England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY and CONSTRUCTION COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		16 October 1998

Introduction

These proceedings arise from the termination of a highway maintenance contract awarded by the Bedfordshire County Council ("the Council") to Fitzpatrick Contractors Limited ("FCL"). The contract was for the period of 4 years 1995/96-1999/2000, and was to take effect from the agreed date of commencement, which was 1 June 1996. The work was to be carried out pursuant to Works Orders for the construction, maintenance and clearance of all directly maintained highways in Bedfordshire for which the Council was responsible. The Council contends that FCL repudiated the contract by wrongfully refusing to start work. FCL admits that it refused to start work on 1 June 1996. It asserts, however, that (i) it was entitled not to start work on that date and/or was prevented from doing so by reason of the Council's failure to make sufficient work available to it; (ii) in any event, it did not repudiate the contract; and (iii) the Council repudiated the contract by giving notice of termination by letter dated 13 June 1996.

This judgment is concerned only with the issues of liability. An important question that has been raised is whether, as the Council contends, there was an implied term of the contract that FCL owed the Council a fundamental obligation of trust and confidence analogous to that owed by employee to employer. There is no authority directly on the point.

Before I come to the issues that arise, I need to set out the relevant history.

Events up to 1 June 1996

On 7 July 1995, the Council invited tenders for the Works from FCL, 4 other contractors and its own County Commercial Services ("CCS"). Previously, all highway maintenance work for highways for which the Council was directly responsible was carried out by the CCS. CCS employees were employed by the Council. It was contemplated that, unless the contract was awarded to CCS, there would be a transfer to the successful tenderer of an undertaking for the purposes of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE"). In that event, there would also be an automatic transfer of the contracts of employment of those CCS employees previously engaged on such work. Appendix B to the Form of Tender (2/A/1/8) stated that "the nature and extent and therefore the value of the work executed under the Term Contract 1995/96-1999/2000 will vary to meet the minimum maintenance requirements of the Network". In response to a question from FCL as to the minimum contract value per annum, the Council wrote on 22 August 1995 that the annual expenditure on work ordered under the proposed contract would be of the order of £6M, but this figure could not be guaranteed, and in reality could be a little less than £5M.

On 1 September 1995, FCL submitted its tender. Unison, which represented the interests of the CSS employees, was less than enthusiastic about the prospect of an outside contractor becoming the employer of the CCS workforce that had previously been doing the highway maintenance work. It expressed concerns to the Council inter alia on the question whether satisfactory pension provision would be made for the employees to be transferred to FCL.

In the event, on 14 February 1996, the Council accepted FCL's tender subject to a number of conditions. It is common ground that by late May 1996 (if not earlier) a binding contract had been concluded. It is not necessary to decide precisely when this happened. At a meeting on 21 February, it was agreed that the commencement date would be 1 June 1996. Preparations for the start of work continued. On 26 March, Mr Freeman, the Engineer's Representative under the contract, prepared an Implementation Programme which showed that the placing of Works Orders with FCL was to start on 31 April (sic). By 16 May, no orders had been issued. On that date, Mr Freeman sent an email to his engineers saying that this could cause "some difficulty for them (ie FCL) to be able to programme works and mobilising the necessary labour". He urged them to "think SERIOUSLY about placing orders in good time."

On the same day, the Council handed to FCL a copy of a Collective Agreement made between the CCS and various unions, which provided that, if an employee of CCS left the employment of the Council between the date of the agreement and 30 September 1998 inter alia on grounds of redundancy, the Local Government (Compensation for Redundancy) Regulations 1994 would apply. The effect of this would be to give such an employee the right to an enhanced redundancy payment in those circumstances. This was the genesis of what I shall call "the redundancy issue". On 22 May, FCL wrote to the Council saying that they were disturbed to find that the Collective Agreement had been negotiated without their knowledge, and that if it were to apply to employees transferred to them on 1 June, they expected the Council to indemnify them against any liabilities arising from it.

On 24 May, Mr Elders, the Managing Director of FCL wrote to the County Solicitor recording his "extreme concern" on 3 matters. The first was the redundancy issue. The second, ("the accrued payments issue") concerned the question of liability for overtime and bonuses payable 2 weeks in arrears to employees to be transferred under the contract in respect of the period prior to transfer. Mr Elders insisted that this liability should be borne by the Council. The third related to Works Orders. On this, he wrote:

"With the planned commencement date of the 1st June--only 4 working days hence--we are extremely alarmed that we are only in receipt of works orders for the first month of the contract with a value of approximately £15,000. In our numerous discussions with Mr Freeman and his colleagues, we have been advised of a planned expenditure for this financial year of between £3.2M and £4M, which equates to an approximate monthly spend of £310-£400,000. This spend level is the minimum requirement to maintain gainful employment for the transferring employees. Unless there is a dramatic increase in the number and value of works orders issued to us in the next few days, we face an untenable situation which we believe jeopardises the commencement date of the contract and puts at risk the security of employment of your transferring employees. We enclose a formal draft letter for approval which records the terms on which your transferring employees will be accepted. This letter also specifically indemnifies us in respect of the collective agreement referred to above. We would propose that this letter is incorporated into the Form of Agreement by Deed."

Clause 1 of the draft letter started as follows: "In consideration of the Contractor performing and continuing to perform its duties in accordance with the provisions of the contract, the Council undertakes and covenants to the Contractor that ..." There then followed a number a detailed sub-clauses. These included at sub-clause 1.4:

"The Council has dismissed by way of redundancy those of the employees listed in Part 2 of the Schedule. In each case the Council has given proper notice ... and has complied with all relevant statutory procedures and the Council shall on the Transfer Date produce for the Contractor's inspection a receipt on Form RP3 ... for the full amount of the statutory redundancy payment due. The Council shall fully and effectively indemnify the contractor against all liabilities costs claims and demands under or in connection with any of the respective employment contracts of the Employees listed in Part 2 of the Schedule or the termination hereof".

Part 2 of the Schedule was blank.

Early in the morning of 29 May, Mr Freeman sent 2 emails to his engineers pressing them as a matter of urgency to issue Works Orders to FCL. He said that FCL did not currently have enough work to employ the CCS staff who were being transferred as from 1 June. Accordingly, it was vital that a much higher value of orders was placed immediately. A meeting was held between the parties later that morning. Mr Davies and Mr Norton attended on behalf of FCL. They were respectively a director and contracts manager of FCL. A number of persons represented the Council. Mr Davies mentioned the 3 outstanding issues which had been the subject of the letter of 24 May. He told me (and I accept) that he regarded the Works Orders issue as by far the most important of these. He told the meeting that, if the workload was insufficient to occupy the workforce on transfer, FCL would be obliged to institute redundancy procedures immediately after transfer. Since it was not said by anyone on behalf of the Council that there would be sufficient work on transfer, Mr Davies suggested that the date of commencement should be deferred until 1 July. He felt that this would allow sufficient time to generate the workload that was necessary to permit the contract to commence seamlessly and with minimum disruption. I accept the evidence of Mr Davies that Mr Potter said that he did not think that he could sell a delay of 4 weeks to the councillors, but that they would probably accept a delay of 2 weeks. Mr Potter was the Policy and Programme Manager in the Council's Engineers Department.

During the course of the day, a substantial number of Works Orders was issued. At 16.00 hrs, Mr Smith, the Engineer appointed for the contract, sent a fax to Mr Davies saying that he understood that more than £200,000 worth of orders had been placed, and that it was envisaged that a further £70,000 worth would be placed by the evening of 30 May. In these circumstances, he said, the start date of 1 June would stand.

On 29 May and after the meeting, Mr Wansborough, the County Solicitor, wrote to Mr Elders. He dealt with a number of points. In relation to the redundancy issue and the accrued payments issue, he confirmed that it was agreed that there should be a further meeting to discuss matters in about 1 month, after the Council had obtained estimates of the figures involved. With regard to the draft document sent by FCL on 24 May, Mr Wansborough wrote that the matter would be looked into and a response given "as far as possible".

On 30 May, Mr Davies responded to Mr Smith's fax of the previous day. He wrote:

"The issues raised in our letter of the 24th May have been discussed fully with you but do not appear to have been resolved in any substantive way, and we believe that it is essential for the successful management of the contract that agreement be reached before the commencement of the contract".

In his letter, Mr Davies went on to analyse the works orders received. He made the point that they were for work to be carried out throughout the year, and did not contribute significantly to the weekly workload. The only work available at the commencement of the contract, he said, was to a value of £14,246, and this was insufficient to maintain gainful employment for the workforce that was to be transferred. Accordingly, he said that FCL could not accept that "the total workforce is transferable under TUPE". He continued:

"We regret to advise you that in the absence of satisfactory agreement of the above matters we will not be commencing the contract on 1st June as previously agreed in good faith. As the proposed transferees have been advised that Fitzpatrick will be their employer with effect from 1st June we suggest that you let them know that this will now not be the case and their employment with Bedfordshire County Council will continue until such time as the points mentioned above have been resolved. We remain committed to the successful commencement of this contract."

On 31 May, Mr Smith replied to Mr Davies' fax. He said that since it had been agreed that the redundancy and accrued payments issues would be reconsidered at a meeting to be held one month later, they were irrelevant to the start date. As regards the Works Orders, there was no obligation on the Council to provide sufficient work to guarantee gainful employment for the transferred workforce at the start of the contract. He suggested that a meeting be convened on 3 June to discuss FCL's proposals for the start of the contract.

Events from 1 June 1996 until termination

The Council immediately made provision for the continuation of highway maintenance. This was achieved without any difficulty by employing the CCS workforce that was to be transferred to FCL.

On 3 June, there was a meeting between representatives of the parties, including the solicitor then acting for FCL. Following that meeting, the solicitors wrote to Mr Smith saying that FCL did not accept that it was under any obligation to undertake work from 1 June. Mr Smith took issue with this in his fax dated 7 June, in which he said that if FCL did not confirm in writing by noon on 11 June that it would perform its obligations under the contract without further delay, the Council would terminate the contract.

Mr Elders replied on 11 June:

"We are prepared to accept works under the above contract without prejudice to any rights and claims which we may have against the Council. We have previously made representations with regard to a suitable date for initiating the contract. We remain of the view that 1 July 1996 would be an appropriate date for the contract to commence provided the Council acts in the meantime to ensure a smooth and effective transition."

Mr Smith replied on the same day. He wrote that it was unclear what was meant by the "proviso", and requested confirmation by 16.00hrs on 12 June that FCL was prepared to take up all its obligations under the contract on Saturday 15 June, adding that if no such unqualified confirmation was received, the Council would treat this as a repudiation and terminate the contract. On receipt of this letter, Mr Elders tried several times to speak to Mr Smith by telephone, in an attempt to resolve the problem and negotiate a compromise. Mr Smith was aware of these attempts to communicate with him, but he made himself unavailable.

Mr Elders responded in writing on 12 June:

"We are in receipt of your latest fax and are extremely disappointed by what we consider to be the unreasonable stance you are adopting in relation to the start date of a 4 year contract.

Our position remains that, without prejudice to any claims the Company may have against the Council in relation to representations made in respect of the Term Contract, we are prepared to perform our obligations under the same.

However, as previously stated we consider that as a practical matter it is unreasonable to commence performance of the contract until at least the transitional items confirmed in writing by us earlier today have been resolved. Even with goodwill on both sides we consider that, based on our previous experience, this will not be possible until 24 June 1996, which we suggest should be the start date as a compromise between our positions."

Mr Elders had indeed written to Mr Potter earlier in the day, identifying 9 operational and administration issues that would need to be "in place" before a start could be made on the contract, saying that many of them could not be achieved by 15 June. Mr Potter did not reply until 24 June. In his letter of that date, he dealt with each of the 9 points, and concluded that none of them provided a "genuine obstruction to a practical commencement of the contract at any time after 1 June".

On 13 June, the Council's Environment Committee resolved to terminate the contract, and on the same day, Mr Smith gave notice to FCL terminating the contract forthwith. On 17 June, Mr Elders wrote again, asking for a reply to his letter in relation to "commencing performance of the contract, and, in particular, the suggested date of the 24 June". Mr Wansborough replied on 18 June, asserting that the termination of the contract was valid. Finally, on 21 June Mr Elders wrote yet again, saying that FCL had consistently stated that it regarded itself as bound by the contract and was prepared to perform its obligations.

Was there an implied term of trust and confidence?

Mr Harvie QC submits that there was a term necessarily to be implied in this contract that FCL would not conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust that existed between itself and the Council. He contends that such an implied term was fundamental to the contractual relationship, and was necessary having regard to the special features of the contract in this case. He identifies as of particular relevance the fact that (i) the contract was the mechanism whereby the Council was to discharge its statutory obligations as highway authority, and (ii) this was not a contract for the performance of a single engineering project, such as the construction of a bridge or a road, but a contract for the provision of a continuous maintenance service. He submits that for these reasons there is a close analogy between this contract and a contract of employment between employer and employee. It is well established that in a contract of employment there is to be implied a term that:

"the employers will not, without reasonable and proper cause, conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee": per EAT (Browne-Wilkinson J) in Woods v W M Car Services (Peterborough) Ltd [1981] ICR 666, 670G.

At page 671A-B, it was made clear that this implied duty is imposed on both parties to the contract of employment. The researches of counsel have not revealed any authority in which such a term has been implied in any contract other than a contract of employment. Mr Harvie submits that I should not be discouraged by this, and that I should be emboldened to fill this gap in the authorities. He says that the normal conditions for the implication of a term are met in this case. These include that the term must be necessary to give business efficacy to the contract, in the sense that the contract would be ineffective without it.

I cannot accept Mr Harvie's submissions. It seems to me that the implied term for which he contends does not satisfy the test of necessity. First, the contract contained a number of express terms which, taken together, gave the Council very considerable rights and powers of control to ensure that FCL performed the contract properly. Thus clause 82 provided for the payment of liquidated damages for failure to respond and/or complete items of work within the prescribed periods. Clause 63 gave the Council the power to forfeit the contract in a number of situations. These included where the Engineer certified that FCL had without reasonable cause failed to commence the Works on the Date for Commencement, or had suspended the progress of the Works for 14 days after receiving from the Engineer written notice to proceed.

Secondly, the court should in any event be very slow to imply into a contract a term, especially one which is couched in rather general terms, where the contract contains numerous detailed express terms such as the contract in this case. In my judgment, in such a case, the court should only do so where there is a clear lacuna. The parties in this case took a great deal of trouble to spell out with precision and in detail the terms that were to govern their contractual relationship. The alleged implied term is expressed in broad and imprecise language. I can see no justification for grafting such a term on to a carefully drafted contract such as this. Recognising this difficulty, Mr Harvie submits, in the alternative, that the term was to be implied only during the period before commencement of work. There are a number of answers to this: the contract expressly addressed the question what was to happen if FCL failed to commence in accordance with the Date of Commencement; it is in any event difficult to see why a duty of trust and confidence should have existed during the period before work started, but then ceased once work had begun: the need for trust and confidence was at least as compelling once work was underlay as during the preliminary stages; and finally one of the special features relied on by Mr Harvie in support of the existence of the implied term is that this was a 4 year contract involving many discrete items of work carried out from time to time during that period: in those circumstances, it seems to me that it would be most odd if the implied term did not apply during the period in which that work was actually carried out.

Thirdly, it seems to me that the fact that the work to be done by FCL was in discharge of the Council's important statutory functions and that there was a public interest in the work being done properly, can have no bearing on whether the alleged implied term was necessary. The Council was able to, and did procure the inclusion in the contract of express provisions which were effective to ensure that FCL did the work properly, with adequate sanctions in the event that it failed to do so.

Fourthly, the fact that this was a contract for a continuous maintenance service, rather than a contract for a single project, is irrelevant. If there is a need for trust and confidence between contracting parties, that need is as great where the project is a 4 year contract to build a hospital as it is in a maintenance contract of the type entered into in the present case. Stripped to its essentials, this was a contract for the supply of labour and materials over a period of time. In fact, it was a far simpler contract than, say a 4 year contract to build a bridge or a hospital. For that reason, it might be argued that there was more justification for implying a term of trust and confidence in a complex construction contract than in a maintenance contract of the type concluded in this case.

A contract of employment is very different from a purely commercial contract, such as a contract for the supply of labour and materials, sale of goods etc. One important difference is that contracts of employment are subject to a complex statutory regime. In Woods, p671B-672A, the EAT emphasised the "technical" reason for the importance of the implied term. It concerned a matter peculiar to employment law, namely the ability of an employee who had been unfairly treated by his employer to exercise his or her statutory right to claim for unfair dismissal. There is no relevant analogy to be made between a complex commercial contract and a contract of employment, and I refuse to imply the term for which Mr Harvie contends.

Was FCL in breach of contract in failing to start on 1 June 1996?

There is no doubt that the agreed start date was 1 June, and that FCL failed to start work on that date. Mr Wilmot-Smith QC submits that the issue of "sufficient" Works Orders by the Engineer was a condition precedent to FCL's obligation to start work. By "sufficient", I understood him to mean sufficient to ensure that the whole of the transferred workforce was gainfully employed from the start date, thereby obviating the need to create redundancies. I reject this submission. On analysis, the argument is that (i) there was an implied term of the contract that there should be sufficient work available on 1 June to keep the whole of the workforce fully employed from the outset; and (ii) this term was a condition precedent to FCL's obligation to accept the transfer of the workforce and start work. Neither proposition is correct. This implied term is no more necessary than the one contended for by Mr Harvie. Even if that is wrong, there is no warrant for saying that the term was a condition precedent. There is nothing in the language of the contract or the surrounding circumstances which supports that assertion.

In my judgment, FCL was in breach of contract in failing to accept the transfer of the workforce, and start work on 1 June. There was some work to do, albeit not as much as FCL would have wished. If (which I doubt) the volume of work available was such as to put the Council in breach of contract, that might have given rise to a claim for damages by FCL. It did not entitle FCL to refuse to perform the contract.

Did the Council repudiate the contract by terminating on 15 June?

This question immediately raises another, namely: did FCL repudiate the contract? In the event that I reject its case that FCL was in breach of a fundamental obligation of trust and confidence, the Council's case is that it made time "of the essence" of the contract when Mr Smith wrote on 11 June saying that, unless FCL confirmed that it was prepared to assume its obligations under the contract on 15 June, its breach would be treated as a repudiation and the contract would be terminated. It is not contended by the Council that FCL renounced or repudiated the contract by seeking to renegotiate on the redundancy and accrued payments issues, although the stance taken by FCL in relation to those issues is strongly relied on by the Council as relevant to the central question, which is whether it was reasonable in the circumstances to impose the deadline of 15 June.

It is clearly established that the period of notice making time "of the essence" must be reasonable, and that what is reasonable will depend on all the facts and circumstances of the case: see Chitty 27th Edition, para 21-013. In my judgment, the period of notice given by the Council was not reasonable. My reasons are as follows.

1. The Council was in no doubt that FCL had the will and the ability to perform this 4 year contract. There was no evidence that FCL was having second thoughts about the project, nor did the Council believe that to be the case.
2. The 3 matters raised by FCL during May were of genuine concern to it. As I said earlier, I find that the problem which was by far the most important to FCL was the Works Orders issue. I have no doubt that this was appreciated by the Council representatives. If there was insufficient work to do at the outset, FCL would at least have to give serious consideration to the question of redundancy. The financial consequences of a lack of Works Orders were potentially far more serious to FCL than those implicit in the other 2 issues. The seriousness of the Works Orders issue was acknowledged by Mr Freeman in his emails and his evidence to me. This is also borne out by the fact that at the meeting on 29 May, Mr Potters said that he thought that the Councillors would probably accept a delay of 2 weeks. This was on the basis of his acceptance that a delay of that length was needed in order to permit the contract to start smoothly and without disruption. The position in relation to the 2 other issues was somewhat different. It is unnecessary to decide whether, in the absence of an amendment to the contract, the liability for any enhanced redundancy payments or accrued bonus or overtime payments due to the transferred workforce would fall to be met by FCL. What is clear is that FCL was not entitled to require these issues to be resolved before it accepted the transfer of the workforce and started work. FCL blew hot and cold on whether it would start work before these points were resolved. At the meeting of 29 May, it agreed to discuss them further at a meeting to be held about 1 month later (ie after work had started). But, as we have seen, in subsequent correspondence, FCL went back to the position it had adopted in Mr Elders' letter of 24 May. In my view, FCL genuinely wanted the issues resolved, and preferably before it started work. I do not believe that anyone thought that, in the context of a 4 year contract with an estimated price of about £5M or £6M per annum, the sums involved in the 2 issues were likely to be significant. In the event, by its letters of 11 and 12 June, FCL dropped its demand that the issues be resolved before it started work.
3. Once it received FCL's letter of 11 June, it should have been clear to the Council that FCL was willing to start work on 1 July provided that sufficient Works Orders were issued in the meantime. It was, therefore, clear that a start was reasonably imminent. The Council had no reason to doubt the bona fides of FCL. If the Council could prove loss flowing from the failure to start earlier, it would be entitled to damages. It could have exercised its right of forfeiture under clause 63 of the contract, but not without going through the hoops laid down by that clause. In my view, it was unreasonable in those circumstances to impose a deadline as tight as 15 June.
4. One of the main reasons why that deadline was unreasonable was that very little of the work which had been made available by 11 June had been required to be carried out by that date. In fact, the value of the work that had been the subject of Works Orders issued by 11 June, and which was required to be carried out by 15 June, was no more than a few thousand pounds. In the context of a contract of the duration and likely total value of this contract, the proportion of the contract value of the work required to be done by 15 June, and the proportion of the contract period that had expired by 15 June, were insignificant.
5. Another important factor is that there was no risk that any work that had to be done between 15 and 24 June would not be done. This was because the whole of the CCS workforce continued to be employed by the Council after 1 June, doing precisely the same kind of maintenance work as they had previously been doing. It seems that by 1 June, the contracts of employment of some of the men had been terminated by the Council, and they had to be re-employed by it. Where the contracts had not yet been terminated, the contracts simply continued. There was some argument before me as to whether there was a transfer of undertaking within the meaning of TUPE, with the consequence that the contracts of employment of the whole workforce were transferred to FCL as a matter of law. It was contended by the Council that the workforce could have refused to be re-employed by the Council, and that this was relevant to the reasonableness of its response to FCL's breach of contract in failing to start work. It is not necessary to become embroiled in the complexities of the TUPE arguments. The fact is that, by the time that Mr Smith wrote his letter of 11 June, those members of the workforce who had to be re-employed had been successfully re-employed by the Council, and the whole of the workforce that was to have been transferred on 1 June was proceeding to carry out Works Orders for the Council without difficulty.
6. If (contrary to my view) it was not unreasonable to insist on a start date of 15 June following receipt of Mr Elders' letter of 11 June, it was in my judgment plainly unreasonable to maintain that insistence after receipt of Mr Elders' letter of 12 June. By that letter, FCL made it clear that it was willing to start work without any pre-conditions. The 3 issues which had exercised the company earlier were not mentioned. The only matters put forward in the letter as preventing the start of work were the 9 "operational and administration issues" identified in Mr Elders' other letter of that date. I have heard no evidence on the question whether the resolution of these issues would reasonable have prevented a start until 24 June. Accordingly, what divided the parties as at 12 June was 7 days. The Council were saying that work should start on Monday 17 June. FCL were saying that they could not start until the following Monday.

I conclude, therefore, that FCL did not repudiate the contract by not taking up its obligations under the contract on 15 June and starting work 2 days later. I have reached this conclusion by considering whether it was reasonable in all the circumstances to require FCL to start work on 17 June, failing which, the contract would be terminated. Another approach to the question whether, by not starting on 17 June, FCL had committed a repudiatory breach of contract is to ask whether that breach was such as would deprive the Council of substantially the whole of the benefit which it was intended that the Council should obtain from the further performance of the contract: see the classic statement of Diplock LJ in HongKong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 26, 70-72. In my view, it is clear beyond argument that this breach did not come anywhere near to satisfying that test. I suspect that it is for this reason that Mr Harvie was so anxious to establish a fundamental implied term of trust and confidence.

It follows from the foregoing that the Council did repudiate the contract.

Conclusion

In the result, the Councils' claim is dismissed. There will be judgment for FCL on liability, with damages to be assessed.