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Complete performance, substantial performance and adjudication

Is sub-contracting in Stevenage more dangerous than sailing the North Atlantic? And what have sub-contracting in Stevenage in 2007 and sailing in the North Atlantic in 1795 got in common with an adjudicator’s decision in 2012?

Regrettably, for the adventurers among you, this blog doesn’t attempt some kind of statistical comparison of the physical risks of the sub-contract and the transatlantic crossing. Perhaps more prosaically, it draws out some legal lessons from the hazards of contracting to complete both these activities. The dangers aren’t limited to sailors and contractors though: the Court of Appeal decision in PC Harrington v Systech ensures the perils apply to the adjudicator caught in the same conundrum.

The North Atlantic: 1795

In 1795, Mr Cutter, a second mate, agreed to sail a ship with Captain Powell from Jamaica back to Liverpool. Cutter didn’t make it, dying 19 days from port. It gets no better: his widow claimed payment for the 50 or so days that he had worked, but got nothing.

The deal struck with the captain recorded that Cutter would be paid 30 guineas if “he proceeds, continues and does his duty as second mate… from hence to the port of Liverpool” (Cutter v Powell, at paragraph 2).

The court found that it was a condition precedent to payment that he sailed with the ship all the way to Liverpool. This was an entire obligation, where nothing is due unless performance is complete.

This same principle can apply where a contractor promises to complete the whole work for a lump sum and stops part done. He is not entitled to any payment.

Sub-Contracting in Stevenage: 2007

Moving on 200 or so years brings us to SWI v P&I Data Services, sub-contracting in Stevenage, and a similar problem. P&I, the contractor, employed SWI to work on two buildings at Glaxo’s facility at the edge of the town. Unfortunately, the report doesn’t tell us what those works were but reassures us that the detail was “contained in the drawings” (paragraph 6), as it so often is.

The works were under two contracts, with payment stated to be “complete for the sum of” £97,800 for building 3 and £239,443.29 for building 5. There were no rates. Further works were added; again on the basis they were “complete for the sum of” a given amount for each addition. P&I paid all but £50,000 of that applied for and SWI sued for the whole amount. A joint expert said there was £40,000 of the agreed works left to do, but crucially this was work that P&I had asked SWI not to finish because the employer no longer wanted it.

The Court of Appeal found that these were fixed price contracts. They had no term allowing for variations and even if one could be implied, it did not follow that a term to reduce the price would also be implied because it was not legally “necessary”.

P&I also tried to use the doctrine of substantial performance. This generally allows payment (minus an amount for the defects) in entire obligation cases where there are some defects or omissions in the claimant’s otherwise complete works. The court did not see how this applied to SWI, where P&I had stopped it from doing the remaining work. The court agreed that SWI could insist on payment of all of the contract sum.

Some might find this surprising, because it is likely to be a greater payment than SWI would receive if P&I had wrongfully terminated a divisible contract with this work still to do. In that case, SWI’s saved costs (such as materials) would likely have been reflected in the level of damages awarded. But at least it’s consistent: do what you’re asked, get paid what you agreed.

However, the court added that if “a whole floor has been taken out, rendering the contract substantially different [it] would … be another matter”. And you might think, yes, that’s sensible too – but in SWI v P&I the omitted works amounted to about 18% of the contract sum. Is that not substantial? Where does substantial start? 50%? How much of a windfall should the court allow? And should the same level of leeway be allowed for people like the unfortunate Mr Cutter? After all, he’d made two-thirds of the voyage and received nothing.

Practical considerations

What then are the practical considerations when faced with a contract that might contain an entire obligation? If you are performing the work, then unless the fixed price contains a big bonus (as Mr Cutter’s 30 guineas was), it will be more prudent to contract to be paid for what you do (by, for instance, having a right to payment of instalments based on the progress made). If you are instructing the work, then the lump sum fixed price contract has attractions, however remember to include an express term allowing omission of works and a fair reduction in price.

The plight of the adjudicator: 2012

And what of the plight of the adjudicator: how did he fall foul of the entire contract? He didn’t build anything, not build something or sail anywhere. However, he did fail to consider a proper defence, which rendered his decision in breach of natural justice and unenforceable. But he still asked to be paid for his work.

The Court of Appeal considered the adjudicator’s entitlement in PC Harrington v Systech and decided he shouldn’t be paid. They looked at the Scheme for Construction Contracts 1998 and the adjudicator’s own terms of engagement and decided that his appointment was an entire contract. His task was to decide the matters in dispute and deliver an enforceable decision. Without an enforceable decision, he hadn’t decided the dispute and wasn’t entitled to payment for any of the work done, even the preparatory steps.

This is a slightly surprising decision, reversing the pro-adjudicator view of the TCC judge (Akenhead J). But as Davis LJ pointed out, an adjudicator could simply draft his terms such that he was entitled to be paid even for unenforceable decisions. Davis LJ appeared to be of the opinion that such a term may be curbed by the market. Others may be less optimistic, given that parties will be reluctant to complain about an adjudicator’s terms before he decides their dispute.

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