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Termination Fallout - The Obligation to Provide Documents After Termination

12 November 2013 #Construction


Liberty Mercian Limited v Cuddy Civil Engineering Limited and Cuddy Demolition and Dismantling Limited [2013] EWHC 2688 (TCC)

Introduction

This matter came before the Technology and Construction Court to, amongst wider issues, interpret the obligations of a contractor to provide the employer with ancillary documentation in the form of sub-contractor collateral warranties, a parent company guarantee and a performance bond following the termination of an NEC3 contract for the development of retail space.

Construction projects will usually, once over a certain value, particular complexity or, particularly, where there are third party interests, require the provision of collateral warranties. The requirement to provide collateral warranties is to create a contractual route of legal recourse where the warranted party is not a party to the original construction contract. In this instance, the employer is not a contracting party to the main contractor and subcontractor agreement. Interestingly, the Contracts (Rights of Third Parties) Act 1999 would prima facie obviate the need for collateral warranties, but the industry has been very slow to adopt this element of the Act and continues to exclude its provisions.

As a result of the Act’s exclusion, third party rights, where granted, arise from the provision of collateral warranties. The obligation for a contractor to provide a warranty (where the warrantor may be a subcontractor) to a third party is derived from an express term of the main contract (and the subcontract). A contractor’s obligation to obtain a collateral warranty often only arises upon receipt of a written request by the employer. Therefore, their provision is an executory obligation and may only arise during or even after the performance of the primary obligations of the contract – namely, for the contractor to provide the works.

Facts

In Liberty Mercian v Cuddy, the obligation for the contractor (Cuddy) to provide a parent company guarantee, a performance bond and to procure sub-contractor warranties (the “Documentation”) arose in the Z – Clauses, which form part of the amendments to an NEC3 contract between Cuddy and the employer Liberty Mercian (the “Contract”). The clauses obliged Cuddy to deliver the Documentation within a certain period of days of a written request by Liberty Merician to do so.

Liberty Mercian, who is seeking the enforcement of this clause, argued that the right to receive the Documents is, firstly, unconditionally acquired as a result of partial performance and therefore, survived termination. Counsel for Liberty Mercian referred to McDonald v Dennys Lascelles Limited (1933) 48 CLR 457 at 477, where Dixon J said:

“Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected.”

The principle in Dennys Lascelles has been accepted in several Court of Appeal decisions.

However, Ramsey J, rejected Cuddy’s argument that the principle in Dennys Lascelles applied in to the facts of this case.  He stated that the obligation to provide the Documents arose because of a written demand by Liberty Mercian which gave rise to an obligation of Cuddy to perform, i.e. provide the documents. The obligation did not arise as merely a result of partial performance of the contract. The demand that triggers the obligation cannot amount partial performance. Partial performance of the actual construction work may give rise to other unconditionally acquired rights, but such rights did not include the provision of the Documents being claimed by Liberty Mercian.

Second, Liberty Mercian argued that provision of the Documents was “ancillary or collateral” rights and such rights survived termination of the primary obligations of the Contract.

The important cases referred to by Liberty Mercian were Heyman v Darwins Limited [1942] AC 356 and Yasuda Fire & Marine Insurance Company of Europe Limited v Orion Marine Insurance Underwriting Agency Limited [1995] QB 174. Liberty Mercian noted that although the documents do not facilitate the successful completion of the work, they are designed to provide financial protection from contractor failures.

The Defence of Cuddy was interesting in that they argued that the obligation to provide the Documents fell within the obligation to “Provide the Works”, as contained in Clause 20.1. Relevantly, the obligations under Clause 20.1 ended at termination. Their argument was, as the obligations under Clause 20.1 ended on termination and the obligation to provide the Documentation arose from this clause, the obligation to provide the Documents had ceased on termination.

Clause 90.5 provided that “After a termination certificate has been issued, the Contractor does no further work necessary to Provide the Works

Cuddy claimed that “Providing the Works” included such documentation which is incidental to completing the works. The failure to provide such documentation gave rise only to a secondary obligation on Cuddy to pay monetary compensation to Liberty Mercian for the breach.

Judgment

Ramsey J turned firstly to the legal principles which define obligations that survive termination. They are derived from Yasuda, which referred to Heymans.

Colman J in Yasuda examined the survival of an arbitration clause (in Heymans) for termination from wrongful repudiation, which was based on two basic principles:

  1. Such termination discharges both parties from future performance of their primary contractual obligations. This is not the same as discharging the contract in all respects.
  1. The contractual function of the dispute resolution clause did not involve the parties in future performance of any of their primary obligations which formed the subject or substance of their bargain.

Colman J then referred to Lord Diplock in Photo Production Limited v Securicor Transport Limited [1980] AC 827 where he stated that references to discharging future performance must be read as confined to primary obligations which are not merely ancillary or collateral to the subject matter of the contract, such as an arbitration clause.

This raised two questions for Cuddy; first, did the obligation of Cuddy to provide the Documents fall within the definition of “Further work necessary to Provide the Works”,  and if it did, is there a distinction between doing work necessary to complete the works and all incidental work, services and actions which the Contract requires. Second, if providing such documents do not fall under “Provide the Works”, do they come under another part of the Contract?

The judge could not see how the obligation to provide these documents was a part of Cuddy’s obligation to “Provide the Works” and decided that the termination provision at Clause 90.5 applied so that Cuddy did no further work necessary to provide the Works after termination, but this exclusion of future performance would not include obligations elsewhere in the Contract, such as the Z Clauses that gave rise to the obligation to provide the Documents.

Ramsey J found that the parent company guarantee, the bond and the sub-contractor warranties are self standing, independent obligations which do not arise under the Cuddy’s obligations to “Provide the Works”. Independent, self- standing obligations do not involve the performance of any primary obligations but only the performance of procedural, collateral and ancillary obligations in relation to past events.

Comment and conclusion

The case provides useful guidance on the status of documents that parties are required to procure over the course of performance of the contract. For example, if a contract requires a contractor to procure a guarantee, the contractor may be bound to do so, even in circumstances where there are unpaid invoices or outstanding sums due.  For contractors, careful consideration should be given to inserting a provision stating that any such documents will only be furnished where, as at the time of request, sums due have been paid in full.

For employers the simple advice is to obtain the warranties / docs before or as close to commencement of the works as possible. The further into a project, the greater the risk of contractor insolvency or default.

Finally, as this case illustrates, it is prudent to review what obligations are discharged on termination and to avoid the scenario where a contractor is no longer obliged to provide important documentation. In circumstances where there is a contractor insolvency, the right of an employer only to sue for damages for breach may be worthless.

Clarkslegal, specialist Construction lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Construction matter please contact Clarkslegal's construction team by email at constructionsector@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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