| Date | 14 November 2001 |
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| Judgment | Yarm Road Limited -v- Costain Limited TCC 30 July 2001 |
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| The Issue | The manner in which a contract can operate retrospectively to govern the parties' relationships before the date of the contract. |
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| Implication |
Circumstances may arise where the HGCR Act will apply to contract works carried out before the effective date of the Act. |
printIn previous articles I have discussed how contracts can regulate the relationships of the parties prior to the date on which the contract was made. This is often called the 'retrospective' effect of the contract. It is a common occurrence in the construction industry since parties will often commence work merely on the strength of a letter of intent. It may then take many weeks, if not months, before a binding contract is formed. The primary issue will not necessarily be whether the contract documents have been formally signed, but whether all the conditions legally necessary for the formation of the contract have been finally agreed. Once this is achieved the contract will apply between the parties to regulate their relationships back to the point when work first commenced. This principle was applied in 1962 in the case of Trollope and Colls -v- Atomic Power Constructions. More recently it was followed in the case of The Atlas Ceiling and Partition Company -v- Crowngate Estates (Cheltenham), reported in November of last year. The interesting twist in this latter case was that works had started under the strength of a letter of intent which pre-dated the coming into force of the Construction Act. The contract had not been formed until after that date. His Honour Judge Thornton QC held that the contract was properly caught by the provisions of the Act. This meant that the parties would be entitled to adjudicate disputed matters which had arisen before the coming into force of the Construction Act. More controversially, the parties would be entitled to expect the full operation of the payment provisions, at a time when those provisions had yet to be made effective under the Act. A further example of the provisions of the Act applying to construction activities which have been carried out before the coming into force of the Act occurred in the case of Yarm Road -v- Costain. In this case the issue was not the retrospective operation of the contract, but instead the operation of a novation agreement. Novation is a type of three-party agreement. It will often be structured in such a way that it will bring an end to the terms of a prior contract between two parties, and create a new form of agreement between one of those parties and a new third party. Costain was main contractor for road widening works on the M5. It had entered into a subcontract in August 1995 with Redpath Dorman Long. Some three years later, for reasons that are not obvious from the judgment, that subcontract was novated in favour of Yarm Road. The novation agreement was expressed to be supplemental to the subcontract made in August 1995. It made it clear that the original subcontractor, Redpath, was to be released and discharged from the subcontract, and that the new subcontractor, Yarm Road, would undertake to perform the subcontract and be bound by its terms. The novation agreement went to great lengths to spell out precisely what was intended. "The substitute sub-contractor" (that is Yarm Road) "undertakes to perform the sub-contract and to be bound by the terms thereof in every way, as if the substitute sub-contractor were a party to the sub-contract in lieu of the original sub-contractor." To sum up, Yarm Road had entered into a subcontract in August 1998, by virtue of the novation agreement, but that agreement bound it to an earlier subcontract dating back to 1995. Would the provisions of the Construction Act apply to the entirety of the subcontract works? Counsel for Costain pointed to certain consequences that he submitted would follow if the novation agreement fell within the Act. Yarm Road would enjoy the right under section 108(2) to refer a dispute to adjudication at any time, which could relate to work done as far back as 1995. It would also enjoy the right to payment without deduction in the absence of a withholding notice served in accordance with section 111. Thus, it would be open to Yarm Road to maintain against Costain claims for interest by way of damages for breaches of contract occurring in 1995, 1996 and 1997, on the footing that monies were withheld in the absence of a proper withholding notice. Upon the making of the novation agreement, any withholding of monies in the absence of a withholding notice, previously lawful, would become unlawful. Costain argued that it would be nonsensical if it were potentially liable in damages for failure to serve a withholding notice in 1995, 1996 or 1997, when the withholding notice regime itself had yet to be conceived. His Honour Judge Havery QC accepted that these anomalies, if they existed, were potentially serious. However, in his judgment it was not open to him to construe the Act in the way in which Costain contended. In his opinion the wording of the Construction Act was clear and the effect inescapable, that the novation agreement fell within section 104 (1) (a) and section 104 (6) (a) of the Act. The agreement was a construction contract within the meaning of the Act. Accordingly, Yarm Road was granted the declaration it sought. It would be entitled to pursue two disputed claims against Costain, amounting to some £4.2 million, by way of adjudication procedures provided for by the Housing Grants, Construction and Regeneration Act 1996.
CJ-0145
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