| Date | 30 November 2005 |
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| Judgment | Shawton Engineering Ltd v DGP International Ltd and Others, CA 18 November 2005 |
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| The Issue | Terminating a subcontract on the grounds of delay when the contractor's obligation is to complete the works within a reasonable time. |
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| Implication |
Where
the requirement is to complete works within a reasonable time, that
reasonable time for completion must be established and notice making
time of the essence given before a contract can be terminated for
delay. |
printIn the recent case of Shawton Engineering v DGP International, the Court of Appeal had to examine the circumstances in which a contracting party might lawfully terminate a contract on the basis of delay in performance by the other party, when that party's obligation is to complete the work within a reasonable time. British Nuclear Fuels had a contract with Kvaerner Construction to construct facilities at Sellafield for handling nuclear waste. Kvaerner subcontracted this work to a joint venture called KAT Nuclear. KAT were effectively the main contractor and they placed a subcontract with Shawton for the design and manufacture of a number of work packages. Shawton in turn subcontracted the design work for five of those packages to DGP. Disputes arose between Shawton and DGP concerning delay in producing the designs. There had been a number of variations to the work to be carried out by DGP and although there was no contractual mechanism for extending the time on account of these variations, Shawton was prepared to give DGP substantially more time in which to complete the work. A series of revised programmes was accepted, and the parties entered into an agreement extending the time for completion of the design work and agreeing that Shawton would pay for the variations claimed by DGP. It seems that underlying this agreement was the fact that further up the line, KAT were themselves having difficulties and were not pressing Shawton to deliver the plant and equipment on time. There was apparently no operational need for the deliveries. Despite this, eventually these matters came to a head and Shawton issued a letter purporting to terminate DGP's subcontract. Shawton claimed the cost of another design subcontractor in the amount of approximately £820,000, a sum which was more than three times DGP's original contract price. Shawton also claimed approximately £1m for alleged delay and disruption. When these matters came to court, Shawton said that DGP had been in breach of its obligation to complete and this entitled Shawton to terminate the subcontract. Shawton accepted that where the contract did not provide a mechanism for extending the time for completion, the legal effect of the variations to the work was that DGP became entitled to complete their work within a reasonable time. Put another way, time was "at large". On hearing these matters in the Technology and Construction Court, Judge Gilliland QC noted that it was for Shawton to prove on the balance of probabilities that DGP had failed to complete its work within a reasonable time. Judge Gilliland had certain views about how this should be approached. Firstly, he rejected Shawton's submission that the reasonable time should be ascertained by reference to the original contract period extended only by an agreed period for variations. Even where the experts appointed by the parties had agreed an appropriate extension of time for the variation works, this, together with the originally agreed period, could not be regarded as a fair indication of what was a reasonable time for completion of the work. This was in effect to treat the originally agreed period as being a reasonable period. In the present case, it was clear that DGP had seriously underestimated the number of drawings which would be required and how long the work would take. Judge Gilliland considered that the approach contended for by Shawton might be correct for a contract with express provisions for an extension of time, but not where time had become "at large". Judge Gilliland also had a particular view concerning to the effect of instructing variations after the original completion date. He held that by instructing extra work after the agreed or extended completion dates, Shawton in effect started time running afresh. DGP became entitled to a reasonable time judged objectively for carrying out the remainder of its work. Lord Justice May, sitting in the Court of Appeal, appeared to be rather unimpressed by the approach taken by Judge Gilliland on these points. If DGP had initially underestimated the time required to complete its works, Shawton would have had the contractual benefit of that underestimation, and this could not be entirely ignored simply because DGP's obligation became to complete within a reasonable time. Lord Justice May was similarly not persuaded by the argument that instructing a variation after the original completion date meant, by itself, that the reasonable time had to be assessed afresh. Despite these criticisms, Lord Justice May agreed that in circumstances where the obligation was to complete within a reasonable time, Shawton could only in law legitimately terminate the contract for delay if either it had given reasonable notice making time of the essence, or DGP's failure to complete within a reasonable time amounted to a fundamental breach depriving Shawton of substantially the whole benefit of the contract. Having reviewed the evidence Lord Justice May agreed with Judge Gilliland in holding that Shawton had not made time of the essence when it had obtained revised programmes which DGP had indicated it would "try" to meet. Accordingly, DGP's obligation had remained to complete the works within a reasonable time. Against that background, and where on the evidence DGP had been making an effort to complete the contract works, it would always be difficult for Shawton to prove that DGP were in repudiatory breach. In consequence, the court was correct to conclude that Shawton had unlawfully terminated the subcontract and its appeal against that finding was dismissed.
CJ-0547
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