REUTERS | Mike Blake

Dodgy currency in Scottish case

The decision in Langstane Housing Association Ltd v Riverside Construction Aberdeen Ltd features some highly dubious judicial reasoning and illustrates the extent to which the courts are out of touch with the real world of contract negotiations for major construction projects. Although a Scottish case, its findings will resonate in England and Wales as well.

The facts

The case revolved around the panel appointment of an engineer (Riverside) by a Housing Association (Langstane). The letter of appointment, issued in 1995, stated that engagements for specific projects would be under the “current” version of the ACE Agreement.

When appointed for a specific project in 2001, Riverside wrote to confirm that its engagement was based on the 1998 ACE Conditions, not the 1988 edition which had been current in 1995. The difference was significant, because the 1998 revision (unlike the 1988 edition) contained a net contribution clause. When Langstane tried to claim damages for breach of the 2001 engagement, Riverside raised the net contribution clause in defence.

On the facts, Riverside’s 2001 letter (to which Langstane had not responded) was held to be decisive. However, the court went on to consider:

  • What was meant by the word “current” in the letter of appointment.
  • Whether the net contribution clause passed the test of reasonableness in the Unfair Contract Terms Act 1977 (UCTA).

This post looks at the meaning of “current”. My next post will consider the UCTA issue.

What did “current” mean?

The judge held that the word “current” was intended to indicate the ACE conditions current at the date of appointment for a particular job, rather than those in effect when the original letter of appointment was issued. His decision appears to be based on an assumption that the parties were aware that the ACE conditions would change from time to time, that they would not be particularly interested in the changes made and that they must therefore be taken to be intended to have used the up-to-date version. The implication seems to be that, if the parties had intended the 1988 conditions to continue to apply, they should have said so clearly in the letter of appointment.

I find this a surprising conclusion. The idea that a party can be bound by terms of which, by definition, it is unaware (because they had not been drafted at the time) seems to be contrary to both legal principle and commercial common sense. This is particularly the case where the form of contract is written mainly with the interests of one party in mind, as is the case with the ACE form. Also, from a legal perspective, an agreement to be bound in future by unspecified terms may well be void for uncertainty.

More seriously, the judge appears to have treated the inclusion of a net contribution clause in the 1998 ACE conditions as evidence of its general acceptance in the market. He seems to have reached this conclusion on the basis of expert evidence that most consulting engineers would want their appointment to contain a net contribution clause.

With respect, this is a staggering leap of reasoning. Just because one party (or a body representing that party’s profession) would like a clause to be included in a contract does not make it market practice. On the contrary, net contribution clauses in appointments are still controversial and it is usual for employers on major schemes to reject them out of hand. Indeed, this is probably the single biggest reason why the ACE conditions are rarely used for major projects.

In short, whilst the judge’s finding on the meaning of “current” is perhaps understandable in isolation, it appears to be based on flawed reasoning and is difficult to defend in context.

Lessons to learn

The judge’s surprising decision on the meaning of “current” illustrates the dangers of using ambiguous terminology in an agreement. It also provides some important lessons for anyone negotiating contract terms:

  • When referring to a form of contract, always be clear which version you mean.
  • In particular, be careful when referring to the “current” version of a contract form or other document. For example, the RICS Code of Measuring Practice is often referred to in this way in legal agreements.
  • Be aware that contract forms can change over time, not only to reflect changes in legislation but also on matters of substance.
  • Do not ignore correspondence in which the other side asserts which terms are to apply to your contract, however unimportant it may seem. Had Langstane replied to Riverside’s 2001 letter, the result would almost certainly have been different.

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