Main contractors and employers stand accused of using vague legal terms such as material breach in an attempt to delay or even avoid paying their subcontractors in full and on time. At least this is what cases such as Mears Limited v Costplan Services (South East) Limited and Others would seem to indicate.
Under the terms of the agreement, Plymouth (Notte Street) Ltd (PNSL) were to build two blocks that Mears were to lease and it was agreed that PNSL were not to make variations which would materially affect the size, layout or appearance of the property. The contract even gave an example of what would constitute a material change, i.e. 3% of any distinct area shown on the building documents.
Once it transpired that 56 rooms were more than 3% smaller, would this mean that the Employer’s Agent (Costplan), who held the power to issue a certificate of practical completion, withhold this on the grounds that there had been a material reduction in room size and would this in turn amount to a material breach of contract?
This answer to this question was important because if this was true it would give Mears the power to terminate the contract.
In this case the court ruled that the material reduction in room size constituted a breach of contract, but there was not in fact a material breach.
Confused? It’s no surprise, and it’s an issue which represents a real challenge for many subcontractors. Although in this case the framework of what constituted a material change was stipulated in the contract, often this would not be the case. And what of other common terms such as “reasonable”, as in whether reasonable progress has been made in line with the terms of contract?
All this vagueness and over complexity puts main contractors in a position of power. So, whilst it can all be argued about and even become the subject of an adjudication, this could of course lead to delayed payment, putting pressure on vital cash flow.
Of course, you could negotiate a settlement, but will that wipe out the profit on the job. In any case, how many times can you afford to give away money just to keep the cash flowing.
So, what can subcontractors do? Well, the first thing is to make sure you understand the risks inherent in any contract before you sign it. It sounds obvious, but yet so few do it. It’s clear that if a contract contains word such as “material” or “reasonable”, it’s important to make sure you understand when and how these terms could affect your ability to get paid. If there is any doubt in this regard, it’s a good idea to get the contract risk assessed by someone who understands the commercial and legal implications of the terms. And, if you currently have a dispute about what is and isn’t reasonable or material, make sure you get some proper legal advice before negotiating your way through the issue.
PJE International have long taken the view that vague contract terms, such as material breach or reasonable progress, should always be specified within the appendixes. Do so will ensure that everyone knows what is meant and when they can be used.
The alternative is not to use them at all and include more detailed parameters upon which performance, quality of work or timeliness can be measured. It may make the contract more difficult to write, but at least everyone would know where they stand.