Retendering: are clients obliged to invite the original contractor appointed?

The recent decision in Mallino Development Ltd v Essex Demolition Contractors Ltd provided a lesson in the retendering of construction contracts. The court ruled the contractor was entitled to damages for loss of profit and overheads due to the employer breaching its contractual obligation to include the contractor in a retender for the works.

On 24 April 2018, Mallino engaged Essex Demolition, under a JCT Standard Building Contract Without Quantities 2016 (as amended), for the Bodmin Jail Development in Cornwall. The works included the construction of a hotel, a visitor attraction and a hospitality venue. This case relates to the visitor attraction known as the ‘Dark Walk’.

The contract was divided into three sections and allowed the employer to retender the final section of the works. Upon this retender, the employer could choose to retain the original contractor, or engage a new contractor and then either novate the original contractor or terminate the original contractor’s engagement. If the employer terminated the original contractor, it was contractually obliged to pay reasonable demobilisation costs, but not loss of profit or overheads on work not completed.

Mallino ultimately engaged a new contractor without requesting tenders for the final section. Initially, by way of adjudication, Essex Demolition successfully claimed damages for breach of contract, which included loss of profit and overheads. The employer did not agree with the adjudicator and took the matter to the court.

In making its case in court, Mallino admitted breach of contract. However, it argued that it would have been entitled to terminate the original contractor without paying loss of profit and overheads in any event. Therefore the original contractor was not entitled to receive those losses as damages.

The employer sought to rely on the case of Lavarack v Woods of Colchester Ltd. It was decided that the original contractor’s losses should be measured with reference to ‘minimum contractual obligations’. Because the employer could have performed the contract in alternative ways, the appropriate damages for breach should be assessed in a way most favourable to it.

Although the court accepted this analysis in principle, it determined it was not applicable to the facts in this case, as this dispute concerned the single obligation to retender the final section of the works and include Essex Demolition in such retender.

Therefore, the court could consider how the employer would have exercised its discretion, rather than assuming it would have acted in a way that minimised its liability (citing Abrahams v Reiach (Herbert) Ltd [1922] 1 KB 477, Durham Tees Valley Airport Ltd v Bmibaby Ltd and another and British Gas Trading Ltd v Shell UK Ltd).

Ultimately, the court held that the contractor would have tendered for the works and that there was a reasonable chance the employer would have appointed the original contractor. The court concluded that even if the Lavarack principle had applied, the least burdensome option for the employer would not have been to reject the original contractor’s tender (which the court found would be ‘cutting off its nose to spite its face’).

Accordingly, the court considered what value there would have been to Essex Demolition had Mallino engaged it to carry out the final stage of work. The parties accepted that this would have amounted to £321,391 (being its base cost, plus lost profit and overheads).

The court then assessed what chance the contractor would have had of being awarded the contract for that work, which it determined was a real and substantial chance at 66%. The original contractor was therefore awarded 66% of its claim for overheads and profit, a sum of £212,118.53.

This case should remind construction clients to consider carefully whether retendering obligations provide sufficient flexibility to appoint an alternative contractor in circumstances where the relationship between the employer and original contractor has broken down.

If there is a strict obligation to retender and include the contractor in such a process, but the employer fails to proceed on this basis, the employer is likely to have to pay significant damages, which could include loss of profit and overheads. It will make no difference if there is an express contractual provision that limits or excludes such payments on termination.

Theresa Mohammed is a partner and Stephanie Geesink is of counsel at Watson Farley & Williams.