Onerous Conditions.

© Daniel Atkinson 2007 05 April 2007

 If a structures founded on pad foundations is likely to settle it is necessary to construct either deeper foundations or to support the structure by piled foundations.

Piles support the structure either directly on bedrock or by friction along its length. This does not necessarily prevent settlement but it may reduce the settlement to an acceptable level. The length of friction piles need to be carefully designed. If they are too short then the settlement may be excessive. If the ground is settling generally by consolidation, the resulting down drag on the piles will itself cause the structures to settle. The consequences of settlement may be huge financially and far greater than the cost of the piling work carried out.

It is for this reason together with the uncertainties of ground conditions, that piling contractors seek to limit their liability by their standard terms and conditions. Two types of clauses are frequently seen. The first is a cap on liability in which the contractor limits his liability to either a stated sum or to the contract price. The second type of clause is the changed ground conditions clause. The contractor excludes the effect of ground conditions different to those foreseeable from the information provided.

In order for such clauses to be effective they must of course be incorporated in the contract for the piling works. As often occurs in the construction industry contracts are made at meetings or by exchange of letters which do not always clearly identify the terms that have been agreed. This is particularly the case when a rapid start is required, which was the situation in Shepherd Homes Limited v Encia Remediation Limited [2007] EWHC 70 (TCC) before Mr Justice Christopher Clarke.

The issue was whether a limitation clause was incorporated into the contract and if so whether it was legally effective. Shepherd Homes Limited employed Encia Remediation Ltd as a civil engineering contractor to provide ground works, roads, paths and sewers for the site, and also to pile the site and create ring beams and floors for the 94 dwellings to be erected.

The work was divided into two stages: Phase 1 consisting of 46 plots and Phase II consisting of 48 plots. The contract price of the works turned out to be £777,459 for Phase 1 and £1,236,031.80 for Phase II.

The work was carried out between July 2001 and September 2002. In around May 2003 properties constructed on the site began to show signs of cracking due to settlement. On 18 October 2005 Shepherd began the proceedings against Encia, which included allegations that the piling design was defective, because of a failure to take into account down drag, and that that was the cause of the settlement.

SHL’s claims at April 2006 was of the order of £3,000,000 in respect of 12 properties. There was a potential liability of the order of £10,000,000 but with a possibility of more.

On 10 March 2006 Encia was granted permission to join Green Piling Ltd, the specialist piling subcontractor which had carried out the piling for Encia. Green was a small piling subcontractor with a turnover in the year to March 2001 of £336,682.

Clause 4.3 of Green’s standard terms and conditions limited their total liability to the Contract Price, whether in contract or tort.

The issue was to what extent, if at all Clause 4.3 formed part of Green’s offer which was accepted by Encia. The way the contract had come about was of course central to the issue.

Encia had been in discussion with a number of piling contractor since early April and by 26 June 2001 had obtained tenders from four of them. The prices on offer were more than the sum Encia had allowed for in its tender to Shepherd. The lead times were longer than hoped for. Encia needed a contrator to start work on site within a relatively short time.

On 27 June 2001 Green and Encia met. Green handed to Encia a package of information about Green which included Green’s terms and conditions.

Encia outlined the works that were required and handed to Green a tender package which included layouts and construction drawings and borehole logs and confirmed that the number of piles required was 641.

Green was then left alone for about 15 – 30 minutes in order calculate a price for the works. The quoted price was too high for Encia.

Green realised that it would have to reduce it price and, on reconsideration, confirmed that its best offer was £100,00. This was said to be a qualified offer based upon the information provided. If the piles had to go deeper in to the ground than he had allowed for Green would not charge any additional sums unless they had to go deeper than was reasonably foreseeable from the information that had been made available.

Encia accepted the £100,000 price and instructed Green to start work on 2 July 2006.

During the meeting it had been agreed that the payment terms were to be 28 days as opposed to 14 days. Encia raised the issue of payment terms because, while Green was working out the tender price, he had looked at Green’s terms and conditions. He was unhappy with the 14 days because it was unusually short that was the reason for it being underlined in the terms. It was a shorter payment period than Encia had with Shepherd.

There was no discussion of clause 4.3 at the meeting.

The upshot of the meeting was that it was agreed the Mr Bates would return to his office and send a fax confirming the position.

It was not suggested in the proceedings that the parties had reached a binding contract, as opposed to an agreement in principle, at the meeting.

On Wednesday 27 June Green faxed Encia submitting the agreed offer of £100,000.00 net stated to be as detailed in attached documents. Enclosed with that letter were documents which included Terms and Conditions of Contract including the amendment made in the manuscript of the meeting in the presence of Encia so as to replace “14” with “28” in relation to the period of days for payment. The terms formed part of Green Piling’s offer of 27th June.

On Friday 29 June 2001 Encia replied by fax confirming the instruction to commence piling works on Monday 2 July 2001.

Encia stated that a formal order would be forwarded. No order was ever forwarded. Green commenced work on Tuesday 3 July 2001.

Encia originally contended that inadequate notice was given of clause 4.3 and that, as a result, the cap was not incorporated into any contract, but in the light of the evidence that defence was not maintained. Nonetheless, Clarke J reviewed the law in this area and made observations which are of general interest to the industry.

Obiter observations

Clarke J considered that a limitation of a contractor’s liablilty to the amount of the contract price was not particularly unusual . Two of the contractors which Encia was considering had terms and conditions which limited liability to the purchase price.

Clause 4.3 did not therefore fall into the category of a clause which was “particularly onerous or unusual”. Some piling contractors’ standard terms include such a provision, some do not. The principle is that the person relying on the clause must have done what was reasonable fairly to bring the clause to the notice of his customer when the contract was made. As Bingham, LJ, put it “… the more outlandish the clause the greater the notice which the other party, if he is to be bound, must in fairness be given”.

Green did what was necessary to give Encia fair notice that their offer was subject to the condition that their liability was limited to the contract price. The letter 27 June included documents, which included a one page document setting out terms and conditions. This contained, in clear and legible print, ten terms. The warranty clause – clause 4 – had 4 sub-clauses amounting to 15 lines in all. It covered, in clear language, the extent and limit of Green’s liability.

Although Clause 4.3 was part of the offer, the next question was whether the offer was accepted by Encia’s letter of 27 June or whether that was a counteroffer. Encia’s letter of 29 June 2001 was ,subject to one point, an acceptance of the offer letter of 27 June.

The fourth paragraph of Encia’s letter stated

“For clarity, we confirm that you have received all AIG Borehole log for this site, have made an assessment of likely pile depths for the scheme and as such bare (sic) all risks/retain all benefits associated with conditions varying from your initial assessment.”

The effect of this paragraph was to cast on Green all the risks of ground conditions varying from those initially assessed whether foreseen, foreseeable or unforeseeable. This differed from the allocation of risk contained in the offer letter incorporating the terms and conditions. Under those terms it was only the risk of foreseen and foreseeable risks that the contractor had to bear. The difference was not trifling. It was observed that unforeseeable (or arguably unforeseeable) ground conditions could be very expensive. It was held that for this reason the letter of 29 June could not be regarded as an acceptance of the offer of 27 June and must be treated as a counter offer.

But the letter of 29 June was only a counter offer in respect of the risk of unforeseen ground conditions and was itself subject to Green’s terms. The letter of 29th June 2001 made no suggestion that they were not to apply. It was an offer to contract on the terms of the offer letter of 27th June 2001 subject to the qualification contained in its fourth paragraph.

Accordingly Green had made an offer on its terms; Encia accepted that offer, subject to a qualification about risk of unforeseen ground conditions, and Green accepted what amounted to Encia’s counter offer.

The next issue then was whether Clause 4.3 was enforceable. Encia’s essential submission was in relation to the Unfair Contract Terms Act 1977. It was argued that since the parties contemplated that Encia would have the benefit of up to £1,000,000 of insurance cover, any term which denied the full extent of such benefit was neither a fair nor reasonable in the circumstances, with the result that the cap was inapplicable.

Clarke J did not accept this argument. In 2001 Green was known by Encia to be a small company. Encia was part of a very large international group. Encia had a superior bargaining position. It was the customer. It could have contracted with others on terms that did not contain a cap. As it was, Encia secured favourable terms for an immediate start and a improvement in Green’s standard payment terms as part of a deal which included those terms.

Clarke J was satisfied that, in the circumstances, the term was a fair and reasonable one to have included in the contract between the parties.

The term did not cease to be fair and reasonable simply because Green confirmed that it had insurance cover of £1,000,000. That did not alter the fact that the cap was a contractual term nor was it inconsistent with it. There was no reason to regard the cap as unreasonable because Green had larger insurance cover, which would also be needed for claims under other contracts.

It was held that clause 4.3 of Green Piling’s terms and conditions formed part of Green’s offer of 27th June and the Contract made between Green and Encia included that clause.

Clause 4.3 satisfied the requirement of reasonableness and was enforceable.