Background

In September 2010 Mulalley and Company Limited (the “Contractor”) entered into a sub-contract with Leander Construction Limited (the “Sub-Contractor”) to carry out groundwork, drainage, concrete framework and related works on a project in London (the “Sub-Contract”).

By May 2010 it had become clear that the works required pursuant to the terms of the Sub-Contract were not being carried out in accordance with the timescales set out in the Sub-Contract’s activity schedule (the “Activity Schedule”). The Contractor contended that the Sub-Contractor’s delay in carrying out the works had resulted in a loss of £131,078.12. As a result, the Contractor withheld this sum from interim payments due to the Sub-Contractor on the assertion that the Sub-Contractor was obliged, and had failed, to carry out the works in accordance with the dates prescribed within the Activity Schedule. The Sub-Contractor retorted that the Sub-Contract contained no such obligation and commenced proceedings for a declaration to that effect.

During the course of the court proceedings, the Contractor accepted that the Activity Schedule did not set out any contractually binding dates but contended that the Sub-Contractor was under an implied obligation to proceed regularly and diligently with the works and the Activity Schedule was the best way of identifying whether the Sub-Contractor had complied with that implied obligation.

The Decision

It was held that there was no implied term in the Sub-Contract which required the Sub-Contractor to proceed regularly and diligently with the works. The only contractual obligation in this regard was that the Sub-Contractor complete the works by the completion date stipulated in the Sub-Contract. As a result, the Contractor was not entitled to withhold the £131,078.14 due to the Sub-Contractor.

Mr Justice Coulson rational behind his refusal to find an implied obligation on the part of the Sub-Contractor to proceed regularly and diligently with the works was based on the following:

the Contractor was unable to demonstrate that the implied term was necessary to give the Sub-Contract business efficacy;
the Sub-Contract worked satisfactorily without the implied term;
the only reason that the implied term was sought was to allow the Contractor to claim unliquidated damages for an interim delay; and
to imply such a term would be contrary to the case law authorities and would be contrary to the proper construction of the Sub-Contract itself.
Implying a term into a contract

Mr Justice Coulson found that the accepted authorities on this issue did not support the Contractor’s argument. It was accepted that in no previous case had the court found an implied term imposing obligations as to the rate of progress of detailed performance where there was already an express contractual completion date within the contract.

It was also noted that the English courts were generally slow to imply terms into a contract where the parties had agreed detailed terms and conditions; the touchstone remains the test of necessity and the Contractor had failed to demonstrate that the alleged term was necessary to ensure the terms of the Sub-Contract were workable.

Implying a term to proceed regularly and diligently

In addition, it was accepted that the courts had been very reluctant to imply additional terms in relation to the timing or regularity of a contractor’s performance where such additional implied terms would regulate a contractor’s performance prior to the contractual completion date. It was held that where the contract provided for a contractual completion date, it was unnecessary and unhelpful to impose other interim progress obligations upon the party carrying out the works.

The construction of the Sub-Contract

In addition, the court noted that under the terms of the Sub-Contract, a failure to proceed regularly and diligently with the works would trigger the contractual termination provisions but it did not necessarily follow that there was to be a separate, free standing implied term which imposed an obligation on the Sub-Contractor to proceed regularly and diligently with the works. The court held the view that due to the fact that the parties had specifically dealt with a situation where the Sub-Contractor failed to proceed regularly and diligently with the works within the termination provisions, it indicated that the parties had considered what should happen if the Sub-Contractor was slow in completing the works. As the parties had not included a separate obligation on the Sub-Contractor to proceed regularly and diligently when carrying out the works that would have given the Contractor a right to claim liquidated damages, the court were unable to accept the argument that an implied term was necessary; the parties were taken to have considered this eventuality and decided to deal with it through the Sub-Contract’s termination provisions.

It was also noted that the Contractor had the ability to control the Sub-Contractor’s performance by way of issuing instructions. Accordingly, the court did not accept that there was a necessity for a further implied term to regulate the Sub-Contractor’s performance.

Comment

This case provides a useful explanation as to why a right to terminate a sub-contract for failing to proceed regularly and diligently does not necessarily imply the existence of a separate, stand alone obligation to proceed regularly and diligently with the works.

This case also provides valuable commentary on the factors which a court will take into consideration when determining whether additional terms will be implied into the provisions of a construction contract: where a party to a construction contract seeks to imply a term as to performance, it must be able to demonstrate that such term is necessary to give the contract business efficacy; if the contract works satisfactorily without the implied term, the courts are unlikely to assist.

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