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Entering Into and Terminating Construction Contracts
Who has authority to enter into contracts on your company’s behalf?
Will penalties be enforceable for early termination of contracts?
In the recent case of CRJ Services Limited v Lanstar Limited t/a CSG Lanstar, Hawkswell Kilvington acted for CRJ in the successful enforcement of an adjudicator’s decision. The case addressed the important legal issues surrounding entering into and terminating construction contracts. The court also provided guidance on natural justice in adjudication decisions.
CRJ, a recycling plant hire company, had entered into contracts with Lanstar, a waste management and recycling company, for the short-term hire of plant and equipment on numerous occasions since 2007. Many of these contracts related to a waste management site which was run and managed for Lanstar by a Mr Vaughan. Lanstar paid CRJ’s hire charges for each hire contract which was entered into.
In late 2009 and early 2010, CRJ and Lanstar entered into three long-term hire contracts (for periods of 2 or 3 years). These long-term hire contracts provided that if Lanstar terminated the contract early, Lanstar would be required to pay 60% of the hire charges for the remainder of the contractual hire period.
In September 2010, following termination of Mr Vaughan’s engagement with Lanstar, the site which Mr Vaughan had managed was closed down and Lanstar informed CRJ of its intention to terminate the three long-term hire agreements.
Lanstar refused to pay the 60% hire charges for the remainder of the hire periods, arguing that Mr Vaughan was not a Lanstar employee and had no authority to enter into the hire contracts on Lanstar’s behalf. CRJ commenced an adjudication to recover payment in respect of one of the long-term contracts for the hire of a shredder. The adjudicator found in favour of CRJ and subsequently CRJ commenced enforcement proceedings.
Lanstar defended CRJ’s claim on the basis that Mr Vaughan had no authority to bind Lanstar, so there had been no contract and the adjudicator had no jurisdiction. Lanstar also argued that there had been a breach of the rules of natural justice during the adjudication because a witness statement from Mr Vaughan which CRJ had served on both Lanstar and the adjudicator had not been received by Lanstar. However, the court did not accept Lanstar’s defence and upheld the adjudicator’s decision. The key issues raised by this case are as follows:
Authority to Enter into Contracts
The court explained that there are 3 different ways in which individuals can have authority to enter into a contract on behalf of the company they work for:
- Express authority. This arises when an individual has expressly been given authority to enter into a contract on behalf of someone else.
- Implied authority. This arises when an individual is authorised to do a particular job and has implied authority to do whatever is incidental to the performance of that job, such as entering into relevant contracts.
- Apparent authority. This arises when third parties are given the impression that an individual has the authority to enter into contracts, for example, because the individual has a job title which suggests he has the appropriate authority.
Here, the court found that Mr Vaughan of Lanstar had both implied and apparent authority to enter into contracts on Lanstar’s behalf. As a result, there was a contract and the adjudicator did have jurisdiction. The court’s conclusion was supported by the following facts:
- Mr Vaughan had entered into numerous hire contracts on Lanstar’s behalf;
- since Lanstar had always paid the charges arising under those hire contracts, Lanstar’s management and directors must have been aware of Mr Vaughan’s conduct; and
- there was no evidence that Lanstar had told CRJ about any limits on Mr Vaughan’s authority to enter into hire contracts on Lanstar’s behalf.
Penalty Charges on Termination of Contracts
The adjudicator found that the 60% hire charge was a genuine pre-estimate of CRJ’s loss. CRJ was required to make monthly payments towards the cost of purchasing the shredder and it had to ensure that this cost was directly funded by the hire contract. It was clear CRJ had not intended to penalise Lanstar when imposing the charge and as such the 60% penalty charge was enforceable.
Adjudication and the Rules of Natural Justice
With regards to Mr Vaughan’s witness statement, the court did not make a judgment as to whether or not it had been received by Lanstar. However, the court noted that the adjudicator would have had no reason to believe that Lanstar had not received the witness statement, since it was served on the adjudicator and Lanstar by email and post.
The court confirmed that any breach of the rules of natural justice must be material in order for the adjudicator’s decision not to be enforced. The court has to consider whether the adjudicator has displayed such a lack of regard for the rules of natural justice that the adjudicator cannot conduct the adjudication fairly. This was not the case here; there was no material breach of the rules of natural justice and the decision was still enforceable. The court noted the following points:
- the adjudicator’s receipt of the witness statement was innocent because he had no reason to believe that Lanstar might not have received it;
- in deciding that there was a contract because Mr Vaughan had apparent authority, the adjudicator relied on the facts of the case rather than the witness statement; and
- the adjudicator’s view on Mr Vaughan’s authority was not part of the dispute referred to adjudication; it was simply incidental to the adjudicator’s investigation into his own jurisdiction.
Penalty Charges – Analysis
- Charges for early termination of hire contracts will be upheld provided that the charge is a genuine pre-estimate of the loss suffered by the plant hire company.
- When entering into contracts, check for specific charges on, say, termination – these may be enforceable, so if you are not prepared to pay them, this is an issue that must be addressed before the contract is signed.
Authority to Enter into Contracts – Analysis
- It is extremely difficult to ‘escape’ from a contract on the basis that the person who signed the contract had no authority to do so.
- Unless it is absolutely clear to third parties that there was no authority to enter into the contract, the courts are likely to find that there is authority.
- Consider reviewing the arrangements within your organisation for entering into contracts; do you have a clear policy on who is allowed to bind the company in contract?
Natural Justice – Analysis
- The courts will enforce adjudication decisions if the breach of the rules of natural justice is only minor.
- Parties seeking to challenge an adjudicator’s decision must be able to prove that the adjudicator has plainly disregarded the rules of fairness.
This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please do not hesitate to contact one of our specialist construction lawyers.