Implied terms and variations in construction contracts – issues arising from recent case law

14 / 10 / 2013

Implied terms in construction contracts (or lack of) and instructions to vary works can cause problems for developers carrying out construction works. These issues were considered in two recent cases: Aspect Contracts (Asbestos) Limited v Higgins Construction Plc and MT Højgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd.[1]

Implied terms

The Aspect v Higgins case confirmed the difficulty that parties will face in seeking to persuade the courts to imply terms into construction contracts (and indeed contracts generally).  Higgins had engaged Aspect to carry out a survey of an estate in Hounslow. Higgins started an adjudication some four years after asbestos was found, alleging that Aspect had failed to pick up the presence of asbestos. The adjudicator found in Higgins’ favour and Aspect paid £658,017.

Adjudication proceedings are binding between the parties until such time as the dispute in question is finally determined by legal proceedings, arbitration or by agreement of the parties.  Two and a half years after the adjudication, Aspect began court proceedings. This was therefore some six and a half years after the asbestos was found. This was outside of the usual time limit for bringing a claim in contract.  Aspect argued, however, that it was implied that they remained entitled to have the dispute finally decided by way of legal proceedings.  The judge disagreed and refused to imply such a term and Aspect’s claim was dismissed.

Statute implies some terms into construction contracts – such as the right to adjudicate under certain construction contracts, the right to claim interest on late payments at the statutory rate (if there is no other substantial contractual remedy) and that goods supplied will be of satisfactory quality. Common law also implies some other terms, but these are limited – recently for example the courts refused to imply a term that a contractor would carry out its works regularly and diligently.  The Aspect v Higgins case is another reminder of the difficulty of convincing a court to imply terms into contract. The courts will not allow terms to be introduced into a contract to make it more reasonable – the implied term has to be necessary to make the contract work. Therefore, if the parties want to include a term in the contract it should be dealt with expressly.

Issues surrounding variations to the works

Variations instructed to a contract for works can be a contentious and potentially costly problem as the parties discovered in the recently decided MT Højgaard v E.On case. E.On and MT had entered into a contract whereby MT would install foundations for a wind farm off the Scottish coast. The bespoke contract they had entered into allowed the parties to vary the works.

Originally MT was responsible for providing a barge for use in the works, called the Lisa. The Lisa proved inadequate for the works and by way of variation orders issued by the engineer E.On commissioned a replacement vessel, called the Resolution, which it supplied on a free issue basis to MT.

Subsequently a dispute arose as to how those variations should be valued under the contract.  MT argued that the variation should be valued as an omission to the part of the contract price which included for provision of the Lisa – a deduction of circa €13 million. E.On however argued that had they not substituted the Resolution, MT would have taken much longer to install the foundations. E.On therefore contended that the valuation should be made applying either a rate or a cost to the time that MT would have taken if it had completed the contract using the Lisa. E.On argued that just under €57,250,000 should be deducted, or in the alternative, just under €34,650,000. The court held that MT’s interpretation was the correct one.

This case shows how important it is to be very clear from the outset how variations to the works will be valued under a contract and also to consider the possible variations that might arise. It is also important for developers to consider the variation and the possible financial outcomes carefully before instructing a variation.  The JCT suite of contracts and other standard form construction contracts include express provisions to deal with variations, including the ability to have variations priced and the impact on programme to be assessed before the employer instructs the variation.