Optimus Build Ltd v Southall & McManus [2020] EWHC 3389 (TCC)
In this case the Technology and Construction Court (TCC) dealt with a dispute brought by a building contractor, Optimus Build Ltd (“Optimus”) against Mr. Southall and Ms. McCanus (the “Employers”). No formal contract existed and the two main issues were:
1. What was the Contract basis? The Employers contended it was a “cost plus” contract; the Contractor contented it was a “fixed price” contract.
2. Which Party validly terminated the Contract? Both Parties claimed they had validly terminated it due to the other having committed a repudiatory breach before the works had been completed which they had accepted (i.e. a breach so fundamental to the contract that it gives the other (innocent) contracting party the option to terminate the contract (by accepting the repudiatory breach) and to then sue for damages).
Brief Facts
The Employers owned a residential property in Manchester. In March 2017 they engaged Optimus to undertake extensive building works at the property. Interim applications 1 and 2 were issued and paid in full (Optimus’ interim valuations were based on its agreed budget estimate “with additional columns added showing the percentage completion against each work subsection with a composite value against each work section”).
A dispute arose following Optimus issuing its interim valuation 3 (“IV 3”) on 26 September 2018, seeking a further payment of £40,685.87 plus VAT. The same day the Employers sought a breakdown “into each individual item”. The next day a meeting occurred, Optimus providing breakdowns to the Employers and on 1 September 2018 the Employers emailed Optimus with various valuation queries. Matters then escalated as follows:
On 3 October 2018 there was a site meeting to discuss matters. The judgment notes that Optimus was “quite happy to provide a more detailed breakdown of the valuation and to address the issues raised”. However the meeting “became contentious” with the Employers insisting a number of the agreed budget estimate prices be reduced, and that the works be “valued on a cost plus basis”; which Optimus refused to do. The Employers offered to pay £20,000 on account until there was “a satisfactory resolution of their concerns”, and the Employers (Mr Southall) “made it clear at the meeting that they required an itemised breakdown of the next month's work before any further work was to be carried out” (underlining added).
On 5 October 2018 Optimus emailed the Employers recording its concern at the Employers seeking to “reduce our price retrospectively without foundation”, maintaining its payment entitlement in IV 3 and recording that:
“We genuinely wish to complete our works on this project but due to our uneasy feeling following the meeting on Wednesday we believe the way to move forward on this project should be under the following circumstances:
(a) Valuation 3 is paid as described above.
(b) The full scope of our remaining works is established.
(c) A payment plan is put in place to cover the remaining works that is mutually acceptable.
We would suggest a meeting as soon as possible to try and agree a way forward and will be happy to meet to try and come to an acceptable resolution. Until we feel comfortable with the situation we will not be carrying out any further works on the project. We hope this adequately clarifies our position." (underlining added).
In subsequent communications the judgement notes that Optimus sought to resolve matters seeking a meeting and remained willing to resolve matters and complete the works. However, the Employers’ email 9 October 2018 rebuffed Optimus attempts to meet and resolve matters, maintaining that Optimus had walked off site, they were not prepared to give Optimus another chance, were making “alternative arrangements” to complete the works and requested Optimus’ scaffolders to urgently remove their scaffolding from the site.
The Employers maintained that Optimus’ email 5 October 2018 was a repudiatory breach of the contract. Optimus had “no contractual right to suspend the works for non-payment of the third valuation or otherwise”; additionally Optimus had “taken steps to demobilise from site and had put the delivery of materials necessary to restart work on indefinite hold”. The Employers’ email 9 October 2018 was its acceptance of Optimus’ wrongful conduct. The Employers wanted nothing further to do with Optimus and began dealing with other contractors to complete the remaining works.
Optimus’ further attempts to resolve matters failed; the Employers’ stance would not change. Therefore Optimus emailed the Employers on 12 October 2018 recording that by the Employers “refusing to meet and by insisting that the claimant remove its remaining equipment from site and not return” the Employers were in repudiatory breach of the Contract, Optimus accepted same, and would prepare and submit its final account (Optimus submitted this on 16 November).
TCC Issue 1 – the Contract:
In a detailed and lengthy analysis, the Judge held that the Contract was a fixed price lump sum contract formed by way of a series of meetings, discussions and correspondence exchanges (including emails and various versions of Optimus’ “budget estimate”) leading up to an agreed revised budget estimate of circa £170,000. It was not a “cost-plus” contract as contended for by the Employers. The term “budget estimate” had to be construed against the facts. As part of his reasons, the Judge stated that there was no logical reason for Optimus to have taken the time and effort of preparing a detailed pricing document (and revised iterations of same as negotiations occurred) if the contract was being tendered on a ‘cost-plus’ basis, nor were the facts and parties’ conduct consistent with a “cost-plus” contract being agreed.
TCC Issue 2 – the termination issue:
As noted above, each Party blamed the other for committing a repudiatory breach and sought costs and damages from the other. The key issue here was did Optimus’ conduct in wrongfully suspending its works amount to a repudiatory breach of Contract that entitled the Employers to terminate? Before analysing the facts the Judge, inter alia, noted the following:
“12. Turning next to the issue of repudiation, it is common ground that there is no right at common law to suspend performance for non-payment of an interim payment so that where – as here – there was no express nor statutory implied [1] contractual right to do so the claimant would not lawfully be entitled to suspend work in such circumstances, even if the defendants were themselves in breach of contract in not paying what was properly due under an interim valuation.
13. However, a wrongful suspension of performance does not in itself necessarily amount to a repudiatory breach of the building contract such as would justify the other party as treating itself as discharged from any further obligation to perform its obligations under the contract.”
On the facts¸ even though it did not have the right to suspend, the Judge held that Optimus had not committed a repudiatory breach. Its email was not repudiatory; it was justified in its complaints (non-payment, the Employers’ seeking to renegotiate the agreed contract terms and prices). Further, Optimus could not proceed with the works anyway, because the Employers (Mr Southall) at the meeting 5 October 2018 had, without contractual justification, told Optimus that it was not to proceed with any further works “unless and until a programme for the following month was produced and agreed with the defendants.” On the facts of this case the Judge concluded:
“Thus, it was not open to the defendants to treat the email as repudiatory. The claimant was not in repudiatory conduct when it was making it plain its willingness to meet and seek to resolve the issues which divided the parties with a view to completing the project.”
Accordingly, the Judge held that it was the Employers that had committed a repudiatory breach based on its conduct post 5 October 2018, which was accepted by Optimus on 12 October 2018. Optimus were awarded a further payment of £23,628.36 for work completed, plus an additional £19,422.96 in damages for breach of contract.
Conclusion
This case highlights a number of key points:
• The uncertainty, issues and risks that can apply when the parties proceed without a formal written contract.
• The dangers, risks and pitfalls of terminating a contract. As the Employers discovered to their costs (including legal fees) attempting to wrongfully terminate a contract where a Party is not entitled to do so can in itself be a contractual repudiation, which if so, the other party may then accept and claim damages, as appropriate (including potential loss of profit claims). Generally speaking termination should only be done as a matter of last resort, with great caution, and not undertaken unless a party has clear evidence, valid grounds and a plain contractual entitlement to do so, plus even then a party should not take steps to terminate before first receiving legal advice. Further, if terminating on the basis of, and using, a termination procedure in the contract this must be followed meticulously.
• Suspension – whilst on the facts of this case wrongly suspending the works did not amount to a repudiation, each case depends on its own particular facts. On a different set of circumstances the result may have gone the other way. As the Judge noted “there is no right at common law to suspend performance for non-payment of an interim payment”. If a Contractor wants to suspend the performance of its contractual obligations it can only legally do so if, where and in accordance with any contractual right (express clause or statutory) that may be included in its contract. If none exists it cannot do so. Further, if there is such a right in the contract, these rights are often very limited in their scope and application, and must both apply and be meticulously followed. Where a Contractor suspends without a right to do so it will be in breach, and (depending on the facts) this may be serious enough (or not as the case may be) to be a repudiatory breach entitling the other party to accept and terminate the Contract.
Note: As noted in the judgment, construction contracts with a residential occupier are excluded from the ambit of Housing Grants, Construction and Regeneration Act 1996 (“HGRA 1996”) therefore the statutory right to suspend performance for non-payment included at Section 112 of the HGRA 1996 did not apply.
Matthew Davies, Director, Blue Sky ADR Ltd
[email protected] / 07552 1267123
Date 12 March 2021
This article is provided for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the writer or by Blue Sky ADR Ltd. If specific advice is required, Blue Sky ADR Ltd should be contacted direct at [email protected]. If you require any further information in relation to this article please contact one of our team.
1. What was the Contract basis? The Employers contended it was a “cost plus” contract; the Contractor contented it was a “fixed price” contract.
2. Which Party validly terminated the Contract? Both Parties claimed they had validly terminated it due to the other having committed a repudiatory breach before the works had been completed which they had accepted (i.e. a breach so fundamental to the contract that it gives the other (innocent) contracting party the option to terminate the contract (by accepting the repudiatory breach) and to then sue for damages).
Brief Facts
The Employers owned a residential property in Manchester. In March 2017 they engaged Optimus to undertake extensive building works at the property. Interim applications 1 and 2 were issued and paid in full (Optimus’ interim valuations were based on its agreed budget estimate “with additional columns added showing the percentage completion against each work subsection with a composite value against each work section”).
A dispute arose following Optimus issuing its interim valuation 3 (“IV 3”) on 26 September 2018, seeking a further payment of £40,685.87 plus VAT. The same day the Employers sought a breakdown “into each individual item”. The next day a meeting occurred, Optimus providing breakdowns to the Employers and on 1 September 2018 the Employers emailed Optimus with various valuation queries. Matters then escalated as follows:
On 3 October 2018 there was a site meeting to discuss matters. The judgment notes that Optimus was “quite happy to provide a more detailed breakdown of the valuation and to address the issues raised”. However the meeting “became contentious” with the Employers insisting a number of the agreed budget estimate prices be reduced, and that the works be “valued on a cost plus basis”; which Optimus refused to do. The Employers offered to pay £20,000 on account until there was “a satisfactory resolution of their concerns”, and the Employers (Mr Southall) “made it clear at the meeting that they required an itemised breakdown of the next month's work before any further work was to be carried out” (underlining added).
On 5 October 2018 Optimus emailed the Employers recording its concern at the Employers seeking to “reduce our price retrospectively without foundation”, maintaining its payment entitlement in IV 3 and recording that:
“We genuinely wish to complete our works on this project but due to our uneasy feeling following the meeting on Wednesday we believe the way to move forward on this project should be under the following circumstances:
(a) Valuation 3 is paid as described above.
(b) The full scope of our remaining works is established.
(c) A payment plan is put in place to cover the remaining works that is mutually acceptable.
We would suggest a meeting as soon as possible to try and agree a way forward and will be happy to meet to try and come to an acceptable resolution. Until we feel comfortable with the situation we will not be carrying out any further works on the project. We hope this adequately clarifies our position." (underlining added).
In subsequent communications the judgement notes that Optimus sought to resolve matters seeking a meeting and remained willing to resolve matters and complete the works. However, the Employers’ email 9 October 2018 rebuffed Optimus attempts to meet and resolve matters, maintaining that Optimus had walked off site, they were not prepared to give Optimus another chance, were making “alternative arrangements” to complete the works and requested Optimus’ scaffolders to urgently remove their scaffolding from the site.
The Employers maintained that Optimus’ email 5 October 2018 was a repudiatory breach of the contract. Optimus had “no contractual right to suspend the works for non-payment of the third valuation or otherwise”; additionally Optimus had “taken steps to demobilise from site and had put the delivery of materials necessary to restart work on indefinite hold”. The Employers’ email 9 October 2018 was its acceptance of Optimus’ wrongful conduct. The Employers wanted nothing further to do with Optimus and began dealing with other contractors to complete the remaining works.
Optimus’ further attempts to resolve matters failed; the Employers’ stance would not change. Therefore Optimus emailed the Employers on 12 October 2018 recording that by the Employers “refusing to meet and by insisting that the claimant remove its remaining equipment from site and not return” the Employers were in repudiatory breach of the Contract, Optimus accepted same, and would prepare and submit its final account (Optimus submitted this on 16 November).
TCC Issue 1 – the Contract:
In a detailed and lengthy analysis, the Judge held that the Contract was a fixed price lump sum contract formed by way of a series of meetings, discussions and correspondence exchanges (including emails and various versions of Optimus’ “budget estimate”) leading up to an agreed revised budget estimate of circa £170,000. It was not a “cost-plus” contract as contended for by the Employers. The term “budget estimate” had to be construed against the facts. As part of his reasons, the Judge stated that there was no logical reason for Optimus to have taken the time and effort of preparing a detailed pricing document (and revised iterations of same as negotiations occurred) if the contract was being tendered on a ‘cost-plus’ basis, nor were the facts and parties’ conduct consistent with a “cost-plus” contract being agreed.
TCC Issue 2 – the termination issue:
As noted above, each Party blamed the other for committing a repudiatory breach and sought costs and damages from the other. The key issue here was did Optimus’ conduct in wrongfully suspending its works amount to a repudiatory breach of Contract that entitled the Employers to terminate? Before analysing the facts the Judge, inter alia, noted the following:
“12. Turning next to the issue of repudiation, it is common ground that there is no right at common law to suspend performance for non-payment of an interim payment so that where – as here – there was no express nor statutory implied [1] contractual right to do so the claimant would not lawfully be entitled to suspend work in such circumstances, even if the defendants were themselves in breach of contract in not paying what was properly due under an interim valuation.
13. However, a wrongful suspension of performance does not in itself necessarily amount to a repudiatory breach of the building contract such as would justify the other party as treating itself as discharged from any further obligation to perform its obligations under the contract.”
On the facts¸ even though it did not have the right to suspend, the Judge held that Optimus had not committed a repudiatory breach. Its email was not repudiatory; it was justified in its complaints (non-payment, the Employers’ seeking to renegotiate the agreed contract terms and prices). Further, Optimus could not proceed with the works anyway, because the Employers (Mr Southall) at the meeting 5 October 2018 had, without contractual justification, told Optimus that it was not to proceed with any further works “unless and until a programme for the following month was produced and agreed with the defendants.” On the facts of this case the Judge concluded:
“Thus, it was not open to the defendants to treat the email as repudiatory. The claimant was not in repudiatory conduct when it was making it plain its willingness to meet and seek to resolve the issues which divided the parties with a view to completing the project.”
Accordingly, the Judge held that it was the Employers that had committed a repudiatory breach based on its conduct post 5 October 2018, which was accepted by Optimus on 12 October 2018. Optimus were awarded a further payment of £23,628.36 for work completed, plus an additional £19,422.96 in damages for breach of contract.
Conclusion
This case highlights a number of key points:
• The uncertainty, issues and risks that can apply when the parties proceed without a formal written contract.
• The dangers, risks and pitfalls of terminating a contract. As the Employers discovered to their costs (including legal fees) attempting to wrongfully terminate a contract where a Party is not entitled to do so can in itself be a contractual repudiation, which if so, the other party may then accept and claim damages, as appropriate (including potential loss of profit claims). Generally speaking termination should only be done as a matter of last resort, with great caution, and not undertaken unless a party has clear evidence, valid grounds and a plain contractual entitlement to do so, plus even then a party should not take steps to terminate before first receiving legal advice. Further, if terminating on the basis of, and using, a termination procedure in the contract this must be followed meticulously.
• Suspension – whilst on the facts of this case wrongly suspending the works did not amount to a repudiation, each case depends on its own particular facts. On a different set of circumstances the result may have gone the other way. As the Judge noted “there is no right at common law to suspend performance for non-payment of an interim payment”. If a Contractor wants to suspend the performance of its contractual obligations it can only legally do so if, where and in accordance with any contractual right (express clause or statutory) that may be included in its contract. If none exists it cannot do so. Further, if there is such a right in the contract, these rights are often very limited in their scope and application, and must both apply and be meticulously followed. Where a Contractor suspends without a right to do so it will be in breach, and (depending on the facts) this may be serious enough (or not as the case may be) to be a repudiatory breach entitling the other party to accept and terminate the Contract.
Note: As noted in the judgment, construction contracts with a residential occupier are excluded from the ambit of Housing Grants, Construction and Regeneration Act 1996 (“HGRA 1996”) therefore the statutory right to suspend performance for non-payment included at Section 112 of the HGRA 1996 did not apply.
Matthew Davies, Director, Blue Sky ADR Ltd
[email protected] / 07552 1267123
Date 12 March 2021
This article is provided for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the writer or by Blue Sky ADR Ltd. If specific advice is required, Blue Sky ADR Ltd should be contacted direct at [email protected]. If you require any further information in relation to this article please contact one of our team.
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