Mulalley case rules in favour of subcontractor

A court has ruled that a subcontract did not contain an implied term requiring a subcontractor to proceed regularly and diligently. Its obligation was limited to completing on time.

The case, Leander Construction v Mulalley, is likely to have widespread application, according to Mark Clinton, a partner at law firm Thomas Eggar.

It was brought after Mulalley engaged Leander as subcontractor. The subcontract contained an activity schedule setting out various activities and dates for them to perform. They were stated to be subject to change and it was accepted that the subcontract did not require Leander to adhere to them.

Mulalley contended however that Leander were required to proceed regularly and diligently and that the activity schedule was the best tool to use to measure whether they were doing so. It also argued that the term was implied into the contract because it was necessary to make it work properly.

Mulalley said Leander was not keeping up with the schedule, and withheld money from payments because of it.

Court takes subcontractor’s side

Leander disputed Mulalley’s arguments, and the court agreed.

It said there was no implied term because it was not necessary in order to make the contract work. There were other terms in the contract which allowed Leander to exercise control over Mulalley’s performance and there was no need for anything further.

The court confirmed that, in the absence of express requirements it is up to the subcontractor how the completion date is met. A main contractor seeking to co-ordinate the work of several subcontractors will need to include appropriate express conditions in his subcontracts.

Problems for main contractors

“Drafting such clauses is a notoriously difficult exercise,” said Clinton. “Perhaps that is why so many contracts steer clear of doing so – look at the JCT forms and see how little reference is made to programmes.

“Simply making the programme a ‘subcontract document’ will not do. If the subcontractor is to be required to follow the programme, it will be necessary to have a mechanism for adjusting programme dates where delay is caused by the contractor – otherwise the obligations will not be enforced.

“Beefing up the contractor’s rights to dictate the pace of progress is one approach but not one likely to be popular with subcontractors.

“Including a general obligation to ‘proceed regularly and diligently’ is another option but the precise meaning of that expression is open to debate. An updated and fuller expression of the same idea would be preferable.”

The case may reignite the debate started 20 years ago by the NEC contract, Clinton feels – should building contracts concern themselves with project management or should they be limited to dealing with rights and liabilities? “Looking again to that form of contract for inspiration may pay dividends,” he says.

Tolent clauses

The Mulalley case is also notable as it is the first to comment on the amendments to the Construction Act since they came into force. Section 108A of the Act was intended to outlaw so called ‘Tolent clauses’, which require one party to pay the adjudication costs of the other regardless of who wins the adjudication.

“Many commentators consider that s108A does not work,” says Clinton. “In Leander, the court gave a clear indication that arguments to the effect that s108A does not prohibit Tolent clauses are likely to be given short shrift.”
Pay less notices: clearing up confusion
Wednesday, February 01, 2012, 5:17:25 PM
The Construction Act changes last autumn has caused uncertainty over pay less notices. Laura Phoenix from Thomas Eggar explains the criteria for an effective pay less notice, and clarifies the wording of the new act.

Confusion about pay less notices has become common as the construction industry gets to grips with changes to the Construction Act, which came into force last Autumn.

It is crucial that a paying party grasps the statutory requirements for pay less notices.

An ineffective pay less notice leaves the payer (usually the client) with little alternative than to pay a sum notified no matter how strongly it disagrees with the figure in question. This must be taken all the more seriously now that payment notices can be issued by the payee (usually the contractor).


The amended Construction Act allows the parties to negotiate and agree whether the client or the contractor issues payment notices.

Where in accordance with tradition, the client is obliged to issue payment notices under the contract, that obligation now has teeth: the contractor can issue a notice of default specifying the sum it considers due if the client misses a payment notice deadline.

The client then has one more ‘bite at the cherry’ which if missed or inadequately performed results in an obligation to pay the sum set out in the contractor’s notice. This ‘bite’ is the pay less notice.

Differences to witholding notices

Statutory requirements for a pay less notice differ from more familiar requirements for a withholding notice (to specify the amount(s) to be withheld and the ground(s) attributable to each amount). These still apply to construction contracts entered into before 1 October 2011.

The new Section 111 (3) of the Construction Act allows the client (or client’s specified person e.g. the contract administrator) to give the contractor notice of the client’s intention to pay less than the notified sum.

Section 111(3) requires a pay less notice to specify:

The sum that the payer / specified person writing the notice considers to be due on the date the notice is served (even if this is zero), and
The basis on which that sum is calculated (again, even if the sum is zero).

To be effective, a pay less notice must be served before any contractual deadline.

If no deadline is expressly agreed, then the amended Scheme2 implies a strict timetable into the contract.

Provided you use an up to date standard form (e.g. JCT 2011), your contract will be compliant with the new Act. Check that your contract refers to pay less notices and generally complies with the 2011 legislation before entering into it. – A non-compliant contract will have unintended consequences.

Question over wording

The wording of new Subsection 111(3) (a) raises an interesting question: What does “the sum that the payer considers to be due on the date the notice is served” mean? The sum that was due at the due date? Or is a further valuation required to take account of work done between the due date and the date of the pay less notice?

The question has given rise to different opinions amongst legal advisors. The answer lies in the use of the word ‘due’. Payment for work done between the due date for a period of work and the deadline for a payless notice does not fall due until the next due date.

In our opinion, the pay less notice should therefore start by setting out the sum which the notice writer (the payer) considers was due at the payment due date even though the figure is determined at the date of service of the pay less notice. A pay less notice can then go on to take account of set-offs arising after the most recent due date but before the deadline for issuing a pay less notice.

For a sample pay less notice and guidance notes or to discuss any query relating to a construction contract, contact the author Laura Phoenix, an Associate in the construction team at Thomas Eggar.

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