Contracts: Handle with care

The construction industry is notoriously sloppy about its contractual arrangements. I am not talking about split infinitives and capitalised letters for defined terms but much more fundamental errors - conflicting provisions on the rate of liquidated and ascertained damages (LADs) in different parts of the same contract, contradictory correspondence bound into the back, pre-contract information given contractual status, and so on.

Rarely are construction contracts compiled by lawyers (a blessing perhaps?), but those who do compile them do not have an understanding of legal principles relating to the construction of commercial contracts, or even, at the most basic level, the need for consistency between different documents produced by different members of the construction team.

And then there is the question of who can validly execute the document on behalf of the parties. Under English law the Companies Act 2006 is clear that a document is validly executed if the company affixes its common seal or if it is signed on behalf of the company by two “authorised signatories” or by a director of the company in the presence of a witness. “Authorised signatories” are every director and the company secretary. In relation to a company the list of directors and the identity of the secretary can be easily checked online.

But how often is this done correctly? We see documents signed by people who are not directors of the company at all - usually directors of another company within the same group but not the contracting company - or by a single director but without a witness, by persons purportedly acting as attorneys on behalf of the company but with no evidence of authority to act, and so on. So even simple rules relating to firms in England, Wales and Northern Ireland seem to get the construction industry confused resulting in documents which have not been validly executed and, therefore, which are not binding.

Rarely are construction contracts compiled by lawyers (a blessing perhaps?), but those who do compile them do not have an understanding of legal principles relating to commercial contracts

And how much more confusing are the execution requirements for documents executed by firms outside of England, Wales and Northern Ireland. Foreign registered companies increasingly work directly here. Alternatively, they work through local English registered subsidiaries but give guarantees of the performance of that subsidiary. Suppliers too are no longer local given the erosion of the UK manufacturing base so the problem of valid execution by foreign companies extends all the way down the supply chain.

The Overseas Companies (Execution of Documents and Registration of Charges) Regulations 2009 modify the Companies Act 2006 in relation to execution of documents by overseas companies. The company must affix its common seal or must execute in any manner permitted by the laws of the territory in which the company is incorporated for the execution of documents by such company. So you need to look at the local law where the company is established.

The Court of Appeal’s decision in Integral Petroleum S.A. and SCU-Finanz AG (2015) dramatically demonstrates the issues. Both Integral and SCU were Swiss companies. They entered into a contract under which SCU purportedly agreed to sell fuel to Integral. That supply contract was governed by English Law and the English High Court had exclusive jurisdiction. Integral made a claim against SCU for breach of contract. The two officers of SCU were Albert Bass and Marine Vartanyan. Their names were registered and published in the Swiss Register of Commerce as “prokurists”. That entry made it clear that their power of signature was joint. The supply contract was signed by Ms Vartanyan alone and not Mr Bass. Accordingly, SCU defended the claim on the basis that the contract was not binding on SCU because only one of the two authorised signatories required by Swiss law has signed. Ms Vartanyan might be bound personally but SCU was not bound. The Court of Appeal upheld this argument.

Is a project manager, or quantity surveyor or other professional, negligent if he does not check the formalities? Probably, yes

So what is the construction industry to do? Strictly, it needs to check the requirements of the laws of the territory in which the company is incorporated to determine the validity of execution of documents. So it needs to go off to Switzerland or Germany or France wherever the company is located, find a lawyer and get an opinion about the validity of execution of the document. These opinions can run to 10 or more pages (the bulk of which are caveats and exclusions to the opinions given) so they do not come cheap. But, if the point is not checked, then the contract may not be binding and there may be no contract at all.

And is a project manager, or quantity surveyor or other professional, negligent if he does not check the formalities? Probably, yes - if you hold yourself out as capable of advising on contracts and arranging their execution, it must be negligent not to be aware of these issues.

So what can be done at a practical level? Maybe it is time for some intervention by the JCT - an “idiot’s guide”, perhaps?

Ann Minogue is a partner in Macfarlanes