Implied terms as to progress and quality

Aidan Steensma, Of Counsel, CMS Cameron McKenna LLP A number of recent cases have dealt with the extent to which terms may be implied into construction contracts. Three cases in particular have shown the potentially surprising results which can sometimes depend upon the implication of terms. Insofar as they involve issues of quality and design such terms will often flow from the specific terms of UK legislation, but will apply internationally where English law is chosen by the parties. Leander Construction Limited v Mulalley and Company Limited [2012] BLR 152 Leander related to a groundworks sub-contract. The main contractor, Leander, initially claimed that the subcontractor, Mulalley, was obliged to perform its works in accordance with an Activity Schedule which set out the dates by which certain activities were required to be completed. It was claimed that Mulalley was late in performing the sub-contract works, as against the Activity Schedule, and that Leander consequently suffered loss due to the delay. Later, it was accepted by Leander that the Activity Schedule was not binding on Mulalley but Leander claimed that, in any event, there was an implied duty on the subcontractor to proceed regularly and diligently. Leander alleged that Mulalley had failed to proceed in a regular and diligent fashion, as it did not follow the Activity Schedule. Leander sought to draw support for its argument from the fact that the sub-contract gave Leander an entitlement to terminate if Mulalley failed to proceed regularly and diligently (subject to certain notice requirements). The court dismissed Leanders claim and held that it was not necessary to imply a term to proceed regularly and diligently to make the contract workable. Mulalley was already required to complete the sub-contract works by a specified completion date. Mulalley therefore had a discretion as to how fast or slow it would proceed during certain periods of the works, subject to its ultimate duty to complete the works by the date specified. The express power to terminate for a failure to proceed regularly and diligently was, perhaps surprisingly, found by the court to work against the implication of a term. That was because the right of termination showed that the parties had expressly considered the issue, but yet had not provided for any express duty to proceed regularly and diligently (as opposed to a right of termination). As the court noted, it is impossible to argue that the alleged term is necessary, in circumstances where the parties must be taken to have considered this eventuality and instead decided to deal with the potential problem in an entirely different way. Dalmare SpA v Union Maritime Limited and Valor Shipping Limited [2012] EWHC 3537 Dalmare concerned the purchase of a ship. The dispute arose due to the ship breaking down thirty hours into a voyage and about a month after delivery due to an engine problem. Although the seller was Norwegian and the ship was inspected and delivered in Greece and Turkey respectively, the sale agreement contained an express choice of English law and the buyers therefore argued that the seller was in breach of the implied term of satisfactory quality provided by the Sale of Goods Act 1979 (UK). The seller argued that the implied term under the Sale of Goods Act was inconsistent with the express terms of the sale agreement, which provided that the ship would, be delivered and taken over as she was at the time of inspection, fair wear and tear excepted. The seller argued that the ship had been delivered in the same condition as at the time of inspection and that this express clause of the sale agreement left no room for the implied term provided for by the Sale of Goods Act. The court found that these words were insufficient to exclude the obligation of satisfactory quality implied by the Sale of Goods Act and in doing so, upheld the traditionally strict approach to ousting the Acts applicability. Although section 55(1) of the Act allows the parties to exclude its implied obligations
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by express agreement, section 55(2) states that, An express term does not negative a term implied by this Act unless inconsistent with it. This provision has been interpreted strictly in the past, to the extent that even a clause excluding all guarantees, warranties or misrepresentations, express or implied [of] merchantability, fitness or suitability has been held to be insufficient because the terms implied by the Act are legally categorised as conditions rather than warranties: see most recently, Bominflot v Petroplus Marketing (The Mercini Lady). Although this rule has been criticised as not representing the true intention of the parties with regard to such clauses, the approach of the courts has been to consider that the parties to this English law contract, foreign as both of them are and quite possibly ignorant of the consequences of their choice of language, intended to contract by reference to what English law had to say about the language which they have adopted. Adopting this strict approach, the sale agreement entered into by Dalmare was insufficient to negative the statutory implied term of satisfactory quality. While on one interpretation the agreement could mean that the ship was to be delivered in an entirely as is condition, an alternative interpretation was that the seller was simply to make no alteration to the condition of the ship between inspection and delivery (and thereby saying nothing about standard of quality warranted by the seller). Accordingly, the clause was not sufficiently clear and could not be said to be sufficiently inconsistent to displace the term implied by the Sale of Goods Act: Given the strict approach to construction of terms alleged to exclude the statutory implied terms consistently adopted by the courts the fact that even on the sellers best case the words must have more than one meaning is fatal to the sellers' case that these words exclude the statutory implied terms. Furthermore, given that an obvious sensible meaning of the words is as part of the temporal obligation [i.e. that the vessel be delivered in the same condition as it was when inspected], section 55(2) defeats the sellers argument, since it cannot be said that the first sentence of clause 11 is inconsistent with the implied term in section 14(2). Trebor Bassett Holdings Ltd v ADT Fire and Security Plc [2012] BLR 441 Statutory implied terms were again before the court in Trebor. That case concerned a fire suppression system designed by ADT. The system failed and as a result the claimants factory burnt down. Part of the case concerned the extent of ADTs liability for the design of the system. The claimant argued that the system amounted to the supply of goods under the Supply of Goods and Services Act 1982 and that accordingly the system was required to be fit for purpose. ADT argued that, while each component of the system was to be fit for purpose, it was only required to exercise due care, skill and diligence in the overall design of the system. The courts analysis of this issue centred on the proper characterisation of the system designed by ADT. Section 4 of the Supply of Goods and Services Act provides for an implied term of fitness for purpose in respect of any goods supplied under the Contract. The question was therefore whether the system as a whole, as opposed to its individual components, could be properly characterised as goods. Lord Justice Tomlinson, in delivering the judgment of the Court of Appeal, did not think so: I do not regard it as either natural or accurate to regard Cadbury as having bought from ADT a system which can be equated with goods which are either of good quality or not as the case may be. I can understand that that description might possibly be apt if Cadbury had contracted to purchase, or ADT had contracted to supply, a standard kit or assembly. In such circumstances there would, ordinarily, be no element of design in order to meet specific requirements. The present is, as it seems to me, a very different situation. what was offered was not a standard product to be taken off the shelf and chosen by reference to its description. If what was offered could properly be described as a product at all, which I doubt, it was at best a bespoke product in respect of which what was of importance was not so much the inherent quality of the constituent parts (which was of course required to be good) but rather their selection as being suitable for the task and the manner in which they were to be combined, located and installed in such manner as "to suit the specific requirements of the risks to be protected". In these circumstances it is I think wholly artificial to regard ADT as having contracted to supply a system which
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can be equated with goods and of which it can simply be asked in the abstract, was it or was it not of good quality. Two interesting observations can be made about this decision: This decision would appear to be at odds with a previous decision in which a system had been held to be goods supplied under the Supply of Goods and Services Act. In John Lelliott v Byrne Bros (Formwork) Ltd an agreement to provide a temporary support system (comprising steel tubes and woodwork, similar to scaffolding) was found to be subject to an implied duty (under the Act and at common law) of fitness for purpose. That obligation was breached because the system, as opposed to individual items of which it was made up, did not provide sufficient support. As the Court of Appeal noted in Trebor, the question in any given case as to whether a system amounts to goods or not is largely a matter of impression, however, it remains to be seen how far the courts distinction between bespoke and off the shelf products will be applied. Quite aside from the Act, it is well established at common law that a contractor who agrees to design and construct works impliedly agrees that the works will be fit for purpose (IBA v EMI Electronics Ltd). The Court of Appeals decision in Trebor would appear to leave this rule untouched as it does not depend on any requirement for the works to be characterised as goods (it is unclear why the common law point was not pursued in Trebor itself). At common law, the courts have specifically resisted attempts to divide up the works, as was done in Trebor, into so many pieces with differing criteria of liability when the implied term of fitness for purpose prescribes a relatively simple and certain standard of liability based on the reasonable fitness of the finished product irrespective of considerations of fault and of whether its unfitness derives from the quality of work or materials or design (Viking Grain Storage Ltd v TH White Installations Ltd).

Conclusions and comment These decisions all have the potential to affect international and domestic construction contracts and show the difficult and surprising issues which can be posed by the implication of terms under English law. The relevance of Leander will be minimised for contracts with express provisions as to progress, such as that in clause 2.4 of the JCT Standard Building Contract ( shall regularly and diligently proceed with and complete the [Works]) or clause 8.1 of the FIDIC Red, Yellow and Silver Books 1999 ( shall then proceed with the Works with due expedition and without delay). However, parties should not expect any further or additional duties in this regard to be implied. Trebor and Dalmare are likely to be of greater relevance in most cases where English law is specified as the governing law. Under the FIDIC Red Book 1999, for example, the contractor is expressed to be responsible for such design of each item of Plant and Materials as is required for the item to be in accordance with the Contract but is not otherwise responsible for the design or specification of the Permanent Works (expect where specific parts of the Works are stated to be the contractors design). This therefore forms the minimum express design obligation within the FIDIC 1999 suite i.e. ensuring the suitability of Plant and Materials. To this, however, must be added where English law applies the more general implied obligations arising under the Supply of Goods and Services Act of satisfactory quality and, in certain circumstances, fitness for purpose for any materials in which ownership is to pass to the employer. These implied obligations may also apply to distinct parts of the works if that part of the works can be distinctly characterised as goods in its own right. Specific words must be used to exclude these terms, as Dalmare shows, and they are unlikely to be entirely excluded by the standard wording quoted above. The FIDIC suite also provides a good example of how the common law obligation of fitness for purpose may apply in practice. Although all of the FIDIC 1999 suite expressly impose on the contractor a fitness
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for purpose duty where it is required to design all or part of the Works, the duty is limited to those purposes specified in the Contract (Red Book 1999 and MDB) or as defined in the Contract (Silver and Yellow Books 1999 and Gold Book 1999 and 2008). The duty implied by English law operates more broadly by reference to any purpose made known to the contractor by the employer, whether expressly or by implication. As this implied duty falls within a special category of implied terms under English law (known as an implication by law), it must be expressly excluded. To the extent that any express term covers part (but not all) of the ground covered by such an implied term (as is the case in the FIDIC 1999 suite), the implied term will continue to apply to fill the gaps: Davy Offshore Ltd v Emerald Field Contracting Ltd. Accordingly, under the FIDIC 1999 suite, the narrower express terms as to fitness for purpose restricted to the purpose specified or defined in the contract could be supplemented by a wider duty based upon any additional purposes made known to the contractor when the contract was concluded. In some instances this may impose an unexpected (and unwelcome) extra burden on the contractor. References: IBA v EMI Electronics Ltd (1978) 11 BLR 29 (Court of Appeal); (1980) 14 BLR 1 (House of Lords); Viking Grain Storage Ltd v TH White Installations Ltd (1985) 3 Con LR 52; Davy Offshore Ltd v Emerald Field Contracting Ltd (1991) 55 BLR 1; John Lelliott v Byrne Bros (Formwork) Ltd (1992) 31 Con LR 89; Bominflot v Petroplus Marketing (The Mercini Lady) [2010] EWCA Civ 1145; Leander Construction Limited v Mulalley and Company Limited [2011] EWHC 3449; Dalmare SpA v Union Maritime Limited and Valor Shipping Limited [2012] EWHC 3537; Trebor Bassett Holdings Ltd & Anor v ADT Fire and Security Plc [2012] EWCA Civ 1158.

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