Don't get too cosy

Sometimes the parties to construction contracts do bizarre things. In AL Barnes vs Time Talk (UK) (see articles on 11 and 17 April 2003), a director of the employer, the contract administrator and contractor entered into a conspiracy to defraud the employer by ensuring that the contract administrator was paid twice for his services. One of the many quirks in Barnes was that the employer colluded in the fraud.

Now let's consider what would happen if the employer was unaware of the scam. Instead, the consultant and contractor agree to scratch each other's backs when it comes to tendering. it happens like this. A good word from the consultant to the employer ensures the contractor is appointment in contract A. The contractor returns the favour by recommending that a different employer appoint the consultant on contract B.

If you were either employer, you might feel that the actions of the the suppliers were in breach of contract in that their recommendations fell short of the contractual standards of skill, care or even good faith to which you were entitled. Your difficulty with bringing proceedings would be the question of your loss. Traditionally, damages are designed to put you in the position you should have been in had the contract been performed properly. But you haven't suffered any loss.

But what about the profit both made out of their other contract? Shouldn't you be able to recover some or all of that? Until recently, the answer would have been a resounding "no". Recent cases suggest that the answer now would, at the very least, "perhaps".

The person to thank for this apparent change in law is George Blake, the double agent who spied for Russia during the 1950s. In 1990, Blake published his autobiography. His publishers agreed to pay him £150,000. It was accepted that publication of the memoirs was a breach of Blake's contractual obligations from his time as a member of the UK intelligence services.

The government sued Blake for breach of contract. It faced a problem. It had not suffered any loss itself as a result of the publication of the book. On normal compensatory principles, it was not entitled to any damages. Instead, it tried to get its hands on the money being paid to Blake.

Its claim was for restitutionary damages – that is, damages which took account of Blake's own profit from his breach of contract. The House of Lords upheld the government's claim but the general feeling at the time was that this was a one-off public policy decision.

However, two recent cases – Experience Hendrix vs PPX Enterprises and Chalpin and Esso vs Niad – suggest that restitutionary damages can be applied to common commercial arrangements. The first case was a dispute about the payment of royalties due from the licensing of master tapes of Jimi Hendrix's recordings; the second was a claim for the additional profit made by Niad when, in breach of the Esso Pricewatch scheme to which it was contractually committed, it charged its customers over the odds for petrol.

Hendrix's estate could not prove that it had suffered as a result of the breach of the licensing agreement, but it could show how much profit the defendant had made as a result of the breach. Likewise, Esso could not show that it had suffered any loss as a result of Niad's overcharging, but it could show that Niad had made additional profit. The courts relied on Blake to award restitutionary damages.

What are the implications for the construction industry? It is naive to assume that, however informal, "you scratch my back and I'll scratch yours" arrangements do not exist. One obvious area for abuse is the relationship between main contractors and subcontractors. What about a director of a main contractor who always recommends the steelwork company run by a relative? Or a large M&E subbie who always recommends the same main contractor? An employer who feels that recommendations of these sort were made without their best interests at heart may have a possible cause of action by virtue of Blake. Alternatively, if you are one of the contractors involved, and you cannot objectively justify your recommendation, you may find yourself facing an action for an account of profits.