The lesser-spotted contract

In You bought it, you pay for it, Tony Bingham discusses the ruling of the Court of Appeal in SWI Limited vs P&I Data Services Limited (27 July, pages 52-53).

Tony suggests readers of Building will find the decision bizarre, but that most construction lawyers will agree with it. Except, I don’t.

Before explaining why, let’s remind ourselves of the details. The dispute arose out of work done on buildings at GlaxoSmithKline’s site in Stevenage. P&I was the main contractor; SWI was the subbie.

In the contract the works had been priced at just under £340,000. An expert, jointly instructed by both parties, valued the work at £300,000.

P&I paid that sum but withheld the remainder. SWI sued for the £40,000 balance, plus costs and interest. The courts had to decide whether SWI was entitled to be paid £340,000 or £300,000.

In simple terms, was this a fixed-price contract?

The judge at first instance and the Court of Appeal agreed that SWI was entitled to be paid the full contract amount.

Tony agrees with the decision and emphasises that the judges’ ability to assess what is and isn’t due is fettered by the terms of the contract (the jelly, as Tony put it). The terms may be a confusing or imprecise (the jelly wobbling), but judges are still constrained by the “terms” of the jelly. Tony concludes by suggesting that “there are quite a lot of wobbly jellies that are lump-sum fixed-price deals”.

But I think the Court of Appeal got it wrong. Here’s why: fixed-price contracts are not normal or prevalent in the construction industry.

The Court of Appeal got it wrong. Fixed-price deals are urban myths: often talked about, but rarely found

They are urban myths – often talked about, but rarely found. The decision in this case is all the more remarkable for deciding that one existed.

This isn’t that controversial a conclusion. As is acknowledged in the judgment, most construction contracts contain provisions dealing with variations (both increasing and decreasing the scope of the work) and extensions of time. It is difficult to describe a contract containing such provisions as being fixed in price because it expressly provides for changes that may result in one party being allowed more time, more money or both.

So the Court of Appeal’s decision appears to be limited to those contracts where no express loss and expense or extension of time provisions exist.

The underlying problem with the decision can be highlighted by imagining what would have happened if SWI had done more work than had been initially agreed and not less.

Without imputing any malice to SWI, it is not difficult to imagine that it would have sought additional time, cost or both. If all else failed, it could have argued that the request to carry out additional work was a variation, which it accepted either expressly or by actually doing the extra work.

What’s more, I imagine most people would accept that SWI should be entitled to be paid for that extra work. There might be some clever argument regarding the precise terms and rates of payment, but the principle seems uncontroversial.

So why is the opposite position – do less work but still get paid the agreed amount – different? Part of the reasoning may lie in a line of Commonwealth cases, including Abbey Developments vs PP Brickwork (4 July 2003), that an employer may not unilaterally withdraw work from a contract simply in order to give the remainder of the work to a cheaper competitor. But those decisions were not referred to by the Court of Appeal.

Rather, the judges concentrated on the fact that there was no express variation procedure (written or oral) and then on the question of whether, as a matter of construction, the contract was a fixed-price contract (which could not be varied if the work was reduced) or a unit price contract (which could).

This seems to be the wrong question. Wasn’t the contract to do a certain amount of work for a certain price? If it was, then what is wrong with a price reduction to reflect the reduced scope of work?