Cleveland Bridge v Sarens: agree terms before starting work
The ongoing dispute between Cleveland Bridge and Sarens is a reminder to contractors of the pitfalls of proceeding on a contract before agreeing key terms. Tom Holroyd and John Garland explain.
Steelwork contractor Cleveland Bridge and Sarens, a major supplier of heavy lifting equipment, are involved in an on-going dispute centring on the M6-Heysham link road project. It concerns Sarens' liability for delays on the scheme, where the firm was providing cranes and lifting equipment, and specifically what had been agreed between the two companies about liquidated and ascertained damages (LADS).
The dispute involved an earlier adjudication and is now subject to court proceedings. The current chapter in the court proceedings involved a discrete hearing on whether the parties agreed a cap on delay damages.
As part of the tender process, Cleveland Bridge provided a draft sub-contract document to Sarens. The document contained what lawyers would call a "general damages" provision, as opposed to a liquidated damages provision.
To put this into context, when considering the risk of subcontractor delay, main contractors essentially have two choices when drawing up sub-contracts.
One option is to make the subcontractor liable for all the main contractor's costs which are directly associated with the delay caused by the subcontractor, known as a "general damages" provision. Recovery under this method can be hard work, as the main contractor has to prove what costs it has incurred. Proving loss is a time-consuming exercise. The upside is that the main contractor can normally recover all the costs it has incurred as a result of the delay, subject to any cap on liability.
Alternatively, the main contractor can apply a LADs provision, so the subcontractor is liable for a specified sum in the event of delay. The advantage with this route is that the main contractor does not need to prove what damage it has suffered; the sub-contractor simply pays the specified sum. The fundamental problem with this approach is that the liquidated sum, which obviously needs to be agreed between the parties pre-contract, is normally insufficient to cover the main contractor's costs of any delay.
Either of the above options can be subject to a cap on overall liability, so that the sub-contractor limits its maximum liability for LADs or general damages. This is normally expressed as a percentage of the contract price.
This is the crux of the argument here between Cleveland Bridge and Sarens.
Sarens argued that they had liability for specified LADs of 2% per week of delay, capped at 10% of their contract price, equating to a cap of £96,000.
Unsurprisingly, Cleveland Bridge argued that general damages applied, with no cap on liability. The consequence would be that Sarens would have unlimited liability for delays they had caused. In other words, Sarens would pay the actual cost to Cleveland Bridge of the delay. On a project of this size, the cost of delay could be far in excess of £96,000.
In considering the dispute, the court looked at the pre-contract discussions around LADs and liability caps.
Three amended sub-contract versions
The chronology of events showed that Sarens commenced work while three amended versions of the sub-contract were still in circulation. Sarens had always objected to the drafting of the liability cap in the various draft sub-contracts issued by Cleveland Bridge, but had begun working on site in between the issuing of drafts two and three anyway.
The court found that a contract had been formed around the time Sarens had started work, but that no cap on liability or LADs provision had been agreed as the parties had never reached a settled position on either the LADs or the liability cap.
Notably, all the draft sub-contracts prepared by Cleveland Bridge had included a cap on liability at 10%. However, as the parties had been unable to agree the exact wording of the cap and whether LADs or general damages applied, the court concluded that no agreement had been reached on either the cap or the LADs.
The consequence was that no cap on general damages or LADs was deemed to be included. This produced a harsh result for Sarens; it now had unlimited liability.
The case serves as a timely reminder when negotiating crucial clauses such as LADs or caps on liability. Whilst the parties to a contract may generally intend to include LADs or a cap, as is the case here, the courts will not fill in the gaps for the parties. Unless the LADs or liability cap is clear and agreed, do not expect the court to enforce it.
Non-enforcement of a crucial clause, such as LADs or liability caps, will nearly always lead to a harsh result for one of the contracting parties; somebody will lose out. For Sarens, it was the difference between a cap of just £96,000 and unlimited liability for delay on a major infrastructure project.
Tom Holroyd is a partner and John Garland a solicitor at Trowers & Hamlins.