04/07/2018

The recent judgment of Harrow London Borough Council v Engie Regeneration (Apollo) Ltd (2018) offers a valuable reminder of the approach taken by the courts to disagreement over the meaning of a contract. 

Engie was appointed by Harrow to deliver a schools expansion programme on the terms of the ACA PPC 2000 (amended 2008) Standard Form of Contract for Project Partnering as amended by the applicable Project Partnering Agreement (the PPA), with a commencement agreement for each school project called off. 

There was a disagreement between the parties regarding latent defects insurance. Engie's understanding was that under the terms of the contract Harrow was obliged to obtain latent defects insurance.  Harrow's position was that there was no obligation in the contract to obtain such insurance.  As the parties could not resolve the issue, Harrow approached the Court for a declaration on the point. 

The clause in the PPA relating to latent defects insurance (clause 19.6) was as follows: 

"If so stated in the Commencement Agreement, Latent Defects Insurance shall be taken out by the Partnering Team member stated in the Commencement Agreement, in the amount and for the risks and period stated in the Commencement Agreement…” 

As is common in such contract arrangements the commencement agreement was effectively a proforma containing gaps to be completed in respect of the specific terms of the PPA. On the matter of insurance the Commencement agreement contained the following (the text on the right having been entered by the parties):

"Clause 19.1 Insurance of Project and Site by: The Client

In the names of: The Client and Constructor 

 

With waiver of rights of subrogation against: None

With the following percentage addition for fees: None

With the following additional or adjusted risks (if any): None 

 

Clause 19.1 Insurance (if any) of third party property damage by:  As above

in the following amount: As above  

 

Clause 19.6  Latent Defects Insurance by: As above if applicable

(Note: The Client to confirm if relevant)”

Harrow's position was that "As above" next to the clause 19.6 entry in the Commencement Agreement related to the word "None" directly above it.  This followed given that 

  • It had not, as the Client, confirmed that latent defects insurance was relevant as required by the note; and
  • No details required under clause 19.6 of the PPA had been included in the Commencement Agreement (e.g. which party was to obtain the insurance, the amount of the insurance and the risks covered).

Engie disagreed and claimed that "As above" related to the entry above for clause 19.1 which stated "The Client"   Where the insurance was stated to be obtained by the client, 

  • other types of insurance which were referred to in the PPA had been omitted from the commencement agreement entirely (such as environmental insurance and whole project insurance), so the inclusion of an entry relating to latent defects amounted to the parties confirming it was relevant.
  • in the circumstances it did not matter if the details required under clause 19.6 were stated, because these could be dealt with by an implied term to give effect to the intended obligation.

In giving judgment in favour of Harrow, the court held that:

  1. The meaning of "As above" was only a small portion of the contractual picture and was not determinative. Construction of the contract terms was a unitary and iterative process (Wood v Capita).[1] 'As above' was non-substantive if the parties did intend for the insurance to be put in place. 
  2. Engie's recourse to omissions was overstated and had to be approached with caution; deletions did not give rise to any ambiguity on this point. Rather than focus on 'as above', emphasis should have been put on other indications in the contractual documents and the partnering approach. 
  3. It makes sense from the contractual terms as a whole and the factual matrix that latent defects insurance was optional. Even if "as above" referred to the client, it remained for the client to confirm that such insurance was applicable. That had not been done.
  4. On the matter of implying a term in absence of the details required under clause 19.6: 

a. Without the specification of the amount, risks and period of any latent defects insurance, an obligation to take out such insurance would be too uncertain to enforce, and the details could not be supplied by a process of construction or implication. The court will not imply terms into a Commencement Agreement dealing with details such as the risk, the amount of cover and the duration which had not been specified contrary to the Partnering Terms. There was no standard latent defects cover and so such a term is too uncertain for the court to enforce. As the 'essential terms' of the insurance policy had not been determined, no complete agreement had arisen[2] (Wells v Devani). 

b. Regarding no standard form of latent defects cover, there is a consensus regarding the start date of such insurance, but there are great differences regarding the end dates and the weatherproof envelope. These have big differences in terms of the knock-on effect on price. 

c. Determining what reasonable terms might be would require a full trial with expert evidence. There was no obvious gap that could be filled clearly and simply. 

d. There was no need to imply a term where the absence of cover was expressly contemplated.

  • The Judge also emphasised that the overarching question had been decided in the Marks and Spencer case: a term can only be applied as without it there would be commercial or contractual inoherence.[3]

Points of Importance 

  • The court will take an iterative approach to interpreting a contractual provision, having regard to the express terms in the context of the contractual arrangement as a whole. 
  • Where there is no ambiguity in the terms of the contract, there is no need to consider what is not included in the contract and try to draw inferences from the same.
  • Where there is a requirement for details to be stated in respect of the extent or scope of an obligation, in order for there to be an enforceable obligation these will normally need to be stated. This may turn on the facts, but in the case here, the details required by the operative clause were essential terms of the subject of the obligation, the latent defects policy.

[1] Wood v Capita Insurance Services Ltd [2017] UKSC 24. Lord Hodge- "This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated." 

[2] Wells v Devani [2016] EWCA Civ 1106

[3] Marks and Spencer v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72

 

Authors

Louise Robling and Martha Mordecai