Today we’re looking at the transition from early works agreements (EWAs) into the main construction contract. Parties aim for a seamless transition: the EWA falls away and the main contract takes over. 

But what if the main contract does not envelop the EWA obligations? Can the employer still hold the contractor accountable for EWA breach which is not also main contract breach? This and other questions were examined recently by the Technology and Construction Court (England) in Belong (Construction) Ltd v Seddon Construction Ltd.

Belong (a developer) engaged Seddon on a pre-construction services agreement (PCSA) which required Seddon to survey and inspect some partially completed works, including opening up and testing air sealing installations. Seddon did not do this.

Later, the parties signed the construction contract, which was not as tough as the PCSA, requiring only that Seddon identify previous works defects as were reasonably identifiable by visual inspection. And it expressly did not require that Seddon open up the earlier works.

What happened next: Air sealing defects came to light, the fixing of which caused critical delay and Seddon applied for an extension of time, which was refused on the reasoning that the delay was caused by Seddon’s failure under the PCSA to open up and test the existing air sealing. Claims entitlement under the construction contract expressly excluded circumstances caused by the contractor’s “error, omission, negligence or default”. 

Seddon took the refusal to adjudication and was successful, so Belong went to court for a final determination. 

The PCSA governed the transition to the construction contract in the following way:

• The parties’ rights and obligations are governed by the PCSA until the earlier of execution of the construction contract or PCSA termination; and 

• Upon construction contract execution, the parties’ “respective rights and liabilities [connected to the PCSA] shall be subsumed into and be subject to the Contract.”

Seddon’s position was that everything under the PCSA being “subsumed” into the construction contract meant being absorbed into it, leaving no trace of the rights, obligations and liabilities that arose under it. Since the only operative terms, therefore, did not require the opening up of earlier works, the PCSA breach was erased.

The court did not agree, and there are four interesting points from the judgment:

First, it was noted that PCSA “obligations” are ended at execution of the construction contract but “rights and liabilities” are subsumed into the new contract. A liability is not the same as a primary obligation; it is a secondary obligation that arises on breach of a primary obligation. So at transition, Seddon had no further obligation to open up works but its liability already accrued for failing to do so, was not wiped out.

Second, the court read “subsumed” in its ordinary sense, agreeing that it means taken up or absorbed into something larger but not agreeing that absorption necessarily destroys its legal relevance. In support of this, the court noted that the PCSA entitled Belong to bring proceedings under the PCSA for up to 12 years after practical completion of the main works. That provision would be meaningless if all PCSA liabilities were dissolved upon execution of the construction contract. 

Third is the provision that PCSA liabilities subsumed into the construction contract are also “subject to” that contract. Does the construction contract not, therefore, override the PCSA so that the liability survives only if the same conduct would have been a breach of the construction contract? The court decided it did not, and that “subject to” only meant that the liability is managed and understood in the context of the construction contract: dispute resolution procedures, exclusions and caps on liability. 

Finally, can the exclusion of claims entitlement for “error, omission, negligence or default” stretch to include breach of a different contract? The court decided it could, noting that the “default” can be of any obligation arising in tort or statute or a contract – not necessarily this one. 

In my view, this decision was a close call. I see merit in the last two of the above arguments from Seddon. The PCSA and the construction contract are closely-linked but contractors signing up to the ubiquitous exclusion of claims entitlement due to “default” without adding “of this contract” might be concerned to hear that the exclusion stretches to other contracts, tort and public law breach. I’m also not sure how the express 12-year PCSA limitation squares with the idea that liability is taken into the construction contract anyway.

But the main lesson is welcome. This contractual arrangement created a quite specific situation in which the PCSA neither survived nor died. Liabilities survived but were no longer to be understood and administered according to the contract under which they arose. Simpler transitions can be achieved by choosing either:

• The EWA remains fully effective as a separate contract, with only the remainder of scope to be performed under the main contract; or

• The EWA works performed and price paid, are to be deemed retrospectively as having been done and paid under the main contract.

* Dubai-based Stuart Jordan is the Global Head of Construction for Baker Botts, a leading international law firm.  He has extensive experience in the Middle East, Russia and the UK.