Outside construction of the RPC building.

Letter of contract versus business common sense – latest from Court of Appeal

20 November 2018. Published by Jake Hardy, Legal Director

In the latest of a long line of higher court authorities debating the boundaries between black letter and more purposive approaches to contractual construction, the Court of Appeal has taken another step away from the high-water marks of the business common sense approach to contractual meaning.

In S&T (UK) Limited v Grove Developments Limited, the court found that parties can work contractual notice machinery according to the black letter terms on the face of the contract, even where that means that the contractual machinery is pointless and commercially nonsensical.(1)

Facts

S&T was a building contractor to Grove, the developer. The industry standard form contract provided that where there was overrun, the developer must send the following notices in sequence to the contractor in order to claim liquidated damages:

  • a notice that the work has not been completed on time (a non-completion notice);
  • a notice that liquidated damages might be sought or deducted from payments due (a warning notice); and
  • a notice that liquidated damages are in fact being deducted or claimed and in what amount (a deduction notice).

Grove sent its notices to S&T as follows:

  • the first notice was sent on 13 October 2016;
  • the second notice was sent (by email) at 5:00:49pm on 18 April 2017; and
  • the third notice was sent just eight seconds later at 5:00:57pm on 18 April 2017.

In court, S&T argued that the warning notice had to have some purpose, to allow it (as the recipient) to at least consider doing something in response before Grove moved to declare liquidated damages due and payable. Instead the third notice had arrived in its email system seven seconds after the second notice, which meant that it had been served before S&T was aware that it had received the second notice. Did the fact that Grove sent the deduction notice immediately following the warning notice make the deduction notice non-compliant?

Decision

The Court of Appeal admitted that it came close to finding that there must be some implied requirement for the elapse of a reasonable period between a warning notice and a deduction notice, so as to give the warning notice at least a semblance of purpose. However, the Court of Appeal found that no such requirement existed; the contract did not specify a time delay (as it did between other contractual machinery steps) and it was not possible to say what a reasonable period would be or to imply a term from business necessity. Instead, it was held as follows:

However surprising it may seem to a judge… the contract requires no more than the giving of notices in a specified sequence. Judges should not generally impose their notions of commercial common sense upon the parties to business disputes. Provided that a scintilla of time elapses after giving notice 2 and before giving notice 3, that is sufficient.

Implications

The decision confirms that parties are more likely to be able to work contractual machinery according to the black letter terms in which it is set out on the face of the contract. This leaves commercial organisations with more freedom to game the black letter terms of contracts as they were agreed in advance, in the knowledge that the courts are less likely to constrain them against purposive principles like business common sense.

This decision is the latest manifestation of a deep tension in UK law between black letter and purposive approaches to determining the nature of voluntary legal relations,(2) which is perhaps the only thing that is certain to continue.

Endnotes

(1) [2018] EWCA Civ 2448.
(2) As neatly outlined by the member of the bench who delivered the leading judgment in a lecture.