A new Appeal Court ruling has revealed a potential flaw in a standard form of contract used by local authorities throughout the UK for purposes such as employing outside firms. It is a flaw that could water down the power of local authorities to terminate contracts if it is believed the contractors have breached their obligations.
The ruling was delivered in response to Great Yarmouth Borough Council’s challenge to the May 1999 High Court decision that they were not entitled to terminate two contracts they claimed had not been properly fulfilled.
The contracts in question covered maintenance and management of sports facilities including cricket and football pitches, bowling greens and a pitch and putt course, council parks, gardens and children’s playgrounds.
Despite reservations, the council awarded the contracts to the Garden Guardian, which tendered £441,488 and £301,586 respectively for the two contracts; a bid that was much lower than the tender of the council’s own Direct Services Organisation.
The contracts were in a standard form drafted by the Association of Metropolitan Authorities, a document commonly used by local authorities for contracts of this type. Hale LJ said that in these circumstances, the issues raised by the case could be of wider importance than the immediate case.
The first of many default notices was served on the Garden Guardian by the council within months, and the contracts were terminated after only seven months.
However, the contractor then successfully sued the council for damages, the level of which remains to be assessed.
In dismissing the appeal against that decision, Hale LJ said one of the key issues was the interpretation of a contract term that stipulated: “If the contractor commits a breach of any of its obligations under the contract the Council may, without prejudice to any accrued rights or remedies under the contract, terminate the Contractor’s employment under the Contract by notice in writing having immediate effect.”
The council claimed that the clause should be applied literally so as to give them the right to terminate the contract for breach of any obligations, other than trivial contraventions.
But Hale LJ said the problem was that the clause did not characterise any particular term as a condition, or indicate which terms were to be considered so important that any breach would justify termination.
“It appears to visit the same draconian consequences upon any breach, however small, of any obligation, however small,” she said.
She considered that a common sense interpretation had to be imposed on the strict words of the contract in cases such as this, where a contractor had invested substantial sums on a four-year contract.
This meant that a court had to be satisfied as a precondition to termination of a contract under the clause that there had been a repudiatory breach or accumulation of breaches.
The council had argued that the total of breaches that the High Court judge accepted had taken place were sufficient to justify termination. But Hale LJ said the question for the court was whether the cumulative effect of the breaches complained of was so serious as to justify bringing the contract to a premature end. She considered the High Court had been right to find that in this case they were not sufficiently serious.
Rice (trading as the Garden Guardian) v Great Yarmouth Borough Council Court of Appeal (Peter Gibson, May and Hale LJJ) 30 June 2000.
Martin Mann QC and Christopher Young (instructed by the solicitor to Great Yarmouth Borough Council) appeared for the appellants; Mark Smith (instructed by Eversheds, of Norwich) appeared for the respondent.
PLS News 4/7/00
