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(contractual) New Years resolutions

13 January 2014

Cliché it may be, but many choose the beginning of a new year to make a new start. With that in mind, this article is a reminder of the need to comply with that most common of pleas from lawyers: "pay attention to detail".

Towards the end of last year we received a number of draft documents which each listed the contracting party as a dormant parent company instead of the correct trading contractor. As a number of cases in 2013 confirmed, this can have severe consequences, including leaving a party with rights enforceable only against a dormant company (generally, parties are bound by the contract they have signed and, whilst the courts can rectify contracts which clearly do not accurately record the parties original intentions, it will not always be straightforward if the mistake relates to a party name).

We look at the lessons arising from one of those cases, Liberty Mercian Limited v Cuddy Civil Engineering Limited, Cuddy Demolition and Dismantling Limited ([2013] EWHC 2688 (TCC)).

The facts

Liberty Mercian (Liberty) contracted with the Cuddy Group for the carrying out of demolition works in connection with a development project. Warranties and other collateral documents were also required.

Tender documents were issued and returned naming Cuddy Group as the contractor. In fact there were two registered Cuddy companies, Cuddy Civil Engineering Limited (Civils); a dormant company and Cuddy Demotion and Dismantling Limited (Demolitions); the company trading as Cuddy Group.

Demolitions commenced work. Following a Companies House search, Libertys solicitors identified Civils as the potential contractor, causing the tenants solicitor to amend the warranty and then the main contractual documentation to refer to Civils. Cuddys made no objection, partly due to payment pressures and partly because it understood that the tenant and Liberty wanted Civils to be the named contractor. Throughout this time, invoices were issued by and monies paid to Demolitions rather than Civils.

A dispute arose which eventually led to proceedings. Liberty sought various remedies, including a declaration that the contract was entered into by Demolitions, not Civils and, in the alternative (if the contracting party was Civils), a declaration that Civils was contractually obliged to deliver a parent company guarantee from Demolitions together with a performance bond and warranties.

The ruling

The court held that Civils, not Demolitions, was the contracting party and that there was no mistake that it could correct. This left Liberty with rights enforceable only against a dormant company.

For a mistake to be correctable by the courts, it must be obvious that a mistake has been made (for example reference to a party that does not exist) and it must be clear to a reasonable person what correction is needed. Here, there was no evidence of a unilateral mistake, as Cuddy thought that the tenant and Liberty wished to contract with Civils rather than Demolitions, and Civils was a legal (although non-trading), entity. The court confirmed that there must be a "strong case" to persuade it that something had gone wrong with the language of a document.

Comment 

Paying attention to the details is hardly a new concept, but it remains as important as ever. Failing to do so creates diverse risks:

1. Employers risk:

  • contracting with a dormant company, whose assets cannot meet potential future liabilities and which may not maintain required insurances
  • contracting with a party whose financial records and history it has not actually investigated
  • being unable to obtain a satisfactory parent company guarantee or bond
  • being unable to enforce the terms of the contract against the contractor actually on site
  • being unable to meet obligations to interested third parties to provide the warranties they are expecting, of a covenant strength as may be required.

2. Contractors and sub-contractors risk:

  • not being paid for work done
  • where they are the non-contracted party actually carrying out the works (like Demolitions), not being able to enforce the contract against their employer in the event of breach
  • where they are the contracting party, but are not carrying out the works (like Civils), being liable for the omissions of another through the contract, for which they may have no contractual recourse against that other
  • inconsistent sub-contracting creating potential exposure to risk, with the named main contractor not being the same as the sub-contracting contractor.

Clearly (if somewhat tritely), it is important to correctly identify each party to a contract. Particular tips are to:

  1. Ensure the identification process begins as soon as possible, so that appropriate company and financial checks can be carried out early and certainly well before contracts are awarded.
  2. Tread carefully where there are multiple companies with similar names.
  3. Check the chosen companys status and insolvency history.
  4. Remember to re-check the details again before contracts are signed, to mitigate the effects of changes between tender and award.
  5. Where appropriate, carry out more detailed checks of contractual counterparties and take legal advice on contracts and related issues as necessary.
  6. Where a company uses a trading name, take care to document both its full registered name and its trading name, to avoid confusion.
  7. Always include registered company numbers wherever possible, as, unlike names, these cannot change.

Finally, carefully check contracts that are prepared by or amended by others and make sure that they reflect what has been agreed. If you notice an error, raise it and do not assume that it necessarily corresponds to changed requirements on their part.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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