This was the question considered in the recent case of Squibb Group Ltd v London Pleasure Gardens Ltd  EWHC 3275.
London Pleasure Gardens Ltd (the “employer”) leased a site in east London from the London Development Agency. The employer intended to develop the site in the period surrounding the London 2012 Olympic Games. The London Borough of Newham (“LBN”) decided to take on the role of the funder and made a loan to the employer to enable it to engage contractors and prepare the site. Under the terms of the loan agreement, LBN had control over any payments that the employer wished to make over £10,000 (later reduced to £2,000).
The employer engaged Squibb Group Ltd (the contractor) to carry out extensive ground works on the site. The building contract included terms that the funder had originally proposed, such as step-in provisions. To this end, the funder was identified in the building contract, but was not mentioned in the contractual payment mechanism.
The contractor completed the works and a substantial payment became due to the contractor from the employer under the building contract. However, the employer failed to pay the contractor in full, following which representatives of the employer, LBN and the contractor met to discuss how best to proceed. Following those discussions, the contractor performed some additional works (having received payment in advance) and received £250,000 of the £424,000 it claimed under the building contract. However, the project was not commercially successful and the employer went into administration, leaving LBN’s loan and the contractor's remaining payments under the building contract outstanding.
The contractor began legal proceedings against LBN, claiming:
- a collateral contract had arisen at the time of conclusion of the construction contract between the contractor and employer;
- a collateral contract or contract had been entered into between LBN and the contractor during the on-site meetings.
The contractor relied on the following points:
- LBN acted in a wider role than just a traditional funder as its interests included regeneration, reputation and local employment.
- LBN had given assurances that the project would not fail.
- Interim certificates had to be signed off by LBN to allow for funds to be released for the contractor to be paid, effectively controlling who was paid.
Each of these points were dismissed by the judge as amounting to a collateral warranty for this case. However, the judge referred to the case of Shanklin Pier v Detel  2KB 854 as a reminder that collateral warranties can be created in similar circumstances.
The Contractor’s alternative argument that a collateral contract had arose during meetings between the parties was also rejected by the judge due to the evidence that the judge was presented with as to what was discussed during the meetings.
This case is a timely reminder that development arrangements involving a chain of contracts need to be administered in a way that is consistent with the chain to avoid additional payment obligations being found to exist:
- Settlement discussions need to be clear as to which party will be paying who and when;
- Additional work requests need to be similarly clear;
- Avoid any representations being made to the construction contractor which are inconsistent with the contractual chain.