PCSAs after Belong v Seddon: Pre-Contract Liabilities

Why should I read this?

The Technology and Construction Court considered whether a contractor could avoid liability for breaches of a PCSA after entry into the main JCT building contract. The PCSA provided that rights and liabilities under the PCSA would be “subsumed into and be subject to” the main contract. HHJ Stephen Davies held that this did not extinguish accrued rights and liabilities under the PCSA. 

This is essential reading for anyone drafting, reviewing or advising on PCSAs in the construction sector. The decision also provides a useful framework for managing the transition from pre-construction services to the main contract.

Background

Belong (Construction) Limited (“Belong”) engaged Seddon Construction Limited (“Seddon”) under the PCSA to carry out preliminary services, which involved the testing of air sealing works (“ASW”), in advance of the parties entering into a JCT Standard Building Contract (with Quantities) (2016) (the “Main Contract”) for the main suite of works. The PCSA contained commonly encountered wording, providing that upon execution of the Main Contract the parties' rights and liabilities would be "subsumed into and be subject to" the main contract. 

Under the Main Contract, the contract administrator instructed Seddon to carry out additional ASW, following which Seddon sought an extension of time (“EOT”) on the basis that these works constituted additional works under the Main Contract. The contract administrator rejected the EOT, arguing that the need for additional works arose from Seddon's failure to adequately perform the services under the PCSA (by failing to open up and test the existing ASW). The Main Contract barred EOTs arising from Seddon's own “omission or default”.

Seddon succeeded in adjudication, arguing that it bore no liability for its failures under the PCSA once the Main Contract was entered into because:

• the services subject to the breach were included in the PCSA but not within the scope of the Main Contract works; and 
• the “subsumed into” clause extinguished its pre-existing liabilities upon entry into the main contract.

Belong challenged that decision in the Technology and Construction Court before HHJ Stephen Davies.

The decision

The Court found in favour of Belong, reversing the adjudicator's decision. HHJ Stephen Davies held that Belong had not lost its rights arising from Seddon's pre-existing breaches of the PCSA as a result of the parties' subsequent entry into the Main Contract.

Distinction between “obligations” and “liabilities”

HHJ Davies distinguished between:

1. an obligation, being a primary obligation; and
2. a liability, which arises as a secondary obligation pursuant to a breach of a primary obligation.

This distinction ensured, as appeared to be the parties’ intention, that once the Main Contract was entered into no continuing obligations under the PCSA remained and the rights and liabilities under the PCSA of each party remained enforceable due to being subsumed into the Main Contract.

Use of the words “subsumed into”

The Court noted the lack of “established legal meaning” covering the words “subsumed into” and therefore applied the Oxford English Dictionary definition of “subsumed”. Crucially, this led HHJ Davies to determine that the words meant that the rights and liabilities under the PCSA had been taken up, or absorbed into, the Main Contract but this did not mean that they lost their independent existence. This resulted in the rights and liabilities under the PCSA maintaining their enforceability, but subject to the terms of the Main Contract.

EOT analysis – “error, omission, negligence or default”

The Main Contract provided that an EOT would not be granted on account of the circumstances and loss and expenses surrounding the EOT existing by reason of any “error, omission, negligence or default of [Seddon]”. The adjudicator, in coming to their decision, concluded that these clauses applied only to errors or defaults arising under the Main Contract itself.

HHJ Davies disagreed and concluded that the adjudicator had applied too narrow an interpretation of the wording. These clauses had specifically not restricted application to a “breach of the terms of this Contract”; instead, the Court interpreted the wording as widely referring to any errors, omissions, negligence or defaults arising out of the parties’ legal obligations under the PCSA and Main Contract – the Court noted that this did not mean that this wide interpretation could not be read in a manner unrelated to the legal obligations undertaken by the parties. Given the close connection between the PCSA and the Main Contract, and given the Court’s reasoning explored above, the Court held that Seddon’s breach of its obligations under the PCSA should fall within the application of these clauses and the contract administrator was therefore justified in refusing the EOT.

Difference between services under a PCSA and works under a Main Contract, and the distinction with a letter of intent (“LOI”)

The differences between a PCSA and a LOI were also considered by the Court in reaching the judgment. In particular, HHJ Davies noted that, under a LOI, “a contractor is required to undertake  the very same works which are to be the subject of the eventual contract…”. Whereas, under a PCSA (and this PCSA in particular), a contractor is employed to carry out specific services in order to get the project in a state whereby the main building contract could feasibly be entered into (under a different scope).

It remains that contracting parties, depending on their specific intentions, can incorporate the services provided under the PCSA into the works provided under the main building contract, or keep the respective scopes separate.

Key takeaways

The central message from Belong v Seddon is clear: Employers and contractors should consider what their intentions are when entering into a PCSA followed by a building contract.

Where a PCSA is used, the drafting should expressly address whether the contractor retains liability for prior breaches, which contract's terms govern the enforcement of those liabilities, and how any differences in scope between the PCSA services and the works under the main contract are to be reconciled.