The Court of Appeal’s judgment in Carillion Construction Ltd v Emcor Engineering Services Ltd and another is an important decision concerning a standard form construction contract, the JCT Domestic Sub-Contract (known as DOM/2). The court confirmed an earlier TCC decision that delays can only be calculated by extending the period of time allowed for practical completion, not by creating a new period.
The effect of this decision is that contracting parties to the DOM/2 will be faced with uncertainty as to the commercial implications of a delay that arises after the date for completion has already passed. One party is likely to receive a windfall in this scenario, but it will be nearly impossible to predict in advance who this will be.
Now that the commercial implications of the clause have been highlighted, the JCT may well reconsider the manner in which delays are calculated so as to bring into alignment the period of culpable delays with the period of liability.
What was Carillion Construction Ltd v Emcor Engineering Services Ltd about?
This is a claim arising from the construction of the Rolls Building (the home of the Commercial Court, the Chancery Division and the TCC).
It is usual practice under building contracts to fix a date for completion, and to add further time “contiguously” (that is, immediately after the original date for completion) when granting an extension of time. However, the claimant (Carillion Construction Ltd) challenged this orthodoxy. It argued that where the delay arose after the original date for practical completion had passed, the extension period should run from the date the delayed works began (a so called “non-contiguous” extension). The structure of the DOM/2 sub-contract in question meant that Carillion would be under-compensated if damages were calculated on a contiguous basis, as opposed to non-contiguously.
Clause 11.2 of the sub-contract required the sub-contractor to give notice to the contractor of a delay or likely delay. Clause 11.3 set out how the contractor must respond to such a notice. If the delay was not the sub-contractor’s responsibility, the contractor was obliged to grant:
“…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.”
The sub-contract was entered into on 18 July 2008 between Carillion (the main contractor) and Emcor, a mechanical and electrical services company (the sub-contractor). The court fit out and the fifth floor fit out (the judges’ offices) were required to be completed by 28 January 2011.
Due to delays, practical completion was not reached until 29 July 2011, 182 days late. Carillion was obliged to pay liquidated damages to the employer, Rolls Development UK Ltd. It in turn blamed Emcor and AECOM (another mechanical and electrical sub-contractor), and sought relief from these two firms. Emcor and AECOM denied the allegations.
At first instance
The matter came before Miss Recorder Nerys Jefford QC (as she then was) for the trial of preliminary issues, including the true construction of clause 11.3. She construed the contract in favour of the sub-contractors, finding that clause 11.3 only allowed for contiguous extensions of time.
Carillion appealed the decision, which came before Jackson, Simon and Flaux LLJ on 2 February 2017.
What were the main legal arguments and what did the Court of Appeal decide?
In Arnold v Britton, Lord Neuberger re-emphasised that when interpreting a written contract, the court seeks to:
“…identify the intention of the parties by reference to what a reasonable person having all the background knowledge which would have been available to parties would have understood them to be using the language in the contract to mean.”
(As per Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd.)
The natural and ordinary meaning of the words used is the first consideration and the court:
“…should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight.”
Carillion advanced three main legal arguments. It argued that:
- The natural meaning of clause 11.3 allows the granting of a non-contiguous extension of time.
- There were no relevant authorities on the issue.
- Regardless of the natural meaning of the clause, commercial common sense should prevail. Carillion’s core submission was that at first instance, the judge’s conclusion meant that Emcor was exempted from liability during the period it was in culpable delay, but liable to the employer when it was not in culpable delay. The loss and damage suffered during the two periods was likely to be different, such that one party would gain a windfall.
The Court of Appeal:
- Rejected the first argument, finding that the phrases “extension of time” and “such revised or further revised period” had the effect of making the permitted period of time longer, not introducing a wholly new period.
- With regard to the second argument, contrasted Carillion’s “rapid journey” through the authorities with the “lengthy excursion” embarked upon by Emcor. It concluded that Carillion was correct on the issue. None of the cases provided any direct support for Emcor’s case. However, it did underline the number of occasions where contractors had not raised the point.
- Was clearly impressed by the logic of the third argument. Jackson LJ found that neither he nor counsel could suggest any convincing answer to it.
However, despite accepting the logic of the argument and confessing to having been “troubled” by the anomalies to which clause 11.3 may give rise, the Court of Appeal maintained the orthodoxy. Jackson LJ found that the scenarios were insufficient to displace the natural interpretation of the words and that, in certain circumstances, this will prove to be a bad bargain for one or the other of the contracting parties.