SYSTECH SOLICITORS LEGAL UPDATE

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RELIANCE AND THE IMPOSITION OF PRE-CONTRACTUAL OBLIGATIONS IN ENGLISH LAW John Blackshaw JOHN BLACKSHAW Trainee Solicitor john.blackshaw@systech-int.com 44 www.systech-int.com
The first question to ask is: is reliance an issue within the construction industry? The global construction industry has changed significantly in the last fifty years, moving from predominantly companies who employ all necessary trades to large management organisations, who employ little or no tradesmen, preferring to secure labour, plant and materials from specialist sub-contractors. This was brought about by the growth of new forms of contract and procurement methods which has resulted simultaneously in bigger companies operating both nationally and internationally working on projects which have become larger and more complex requiring specialist knowledge in many areas. A further reason for this shift was a reduction of risk and the fact that with larger projects it would be almost impossible for a single company to employ all of the required specialist trades under one roof to complete a project. This paradigm shift has resulted in a dramatic growth in the number of smaller specialist sub-contractors. On the one hand this has provided a larger pool to choose from but has also increased the dominance of small companies in the market. Passing responsibility and risk to specialist subcontractors has allowed main contractors to operate as a more streamlined and professional organisation and better manage costs. However, the result of this transformation in the market is that main contractors have become more reliant on specialist sub-contractors and reliance in general has taken a more dominant role. A scenario to consider A main contractor is looking to secure a major new project and requires specialist sub-contractors to carry out specific packages of the works. He contacts suitable companies who provide him with a price, which he considers favourable and consolidates these prices into a single sum for his competitive tender submission to his client. A couple of weeks later he is delighted to learn he has been awarded the project and subsequently commences work on site. What can possibly go wrong? Well one possibility is that before he appoints one of the proposed specialist sub-contractors, whose prices were consolidated into the main bid, the company withdraws and notifies him that they have had second thoughts. In order to cover certain “unknown eventualities” they wish to increase their prices by 25% across the board. This, even though they are fully aware that you have already incorporated the original prices into your own tender submission and relied upon them to win the work. Despite your protestations they are adamant that they will not stick to the original prices. Due to this change in circumstances the main contractor cannot now profit from the works What does he do in this situation? The answer depends largely on where he is. The one place he may not like to be at this moment is in England or Wales as the law provides little or no protection in cases like this, unlike many other jurisdictions. Indeed England and Wales stand out amongst the major common law jurisdictions in not providing protection to the main contractor in this case. The main options available then are to either accept a higher price from the sub-contractor or look for someone else. The latter not always being an easy option. Redress through a legal means would not normally be afforded to the main contractor. So why is the main contractor in this situation? The reason you are now stuck with no redress against the subcontractor is that under English law there are little or no consequences for breaking off pre-contractual negotiations or withdrawing a tender before it is accepted even when the withdrawing party knows that his prices had been acted upon in good faith and relied upon by another party in securing a project. The subcontractor will in this case not normally be liable for any losses incurred by the main contractor. The English courts will not enforce a gratuitous promise and in these circumstances the tender submission from your specialist sub-contractor amounts to little more than this. For the promise to become an obligation there must “in general” be consideration. Is this fair? It certainly does not sound fair as it appears to allow subcontractors the opportunity to effectually blackmail main contractors into giving them work at prices they know they would not have secured otherwise. This being even more so the more specialised a sub-contractor may be. So is there a solution? There are several possible solutions including collateral agreements but one potentially less formalised solution which is used in relation to the submission of tenders and pre-contractual negotiations in many jurisdictions is in the form of an equitable remedy called Estoppel (common law jurisdictions) or Culpa in Contrahendo (civil law jurisdictions). Both are used to place an obligation on one party brought about by reliance on the part of the other. There is no need in this case for consideration. Reliance is the key issue. In the words of Lord Denning in the case of Central 1 {1947] KB 130 www.systech-int.com 5
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SYSTECH SOLICITORS LEGAL UPDATE

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