‘Cutting its Nose Off to Spite its Face’ – Contractor awarded damages after being excluded from re-tender

Michael Comba explores a case which serves as an example of how employers' re-tendering obligations should be treated seriously.

Mallino Development Limited v Essex Demolition Contractors Limited [2022] EWHC 1418 (TCC)

With two-stage+ contracting arrangements becoming more common, employers’ re-tendering obligations are coming under increasing scrutiny. This case serves as an example of how such obligations should be treated seriously and a breach of them can result in significant claims from contractors for overheads and profit.

The facts

Mallino Development Limited employed Essex Demolition Contractors Limited to build a visitor attraction at Bodmin Jail. The Contract was an amended form of the JCT Standard Building Contract Without Quantities 2016.

Broken into three sections, the Contract was also varied to allow the Employer to request tenders for the later section of the works from the Contractor such to alternative contractors. The Employer did not request tenders for the final section, and instead simply awarded the works to an alternative contractor. The Contractor successfully brought an adjudication claiming the Employer breached its obligations by not inviting tenders and claimed lost overheads and profits (OHP).

The Employer accepted it had breached the Contract, but argued the Adjudicator erred in law by deciding that the Contractor had an entitlement to OHP. The Employer, citing Lavarack v Woods of Colchester Ltd [1], claimed that the Contractor’s losses should be measured with reference to ‘minimum contractual obligations’ (MCO). i.e., given the Employer could have performed the contract in alternative ways (not awarding the final section as it did) damages should be assessed in a way most favourable to it.

The judgement

While the court accepted the Employer’s analysis regarding MCO, it held that it was not applicable to this case. The dispute concerned performance of only a single obligation (to re-tender the Contract) and the authorities are clear that such scenarios are excepted from MCO. [2] The court was permitted to consider how the Employer would have exercised its discretion. It was not required to assume the Employer would have acted in a way that minimised its liability to the Contractor.

On the facts, the court held that the Contractor would have tendered for the works if given the opportunity and there was a reasonable chance (66%) that the Employer would have appointed them. To not do so would be it ‘cutting its nose off to spite its face’. The Contractor was therefore awarded 66% of its claim for OHP.

Analysis

This case demonstrates that Employers must tread carefully when drafting, and signing up to, re-tendering obligations. It must be considered whether there is sufficient flexibility to choose whether to re-tender at all and scope to appoint an alternative contractor. With growing popularity in two-stage contracts in the industry, this is going to be a live issue.

The case also illustrates the pitfalls of letting personal preferences get in the way of commercial and legal reality. It was heavily implied that the Employer had simply taken a dislike to the Contractor and let that get in the way of sensible decision-making. It paid the price – to the tune of a 6 figure sum.

[1] [1967] 1 QB 278.

[2] British Gas Trading Ltd v. Shell UK Ltd [2019] EWCA Civ 2349

Michael Comba is a Solicitor at Sharpe Pritchard LLP.

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