Construction

Implied obligations on employers in property development and construction projects: update

The recent Court of Appeal decision in Clin v Walter Lilly [2018] EWCA Civ 490 highlights that even detailed and well-crafted agreements require terms to be implied in order to make them work properly.

A developer needs to be aware that it can be subject to a range of obligations that are not written down in the express terms of its contract with the contractor, joint venture partners or other parties under an overage agreement. This update will consider how these terms arise before examining the impact of recent cases.

Implied terms: the general law

The general law on the implication of contractual terms is now stable and relatively easy to state, even if it is not always so straightforward to apply in a particular case. In Marks and Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72, [2016] AC 742 Lord Neuberger confirmed that the test for the implication of a term to give business efficacy to a contract remains one of strict necessity. In summary:

  • There are two types of implied term: those implied by law (such as by statute such as the Sale of Goods Act 1979 or, occasionally, by the common law) and those implied into a particular contract in the light of the express terms, commercial common sense, and the facts known to both parties at the time the contract was made (Geys v Société Générale, London Branch [2012] UKSC 63, [2013] 1 AC 523 at [55]). In this update, we are going to examine the second.
  • Construing the words which the parties have used in their contract and implying terms into the contract both involve determining the scope and meaning of the contract, and so are part of its construction or interpretation in a broad sense. It is only after the process of construing the express words is complete that the issue of an implied term can be considered. Otherwise, the process of implication is a different exercise from that of construction.
  • There have been several observations as to what requirements must be satisfied before a term can be implied into a detailed commercial contract. Possibly the clearest distillation of the test can be found in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 where Lord Simon stated that for a term to be implied it must be:
  1. Reasonable and equitable;
  2. Necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
  3. So obvious that it ‘goes without saying’;
  4. Capable of clear expression;
  5. Not in contradiction with the express term of the contract.
  • Lord Neuberger confirmed that implication of a term is not critically dependent on proof of the actual intention of the parties: one is concerned with what notional reasonable people in the position of the parties at the time at which they were contracting would have agreed.
  • It is a necessary but not sufficient condition for implying a term that it appeared fair, or that the court considered that the parties would have agreed it if it had been suggested to them.
  • Further, Lord Neuberger stated that a test of ‘reasonable and equitable’ adds nothing. ‘Business necessity’ and ‘obviousness’ can be alternatives, although in practice they will generally both be satisfied. As for necessity, a useful test would be that ‘a term can only be implied if, without the term, the contract would lack commercial or practical coherence.’ [21]

Implied terms: obligations on the property developer

It can be difficult at first blush to see how a well-drafted and detailed JCT, NEC or FIDIC contract can leave room in English law for the implication of contractual terms. Broadly, there are two limbs to an employer’s obligations in a construction contract:

 

  1. A negative obligation not to do anything to hinder the other party from performing the contract (sometimes called the prevention principle).
  2. A corresponding positive obligation to do what is necessary to bring about completion of the contract. This is seen, for example, when considering the architect’s duty to supply necessary information to the builder during construction: London Borough of Merton v Leach (1985) 32 BLR 51 (where at 81 Vinelott J applied this principle to state that, ‘it is, I think, clear that the implementation of a building contract embodying the JCT general conditions does require close co-operation between the contractor and the architect’).

These principles were applied in the context of a development agreement in Alghussein Establishment v Eton College [1988] 1 WLR 587, HL. Eton College owned a site that they wanted to develop. They granted to Suregrand Ltd a licence to enter the site to undertake the development with the grant of a lease to follow. Suregrand assigned its rights to Alghussein who failed to progress the works in breach of a due diligence clause, saying it was not reasonably practicable: Eton therefore terminated the agreement. Alghussein then argued it was entitled to a lease anyway. It was held that Alghussein was not entitled to rely on its own breach of contract to obtain the grant of a lease.

Hudson on Construction Contracts recites a useful list of specific obligations that can arise by way of implied terms at 3-129ff, including issues of administration; possession of the site; information and instructions; and the scope of the work. Even this list, however, was not exhaustive, as the Court of Appeal demonstrated recently.

Obligation on the developer to seek planning permission

In Clin v Walter Lilly, Mr Clin engaged Walter Lilly under a JCT Building Contract with Quantities, 2005 edition, incorporating Revision 2 (2009), to carry out demolition and refurbishment works to two houses, converting them into one dwelling-house. The local planning authority then asserted that the work would require planning permission, causing a severe delay to the project while this was resolved. Walter Lilly brought a claim seeking a declaration that this was a Relevant Event, which would then entitle it to damages. The extent of the employer’s obligation to obtain planning permission was heard as a preliminary issue in the TCC before going on appeal to the Court of Appeal.

There was no dispute that there was an implied term in the construction contract that each party is not to prevent the other from discharging its obligations, as well as the usual implied term to the effect that each is to co-operate with the other. Both parties also accepted, in principle, that an appropriate term should be implied into the contract to allocate responsibility for the making of applications for any requisite planning permissions or conservation consents. Mr Clin also accepted some responsibility for obtaining planning permission: the question was the extent of this obligation. Did Mr Clin have to ensure that planning permission was obtained, or was he under a more limited obligation, such as to exercise reasonable diligence to obtain the necessary planning permission?

The Court of Appeal accepted at [26] that some support may be found in the authorities for the proposition that the employer will generally bear the responsibility of obtaining the necessary planning permission, given that the execution of the work would otherwise be unlawful. Edwards-Stuart J, the Judge at first instance accepted, however, that if the necessary planning permission had not been obtained by the time the contractor put in his tender, he must decide whether to accept the risk that planning permission might not be granted ([2016] EWHC 357 (TCC) at [61]). Both the Judge at first instance and the Court of Appeal held that the implied term could not extend to an obligation to ensure that planning permission or conservation area consent was in fact granted, or granted within a particular time, as this depended on an administrative discretion exercised by the local planning authority and, on appeal, to the Secretary of State.

Instead, at [37], Lindblom LJ held that the appropriate term that was to be implied read as follows:

“The Employer will use all due diligence to obtain in respect of the Works any permission, consent, approval or certificate as is required under, or in accordance with, the provisions of any statute or statutory instrument for the time being in force pertaining to town and country planning.”

This extended to an obligation to make a timely application for any such permission or other approval or ensure a timely application was made on his behalf, to ensure sufficient information was provided to the local planning authority in support of the application, and to co-operate with the authority in the statutory process [38].

Whether or not this was a Relevant Event, therefore, depended on the facts of the case, which had not been determined.

Obligation on a developer to progress a development

Sparks v Biden [2017] EWHC 1994 (Ch) was a dispute arising out of the sale of land subject to an overage agreement. Mr Sparks had acquired land for residential development that he wanted to use to fund his retirement. He lacked the expertise, however, to develop the land himself. He therefore granted an option to purchase the land to a developer, together with overage. Overage arose once any of the new dwellings were sold. The developer was under a contractual obligation to obtain planning permission and to construct the dwellings, but there was no express obligation to sell them. Instead, the developer leased out the dwellings as they were built, so that overage was not payable.

Judge Davis-White QC (Sitting as a Judge of the Chancery Division) held that there was an implied term that that the new houses were to be sold, and that this was to be within a reasonable period of time. The structure of the contract was directed towards a situation whereby overage was payable, otherwise it was difficult to see why there were obligations to construct the development and pay overage. A similar decision was reached in the earlier case of Renewal Leeds Ltd v Lowry Properties Ltd [2010] EWHC 2902 (Ch). The judge in Sparks stressed, however, that these decisions often turn on their own facts.

Conclusion

There are many situations where there appears to be a lacuna in a development or construction contract, especially when there is a problem obtaining consents from a third party. For example, in the author’s experience, the parties may not reach an express agreement on the provision of utilities to a building, or what is to happen if one party simply fails to start a property development. Sometimes the loss will simply lie where it falls, and nothing is to happen. On other occasions, the court will be willing to imply a term into the agreement. Property developers need to be aware, however, that the express terms may not contain the full extent of their contractual obligations.

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The recent Court of Appeal decision in Clin v Walter Lilly [2018] EWCA Civ 490 highlights that even detailed and well-crafted agreements require terms to be implied in order to make them work properly.