When does inconsistent conduct amount to a variation of contract? Merit Holdings Limited v Michael J Lonsdale Limited [2017]

An issue which often arises in a commercial setting is where two companies agree a contract for goods or services but do not put the terms in writing, instead relying on verbal agreement or letters of intent. While this does not in itself cause any issue it may lead to issues further down the line if there is disagreement on the specific terms of that contract. This was the issue in the recent case of Merit Holdings Limited v Michael J Lonsdale Limited [2017].

A secondary issue was raised in the case relating to civil procedure, in particular, claims issued under Part 8 of the Civil Procedure Rules 1998. The Part 8 procedure is generally intended to be used for the determination of claims that do not have a substantial dispute of fact and that are, therefore, capable of being resolved without lengthy and complicated pleadings. In this case the claim was issued under Part 8, but it was queried whether this was appropriate in the circumstances.

Facts

A claim arose in relation to the construction of premises in London between a contractor, Michael J Lonsdale Ltd (“MJL”), and a sub-contractor, Merit Holdings Ltd (“Merit”), in particular the off-site prefabrication of materials which was sub-contracted to Merit. Between November 2015 and April 2016 MJL sent three letters of intent to Merit concerning the work. The initial letter stated that MJL would reimburse the costs wholly and necessarily incurred up to a maximum of £330,000. A third letter revised this cap up to £430,000. Both letters set an expiry date with the third letter setting this at 29 April 2016. MJL paid for the work on a monthly basis upon application by Merit.

The work continued past 29 April 2016 and the payments far exceeded the cap. MJL subsequently terminated the contract in July 2016 on the basis that Merit had not kept up with the schedule of works efficiently.

A dispute on the payment arose and the parties entered into several adjudications. Most of the adjudications found in favour of Merit. One key finding by an adjudicator was that the parties had evidently agreed on a contract sum, pursuant to which the payments were being made. A final adjudication was made on the basis of which Merit’s entitlement was to be calculated. The adjudicator found in favour of MJL and Merit issued Part 8 proceedings as a result.

Merit sought a declaration that the contract between the parties did not include a cap on payments as the parties had, through their actions, either created a new contract on terms different to those in the letters of intent or had varied the original terms.

Decision in the case

On the specific facts in the case the judge held that there was no evidence that MJL and Merit had agreed to remove the cap on costs despite inference through the parties’ actions to date. Particular focus was given to the fact that the applications for payment were made for the value of the works in excess of the cap and subsequently that those payments were made and that this continued past 29 April 2016. However, the judge held that the only inference to be drawn from this was that the relationship continued on the same basis as before 29 April 2016 (i.e. that payment would be made for the value of the work done). The judge decided that it was a commercially sensible position that Merit would continue to be paid for the work done in line with the assumed contract sum in excess of the caps and that the parties could be taken to have reached an agreement to that effect. In effect the actions of the parties were of secondary importance to the original letters of intent. The judge also highlighted that due to the claim being pursued under Part 8, not all the facts and contextual information were available to her and therefore she was particularly hesitant to make any finding.

In respect of the procedure, the judge stated that Part 8 was appropriate in cases where there was an issue going directly to the constitution of an adjudication at its commencement. However, the judge was clear that it should not be assumed that it is appropriate for a case to be dealt with in this way just because it is related to an adjudication.

In the immediate case although it was clear that there was a relationship with the adjudication, the issues did not relate directly to the constitution at commencement and therefore the Part 8 procedure was not appropriate. In addition the court was being asked to determine the nature of the contractual relationship rather than just the meaning of written terms between the parties. Taking this into account the court held that the Part 8 procedure was probably inappropriate for this case.

Jefford J refused Merit’s application, found that they were not entitled to the declaration as presented, and declined to make any alternative declarations.

Points to note

A clear outcome of this case is the indication that a Court will favour written evidence over the actual conduct of the parties where the exact terms of a business relationship are unclear thereby restricting situations in which conduct could be said to amount to a variance. The best way to avoid the type of issues that arose in this situation is to have a clear written contract setting out each party’s rights and obligations. As a follow up to this, any variation to the contract should be made in writing with clear understanding and acceptance by both parties.

This case is also a reminder that the Part 8 procedure should not be used where there is a substantial dispute of fact. In this particular case it meant that the judge refused to grant any declarations which was unhelpful in advancing the matter.