If you are signing a contract as part of a consortium, it’s vital to identify all of the contracting parties. A recent case reveals the dangers of not doing so
Make sure you tell a party who you are.
A recent case, concerning a “consortium” that argued it was not a legal entity, gives a reminder of the consequences of not doing so. Normally, contractors and subcontractors will know who they are dealing with. The subcontractor offers to do work, and the contractor accepts the proposal. Difficulties can arise when the “contractor” is a consortium, as the identity of the contracting party can be confused. Beware: a member of a consortium may end up liable to pay the subcontractor. This is because although the representatives may not have the authority to bind the consortium, they may have acted in such a way that the subcontractor believed they did have the authority to make agreements.
Specialist subcontractor Tube Tech had been employed to clean pipes in condensers and heat exchangers in a liquefied natural gas production plant in Nigeria. A dispute arose as to the payment for the work, with Tube Tech claiming almost £650,000 for the works completed under the contracts.
There were a number of defendants, which Tube Tech believed formed a consortium called TSKJ. TSKJ denied that it was a party to the contract for the works undertaken by Tube Tech. The court had to determine if there was a contract and with which party. Tube Tech asserted that the contract for the works had been completed between itself and a consortium of the first four defendants, TSKJ. The defendants denied that the consortium existed; it said the name TSKJ was only used in some press reports; it also noted that Tube Tech had contracted with a different firm.
The problem for TSKJ was that the judge did not agree and found in favour of Tube Tech. This is why: on the facts, the contract for the works had been made with TSKJ. Tube Tech had sent its contract proposal to TSKJ/MW Kellogg Ltd for signature. The front page of the contract included TSKJ as the addressee and a summary of the payment terms. After sending the proposal, Tube Tech realised there was an error in the payment terms and forwarded an amended front page to reflect the correct terms, the reference to TSKJ remaining on the amended version. The proposal was returned to Tube Tech – signed, but with the original front page including the incorrect payment terms and an alteration changing the addressee from TSKJ to LNG (the fifth defendant). Tube Tech then informed the defendant that the front page of the signed contract had been superseded by the amended version. The defendant failed to respond to this. The court determined that by serving the amended front page, Tube Tech had made a counter-offer that had been accepted by the performance of the work. Therefore, the contract had been made between Tube Tech and TSKJ. This is classic “battle of the forms” stuff. But there was more to it.
The court also found that Tube Tech had believed it was dealing with TSKJ. Also, the court declined to accept the defendants’ argument that they had never traded as a consortium: they had allowed the consortium name to be used by other companies including the fifth defendant, and by doing this led Tube Tech to believe those companies were able to contract on behalf of the consortium. A number of meetings had occurred, attended by Tube Tech and TSKJ at which TSKJ had not informed Tube Tech of the nature of the consortium, and had led Tube Tech to believe that it was contracting with the consortium. Although the persons who signed the contract proposal on behalf of the consortium had no express authority to enter into contracts, it was a reasonable assumption to make that they had authority to sign the contract and as such the contract was formed.
This case again emphasises the importance of certainty of contractual terms and what can happen when different copies of documents are moving between the parties. Unless the final document sent between the parties is expressly rejected, it can form the basis of an acceptance and therefore the basis of a contract. This is especially important where several companies come together to work on a project.
The danger is that if the companies conduct themselves as a consortium, even though in fact they are not, they can be taken to have contracted as a consortium and thus expose themselves to greater liabilities.
Jonathan Brooks is a construction partner at law firm Osborne Clarke