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The incorporation of main contract terms in sub contracts

June 2017 - Issue 94

In Dawnus Construction Holdings v Amey LG Ltd, HHJ Keyser QC granted declaratory relief on a point of construction related to the parties’ sub-contract. This case highlights the difficulties that can arise on construction projects, particularly when parties seek to incorporate main contract terms into a sub-contract.

Background

In August 2008, Amey was appointed by Plymouth City Council as the main contractor to carry out highways works (the Main Contract). Amey subsequently entered into a sub-contract with Dawnus Construction Holdings (the Services Agreement). It was agreed that both contracts were “construction contracts”.

During the project, four disputes were referred to adjudication. The judgment explains that matters decided by the first and second adjudicators were relied upon by the third and fourth adjudicators when they reached their decisions and that, once the project came to an end, Dawnus wanted to litigate certain maters. If those matters were decided in its favour, up to an additional £1 million would be due to it.

However, problems arose as to whether the Services Agreement was subject to the dispute resolution provisions of the Main Contract. If it was, then there could be no legal proceedings. This was because of clause 63 of the Main Contract which contained a condition precedent to litigation: a party had to refer a dispute to adjudication (clause 63.1) and then give a notice of dissatisfaction before it was permitted to commence legal proceedings (clause 62.11). That notice had to be given within four weeks of the adjudicator’s decision (clause 63.2). At the very latest, this would be in August 2015 and could only relate to the last adjudicator’s decision. Whilst it isn’t clear when Dawnus decided to litigate the dispute, it was clearly considerably out of time by early 2017 when the declaratory relief proceedings were issued.

Was clause 63 of the Main Contract incorporated into the Services Agreement?

It was held that it was. HHJ Keyser QC reached this decision by applying the relevant principles governing the construction of contracts noting that a contract “should be given the meaning it would convey to a reasonable person having all the background knowledge which is reasonably available to that person…to whom the document is addressed”. This meant looking at the terms of the Services Agreement and its Recitals, particularly Recital 3, which said that: “the terms and conditions of the Main Contract shall apply (save where the provisions of the agreement conflict or otherwise specifically require) as if they were repeated in this agreement…”

The court focussed in particular on the reference to “conflict” in Recital 3. The court decided that Clause 20 and Appendix 12 of the Services Agreement dealt with the referral of disputes to adjudication. In the usual way for construction contracts, this right could be exercised “at any time” and the adjudicator’s decision was binding until the dispute was determined by legal proceedings or agreement. It decided that clause 60 of the Main Contract also provided a right to adjudicate disputes. However, this contract went further and required the giving of a notice of dissatisfaction (clause 62.11) before litigation could follow. This notice had to be given within four weeks (clause 63.2). The court described clause 63.2 as a critical provision.

The court noted Dawnus’ argument that to import clause 63 into the Services Agreement would radically alter its meaning, but was not persuaded by it. Similarly, it rejected the argument that a party that is giving up valuable rights must make it clear that that is what it intends to do. Instead, it concluded that the Services Agreement permitted the parties to litigate unconditionally, whereas the Main Contract contained a fettered right to litigate. Clause 20 and Appendix 12 of the Services Agreement dealt with adjudication, as did clause 60 of the Main Contract. However, clause 63 was not part of the Main Contract’s adjudication provision. Instead, clause 63 dealt with the right to litigate. It restricted that right, but it was not a “conflict or contradiction” to transpose it into the Services Agreement. The court went further saying “the result gives rise to no commercial absurdity. There is nothing contrary to common sense in having a restriction on the right to litigate. There are obvious reasons why parties may find certainty and finality advantageous”.

Conclusion

Once again the court has confirmed that parties to a construction contract can agree to a tiered dispute resolution procedure providing for litigation (or arbitration) only after adjudication (Anglian Water Services Ltd v Laing O’Rourke Utilities Ltd [2010]). It is also a reminder that parties need to take notice of what they have agreed to. Here, the parties were deemed to have full knowledge of the Main Contract’s provisions (under Recital 2 of the Services Agreement), meaning they were aware of the need to serve a notice of dissatisfaction under clause 63.2. This proved to be a costly oversight for the Claimant.

It should be noted that there is a widely held perception that Recitals do not automatically form part of the operative, legally binding agreement between the contracting parties. However, as is clear from this case, whether the Recitals have legal effect will depend on the construction of the particular contract when taken as a whole.

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