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Unclear contract terms: Sign up to them at your peril

A recent case involving GB Building Solutions has illustrated the importance of clarity when drafting construction contracts.

The judgement in GB Building Solutions Limited (in administration) v SFS Fire Services Limited (t/a Central Fire Protection) [2017] EWHC 1289 (TCC) illustrates yet again the importance of clearly defining terms and, in particular, critical dates in construction contracts.

This is one in a series of recent cases in which the Technology and Construction Court judges have re-affirmed their strict approach to contract interpretation.

Facts of the case

The contractor, GB Building Solutions, had brought a claim against its subcontractor, SFS Fire Services, for flood damage to an office building project in Manchester. The subcontractor was employed to design and install the sprinkler system.

A preliminary issue which came before the court was whether the flood damage occurred before or after the ‘terminal date’ (the date of practical completion of the subcontract works). If it occurred before the terminal date, the claim could not progress.

Flooding was one of the specified perils covered by the contractor’s all risks insurance and the subcontractor was not responsible for the cost of remedying damage to subcontract works caused by specified perils before the terminal date, as such damage would be covered under the contractor’s all risks insurance policy.

However, the subcontractor was responsible for such damage caused by its breach after the terminal date.

“The judge agreed with the contractor’s argument that it may have been intended that practical completion have different meanings in different parts of the subcontract”

Unhelpfully, the subcontract contained two conflicting definitions of ‘practical completion’: one which meant that the terminal date occurred before the flooding; and one which meant it occurred afterwards.

‘Practical completion’ (of the subcontract works) was defined by reference to the date of practical completion under the main building contract. This definition featured in the schedule of amendments which took precedence over the subcontract conditions.

However, a clause in the subcontract conditions (to which the definition of ‘terminal date’ referred), entitled ‘Date of practical completion’, provided a procedure for the determination of the practical completion date.

The subcontractor had to notify the contractor when the subcontract works were in its opinion practically complete, and practical completion would be considered to have occurred on the date so notified by the subcontractor if the contractor had not objected within 14 days.

The arguments

The subcontractor argued that the parties had chosen to insert a definition of practical completion, and therefore this definition should apply across the subcontract regardless of whether the term ‘practical completion’ was capitalised or not.

However, the judge agreed with the contractor’s argument that it may have been intended that practical completion have different meanings in different parts of the subcontract.

Judge Davies noted that ‘practical completion’ was relevant for a number of clauses under the subcontract, including in relation to insurance, payment, responsibility for damage/delay and commencement of the defects liability period.

“Care should be taken to avoid inconsistent definitions, particularly when inserting new clauses into existing contract forms”

The judge gave little weight to the subcontractor’s argument that it would make sense for it not to be responsible for losses occasioned by flooding up to practical completion of the main works (ie practical completion), as the contractor’s all risks policy would cover damage caused by specified perils up to that point even if the subcontract works achieved practical completion at an earlier date.

He was also unwilling to give much weight to arguments based on what constituted commercial common sense, given that this was a detailed contract, incorporating detailed amendments with competing interests in play.

What it means

The practical completion statement was issued (with no dissent from the contractor) before the flooding.

As the flooding came after the terminal date, the judge held that the subcontractor should be held responsible if the flooding was caused by their breach.

This case illustrates the importance of clarity in drafting in construction contracts, particularly if the contract is based on a JCT form with a schedule of amendments.

The courts are likely to view such a contract as a detailed, negotiated contract and be less likely to be willing to look beyond the contract to what the parties actually intended.

Care should be taken to avoid inconsistent definitions, particularly when inserting new clauses into existing contract forms.

Within the definition of ‘terminal date’, the parties should have used either the capitalised term ‘Practical Completion’ or an alternative defined term (depending on what the parties intended) to ensure it was clear how the terminal date was to be established.

Robert Read is an associate in the construction team at Kingsley Napley

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