Dene Construction Ltd & Anor v Antshire Ltd

A contract is not a sham merely because it is disadvantageous, artificial, later varied, or subsequently operated imperfectly. The question is whether all parties shared a subjective intention, when the document was made, to create the appearance of legal rights and obligations different from those they actually intended. The court may examine the surrounding circumstances and subsequent conduct, but later events cannot by themselves establish that the agreement was a sham at inception.

Instructions given by an owner or developer within the general scope of an existing building contract are contractual variations. They do not create separate agreements or direct liability unless the evidence establishes that intention.

The claims arose from the construction of holiday lodge accommodation. Dene Construction claimed that the written contract between Antshire and GJ Associates & Builders Ltd was a sham, that the latter acted as Antshire’s agent, and that the Donnachies gave a guarantee and separately instructed additional works. Morgan advanced a related claim for unpaid subcontract work, additional works allegedly instructed directly, work at a public house, and tax-related losses.

The principal issues were whether the February 2001 JCT contract was a sham, whether the alleged guarantee was genuine, whether works were separately contracted with Antshire or the Donnachies, and which parties were liable for Morgan’s claims.

1. The Dene claims failed. The court found that the JCT contract dated 16 February 2001 was not a sham. Applying the principles in Snook v London and West Riding Investment Ltd [1967] 2 QB 786, and the guidance derived from Hitch v Stone [2001] EWCA CV 63, the relevant question was whether Antshire, the Donnachies and GJAB intended the document to create an apparent employer–independent contractor relationship while intending a different legal relationship.
2. The inquiry was subjective and required careful examination of the facts. The court could consider the circumstances surrounding execution and subsequent conduct. The JCT contract was consistent with the parties’ original intentions, the bank’s funding arrangements, and the operation of GJAB as an independent head contractor. Later difficulties, direct involvement by the Donnachies, and payment of legal costs did not prove that the contract had been a sham when made.
3. The alleged written guarantee was not genuine. The signature attributed to Andrew Donnachie had been written by somebody else, and the words referring to a signed agreement had been added later. Although John Donnachie gave vague assurances that those working for him would be paid, no specific guarantee was established.
4. The alleged additional works instructed by the Donnachies fell within the general scope of the existing contract and were variations. They were not separate agreements creating personal or direct liability.
5. In the Morgan action, Morgan’s subcontract was with GJAB, so Antshire and John Donnachie were not liable for the unpaid subcontract balance of £79,237.34. However, work valued at £29,128.28 had been instructed by John Donnachie on his own behalf or that of Antshire, not Tilford Woods Ltd. Morgan also recovered £21,635.80 for public-house works and £3,591.96 for tax-related losses. Judgment was therefore entered for Morgan against Antshire and John Donnachie for £54,356.04.