| Date | 8 February 1996 |
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| Judgment | Bovis Construction (Scotland) Ltd -v- Whatlings Construction Ltd (Scotland), (unreported), House of Lords 12 October 1995 |
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| The Issue | Clauses limiting subcontractor's entitlement to damages in the event of delay. |
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| Implication |
A clause limiting liability should state clearly and unambiguously the scope of the limitation and will be construed with a degree of strictness. |
printSubcontractors have a tough time in the construction industry, and nowhere is this more evident that when one looks into the consequences of their failure to perform. If the failure concerns defects in the works, subcontractors, in similar fashion to main contractors, will be liable for those damages which were a foreseeable consequence of the breach - the rules in Hadley -v- Baxendale dictating the type of costs or losses to which they will be held liable. However, if the failure is one of delay to progress or completion, the subcontractor will find itself in a considerably more difficult position than a main contractor. Although main contractors will generally not face damages as a result of failure to progress the works according to a programme, (unless their employment has been validly determined), subcontractors routinely enter into contracts which allow deductions of monies as a consequence of failure to comply with a programme or sequence of works. Furthermore, main contractors will normally operate under liquidated and ascertained damages provisions, such that their financial risk in the event of delay in completion is quantified from the outset, often capped to a maximum liability. Not so for subcontractors. If they delay completion, the amount of damages will be whatever the main contractor suffers as a consequence, including claims from other subcontractors, together with the main contractor's own direct costs and losses. These 'general' damages are the subject of much abuse in the industry. Main or management contractors and construction managers often set-off substantial sums from subcontractors arising from allegations of breach, which in the final analysis, despite attempts to regulate the process by adjudication, all too often result in the burden of a 'commercial' settlement to the subcontractor which bears little foundation in actual proven damages. Is no surprise therefore that subcontractors throughout the industry attempt to impose a limitation upon the damages which they will face in the event of a dispute concerning progress or completion. Great care must however be taken in the drafting of such provisions, since if they are not entirely clear in their intent, they will fail. Such is the case in the recent decision by the House of Lords involving Bovis Construction (Scotland) Ltd and Whatlings Construction Ltd (Scotland), reported in the Times on 20 October 1995. Bovis were management contractors employed by Glasgow District Council to construct a new concert hall. The construction work was entirely sub-let to package contractors, Whatlings, being responsible for construction of the east and west frames of the building. Whatlings were keen to limit their exposure to damages, and following discussions with the management contractor, Bovis, they obtained a letter which subsequently became a term of the contract, stating: "The District Council would not accept the limitation of damages which arose through your non performance by way of failure to meet the requirements of the specification etc, and wished to maintain their rights to pursue you for all costs in this respect through ourselves. However, in respect of time related costs they were prepared to accept the limit for damages set by you of £100,000. This acceptance is given with the proviso that you accept a set limit to your entitlement to recover damages of £100,000 against other package contractors Bovis Construction (Scotland) Limited or the various members of the design team should their actions result in your incurring costs which again would be time related." Now those of us blessed with perfect hindsight will have immediately spotted the difficulty with this agreement. What does the word "etc" mean? What are "time related costs"? This latter question (and a damages claim from Bovis amounting to £2.7 million), is the reason why this case went all the way to the House of Lords, stoking the pension funds of a small but no doubt very healthy band of lawyers. Lord Jauncey of Tullichettle in his judgement stated that: "these words (time related costs) are intended to refer to damages flowing from late performance of the contract, as opposed to those flowing from bad performance or non-performance." But non-performance and late performance can cross over each other, mused his Lordship. Did the parties intend to limit the subcontractor's liability in the event of a failure to progress the rectification of defects for example, but not to limit the liability where there was simply a failure to commence the remedials? In the event the real issue was somewhat easier. The subcontractor's employment had been determined as a result of their failure to proceed with diligence , and clearly this had led to their non-performance. The limit of £100,000 could not therefore be applicable, as the damages flowing from non-performance could not be said to be 'time related costs'. The management contractor thus won the day, though whether the £ 2.7 million damages are a correct measure, as opposed to a "bona fide estimate" will no doubt require more legal wrangling. The message? When drafting contracts one cannot assume that the normal construction industry usage of words will necessarily dictate their ultimate meaning in a court of law. Things have to be spelled out more clearly than that.
CJ-0604
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