Discounts  © Daniel Atkinson 1999

Many standard forms of subcontract allow for discount typically of 2½%. This can represent the difference between profit and loss for contractors, and so it is not surprising that disputes arise. The leading case is the Court of Appeal decision in Team Services plc v Kier Management and Design (1993), but two recent decisions provide further guidance and insight and suggest a more commercial approach to the issue than suggested by the majority decision in that case..

Different terminology is used to describe discounts such as "cash" or "preferential" or "trade" or simply "discount". The key question in each case is whether the discount is entirely unconditional and therefore a reduction in the price or whether it is conditional, normally on prompt payment. In each case this will be a matter of interpretation of the contract.

In Team Services the parties had used a standard form of subcontract which provided for "cash discount" but had deleted the words "if payment is made within fourteen days" from the standard form. The Court of Appeal looked at the deleted words to throw light on the meaning of the remaining words and held by a majority that the discount was not dependent upon prompt payment. The reasonable assumption that in the absence of words to the contrary "cash discount" depends upon prompt payment makes commercial sense. The Court of Appeal took a more literal approach although the decision has been criticised.

In Norwest Holst Construction Ltd v CWS (1998)) his Honour Judge Thornton examined the wording of the DOM/1 standard form in which the word "cash" had been crossed out from the words "cash discount". The decision in Team Services was relied upon to show that words that have been deleted in a standard contract can be considered when construing the words that remain to aid the construction of those words. It was argued that the omission of the word "cash" meant that the parties intended to severe the entitlement to discount from any obligation to pay instalments promptly since there could be no other purpose for the deletion. Whilst not disagreeing with the adoption of the method of interpretation in Team Services, the interpretation suggested was rejected by Judge Thornton. He held that a purpose for the crossing out of the words "cash" could well be to entitle discount to be taken into account when a payment was made by means of a set-off. Although payment would not actually be made because of the set-off, advantage could still be taken of the discount in any accounting exercise because of the deletion of the word "cash". It was held therefore that the discount of 2½% could only be deducted if there was prompt payment.

In Wescol Structures Ltd v Miller Construction Ltd (1998) the formation of contract was complicated in a way which can only happen in construction. The contract was concluded by a letter of intent by Miller which listed the previous correspondence and by Wescol entering on the subcontract works thereafter. The issue again was the 2½% cash discount. It was considered that there were aspects of the correspondence in this case which might be thought to point to a conclusion similar to that reached in Team Services. In particular, Wescol's original pricing structure had been "nett" and then arithmetical adjustments had been made to inflate the quotation to provide for the anticipated "cash discount". This it was argued suggested that Wescol's interests would have been fully served by payment net of discount without making it conditional on prompt payment. On the other hand, from the outset Wescol had stipulated for both the application of the standard subcontract conditions and for a specified relationship between valuation and payment. It was therefore held that Miller was not entitled to deduct and retain the discount if it did not met the stipulated payment terms.

The above decisions show the difficulties of interpretation of "discount" clauses if they are not clearly and unambiguously drafted. There is no presumption that the parties intend the discount to be dependant upon prompt payment, and each contract needs interpreted in the light of its own particular facts. Nonetheless the two recent decisions suggest the courts will take a purposive approach.