Lee Jae-Won
REUTERS | Lee Jae-Won

Giving notice under a construction contract – difficulties for companies?

A recent Court of Appeal decision set many construction practitioners thinking about how the parties communicate and give notices to each other. In particular, when a statute or contract requires a company to give a notice or sign a document, do the execution rules of the Companies Acts always apply?

The case and the Court of Appeal’s judgment

Hilmi & Associates Ltd v 20 Pembridge Villas Freehold Ltd concerned a group of tenants who wanted to acquire the freehold of a building. In order to do so they had to give notice to their landlord in accordance with section 13 of the Leasehold Reform Housing and Urban Development Act 1993 (1993 Act). Section 99(5) of the 1993 Act required that the notice must be signed by the tenant, not on its behalf. One of the tenants was a company and its notice was signed by one of its directors.

The freeholder disputed whether the company’s notice was valid, arguing that it did not comply with the requirement for the tenant to sign the notice. The judge at first instance found that the notice was valid, but this was overturned by Lloyd LJ in the Court of Appeal. In short, Lloyd LJ decided that the company should have executed the notice in accordance with the requirements of the Companies Act 1985 (which applied at the time of the notice).

Might Hilmi affect notices under construction contracts?

Is this judgment only relevant to the 1993 Act, in a property law context, or does it apply to every situation where a statute or contract requires a company to give a notice or sign a document?

Construction contracts regularly include wording requiring a party to give notice, without making any express provision for how it is to be signed or executed by a company. For example, the JCT Standard Building Contract 2005 Edition Revision 2 2009 (SBC05) refers throughout to notices given by a party, yet most parties do not comply with the Companies Acts’ execution requirements when giving such notices. Clause 1.7 of the SBC05, which sets out the notice requirements, refers to the method of delivery and timing of a notice, rather than any formalities for execution.

Possible interpretations of the judgment

In allowing the landlord’s appeal, Lloyd LJ paid particular attention to the Companies Acts. Paragraphs 26 to 28 of his judgment can be read as deciding that, when giving a formal notice for a legal purpose, a company must comply with the Companies Acts’ provisions for “executing” a document.

However, does Lloyd LJ’s judgment have such wide effect? To the extent that it has concerned construction practitioners at all in the past, prevailing wisdom suggests that a contractual or statutory provision requiring notice by a person would, in the case of a company, be satisfied by a notice given on its behalf.

With that in mind, there is a strong argument that Lloyd LJ’s comments should be taken in context and limited to the 1993 Act (and other situations where the wording of a statute or contractual provision expressly excludes notices given on behalf of a company).

In light of Hilmi, is any action required?

Arguably, construction practitioners do not need to take any action. However, they could adopt a belt and braces approach by amending their building contracts to clarify notice requirements. This would require some caution, as it is a deceptively complex task and must be undertaken with care to avoid unforeseen consequences. For example, creating strict and complex rules governing notices is only helpful if the parties are capable of complying with them in practice. As such, it may be sensible to avoid wholesale amendments.

If practitioners remain concerned, an alternative way of allaying any concerns may be to clarify notice requirements in documents that are ancillary to the construction contract; for example, by agreeing appropriate wording in the communications protocol mentioned in the JCT SBC05.

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