Watch out for main contractors who change standard forms of contract to suit themselves, warns Andrew Milner
Main contractors often make bespoke amendments to standard form contracts, attempting to limit their risk and liability, usually at the expense of subcontractors. This can lead to problems of interpretation, such as the exact meaning of a particular term of the contract.
Such a problem arose in Fitzpatrick Contractors v Tyco Fire and Integrated Solutions (UK) (2008).
Fitzpatrick subcontracted the design, manufacture and installation of mechanical and electrical works to Tyco. The works were significantly delayed and, in addition, Fitzpatrick asserted that the works carried out by Tyco were incomplete and defective. Fitzpatrick claimed £19 million in damages.
A potentially critical dispute arose regarding the interpretation of clause 3(4) of the contract, given that Fitzpatrick was claiming many millions of pounds in damages. The unamended version of the standard clause 3(4) read as follows:
“The subcontractor… acknowledges that any breach by him of the subcontract may result in the contractor’s committing breaches of and becoming liable in damages under the main contract and other contracts… and may occasion further loss or expense to the contractor in connection with the main works and all such damages, loss and expense… are agreed to be within the contemplation of the parties as being probable results of any such breach by the subcontractor.”
This clause widened Tyco’s liability to prevent it from arguing that a breach by it (which caused Fitzpatrick to become liable to a third party) was a loss that arose under the second limb of Hadley v Baxendale and was not within the contemplation of the parties at the time of entering into contract. In the present case, the parties amended clause 3(4) by adding the words at the end:
“…up to a maximum of 25% of the subcontract value (exclusive of such figures contemplated)… the liquidated damages sum contained in the main contract… will be replaced £1562.83.”
The judge considered there were two possible caps in the amended version: the £1562.83 on liquidated damages if Tyco’s breach caused delay to the main contract, and the 25% on “such damages, loss or expense”.
The parties were agreed as to the first cap but could not agree to the meaning of the second. Tyco argued that the 25% was a complete cap on its liabilities whereas Fitzpatrick argued that clause 3(4) related only to its liabilities to the employer and to the other subcontractors, but did not affect its own claims for damages against Tyco for its poor performance.
The judge concluded that, although he found that the clear focus of the discussions between the parties was on liquidated damages, he considered it would not be right to construe clause 3(4) as relating only to liquidated damages. The clause was plainly intended to be wider than that, otherwise there would simply have been reference to the £1562.83.
He agreed with Fitzpatrick that the clause was concerned with third party liabilities, not Tyco’s ordinary liability to reimburse Fitzpatrick for the direct losses that Fitzpatrick itself might suffer as a result of Tyco’s subcontract breaches.
He reached his decision for a variety of reasons, but perhaps the most significant example was this. The most important provision of the subcontract that supported Fitzpatrick’s argument was clause 17(3), which allowed Fitzpatrick to take part of the subcontract work away from Tyco and recover its costs. If, in accordance with clause 17(3), Fitzpatrick omitted work that cost it, say, 40% of the subcontract value and had it carried out by others, it would be entitled to recover those costs from Tyco. There was nothing in that clause limiting Fitzpatrick’s right.
If, therefore, Tyco’s argument was correct, this would apply to clause 17(3), so that if all the remaining work was done by Tyco it would be entitled to be paid 75% of the value of the subcontract work, even though 40% had been omitted. Therefore clause 17(3) could not be interpreted as if it were subject to the alleged cap in clause 3(4), and Tyco’s argument failed.
This case is a poignant reminder of the problems created by bespoke amendments to standard clauses, which lead to complex legal arguments over the nature, scope and interpretation of the terms.
It also comes at a price as Fitzpatrick alone expended costs somewhere in the order of £260 000.
Electrical and Mechanical Contractor
Andrew Milner is with Integritam Construction Consultancy. Email: firstname.lastname@example.org