The difficulty of finding a contractual mechanism that will allow enforcement of procedural obligations under construction contracts has been illustrated once again by Chiemgauer Membran und Zeltbau GmbH (Koch) vs New Millennium Experience Company Ltd.
Here, New Millennium Experience Company terminated Koch’s contract to supply a PVC roof for the Millennium Dome and contracted with Birdair Inc for a Teflon roof instead. It terminated Koch’s trade contract under a provision that stated that, upon termination without breach, the trade contractor was entitled to compensation.
Koch duly submitted a claim for £2.22m in compensation. NMEC did not pay and a writ was issued.
NMEC’s solicitors alleged that Koch was not entitled to any payment at all because of another trade contract term that made it a “condition precedent to any liability or obligation of the client under this trade contract” that Koch provide a parent company guarantee and performance bond.
It took the Court of Appeal to sort it out. Unsurprisingly, the Court of Appeal found that NMEC could not have it both ways: the parties could not have “intended that the effect of
their agreement should be that the trade contractor should be entitled to carry on works without being paid for some indefinite period until it chose to provide the guarantee and performance bond”. This was “commercial nonsense”.
In any event, NMEC chose to treat the contract as continuing and served notice of termination under it. The condition precedent was for the benefit of the client and it effectively waived it.
Of course, NMEC used the condition precedent wording when drafting the contract, because it suffered no immediate loss as a result of the failure to provide a guarantee or bond. A loss would only arise if a judgment obtained against a trade contractor could not be enforced against it because of insolvency.
Condition precedent wording litters bespoke construction contracts: it is a condition precedent to an entitlement to an extension of time that notices and particulars have been given immediately; it is a condition precedent to a cost claim that it is notified within seven days, and so on. The courts are notoriously reluctant to interpret these provisions to mean that the contractor should not get its true entitlement.
Other sanctions are often incorporated in an attempt to enforce procedural obligations, such as penalties for failure to deliver documents such as programmes and signed-off interim statements of account. Many of these are also of dubious validity.
But in many of these cases, clients are trying to encourage contractors to deliver necessary paperwork promptly and efficiently. If a claim arises, the client wants to know and usually wants to pay promptly. It should not hang around and mutate.
For an industry that is so good at producing paper, it seems extraordinary that contractors and subcontractors cannot produce the necessary documents promptly, efficiently and succinctly.
Ann Minogue is a partner in solicitor CMS Cameron McKenna.