The £40,000 fix

Over Christmas I did a trawl of 2007’s crop of construction cases. One in particular caught my eye. The facts were straightforward but the decision was odd – to say the least. You may be pleased to hear that it has nothing to do with adjudication, or, indeed, with Wembley stadium.

It was SWI vs P&I Data Services. In mid-2006 P&I was engaged by pharmaceutical company GlaxoSmithKline (GSK) to carry out works at two sites in Stevenage, Hertfordshire. SWI was P&I’s subcontractor for some of the works; it had submitted tenders for both sites for the sums of £97,800 and £239,443. The subcontract documentation consisted of SWI’s tenders and purchase orders from P&I. SWI’s prices related to work detailed on the issued tender drawings but there were no rates for individual items of work.

SWI was asked to tender separately for extras; SWI’s tenders for these extras were always accepted.

On completion of the work the sum of £51,114 remained outstanding. P&I argued that SWI had not performed all the work for which it had charged and, therefore, that this money was not due.

The county court found in favour of SWI. Both contracts were fixed price. Although a jointly agreed expert had measured the work and found that SWI had not carried out some £40,000 of it, the district judge did not reduce the amount claimed by SWI.

The case went to the Court of Appeal, which decided that there were three issues to be resolved:

• Were the subcontracts fixed price, or were they based on unit prices to be applied in measuring the works at the end of the job?
• Was there a term in the subcontracts (either expressed or implied) dealing with variations and their consequences?
• Should an allowance have been made for the £40,000?

P&I argued that the contract was actually operated on a unit price basis, and the work was measured and valued every month.

Although a jointly agreed expert had measured the work and found that SWI had not carried out some £40,000 of it, the district judge did not reduce the amount claimed by SWI

The Court of Appeal rejected this argument; the subcontract did not contain any unit rates. All that could have been calculated was the amount of work done and what proportion of the total price was, at the relevant time, due. Therefore, the contracts were fixed price.

P&I then argued that even if the contracts were fixed price, if GSK chose to vary the works (by omitting part of them), P&I would be entitled to instruct SWI to omit the relevant works and SWI would have to reduce its quoted price. SWI was aware of the contract between GSK and P&I, which allowed GSK to vary the works. It must have been an implied term of the subcontracts, therefore, that P&I would be entitled to vary the subcontract works.

The court rejected this too. It said variations could be accommodated without implying a term that altered the fixed price.

Finally, P&I argued that an allowance should be made for the omitted work, and it referred to the legal concept of substantial performance. Provided that it has substantially performed its works, a contractor can recover the full price, subject to a reduction to reflect the amount of the under-performance. In this case (albeit at P&I’s insistence) SWI had performed less than that it had quoted for. Therefore, there should be a reduction for the omitted work.

The court batted away this argument too. SWI had done what it had been asked to do. If P&I had wanted to reduce the price following a reduction of the agreed works, it should have made express arrangements to do so in the subcontract.

The decision seems to result in a windfall for SWI. SWI’s loss from P&I’s breach of contract in omitting the works was its loss of profit on the £40k worth of work it didn’t do. If, after the contract was entered into, P&I had given all the work to someone else, it would have had to pay damages to SWI for the loss of profits on the contracted works – not the total price for the works.