Not acting under strict terms of a contract? Beware - it’s sometimes hard to get back on the straight and narrow

Steven Carey

The recent case of Mears Limited vs Shoreline Housing Partnership Limited (SHP) demonstrates what can happen if the parties veer off the clear route marked out for them by the contract – it is sometimes difficult to get back on the straight and narrow. Whilst courts will generally seek to uphold the strict contractual provisions, Mears was able to rely on a separate convention based upon how the parties had conducted themselves to claim £300,000.

SHP is a registered social landlord that manages some 8,000 properties. Mears responded to a tender put out by SHP for responsive repairs and maintenance across its portfolio. The tender documentation and later the contract (NEC3 Term Service Contract incorporating “Option C” “Target Contract with price list”) set out a particular payment mechanism. The contract was entered into by the parties in December 2009, but was backdated to July 2009, when Mears actually started to provide the repair and maintenance services to SHP. From July to December 2009 the parties operated using an entirely different pricing mechanism based on a series of ‘composite codes’. These were set out in a document put together by Mears following a series of meetings and imported onto both parties’ computer systems. Despite 13,600 ‘orders’ being placed by SHP under this mechanism it was not included in the contract. The composite codes were put in place following co-operative discussions between the parties about how jobs were to be priced in practice to make the process as simple as possible for SHP’s team.

During the autumn of 2009 SHP became concerned that the savings they expected were not materialising. Consequently, in January 2010, SHP claimed that the use of the composite codes basis for payment resulted in them making overpayments to Mears, and it withheld payment of £300,000. Mears made a claim in relation to the deducted £300,000 sum.

Despite the clear pricing mechanism set out in the December 2009 contract, which did not acknowledge the applicability of composite rates, the Court found that their use was an appropriate pricing mechanism and that Mears was entitled to the £300,000 previously withheld from it. In coming to this conclusion the Court relied on the legal principle of estoppel, which prevents a party from going back upon a previous agreement or statement where it would be unjust and/or unconscionable for them to do so. At the very heart of estoppel is the idea of fairness. In this case the following estoppels were considered relevant:

  • Estoppel by convention – where parties share an assumption (of law or fact) that is agreed between them. If one of those parties relies on or acts upon that assumption then the other party cannot later go back on that assumption if it would be unjust to do so.
  • Estoppel by representation – where a party makes a false representation to another party, knowing that the other was likely to act on it, and that second party does indeed act on it to its detriment, then the party making the representation cannot then deny the truth of that representation.

In this case, from oral evidence and contemporaneous records, the Court found that there was clearly evidence that the parties had operated on a common assumption that Mears would be paid against the composite codes and it would be unjust to allow SHP to resile from that position. An important element of estoppel is that once SHP notified Mears that it did not want to continue to operate under this assumption then for the future operation of the contract the estoppel falls away. Furthermore, the fact that the contract entered into during December 2009 contained an entire agreement clause, which meant that one had only to look at the words in the contract to define their respective obligations, nor that the contract contained a provision that any variation to the contract had to be in writing, did not significantly exclude the estoppel.

Any first year law student will inform you that “estoppel is a shield rather than a sword”. So how could Mears rely upon this to claim its £300,000? The Court found that whilst Mears could not base a cause of action on an estoppel it could use the principle to defeat SHP’s defence to its claim. Perhaps a little bit of the sword in this analysis!

The moral of this story: the law is about truth and justice after all. The other is that parties really should set down precisely how they wish to conduct themselves. Heard that one before.

Steven Carey is partner in the real estate, construction and engineering team at Charles Russell Speechlys