EMCOR Drake and Scull Ltd. v Sir Robert McaLpine Ltd.

The formation and scope of a construction contract depend on objective interpretation of the parties’ communications, read in context. Uncommunicated subjective intentions are immaterial. Where an interim order is expressly capped and is to be superseded by a formal sub-contract, a later undertaking to enter into that sub-contract does not, without more, create an agreement for the whole works. Unsettled material terms and the absence of a conforming formal sub-contract reinforce that conclusion. A series of capped orders confines the work obligation and payment entitlement to the stated aggregate limit. Costs of preliminary issues remain a matter of judicial discretion; there is no general rule requiring costs to be reserved merely because other issues remain.

The appellant main contractor engaged the respondent to undertake mechanical and electrical works for a hospital PFI project. The parties agreed a price of approximately £34.25 million in principle but never executed the contemplated formal sub-contract. Work proceeded under a series of interim orders with stated monetary limits. The Technology and Construction Court, in [2004] EWHC 1017 (TCC), held that the respondent was obliged to undertake design, procurement and site works only up to £14 million, and was entitled to a reasonable sum for work done within that limit. The appeal concerned whether the parties’ order and subsequent letter created an obligation to perform all the works, and whether the costs of the preliminary issues should have been reserved.

Appeal dismissed. Lord Justice Clarke gave the judgment, with Lord Justices Peter Gibson and Keene agreeing.

1. The contractual question was determined objectively from the communications between the parties, construed in their context and against the surrounding circumstances. Uncommunicated subjective intentions did not determine the agreement.
2. The 3 July order created an interim contractual basis for design and procurement work. It was expressly limited to £1 million, contemplated supersession by a formal sub-contract, and carried an implied term that the work would be performed in a good and workmanlike manner. EDS was entitled to a reasonable sum for work done within the limit.
3. The 20 August letter was not itself a present agreement for the whole of the M&E works. It contemplated future events, including the execution of a sub-contract. It had no immediate contractual effect merely by being sent and received, although it probably later acquired contractual effect in relation to the continuing interim arrangement. The letter and the order had to be construed together.
4. Even assuming agreement on the letter’s terms, the documents did not establish an obligation to carry out the whole works for £34.25 million. Important matters remained unsettled, including design responsibility, liability caps, suspension rights, changes in law, liquidated damages and the treatment of design errors and omissions. No formal sub-contract complying, or substantially complying, with the letter was ever proffered.
5. The subsequent orders showed that the parties continued to contract for work subject to particular monetary limits. The effective orders produced an aggregate limit of £14 million. The respondent was not thereby bound to undertake the whole of the M&E works.
6. Under Civil Procedure Rules 1998 Part 44.3, costs are a matter for judicial discretion. There was no general principle requiring costs of preliminary issues to be reserved because other issues remained. Given the importance and distinctness of the issues, the judge was entitled to order the appellant to pay the respondent’s costs.

The appellant was ordered to pay £38,000 costs within 14 days. Permission to appeal the costs order was refused.

• Court of Appeal (Civil Division): Appeal against the preliminary issue determination dismissed. The application for permission to appeal the costs order was refused.
• Queen’s Bench Division, Technology and Construction Court: His Honour Judge Richard Havery QC, [2004] EWHC 1017 (TCC), held that the respondent’s obligations were limited to M&E work up to £14 million and determined the related payment and quality terms.