeal basis with ACT submitting interim applications for payment during the course of the works. The works went on for a period of nearly two years, by which point ACT had been paid approximately £1.3 million. At this point the parties have drifted apart. Later, ACT submitted to Clarke a "reconciliation statement" for its work. This showed that the value of the work calculated by ACT was of the order of £1.5 million. This led to a dispute and ACT commenced proceedings for the recovery of a claimed balance of approximately £200,000. Analysis of court’s response The court initially interpreted on certain preliminary questions on existence of a contract, and if so, what were its terms as to payment, the scope of the work and the contract period? Clarke argued that there was an agreement between the parties that ACT would construct the job, including the supply and installation of the necessary workshop equipment, for a cost, which was to be not more than £815,000. Since the works had not been completed, Clarke was looking for a rebate upon the sum. ACT on the other hand argued that the contract was one for time and materials, with various mark-ups to be applied based on earlier dealings between the parties. Judge Thornton noted that drawings and specifications of the work had not been agreed, nor was there agreement as to the extent to which equipment being ordered and paid for directly by Clarke would be included within the scope of the work or its price. In other words, written contract was not there. In short, he held that no contract had come into being between Clarke and ACT and that, in consequence, ACT became entitled to be paid on a quantum meruit basis. The quantum meruit was to be a reasonable price, calculated on a day work basis for the time and materials employed by ACT subject to a mark-up of 15% to be applied to the last two outstanding invoices submitted by ACT. Interestingly, Judge Thornton concluded that all earlier invoices for which mark-ups of up to 25% had been applied were not open for review, since Clarke had not previously challenged these. At the end of that analysis judge Thornton gave judgment for ACT for some £186,000. That sum became the subject of an appeal. Lord Justice Ward, sitting in the Court of Appeal, disagreed with Judge Thornton that there had been no contract, instead holding that the proper conclusion was to find that there was "a contractual quantum meruit". He explained this to the effect that, provided there is an instruction to do work, and an acceptance of that instruction, then there is a contract and the law will imply into it an obligation to pay a reasonable sum for that work. This made absolutely no difference however to Clarke, because the contractual quantum meruit contained no term limiting payment to £815,000 or any other figure. Lord Justice Ward did, however, reverse Judge Thornton's decision concerning the earlier payment applications. These, he held, were merely interim applications for payment and the mark-ups which had been applied by ACT in respect of all earlier applications for payment were very much open to review. This exercise was referred back to the Technology and Construction Court if the parties should not agree the correct figure. contract/no contract debate The validity of contract if it happened between Clarke & sons V Act construction has to be analysed. There were doubts expressed by the court that whether the contract has been formed or not? The courts will normally seek to find a contract arising out of parties' dealings and in the absence of express terms, imply into that contract an obligation to pay a reasonable sum. Despite the sterling efforts of many in the construction industry, the procurement and contractual arrangements even for large construction projects are often extremely haphazard. A typical example is described in the Court of Appeal decision in the case of ACT Construction v E Clarke & Sons. In Clarke & Sons v ACT Construction (2002) the judge at first instance held that there was no contract between the parties. It was observed that the parties’ relationship was not a contractual one, with the consequence that the value of the work carried out by ACT could be recovered and paid for, but on the basis of a quantum meruit, a reasonable sum, a restitutionary basis in fact. However the Court of Appeal disagreed and held that the proper conclusion was that there was "a contractual quantum meruit". It was observed that in focusing on the essential ingredients for "a building contract of some complexity" the judge may have lost sight of the fact that even if there was no entire contract, and especially if there is no "formal" contract, there may still be an agreement to carry out work, the entire scope of which was not yet agreed, even if a price has not been agreed. It was held that provided there was an instruction to do work and an acceptance of that instruction, then there was a contract and the law would imply into it an obligation to pay a reasonable sum for that work. It was held that was the situation in the instant case. It was observed that reversing the judge on this point did not significantly advance either case. Creation of contracts In general, for legal implementation of any agreement made between two or more parties, formation of contract is very much necessary. This will solve several problems arising out of the agreement. The courts can interpret the things in clear and right perspective and the parties would get genuine benefit according to the state of their merits and demerits. However, when contract is not formed and the parties agreed orally or verbally, an if one of the two parties feel dissatisfied with the terms of the agreement and action plan implemented, then they have to solve it through either bilateral negotiations or through an adjudication process by court of law. In case of Clarke & sons v Act (2002), there has not been any formation of contract, which made the settlement process complex. Rather, there was no bilateral compromise and each of them denied other’s views relating to the contract on construction of house. Hence they had to seek the justice in adjudication process through court of law. Battle of the forms Contract negotiations for major outsourcing transactions can be extremely complex. For smaller transactions, there remains the "battle of the forms." When businesses trade with other businesses who can afford their own lawyers, they find that other business have contract forms of their own.  Since forms for business sellers and business buyers alike are written by lawyers, they will be one-sided, in favor of the business that hires the lawyer to draft the form.  This exchange of legal contract forms is referred to in legal circles as the “battle of the forms.” When dispute arises, a judge has to make sense of the fact that there are two form contracts vying for control, not just one.   Since there can be only one contract, the law has had to find a way to resolve this “battle of the forms.” The battle of the forms and its legal treatment is attributed to two factors. The first factor is the failure of the participants to read thoroughly the terms of the other party's form. The second factor is attributed to section 2-207 of the Uniform Commercial Code (UCC). Here in the case of Clarke & sons v Act (2002), there has not been any reference made to the battle of forms directly. However, the courts have definitely taken in to consideration, what ever the receipts or forms that helped in the interpretation of battle of forms. Express terms, Implied terms and payment provisions In Clarke & Sons v ACT Construction [2002], ACT was involved to carry out an extensive redevelopment of a former cold store in Kangley Bridge Road, Sydenham, SE26, so as to convert it into a 24-hour coach depot for Clarke. ACT’s commenced proceedings for the recovery of the sum of £208,608.28 being the difference between the cost of the work calculated by ACT to be £1,485,312.88 and £1,276,704.60 paid by Clarke. Clarke counterclaimed damages both for the failure to complete the work within a reasonable time and for defective work. ACT asserted that an express or implied term of that contract was that the price to be paid for the work was to be calculated on “a time and materials” basis, i.e. at the cost of labour, plant and materials, subcontractors, professional fees, etc., with the markups ranging from 25% to 10% on those elements of the cost. The Court of Appeal agreed with the judge at first instance that the previous work carried out by ACT for Clarke did not exhibit a course of dealing which led to the implication of a time and materials basis for payment. Each of the jobs was carried out under very different bases of working and pricing. The issue then was the assessment of the reasonable remuneration. The judge at first instance decided that it was cost plus 15%. The judge found that it was “slightly higher” than the bracket of 5%-12% advanced by Clarke’s expert but that bracket was based on defined building contracts whereas day works were being charged for with higher uplifts in 1992/1994. He also considered the higher percentages charged out and paid for pursuant to the earlier invoices. The Court of Appeal held that there was no reason why the prices actually paid should not be factors to take into account in the instant case. Averaged out the uplift was about 20%. The next issue was whether the uplift was to be applied only to the last two applications for payment, as the judge held, or to all applications submitted for work done in and after April 1992. The judge at first instance concluded that it was not appropriate to re-open the “settled and not previously challenged” invoices. He held that payments were being made overall by reference to the invoices and that each payment was in the nature of a compromise or agreed settlement on analysis of the work carried out in the preceding period to which it related. The Court of Appeal held that the earlier applications for payment represented about the best estimate of the value of the work being done at that time, that ACT reserved the right and exercised the right to review the whole operation of the account at the conclusion of the work. It was held that the judge was wrong to limit Clarke’s case in that way. All costs from April 1992 were subject to a 15% uplift on the finding of the judge that that was the reasonable markup. It was 15% whether ACT charged 25% or 20% or 10%. The Court of Appeal therefore allowed the appeal in this respect and remitted that matter back to the court below for the calculations to be made in default of agreement. Analysis of the difference between i)a quantum meruit payment in contract and ii)a claim for quantum meruit in restitution? Literally, quantum meruit means: "as much as is deserved," which does not immediately connect with anything in our modern forms of contract (Columbia Law Review, 1934). These seem much more concerned with maximizing risk and minimizing reward for the other party. In construction, the main circumstances that might give rise to claims for payment on a "quantum meruit" basis are: Where the parties to a contract fail to agree a price; Where no contract comes into existence but the facts indicate that the parties had agreed the services should be performed and that payment for those services would be made; or Where no contract comes into existence and the facts do not support the existence of any implied contract; or When a contract is brought to a premature end by a repudiatory breach. These conditions support the quantum meruit application to the present case. In the first instance, a term granting payment in consideration for services rendered will be implied. In the second instance, a contract will be implied on the basis of the facts. The present case falls under this category. In both cases, the obligation will be to pay a reasonable price. That price will generally be based on the cost properly and reasonably incurred by the contractor, together with a reasonable allowance for profit. The third and fourth situations are instances of quasi-contract or implied-in-law contract. For these, payment is based upon the principle of restitution. One has to observe the difference in emphasis between the first pair and the second. In the first, compensation is measured in terms of what the contractor deserves. In the second, the obligation is to reimburse the contractor for the value of the advantage received by the client as a result of the work done. However, the quantum meruit will not be applicable when written contract is made (Olanda, 1919 and Gilbert and Partners -v- Knight, 1968). Had the parties in Clarke incorporated the Housing Construction and Regeneration Act 1996 into their contract would their quarrel have been solved easier and cheaper? The Housing construction and regeneration act 1996 stated clearly about some basic provisions of contract and hence this would have solved the present case in an easier manner. However, both the parties couldn’t take care to enter in to a written contract and hence the effect of housing construction and regeneration act is not at all there. Section 104 under Part II of Housing construction and reconstruction act (1996) mentioned that “construction contract” means an agreement with a person for any of the following (a) the carrying out of construction operations (Housing Grants, Construction and Regeneration Act 1996a); (b) arranging for the carrying out of construction operations by others, whether under sub-contract to him or otherwise; (c) providing his own labour, or the labour of others, for the carrying out of construction operations. (2) References in this Part to a construction contract include an agreement— (a) to do architectural, design, or surveying work, or (b) to provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape, in relation to construction operations. These provisions clearly reflect that the present case comes under Housing construction and regenerationa act (1996). Similarly, the section 105 states the meaning of “construction operations” as operations of any of the following descriptions (a) construction, alteration, repair, maintenance, extension, demolition or dismantling of buildings, or structures forming, or to form, part of the land (whether permanent or not); (b) construction, alteration, repair, maintenance, extension, demolition or dismantling of any works forming, or to form, part of the land. This is also highly applicable to the present case. However the section 107 was not fully satified by the present case as there was no written contract. Section 107 under Part II of Housing construction and reconstruction act (1996) mentioned that contract provisions are applicable only to agreements in writing (1) The provisions of this Part apply only where the construction contract is in writing, and any other agreement between the parties as to any matter is effective for the purposes of this Part only if in writing (Housing Grants, Construction and Regeneration Act 1996b). The expressions“agreement”, “agree” and “agreed” shall be construed accordingly. (2) There is an agreement in writing— (a) if the agreement is made in writing (whether or not it is signed by the parties), (b) if the agreement is made by exchange of communications in writing, or (c) if the agreement is evidenced in writing. (3) Where parties agree otherwise than in writing by reference to terms which are in writing, they make an agreement in writing. (4) An agreement is evidenced in writing if an agreement made otherwise than in writing is recorded by one of the parties, or by a third party, with the authority of the parties to the agreement. (5) An exchange of written submissions in adjudication proceedings, or in arbitral or legal proceedings in which the existence of an agreement otherwise than in writing is alleged by one party against another party and not denied by the other party in his response constitutes as between those parties an agreement in writing to the effect alleged. As mentioned earlier, the present case lacks evidence for written contract. However, it has substantial evidence for formation of a verbal agreement. Section 108 under Part II of Housing construction and reconstruction act (1996) stated about “right to refer disputes to adjudication’ in the following contexts. (1) A party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with this section (Housing Grants, Construction and Regeneration Act 1996c). For this purpose “dispute” includes any difference. (2) The contract shall (a) enable a party to give notice at any time of his intention to refer a dispute to adjudication; Hence Clarke & sons have a solid right to challenge ACT construction Ltd. For adjudication. Conclusion The case between Clarke & sons v Act construction Ltd. throws light on some limitations of construction law especially when no written contract is made. However, it supports the application of quantum meruit in restitude so that the interests of genuine customers are protected. It also gave wide scope for discussing the prospects of seeking adjudication and payment provisions. Had the Housing construction and regeneration act (1996) been incorporated in te contract, this case would have been conveniently solved. References Clarke & Sons v ACT Construction [2002] EWCA Civ 972 Columbia Law Review. 1934. Contracts. "Quantum Meruit". Measure of Recovery after Part Performance of Building Contract and Progress Payments. 34 (2): 365-367. Gilbert and Partners -v- Knight. 1968. (CA) 2 ALL ER 248. Housing Grants, Construction and Regeneration Act 1996 (c. 53). 1996a. Part II Construction contracts. Introductory provisions. 104 Construction contracts. http://www.opsi.gov.uk/ACTS/acts1996/pt2-pb1-l1g104. Housing Grants, Construction and Regeneration Act 1996 (c. 53). 1996b. Part II Construction contracts. Introductory provisions. 107 Provisions applicable only to agreements in writing. ttp://www.opsi.gov.uk/ACTS/acts1996/pt2-pb1-l1g104. Olanda. 1919. 2 KB 728. Housing Grants, Construction and Regeneration Act 1996 (c. 53). 1996c. Part II Construction contracts. Introductory provisions. 108 Right to refer disputes to adjudication. http://www.opsi.gov.uk/ACTS/acts1996/pt2-pb1-l1g104. Read More