Pitfalls of Design & Build Contracts

SOURCE:
Rodney Martin
BSc, LLB(Hons), MSc, MRICs, MCIArb
Executive Director James R Knowles (Malaysia) Sdn Bhd
July 2000

Design and build or turnkey contracting has become a popular method of procuring building works in Malaysia. Contractors should familiarise themselves with the various problems which can arise when taking on the more onerous obligations usually associated with design and build contracting. It therefore follows that design and build contracts should not be undertaken by contractors unless they are fully prepared for the obligations which will be imposed upon them with this method of procurement.

Under design and build arrangements the employer or owner, for whom the works are to be carried out, deals directly with the contractor who provides a complete service of both design and construction of the works. There are different types of arrangements under the design and build ‘banner’ each of which have separate and accepted terminology to describe them within the industry and it is important to be clear and accurate with the use of such terminology. Where the project to be procured is confined to building or civil engineering works this is usually known as, ‘design and build’ or ‘package deal’ procurement. However, where the contractor is required to provide not only the building or road etc., but also any machinery or equipment and associated works then the project is usually known as ‘turnkey’ procurement. The inference being that the employer or owner merely has to unlock the door to his new building, or facility and he will immediately be able to put it to it’s intended use.

One good reason for the employer/owner to choose design and build or turnkey contracting is that by approaching a contractor who is a specialist, that contractor will have the necessary skill and knowledge to design and execute the works where their nature requires such specialist input. Another reason for choosing this method of procurement is that there may be savings in cost and/or time by adopting this method of procurement as opposed to a more traditional route.

However although there may be clear advantages for the employer, the contractor’s obligations tend to be extended somewhat under a design and build or turnkey contract.

In the traditional method of procuring building work designers are engaged by the employer to carry out the design and a contractor is engaged to carry out the construction of the work. There is therefore a clear divide between responsibility for design and responsibility for workmanship and materials. The design is clearly the responsibility of the designers and the construction work is clearly the responsibility of the contractor.

In a design and build or turnkey project the position is different since the contractor not only takes on the task of constructor but also of designer. This has the effect of radically changing the contractor’s obligations in respect of design.

It is important to examine the nature of this shift of responsibility for design. If one considers the architect or engineer’s obligations to the employer under a traditional procurement arrangement one will find that the architect or engineer owes the employer a duty to use the reasonable skill and care of a designer. This raises the question of what is considered to be ‘reasonable’ in the context of a professional architect or engineer. The English courts have defined the professional man’s obligations to his client as the ordinary skill of an ordinary competent man exercising that particular art. Therefore the designer must act in accordance with the usual practice of his profession. This means that in carrying out his duties the architect or engineer must use the reasonable skill that can expected of an architect or engineer. By contrast, a design and build contractor will usually be required to take on the express obligation of providing a building which is fit for it’s intended purpose. This is an absolute obligation and is a greater obligation than the use of reasonable skill and care in the design.

In view of the responsibility taken on by contractors who design and build the works for a particular project caution must be exercised from the outset.

Upon receiving design and build tender documentation the contractor should examine the content carefully. In view of the fact that the contractor is to be responsible for design in this situation only minimum design input ought to have been provided by the employer in compiling the tender documents. There is much skill required in drafting the project brief (often referred to as “Employer’s Requirements”).

Too often the employer carries out much design work prior to tender which often restricts the options available to the contractor to develop the design post award. Excessive design work carried out by the employer at pre-contract stage can also cause difficulties in determining design responsibility once the contract has been awarded. The project brief should define the site and the works which may require drawings to be included. All relevant criteria which are to govern the works including quality and performance requirements should be provided. Skill is required by the draftsman who prepares the project brief on behalf of the employer when specifying quality. The terminology used should not be too detailed in case it reduces the contractor’s design responsibility, which is not after all the intention.

Neither should the terminology be so vague to cause difficulty in enforcing the requirements during the execution of the works. Most importantly the terminology should not require reliance on subjective language which will cause problems both at tender stage when the contractor is pricing and also later when the contract is being administered. An example of subjective language in this context would be to use the phrase “best quality” to define a standard of quality. Disputes would no doubt arise because of the different interpretations given to such a phrase by the employer and the contractor.

Ideally the project brief should set down just enough information so as to convey the employer’s requirements with respect to the scope of work intended to be included within the contract. The contractor will take note of these requirements and during the tender period will develop a scheme in principle which will meet the employer’s needs. The extent to which the tenderer is required to develop the design within his proposals to form the basis of his tender submission should be defined in the instructions to tenderers. Although the employer may want to receive a fairly detailed design proposal from each tenderer and indeed may request for such details to be included in the contractor’s proposals, in reality a contractor will be reluctant to carry out an expensive design exercise as part of his tender if he only has one chance in four or five of being successful. If the contractor’s tender is accepted he will then develop the design and it is the intention that the employer will interfere with this process as little as possible.

However, more often than not the employer will want to retain an involvement in the design process and also order variations to the scope of work. This may lead to disputes and differences as to the valuation of the additional works ordered and time entitlement to carry out such variations. The intention of design and build is to leave the contractor alone to carry out design and construct the facility without hindrance. Continual interference during the design development stage by the employer will severely compromise the design and build philosophy and jeopardise the employer’s ability to receive the benefits that this type of procurement should render.

Since the contractor usually takes on an absolute obligation to provide a building, installation, or facility as the case may be, which is fit for it’s intended purpose, care must be taken to appoint designers with appropriate skills to execute the design required. Larger contracting organisations may have in-house design teams to provide this service. The adequacy and competence of such resources will therefore no doubt be reviewed and assessed periodically by the organisations’ management in the same way as would be the case for any other department. However, it is common practice for contractors undertaking design and build work to appoint independent designers to carry out design work for them. When doing so it is important that the contractor engages consultants who understand the subtle differences of working for a contractor as opposed to an employer/owner.

Traditionally a design will evolve from a designer’s drawing board and then a price will be put to that design. Under design and build practice the opposite is usually true whereby the design has to fit the price (assuming the price was reasonably calculated as part of the contractor’s tender in the first place). This requires perhaps an even greater commercial awareness on the part of the designer than might be exercised under traditional procurement arrangements. Another potential problem area to overcome is the fact that the designer’s ‘master’ is the contractor and not the employer which is the reverse of the traditional position. This becomes a potential problem in situations where the consultants have been novated from the employment of the employer to the employment of the contractor. A novation is a tripartite agreement by which an existing contract between A and B (for example designer and employer) is discharged and a fresh contract is made between A and C (for example designer and contractor) usually on the same terms as the first contract. Novation differs from assignment in that the consent of all parties is necessary although this may be inferred by conduct and need not be expressed. Novation of designers on the face of it seems a perfectly sensible proposition where a design concept has been initiated under the responsibility of the employer to describe his requirements and then later completed by the same designers once novated to the contractor. However, in practice consultants may find difficulty in turning their original design concept into a fully designed scheme while at the same time being constrained by the contractor’s commercial considerations defined by the tender price for the project.

A design and build project is usually awarded on a lump sum basis and is not subject to remeasurement. It is uncommon for detailed bills of quantites to be used due to the absence at tender stage of detailed drawings from which to measure such quantities. It is therefore essential from the contractor’s point of view to ensure that the contract sum is broken down into sufficient detail to permit the reasonably accurate valuation of the works for the purposes of interim payments.

The contractor should carefully scrutinise the payment provisions of the proposed conditions of contract at tender stage to identify in what manner and in what proportion he will be entitled to be paid during the execution of the works.

Occasionally contractors are faced with onerous terms which permit payment on an interim basis only upon overall completion of a part or section of the works. Under such circumstances a contractor might find himself being denied payment of considerable sums but for minor outstanding items which are of insignificant value. Contractors should therefore ensure that an adequate mechanism is in place under design and build contracts to permit interim payment as the work proceeds.
It is also important, in the absence of bills of quantities, to agree schedules of rates as far as possible for the evaluation of variations. These rates should also include for design work which would usually be recoverable in relation to any additional design resulting from such variations.

In summary, it is therefore important for the contractor to ensure, notwithstanding time and cost considerations, that his design and build tender proposal represents a fully considered scheme which meets the requirements of the employer with a price to match. It is quite usual for contract documents to be drafted in such a way as to place an obligation on the contractor to meet the employer’s requirements irrespective of any attempted qualifications set out in the contractor’s tender proposals. The employer’s requirements will have to be met for a lump sum without adjustment save for variations. The risks upon the contractor are therefore high and it is for this reason that any tender which is submitted on a design and build basis should have made provision as far as possible for the problems which may occur under this type of procurement.

Estoppel

Estoppel is an equitable doctrine. Usually as a defense, a party is prevented (or estopped) from successfully asserting what would or might otherwise be his legal rights.(e.g. of expression such as “you can’t now just turn round and say that”). For building contract purposes, it is appropriate to consider :

1. Estoppel by representation
2. Estoppel by convention, and
3. Promissory estoppel.

Estoppel by representation

If a party makes a representation with the intention and effect of inducing another party to alter his position to his detriment in reliance on the representation, the party making the representation may be estopped from relying on facts which are at variance with the representation. The representation must be factual or an existing state of mind or belief and not a future promise. It must be unambiguous and unequivocal.


Estoppel by convention

Where parties have acted upon a common assumption of fact or law on the basis of which they have regulated their subsequent dealings, they will be estopped from subsequent denying that the assumption is true if it would be unjust or unconscionable to permit them to resile from it.


Promissory estoppel

Where a party has made an unequivocal promise or representation to another party that he will not enforce his strict legal rights and the promise or representation is intended to be relied on and is in fact relied on, the first party may be estopped from successfully asserting his strict legal rights if it would be unconscionable or unjust to allow him to do so.

Breach of Contract & Damage Claims

Damages are awarded to put the plaintiff as nearly as possible “ in the same position as he would have been in if he had not sustained the wrong for which he is now getting compensation or reparation”. (Lord Blackburn in Livingstone vs Rawyards Coal company (1880) 5 App. Cas. 25 at 39 (H.L.).


Damages for breach of contract

“The governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do, as if his rights have been observed.” (Asquith L.J. in Victoria Laundry Ltd. Vs Newman Ltd. (1949) 2 K.B. 528 at 539 (C.A.)

“The general principle for the assessment of damages is compensatory…” (Lord Wilberforce in Johnson vs Agnew (1980) A.C. 367 at 400 (H.L.);

But if this purpose were relentlessly pursued it would lead to the party in default having to pay “for all loss de facto resulting from a particular breach however improbable, however unpredictable”. ( ibid.) The courts therefore set a limit to the loss for which damages are recoverable, and loss beyond such limit is said to be too remote. The famous rule as stated in the case of Hadley vs baxendale is :

“ Where two parties have made a contract which one of them has broken the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either (1) arising naturally,i.e. according to the usual course of things from such breach of contract itself, or (2) such as reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it.” (Alderson B. at p. 354.)


Mitigation of loss


The award of damages as compensation is qualified by a principle, “ which impose on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps”. (Lord Haldane in British westinghouse vs Underground Railway Co. (1912) A.C. 673 at 689 (H.L.).

But “this does not impose on the plaintiff an obligation to take any step which is reasonable and prudent man would not ordinarily take in the course of his business”. (British Westinghouse vs Underground Railway Co. (1912) A.C. 673 at 689 H.L.).

Any gain resulting from the plaintiff’s reasonable steps in mitigation must be balanced against the loss caused by the breach. Any loss resulting from such reasonable steps is recoverable.The onus of proof is on the defendant to prove any failure to mitigate.


Causation and Concurrent Causes

“Causation is a mental concept, generally based on inference or induction from uniformity of sequence as between two events that there is a casual connection between them,” (Lord Wright in Monarch Steamship Co. vs Karlshamns Oljefabriker (1949) A.C. 196 at 228 H.L.)

For a plaintiff to succeed in a claim for damages, he has to establish on the balance of probabilities an effective causal connection between the defendant’s breach of contract or negligence and the plaintiff loss. An intervening act by a third party, or by the plaintiff may break the chain of causation. But an act by the plaintiff will not normally break the chain of causation if it was reasonable. (Emeh vs Kensington & Chelsea Health Authority (1985) Q.B. 1012 (C.A.)

Variations ordered by the employer after the contractor is already in culpable delay will not normally deprive the employer of his right to damages,subject, it is thought, to an appropriate adjustment for any additional time resulting from the variations. ( McAlpine Hemberoak vs McDermott International (1992) 58 B.L.R. 1 at 35 (C.A.)


CONTRACTOR’S BREACH OF CONTRACT


Cost of Completion

Where the contractor fails to complete, the measure of damages in the first instance is the difference between the contract price and the amount it would actually cost the employer to complete the contract work substantially as it was originally intended, and in a reasonable manner, and at the earliest reasonable opportunity. (Mertens vs Home Freehold Co. (1921) 2 K.B. 526 (C.A.); Radford vs De froberville (1977) 1 W.L.R.1262


Offer to Complete

Where a contractor who has repudiated his contract offers to complete under a new contract it is a question of fact in each case whether an employer who does not accept such offer is acting reasonably in mitigation of his loss. (Strutt vs Whitnell (1975) 1 W.L.R.870 C.A.) .

If it is unreasonable to refuse such an offer, damages are calculated as if the offer had been accepted. (Sotiros vs Sameiet Solholt (1983) 1 Lloyd’s Rep. 605 C.A.)

Each case will depend on its facts, but it is thought that conduct which amounts to repudiation by a contractor is likely to render reasonable an employer’s refusal to reengage him.

Defective Work

Where there has been substantial completion the measure of damages is the amount which the work is worth less by reason of the defects and omissions, and is normally calculated by the cost of making them good,i.e. the cost of reinstatement. (Denning L.J. in Hoenig vs Isaacs (1952) 2 All E.R. 176 at 181 C.A.); East ham Borough Council vs Bernard Sunley & Sons Ltd. (1966) A.C. 406 .)

“If there is no alternative course which will provide what he requires, or none which will cost less, he is entitled to the cost of repair or reinstatement even if it is very expensive.” ( Staughton L.J. in Ruxley Electronics Ltd. Vs Forsyth (1994) 1 W.L.R. 650 at 661 C.A.)

Sometimes, perhaps more often in tort than for breach of contract, the proper measure of damages is not the cost of reinstatement but the difference in value between the work as it is and as it ought to have been. (Dodd Properties vs Canterbury City Council (1980)1 W.L.R.433 at 465 C.A.).

This will be so if the plaintiff has no prospect or intention of rebuilding, or where it would otherwise to unreasonable as between the plaintiff and the defendant to award the cost of reinstatement. ( C.R. Taylor vs Hepworths (1977) 1 W.L.R. 659 at 667).

A claim for diminution in value will not normally exceed the relevant costs of reinstatement. If all the necessary remedial works have been successfully carried out, residual diminution in value is not additionally recoverable.(Murphy vs Brentwood D.C.(1991) 1 A.C. 398 at 430 and 436 C.A.)

Betterment

Where works of repair or reinstatement result in the plaintiff having a better building than would have had for the wrong for which damages are claimed, a deduction from the damages awarded will usually not be made for betterment if the plaintiff has no reasonable choice, unless perhaps this would be absurd.(Bacon vs Cooper (Metals) Ltd. (1982) 1 All E.R. 397 at 400).

If a plaintiff chooses to rebuild to a higher standard than is strictly necessary, he can recover the cost of the works less a credit for betterment, unless the new works are so different as to break the chain of causation. If the damages are executed as part of a larger programme of work, it may be appropriate to award damages based on the cheapest estimate of the cost of the remedial works by themselves. (Jones vs Stroud D.C. (1986) 1 W.L.R. 1141 at 1150 (C.A.)


Destruction of Premises

Where a breach results in the destruction of the premises or part of them and the innocent party has no option but to rebuild, the measure of damages is the cost of replacement. (Harbutt’s “Plasticine” Ltd. Vs Wayne Tank and Pump Co. Ltd. (1970) 1 Q.B. 447 (C.A.)

Delay

Damages for a contractor’s failure in breach of contract to complete on time are often the subject of a provision for liquidated damages. If to the contractor’s knowledge the contract works consist of an expansion of a factory or other profit-earning structure, he is liable for loss of business resulting from his breach. ( Victoria Laundry Ltd. Vs Newman Ltd. 91949) 2 K.B. 528 (C.A.).

Loss of profit should be expressly pleaded and is inconsistent with a claim for capital expenditure incurred to make that profit. (Perestrello Ltd. Vs United Paint Co.Ltd. (1969) 1 W.L.R. 570 (C.A.).

The period of time to be taken in calculating general damages for delay by a contractor will be the additional time, which his breach of contract is calculated or assessed to have caused.


Going Slow

Interim slowness not resulting in a failure to complete on time may not be a breach of contract at all (G.L.C. vs Cleveland Bridge and Engineering (1984) 34 B.L.R. 50 C.A.)


EMPLOYER’S BREACH OF CONTRACT


No work carried out

If there is a repudiation of the contract by the employer before any work is carried out the damages recoverable are, it seems, prima facie the amount of profit which the parties knew, or must be taken to have assumed, the contractor would have made if he had been permitted to complete in the ordinary way. (Ranger vs G.W. Railway (1854) %H.L.C. 72 H.L.)


Election to claim waste expenditure

The contractor may, it seems, elect to claim wasted expenditure instead of loss of profit, and can include pre-contract expenditure made in preparation for performance provided it was such as would have been reasonably in the contemplation of the employer at the time of entering into the contract. (Anglia Television Ltd. Vs Reed (1972) 1 Q.B. 60 (C.A.)

Work completed

Where the employer breach does not prevent completion the damages recoverable, if any, will vary according to the circumstances. Where the contract does not provide for an extension of time on account of the delay, delay cause by the employer may give rise to a claim for damages. Delay may for example turn a summer contract into a winter contract thus causing increase of working, or it may keep plant , machineries or men idle; there may be disruption which reduces productivity or cause other losses. All these head of loss require consideration .


Claim for delay or disruption

Contractor ‘s claim for delay and disruption are commonly brought under these heads :

1. increased preliminaries
2. overheads
3. loss of profit
4. loss of productivity or uneconomic working
5. increase cost from inflation
6. interest for non-payment of money
   

It is not the function of the courts where there is a breach of contract knowingly…to put the plaintiff in a better financial position than if the contract had been properly performed. (Ackner L.J. in C. & P Haulage vs middleton (1983) 1 W.L.R. 1461 at 1467 (C.A.)

Physical Damages & Economic Loss

Whereas , the existence of a duty of care not to cause economic loss requires special analysis, it may be that the criteria applicable to cases of physical damage and to cases of economic loss are the same,viz., that the damage should be reasonably foreseeable, that the relationship between the parties should be sufficiently proximate and that it should be fair, just and reasonable to impose a duty of care.( Marc Rich vs Bishop Rock Marine (1994) 1 W.L.R. 1071 (C.A.).

Liability for Physical Damages

In the absence of a contractual duty or a special relationship of proximity, a builder owes no duty of care in tort in respect of the quality of his work. (D. & F. Estates vs Church Commissioners (1989) A.C. 177 (H.L.); Murphy vs Brentwood District Council (1991) 1 A.C. 398 at 480 (H.L.). The principle does not extend to bring home liability towards an occupier who knows the full extend of the defect yet continues to occupy the building. A landlord who is responsible for the design and construction of a house let by him is under a duty to take reasonable care that the house is free from defects likely to cause injury to any person whom he ought reasonably to have in contemplation as likely to be affected by the defects. (Rimmer vs Liverpool City Council (1985) Q.B. 1 (C.A.).

“ Knowledge of the existence of a danger does not always enable a person to avoid the danger. In simple case it does. In other cases, especially where building are concerned, it would be absurdly unrealistic to suggest that a person can always take steps to avoid a danger once he knows of its existence, and that if he does not do so he is the author of his own misfortune…Knowledge, or opportunity for inspection, does not by itself always negative a duty of care or break the chain of causation. Whether it does depends on all the circumstances. It will only do so when it is reasonable to expect the plaintiff to remove or avoid the danger and unreasonable foe him to run the risk of being injured by the danger. (Sir Donald Nicolls V.-C. in Target vs Torfaen Borough Council (1992) 3 All E.R. 27 at 37 (C.A.).

Personal Injury

A contractor will be liable if a plaintiff suffers personal injury because of the contractor’s negligence. Where contractors carrying out reconstruction works obstructed the normal approach to a house so that it was impassable, they were held liable when a visitor was injured while using a dangerous alternative route suggested by the contractors’ workmen.(A.C. Billings Ltd. Vs Riden (1958) A.C. 240 (H.L.); George Hawkins vs Chrysler (U.K.) (1986) 38 B.L.R. 36 (C.A.).

Physical Damage to Property

“In most claims in respect pf physical damage to property the question of the existence of a duty of care does not give rise to any problem because it is self-evident that such a duty exist and the contrary view is unarguable. (Lord Brandon in Mobil Oil Hong Kong United Dockyards (1991) 1 Lloyd’s Rep. 309 at 328 (P.C.).

Negligent instructions

An architect or engineer who issues instructions which he knows or ought to know are likely to cause injury to person or property may be liable in negligence if injury results.(Clay vs A.J. Crump & Sons (1964) 1 Q.B. 533 (C.A.)

Economic Loss

Economic loss is monetary loss and pure economic loss is monetary loss unrelated to physical injury to person or “other” property.

‘ the affliction of physical injury to person or property of another universally requires to be justified. The causing of economic loss does not. If it is to be categorized as wrongful it is necessary to find some factor beyond the mere occurrence of the loss and the fact that its occurrence could be foreseen. (Lord Oliver in Murphy vs Brentwood District Council (1991) 1 A.C. 398 at 487 (H.L.).

Pure economic loss may be recoverable against a party who owes the loser a relevant contractual duty. “ But it is not recoverable in tort in the absence of a special relationship of proximity imposing on the tortfeasor a duty of care to safeguard the plaintiff from economic loss.”(Lord Bridge in Murphy vsBrentwood District Council (1991) 1 A.C. 398 at 475 (H.L.)

The loss sustained by a building owner from an ordinary building defect is the cost of rectifying the defect.

Consequential Economic Loss

Economic loss which is consequential upon actionable physical damage to person or property is sometimes recoverable. Consequential economic loss is habitually awarded in personal injury case ,e.g. for future loss of earnings. It has also been awarded in commercial cases , but there is no clear principle to determine when such losses are recoverable and when it is not.

Liability for negligence of sub-contractors

A main contractor is not generally liable, other than in contract, for the negligence of his sub-contractors. But, “ if in the course of supervision the main contractor in fact comes to know that the sub-contractor’s work is being done in a defective and foreseeably dangerous way and if he condones that negligence on the part of the sub-contractor, he will no doubt make himself potentially liable for the consequences as a joint tortfeasor.(Lambert vs Lewis (1982) A.C. 225 at 278 (H.L.).

Professional negligence

Breach of a professional person’s obligations to his client is habitually referred to as professional negligence. It has now been held that persons who perform services of a professional or quasi-professional nature possessing a special expertise may assume responsibility giving rise to a tortious liability irrespective of whether there is a contractual relationship between the parties, so that the plaintiff may choose between concurrent remedies in contract or tort. (Henderson vs Merrett Syndicates Ltd. (1994) 3 W.L.R. 761 (H.L.).

This understanding of the law has been applied by Official Referees to architects and engineers. (Wessex Regional Health Authority vs H.L.M. Design (1994) 10 Const.L.J. 165 at 186).

Everyone who enters into a contract assumes responsibilities and the essence of the law under discussion is that concurrent duties in tort are also co-existence with those in contract.

Repudiation of Contract

Repudiation generally

The word “Repudiation” is most conveniently term to describe circumstances where “ one party so acts or so express himself as to show that he does not mean to accept the obligation of a contract any further.

Every breach of contract entitles the other party to damages to compensate for the loss sustained in consequences of the breach. But with the exceptions and subject to express contractual rights of determination, breach of contract by one party does not discharge the other party from performance of his unperformed obligations. (Photo Production vs Securicor (1980) A.C. 827 at 849 (H.L.).

There are 2 circumstances in which breach of contract by one party entitles the other to elect to put an end to all remaining primary obligations of both parties. These are:

1. Where the contracting parties have agreed, whether by express words or implication of law that any breach of the contractual term in question shall entitle the other party to elect to put an end to all remaining primary obligations of both parties, i.e. where there is a breach of condition;
2. Where the event resulting from the breach of contract has the effect of depriving the other party of substantially the whole benefit, which it was the intention of the parties that should obtain from the contract, i.e. where there is a “fundamental breach”.

Operation of the election to put an end to all remaining primary obligations of both parties is variously referred to as the “determination” or “rescission” of the contract or as “treating the contract as repudiated” or “accepting the repudiation” of the contract breaker.


Acceptance of repudiation

Repudiation by one party standing alone does not terminate the contract. It takes two to end it, by repudiation on the one side, and acceptance of the repudiation on the other. The innocent party must make it plain that “ in view of the wrongful act of the party who has repudiated he claims to treat the contract as an end (i.e. rescind a contract). Acceptance of repudiation by the employer does not affect the contractor’s accrued rights to the payment of installments of the contract price unless the contract otherwise provides. (Hyundai Industries vs Papadopoulos (1980) 1 W.L.R. 1129 (H.L.)

“The contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired… the contract is discharged so far as it is executory only."”(Dixon J. in McDonald vs Dennys lascelles Ltd> (1933) 48 C.L.R. 457 at 476.

But advance payment may be recoverable if the contractor has provided no consideration in the nature of part performance. (Rover International vs Cannon Film (1989) W.L.R. 912 at 932 (C.A.)

A full arbitration clause will normally continue to apply to disputes arising upon the acceptance of repudiation.(Heyman vs Darwin (1942)A.C. 356 (H.L.)


Repudiation and contractual determination clause

A party who purports to operate a contractual determination clause when he is not entitled to do so either factually or legally is likely to repudiate the contract.(AchitecturaInstallation Services vs James Gibbons (1989) 16 L.R. 68 at 73. This is because a party who acts upon a contractual determination clause usually refuses or ceases to perform his own obligations. If this is not in accordance with the contract, he will usually himself be in fundamental breach.

Contractual determination clause do not exclude common law remedies available upon repudiation unless the agreement expressly provides that the contractual rights are to be exclusive remedy for the breach in question.(Modern Engineering(Bristol) vs Gilbert-Ash(1974 A.C. 689 (H.L.)


Repudiation by contractor

Refusal or abandonment. An absolute refusal to carry out the work or an abandonment of the work before it is substantially completed, without any lawful excuse, is a repudiation. (Mersey Steel & Iron Co. vs naylor (1884) 9 App. Cas. 434(H.L.); Marshall vs mackintosh (1898) 78 L.T. 750 ; Hoeing vs Isaacs (1952) 2 All E.R. 176 (C.A.).


Defects

A breach consisting of mere negligent omissions or bad workmanship where the work is substantially completed does not go to the root of the contract in the ordinary lump sum contract, and is therefore not a repudiation.(Hoeing vs Isaacs (1952) 2 All E.R. 176 (C.A.)

Omissions and bad work that occur during the course of the work cannot be considered as repudiation if they are not such as to prevent substantial completion. There is a repudiation where, having regard to the construction of the contract and all the facts and circumstances, the gravity of the breaches is such as to show that the contractor does not intend to or cannot substantially perform his obligation under the contract. (Swisse Atlantique vs N.V. Rotterdamsche Kolen Centrale (1967) 1 A.C. 361 at 422(H.L.)


Delay

Delay on the part of the contractor where time is not of the essence of the contract does not amount to a repudiation unless it is such as to show that he will not, or cannot, carry out the contract. In Hill vs London Borough of Camden, it was held on the facts that a contractor, who has reduce his workforce to such an extent that it might have been said that they were not proceeding “ regularly and dilligently” within the meaning of clause 25 of the JCT Form, had not by such conduct repudiated the contract.

In most cases it is desirable to give notice that continuance of the delay will be treated as repudiation before purporting to accept the repudiation by dismissing the contractor.

When time is the essence either by the terms of the contract, or as a result of a notice making it of the essence, and the contractor fails to complete to time the employer is entitled to treat the contract as at an end and to dismiss the contractor from the site.(Rickards vs Oppenheim (1950) 1 K.B. 616 at 628 (C.A.)


Repudiation by employer

Refusal. An absolute refusal by the employer to carry out his part of the contract, whether made before the works commenced or while they are being carried out is a repudiation of the contract.(Hochster vs de la tour(1853) 2 E & B 678; Steel & Iron Co. Ltd. Vs Naylor (1884) 9 App.Cas.434(H.L.)


Rendering completion impossible

It is, in general, a repudiation if the employer wrongfully by his own acts, and without lawful excuses, renders completion impossible. ( Stirling vs Maitland (1864) 5 B.& S. 840 and 852


Possession of site

The employer repudiates the contract if he fails to give possession of the site at all, or without lawful excuse ejects the contractor from the site before completion. (Felton vs Wharnie (1906) H.B.C. (4th edition), Vol 2, p.398(C.A.)


Order not to complete

A clear unjustified order not to complete the works is a repudiation.(Cort vs Ambergate Railway (1851) 17 Q.B. 127.


Under-certification

It has been settled that the architect is the employer’s agent when giving his certificate. (Sutcliffe vs Thackrah (1974) A.C. 727(H.L.). It has been held that an employer cannot stand by and take advantage of his architect applying a wrong principle in certifying.(Panamera,etc vs Frederick Leyland & Co. Ltd. (1947) A.C. 428 (H.L.)


No general right to suspend work

Although particular contracts may give the contractor express rights if certificates are not paid, there is no general right to suspend work if payment is wrongly withheld. (Lubenham vs South Pembrokeshire D.C. (1986) 33 B.L.R. 39 at 70 (C.A.). This is consistent with the principle that, except where there is a breach of condition or fundamental breach of contract, breach of contract by one party does not discharge the other party from performance of his unperformed obligation. (Wells vs Army & Navy Co-op Soceity (1902) 86 L.T. 764.)


Party cannot rely on own wrong

It applies to a party seeking to obtain a benefit under a continuing contract on account of his own breach as much as to a party who relies on his own breach to avoid a contract and thereby escape his obligation.

A similar principle is applied to the construction of contracts which provide that, upon the happening of certain events, either party may declare the contract void provided that he has himself in breach of a duty owed to the other party been the means of bringing about the event; for example, an insolvent contractor cannot rely on his own insolvency to escape from the contract. ( New Zealand Shipping Co. vs Ateliers,etc.,de France (1919) A.C. 1 at 13 (H.L.)

Negligence & Economic Duress

To establish a claim in negligence, a plaintiff must show that the defendant owes him a duty of care and that there has been a breach of that duty causing actionable damages.(Grant vs Australian Knitting Mills 91936) A.C. 85 at 103 (P.C.).

Definition of the circumstances in which a defendant owes a duty of care and that there has been a breach of that duty causing actionable damages. Whatever the nature of the harm sustained, the court asks whether the damage was reasonably foreseeable and considers the nature of the relationship between the parties and whether in all the circumstances it is fair, just and reasonable to impose a duty of care.(Marc rich vs Bishop Rock Marine (1994) 1 W.L.R. 1071 C.A.)

Generally, the damages necessary to sustain a claim in negligence must be actual physical injury to person or property other than property which is the product of the negligence itself. Normally, a plaintiff claiming in negligence cannot recover economic loss. Economic loss is only recoverable where there is a special relationship amounting to reliance by the plaintiff on the defendant or where the economic loss is truly consequential upon actual physical injury to person or property. Since damages is an essential ingredient of the cause of action of negligence, the limitation period will not start to run until the damages has occurred. (Pirelli vs Faber & partners (1983) 2 A.C. 1 (H.L.).

An agreement made under duress in the form of illegitimate economic pressure which amounts to a coercion of will and which vitiates consent may be voidable.

(See: Occidental Worldwide Investment vs Skibs A/S Avanti (1976) 1 Lloyd’s Rep. 293; North Ocean Shipping vs Hyundai Construction (1979) Q.B. 705).

“It must be shown that the payment made or the contract entered into was not a voluntary act”

(See: Lord Scarman in Pao On vs Lau Yiu Long (1980) A.C. 614 at 636 (P.C.).

It must also be shown that the pressure exerted was ill legitimate.

(see:Universe Tankships vs International Transport Worker Federation (1983) 1 A.C. 366 at 384,400 H.L.).

Sufficiently coercive threat to break a contract may amount to economic duress. This occur typically where a party to an existing contract compels by coercion uncovenanted additional payment by threatening not to perform the contract if his demand is not met.

In a building contract, if for example a sub-contractor has undertaken work at fixed price and, before he has completed the work, he declines to continue with it unless the contractor agrees to pay an increased price. Such an agreement could be voidable for economic duress if the sub-contractor was held guilty of securing the contractor’s promise by taking unfair advantage of the difficulties he would cause if he did not complete the work.

(see: William vs Roffey bros. 91991) 1 Q.B. 1 at 13 (C.A.)

Frustrated Contract & Impossibility

Impossibility at time of contract

Actual physical impossibility of performing the contract, whatever means are employed which exist at the time of entering into the contract is, subject to express terms or warranties an excuse for non-performance. But the contractor is liable in damages if he has warranted the possibility of the work or if he has positively and absolutely contracted to do the work.

(Taylor vs Caldwell (1863) 3 B & S 826;Clifford vs Watts (1870) L.R. 5 C.P. 577 at 588; Jones vs St.John’s College, Oxford (1870) L.R. 6 Q.B. 115).


Frustration Generally

Very rarely after the contract has been lawfully entered into and is in course of operation there may arise some intervening event or change of circumstances of so catastrophic or fundamental a nature as to determine the contract prematurely by the operation of the doctrine of frustration.

(Cricklewood Property & Investment trust Ltd. vs. Leighton’s Investment Trust Ltd. (1945) A.C. 221 at 228 H.L.)

The formulation in “Davis Contractors vs Fareham (1956) A.C. 696(H.L.) is now usually regarded as the “classic statement of the doctrine”.

It was there said that frustration: “ occurs wherever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non heac in foedera veni. It was not this that I promised to do”

(Lord Radcliffe in Davis Contractors Ltd. Vs Fareham U.D.C. (1956) A.C. 696nat 729 (H.L.); Amalgamated Investment Ltd. Vs John Walker Ltd. 91977) 1 W.L.R. 164 (C.A.).