The High Court has recently reminded everyone that parties’ conduct can alter their legal relationship even if the contract contains an “entire agreement” clause. The case arose from a payment dispute between a housing association and a private sector housing maintenance contractor and provides a warning about starting work without implementing functional systems, leading to a compromise that actually ends up binding the parties.

Background

Shoreline Housing Partnership manages just under 8000 homes in Lincolnshire. For maintenance and repair, Shoreline had previously used its own subsidiary but decided to make cost and efficiency savings by outsourcing to a private sector provider and TUPE transferring in-house maintenance staff.

The tender was OJEU’d based on NEC Term Service Contract Option C (target cost with price list), with a structure allowing interim payments on a “cost plus” basis, adjusted with a pain share / gain share calculation every six months by reference to the tendered prices.

Mears were appointed with a bid that indicated a 22% saving for Shoreline, equating to approximately £1 million per annum. Work was due to start in July but the contract would not be ready for signature until December. Therefore Shoreline’s head of property investment and Shoreline’s service manager agreed with Mears that invoicing could start on the basis of the prices in the NEC3 Option C Price List (even though the parties had procured on the basis of a cost plus billing plan).

Shoreline then conceded to Mears that the Price List was “somewhat academic” because jobs that Mears would have to do were not listed and therefore not priced. Shoreline’s own call centre staff said that when the tenants requested help, the call centre could not identify which task applied from the Price List, a problem compounded by discovering new problems on site and also the use of day work rates – leading to more management time and more inspections - so Shoreline staff understandably pushed for a user friendly, workable system.

Agreement of 'composite codes'

Numerous meetings between senior people of all sides took place throughout May, leading to the agreement of “composite codes” – activities and prices that would be noted on job bookings. So Mears started work in July. By January the following year, Mears had carried out 13,600 orders booked by Shoreline using composite codes, and invoiced according to the price on those composite codes. Shoreline paid those invoices.

The final draft contract had appeared just before Christmas as planned, but by that stage Shoreline had noticed that the Mears costs were significantly more than planned, so they called in Mears alleging prolonged inflated invoicing, overpayment and non-compliance with the contract. Mears simply said that Shoreline were in all the meetings and agreed the system that was being used. Shoreline recalculated all the cost plus prices using the contractual mechanism, applied the pain share / gain share, and withheld about £300,000. Mears sued.

Outcome

Shoreline said the contract was the retrospective entire agreement (as per the entire agreement clause) – Mears said that the parties worked on a shared assumption, both parties complied with that, work was completed and paid, and Shoreline cannot now go back on what was openly agreed to get some extra benefit.

The judge agreed with Mears, saying that the parties acted on an assumed state of facts, that assumption was openly communicated, shared and acquiesced by both sides, relied upon and operated for a long period, and it would now be unjust to allow the person to deny those facts and gain a benefit. Mears succeeded in their argument.

Comment

So what should you do to avoid this scenario? Analyse your management and control systems before tendering, scope the job that is being tendered to reflect how you work and what you need, create a system that is workable, make sure all of your staff understand what is required and then operate the required system, draft and negotiate your contract earlier, and avoid prolonged “stopgap” compromises. Don’t assume the contract will get you out of trouble. Michael Hiscock or another member of the Wright Hassall Construction Team can help.

About the author

Michael Hiscock Partner

Michael is a specialist in construction and engineering procurement, advising on a wide variety of works contracts (e.g. JCT, NEC3, MF/1, ICC, PPC2000), professional terms of appointment (e.g. RICS, ACE, RIBA) bonds, guarantees and ancillary documentation.