| Date | 12 January 2005 |
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| Judgment | Emcor Drake & Scull v Sir Robert McAlpine, CA 21 December 2004 |
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| The Issue | Negotiation of subcontract terms whilst the works are proceeding. |
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| Implication |
A supplier will always have the upper hand in contract negotiations where the purchaser is forced to order the commencement of works before contract terms can be agreed. |
printIn May 2001 Sir Robert McAlpine entered into a contract with Summit Health Care as main contractor for the Dudley Hospitals PFI project. The contract works required considerable construction and refurbishment work to existing hospital buildings in the Dudley area. The project also involved extensive mechanical and electrical installations and despite that McAlpine had been in negotiations for over a year with a preferred subcontractor, Emcor Drake & Scull, no subcontract had yet been placed. That put McAlpine in a very difficult position. The timescale of the project demanded that design and fabrication works for the M&E services should commence, but it was not in a position to agree all the necessary terms of the subcontract. This of course is a situation which underpins the vast majority of construction disputes in the UK. Emcor had submitted a price for the M&E works based on outline cost plans amounting to approximately £34 million. It was the intention of the parties that Emcor would enter into a DOM/2 form of subcontract amended to align with the main contract conditions. Despite extensive efforts by both parties, by the time McAlpine had entered into the main contract, agreement had still not been reached on the scope and price for the subcontract works. The solution which McAlpine was forced to adopt was to issue what it described as a "short order" whereby Emcor would be placed under contract to commence and carry out works up to a limit of value initially set at £1 million. It was also intended that the order would be accompanied with a letter of intent, drafted in such a way that it would confirm everything that had been agreed between the parties up to that point in time. This would then be replaced by the formal subcontract as soon as possible thereafter. Since it was McAlpine's policy not to issue letters of intent, this involved a rather contrived procedure whereby McAlpine would draft the letter that Emcor was to place on its own letter headed paper and return to McAlpine. The draft letter was sent to Emcor with a request to prepare it and forward it to McAlpine as soon as possible. In the event, Emcor did not return the letter until a further two months had passed. Moreover, to the consternation of McAlpine, Emcor had made "several small changes". In the meantime Emcor had commenced works on the strength of the initial order from McAlpine for design and procurement of long lead-in items to a maximum value of £1 million. McAlpine subsequently placed further limited orders on Emcor up to a total value of £14 million. Despite this, by December 2001 negotiations in respect of the subcontract had not resolved matters. Draft subcontract documents prepared by McAlpine did not correspond to the undertakings given by Emcor in the letter of intent prepared earlier in the year. The contract period differed, the extent of design liability remained an issue and the amount of liquidated damages was still not agreed. By October 2002 the relationship between the parties had further deteriorated. At this point McAlpine issued a further order in the value of approximately £20 million as an addendum to the previous orders indicating that it believed Emcor now to be under a duty to carry out and complete the entirety of the works for the total amount of orders now placed. Emcor rejected this approach and indicated that it did not believe that a contract existed between the parties. Neither did it consider that extending the order value without resolution of the underlying issues was in the best interests of either party. Emcor offered to step down and allow McAlpine to procure another subcontractor to carry out and complete the works. McAlpine replied by stating that they considered Emcor to be in repudiation of their subcontract, and indicated its acceptance of that repudiation. Later that day the entirety of Emcor's workforce was shepherded unceremoniously from the work site. Unsurprisingly the matter moved from there to the courts. The Technology and Construction Court was initially asked to determine, on the basis of a preliminary issue, whether Emcor had been placed under an obligation to complete the whole of the mechanical and electrical works. His Honour Judge Richard Havery QC concluded that they had not. The letter of intent sent by Emcor simply represented the extent of agreement that the negotiations had reached and was not intended as a contract. No subcontract that conformed with that letter in important respects had ever been offered to Emcor for signature. In essence therefore, that letter was no more than an undertaking on the part of Emcor to enter into a subcontract when called upon to do so. It did not immediately bind Emcor as though a subcontract had in fact been formed. Both parties intended that a subcontract was to be made by the execution of a formal document. That had never happened. In consequence, Emcor was entitled to be paid a reasonable sum for the works carried out up to the limit of £14 million represented by the orders issued by McAlpine. Since it was not in repudiatory breach of subcontract, Emcor would not be responsible for the significant costs to which McAlpine had been put in securing a replacement subcontractor for the completion of the mechanical and electrical works. Immediately before Christmas, these matters were reviewed in the Court of Appeal. The appeal court concluded that Judge Havery had been correct to find that at no stage had the parties agreed that Emcor would carry out all the work for an agreed sum. The appeal was dismissed.
CJ-0501
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