| Date | 3 October 2001 |
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| Judgment | De Gruchy Holdings Limited -v- House of Fraser (Stores) Limited, TCC 22 May 2001 |
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| The Issue | Failure to administer a management contract according to its normal terms. |
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| Implication |
The courts will look for a practical resolution to reflect the parties conduct, despite failure to observe the strict contractual mechanisms. |
printManagement contracting has, to a certain extent, lost its attraction in the construction industry. Under this arrangement the management contractor is paid a fee for managing the works, together with payment for the prime cost of the works in respect of any common site services provided by the management contractor and sums payable to works contractors. This can be a particularly lucrative position for a management contractor to occupy given that it carries little risk in respect of the failure of works contractors to meet their contractual obligations. The complexity of operation of these provisions, coupled with a concern sometimes expressed over the lack of transparency in respect of monies paid as prime cost, has caused some clients to be cautious in the use of this form of procurement. Where the formal contract procedures are not fully and correctly put in place, life can become even more difficult. The case of De Gruchy Holdings Limited -v- House of Fraser (Stores) Limited recently examined the operation of a management contract where the proper procedures had not been adhered to. De Gruchy was the assignee of RDB Interiors, a firm of contractors based in Jersey who had gone into receivership after completion of the contract. House of Fraser had engaged RDB for the fitting out of the shell of their new store in the Bluewater shopping development in Kent. At the outset, House of Fraser had issued a letter of intent to RDB stating that it was their intention "to enter into a formal contract with you on the basis of a JCT standard form of building contract yet to be determined". The intention was that RDB would be a lump sum main contractor. Some nine months later, by which time the works were substantially performed, RDB had entered into a JCT standard form of management contract to reflect the role which they had assumed. The contract was agreed to have retrospective effect. Although the project had been conducted as a management contract, this was not reflected in arrangements with others. The mechanical and electrical contractor Haden Young, had not entered into a works contract and neither was there a works contract in respect of the shop fitting and joinery works which was being separately carried out by RDB. Haden Young had refused to enter into a works contract. It was particularly concerned with the lack of the direct payment provisions under such an arrangement. Given the eventual insolvency of RDB their commercial judgment was perhaps justified. In the event House of Fraser entered into a direct agreement with Haden Young bypassing the mechanisms of the management contract. Despite this Haden Young were treated as if they were a works contractor with the knowledge and active encouragement of House of Fraser's contract administrator and project quantity surveyors. A number of disputes arose between House of Fraser and RDB, which De Gruchy prosecuted on the latter's behalf. One of these disputes concerned the amount of management fees due to RDB. House of Fraser had refused to take into account the value of mechanical and electrical works, one of the most significant works packages. It argued that Haden Young had never become a works contractor and as such the cost of its work did not fall within the definition of prime cost as set out in the second schedule of the contract. His Honour Judge David Wilcox was unable to accept this approach. By entering into negotiations and by concluding a separate agreement with Haden Young, in his opinion House of Fraser had breached its implied contractual obligation to co-operate such that it would be possible for RDB to conclude a works contract with Haden Young. It was not open for House of Fraser to take advantage of the non-fulfilment of a condition, the performance of which had been hindered by itself. Accordingly the Haden Young final account fell to be treated as part of the prime cost upon which RDF would be entitled to their management fee. In dealing with the disputed valuation of the prime cost, the parties had jointly instructed an expert quantity surveyor. He understood that his role was to put himself in the shoes of the PQS and provide a report upon the amount to be included in the final account of the management contractor. House of Fraser argued that the proper role of the expert was to consider what was the reasonable remuneration due under the contract at the time of certification. It was particularly critical that RDB had not provided sufficient or timely information under the management contract, and this should be reflected in the expert valuation. Judge Wilcox accepted that this might be an interesting academic exercise, but it would not assist the parties. In dealing with the parties, the joint expert quantity surveyor had moved the dispute on. A number of matters had ceased to be controversial. The parties had moved beyond the historical position that had existed at the time that the dispute was first made the subject of court proceedings. It would be a waste of expenditure and court time to investigate matters which were no longer in dispute. Working through each head of claim, Judge Wilcox ordered judgment in the amount reported by the joint expert quantity surveyor. De Gruchy, on behalf of RDB Interiors, was entitled to a payment of a further £991,000 plus interest.
CJ-0139
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