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Common sense is over-rated

At first glance, Carillion Construction Ltd v Woods Bagot Europe Ltd and others appears to be important because it touches on a common issue in delay and disruption claims of how an extension of time is to be awarded.

However, on closer inspection the case is not really about delay and disruption. It is merely another case about interpreting contracts. The case is important because it is a prime example of the more limited role that commercial common sense has in the construction of contracts in the post Arnold v Britton world, in which Lord Neuberger said that:

“…the reliance placed in some cases on commercial common sense and surrounding circumstances … should not be invoked to undervalue the importance of the language of the provision which is to be construed.”

Carillion Construction Ltd v Woods Bagot Europe Ltd and others

This case concerned the determination of a number of preliminary issues in a dispute arising out of the works to complete the Rolls Building.

The claimant, Carillion, was the main contractor and engaged the second defendant, AECOM, as its sub-contractor for various M&E services. Carillion also appointed the third defendant as M&E sub-contractor for other aspects of the works, and the fourth defendant provided Carillion with a parent company guarantee in respect of the third defendant. The third and fourth defendants are collectively referred to in the judgment as EMCOR.

Carillion’s works were heavily delayed and there were also defects. As a result, it commenced proceedings against a number of parties. This judgment dealt with the part of Carillion’s claim for recovery of loss and expense caused by delays to the completion of both EMCOR and AECOM’s works.

In determining the proper amount of recoverable loss and expense, one of the questions for the court was how any extension of time to which EMCOR might be entitled should be calculated in accordance with the wording of clause 11.3 of DOM/2 (which it had been appointed under), which provided as follows:

“11.3. If on receipt of any notice, particulars and estimate under clause 11.2 the Contractor properly considers that:

11.3.1 any of the causes of the delay is an act, omission or default of the Contractor, his servants or agents or his sub-contractors, their servants or agents (other than the Sub-Contractor, his servants or agents) or is the occurrence of a Relevant Event; and

11.3.2 the completion of the Sub-Contract Works is likely to be delayed thereby beyond the period or periods stated in the Appendix, part 4, or any revised such period or periods,

then the Contractor shall, in writing, give an extension of time to the Sub-Contractor by fixing such revised or further revised period or periods for the completion of the Sub-Contract Works as the Contractor then estimates to be reasonable.”

Emcor’s submissions

EMCOR’s primary submission was that the wording “fixing such period or further revised period as the Contractor then estimates to be reasonable” in clause 11.3 would be understood by a reasonable person in the parties’ position at the time of making the sub-contract as requiring a further period to be added contiguously to the pre-existing period.

In EMCOR’s submission, this approach was supported by the case law, in particular Balfour Beatty Building Ltd v Chestermount Properties Ltd (which was concerned with the JCT Standard Form, 1980 Edition), where Colman J upheld an arbitrator’s decision on two preliminary issues, one of which was:

“In granting an extension of time in respect of the Relevant Event occurring during a period of culpable delay, ought the Architect to award a gross’ extension (that is, one that re-fixes the Completion Date at the calendar date upon which the work would reasonably be expected to be completed having regard to the calendar date upon which it is instructed) or ought it to be a net’ extension (that is, one which calculates the revised Completion Date by taking the date currently fixed and adding the number of days which the Architect regards as fair and reasonable)?”

Colman J upheld the arbitrator’s decision that the architect’s approach should be to award a net extension of time, saying that:

“The completion date as adjusted retrospectively is thus not the date by which the contractor ought to have achieved or ought in future to achieve practical completion but the date which marks the end of the total number of working days starting from the date of possession within which the contractor ought fairly and reasonably to have completed the works.”

Carillion’s submissions

Carillion’s approach was that the natural and ordinary meaning of clause 11.3 allowed for additional but discontinuous periods of time to be granted for the carrying out and completion of the sub-contract works. The commercial common sense of that construction was supported by an example that appears at paragraph 39 of the judgment and which is worth setting out in full:

“Say that the period for completion of EMCOR’s subcontract works is 100 days. By the end of this period, the subcontract works are not complete. That has the effect of delaying the main contract works and that delay and the loss and expense caused by it and suffered or incurred by Carillion is EMCOR’s liability under clause 12. By Day 150 the subcontract works are still not complete. At this point, a major variation to the subcontract works is instructed. This is a Relevant Event under clause 11.3 and entitles EMCOR to an extension of time. Say that the effect of this variation is that EMCOR requires and is entitled to another 50 days to complete the subcontract works. If that 50 days is added to the original 100-day period for completion, there is no breach by EMCOR in failing to complete until Day 150. So the impact and consequences of EMCOR’s delay are determined by reference to its failure to complete by Day 150. This, says Ms Ansell QC, is artificial and does not reflect the reality of the impact of EMCOR’s failure to complete by Day 100. Further, if by Day 150 some other sub-contractor’s default is now driving the delay to the completion of the main contract works, EMCOR may be absolved from all liability because they can say that their failure to complete by Day 150 has not caused loss and expense that is recoverable under clause 12. If on the other hand, EMCOR is given a further period of 50 days between Day 150 and Day 200 to complete its works and is relieved from the consequences of its failure to complete for this further period, that properly reflects the loss and expense for which EMCOR is responsible. If the subcontract works were still incomplete by Day 200, EMCOR would again be in breach and liable for the loss and expense caused by its failure to complete by that date.”

Carillion dealt with the case law EMCOR relied on (which applied Chestermount) by arguing that it was not relevant, in particular on the basis that the contracts in question in those cases had a completion date fixed and did not provide, as with DOM/2, for a period of completion to be fixed. In addition, the potential injustice demonstrated by Carillion’s example was said not to arise in cases like Chestermount as:

“…there was a fixed completion date and a sum payable as liquidated damages in the event of non-completion and the extension of time operated to relieve the Contractor from the obligation to pay liquidated damages for non-completion. It followed, as Colman J said, that the only way to extend the period for completion of the works was to fix a later Date for Completion. Further, since the sum payable for failure to complete by the Completion Date was a fixed rate, it would have made no difference whether a further period for completion was added to the end of the existing period for completion or related to a further discrete period of time.”

In contrast, the extension of time machinery in DOM/2 did not relieve the sub-contractor from liability to pay liquidated damages but rather from liability to pay loss and expense, such that in Carillion’s submission:

“What EMCOR is obliged to pay, and what it is relieved from paying, should, therefore, reflect the actual loss caused by its failure to complete on time and that, argues Ms Ansell QC, involves considering the impact of that failure to complete at the time it occurs.”

Decision and comment

Recorder Nerys Jefford QC determined that EMCOR’s interpretation was to be preferred. She found that what was contemplated by the contract in this instance was the revision of the period for completion as set out in Appendix part 4, rather than the fixing of abstract periods of completion. This conclusion was reached partly because of the other provisions of the contract, such as:

  • Clause 11.2.2.1, which provided for notice of an expected delay, “beyond the expiry of the period or periods stated in the Appendix part 4 or beyond the expiry of any extended period or periods previously fixed under clause 11”.
  • Clause 11.6, which provided for the fixing of “a period or periods for the completion of the Sub-Contract Works shorter than that previously fixed under clause 11.3”.

As to Carillion’s arguments in relation to commercial common sense, the judge held that the fact that:

“…there may be such factual scenarios does not affect the, to my mind, obvious interpretation of clause 11.3. In any event, these are only potential factual scenarios that may arise particularly on a contract where there is more than one sub-contractor. They will not necessarily arise and it follows that the extent to which they can influence the interpretation of the clause must be limited.”

This statement must be right, insofar as one interprets a contract at the point it is entered into, and not from the retrospective viewpoint of a party that has suffered injustice as a result of a particular interpretation of the contract.

Further, the reality is that it is unlikely that the parties here, or any reasonable person, would have turned their minds to the specific issue of how an extension of time was to be granted, at least as that question transpired in this litigation, which leaves one merely with the natural and ordinary meaning of the words. In fact, the judge’s decision is consistent with recent authority in rowing back from the days of Chartbrook v Persimmon Homes Ltd, when the courts seemed more willing to imbue the reasonable person with commercial common sense in ascertaining the natural and ordinary meaning of the words, as well as to use it when the meaning of the words was unclear.

Conclusion

Overall, it is suggested that the logic in Carillion’s submissions was spot on and its reading of the case law on the calculation of extensions of time as inapplicable to their circumstances, was absolutely right. In fact, I think the position advocated for by Carillion was preferable altogether.

However, it fell into the post-Arnold v Britton trap of having the better of the arguments on the justice or potential effects of a particular interpretation. This can sometimes mean that a party reverse engineers its interpretation of a contract. The approach adopted by the judge in this case was correct as a matter of law in applying Arnold v Britton and the focus on the natural and ordinary meaning of the words. This approach has the value of legalistic coherence but, on one view, it does make commercial contracts (and therefore English law) less commercially useful.

Hardwicke Charlie Thompson

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