Can a term be implied into a contract which requires the contractor to proceed with its works “regularly and diligently”?
This is the question the Court had to deal with in Leander Construction Ltd v Mulalley & Company Ltd. Mulalley engaged Leander as a ground works contractor. Mulalley accepted that £131K was due to Leander but had served 2 Withholding Notices on the basis that Leander had failed to comply with the Activity Schedule in relation to the works.
Leander challenged the validity of the Withholding Notices.
When the matter came to Court, Mulalley admitted that the Activity Schedule was not contractually binding (it referred to “indicative dates”) but argued that there was an implied term that Leander was obliged to proceed with its works “regularly and diligently” and that the Activity Schedule was the best measure of compliance.
In part, Mulalley relied on the fact that the contract allowed it to serve a default notice if Leander failed to proceed “regularly and diligently”, and terminate Leander’s employment if it did not rectify this default.
The Court provided a very useful recap on the implication of terms, which require the term to be:
- reasonable;
- necessary to give the contract business efficacy;
- obvious;
- clear; and
- not inconsistent with the express terms
The Court also looked at what was meant by “regularly and diligently”. Although proposed definitions are not without controversy, the meaning is generally linked to the contractor’s requirement to comply with its contractual obligations.
The Courts have therefore taken the view that in the absence of any express terms, the contractor is entitled to plan and execute its works as it sees fit providing the contractual completion date is met.
It was therefore decided that:
- the Court should be unwilling to imply terms where there are detailed express terms in existence;
- the term was not necessary to make the contract work;
- termination founded on the contractor’s failure to proceed regularly and diligently did not give rise to a separate obligation to proceed in such a way, in the same way that termination founded on the contractor’s insolvency did not give rise to a separate obligation on the contractor not to become insolvent; and
- there were already other express terms which Mulalley could have relied upon to expedite Leander’s performance.
The Court therefore found that Mulalley’s Withholding Notices were invalid as they were based on a non-existent implied term.
COMMENT: The message is clear. If the contractor is required to proceed in a certain way, the contract should expressly provide for this. The case also reiterates the importance of relying on enforceable contractual obligations as a ground for withholding. This also applies to the new “Pay Less” Notices under the amended Construction Act which requires the paying party to set out the “basis upon which” the sum due has been calculated.
Author: James Coppinger, Head of Construction and Engineering.
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