Construction and Engineering projects are inherently complex and therefore it is no surprise that significant time, effort and costs are deployed to ensure that the risks, rights and obligations between the parties are carefully set out in their contract. However, this does mean that construction and engineering contracts are lengthy and complex documents. The industry has done its best to simplify the contracting machinery and many standard form contracts are now in play such as the JCT, NEC or FIDIC suite of contracts, to name just a few.
However, even standard contracts will still need to be carefully tailored to address the specific issues/requirements of the project and the parties involved. The purpose of this article is to highlight that having spent so much time and effort negotiating and tailoring the contract, the rights and obligations the parties thought they had secured may be lost or rendered unenforceable by reason of what the parties actually do after the contract has been made!
What is Estoppel?
The classic statement of the law of equitable estoppel can be found in the statement of Lord Cairns CJ in the case of Hughes v Metropolitan Railway.
"It is the first principle upon which all Courts of Equity proceed, that if parties who have entered into definite and distinct terms involving certain legal results - certain penalties or legal forfeiture - afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties."
Estoppel is derived from the law of Equity. Closely linked is the doctrine of waiver. In reality the concepts overlap and are interchangeable. The essential point in either case is that a right or remedy is provided for by the terms of the contract, one party acts (by way of breach) to trigger the exercise of a right or remedy provided for in the contract but the ability of the innocent party to rely on or enforce the right or remedy is then challenged because they (the innocent party) is alleged to have acted in such a way that it is inconsistent with the exercise of the right or remedy provided for. In so doing the innocent party is said to have waived its rights or is estopped from relying on its rights under the contract.
Waiver by Election
Most contracts provide for the right of a party to treat the contract as terminated if a particular breach is committed by the other party. The innocent party is faced with a choice as to what it does in the event that such a breach occurs. It may elect to terminate (as provided for by the contract) or it may elect to affirm the contract in which case the right to terminate the contract is waived by election.
In the latter case the election is a positive decision by the innocent party to treat the contract as continuing. But such an election does not need to be expressly stated in clear words. An election can also be made by unequivocal conduct for example by continuing to perform obligations which, as the innocent party, you would not do if you were treating the contract as being terminated. The analogy often used is of the fork in the road with no opportunity to retrace one’s steps. The election as to which fork to go down is therefore irreversible once made; for example, continuing to accept services/works from a party in circumstances where a previous breach by that party gave rise to a right to terminate could be conduct which amounts to a waiver by election. In this scenario the right to terminate is effectively lost.
In the case of Peyman v Lanjani it was held by the Court of Appeal that the party alleged to have made an election by waiver should not only be aware of the facts of the breach but also that the breach would give rise to the right to elect to terminate. This, in its own right, can be a source of contention between the parties to a contract.
Waiver by election does not require the other party to rely on the waiver. Cases involving waiver by election are generally limited to situations where the innocent party must make a choice between two different courses of action. A breach which amounts to a termination event is the classic scenario. In reality, the majority of breaches will not give rise to an immediate or qualified right to terminate. Most breaches of contract will give rise to other remedies such as the right to claim damages or to withhold an action until the breach is corrected. In these situations the stark choice between two mutually inconsistent options does not arise. Nevertheless, the conduct of the innocent party may still give rise to another form of waiver, know as waiver by estoppel.
Waiver by Estoppel
Any contractual right, obligation or remedy is capable of being waived and this includes obligations which amount to conditions precedent. It is easiest to think of this form of waiver as not about making an actual conscious choice (which is a key feature of waiver by election), but instead simply acting in such a way that a reasonable person taking an objective view would be satisfied that the right or remedy was not being relied upon. In that situation a party may be estopped from then relying on a right, obligation or remedy.
Some examples of obligations which have been the subject of waiver by estoppel defences include where an innocent party has failed to make a claim under a contract where deadlines for delivery of goods or services have been missed, payment dates have been missed or a party has failed to give notice (condition precedents) of events or circumstances within a certain period of time which give rise to delay. All of these are common scenarios in construction and engineering contracts.
If breaches occur routinely, and are overlooked routinely, then it is possible that on a further re-occurrence of the same breach the ‘innocent party’ will not be able to rely on the breach. That is because a reasonable objective bystander would believe the specific obligation to, for example deliver on time or to a specific place or give written notice with a certain period, was not being actively enforced. The fact that the innocent party did not intend to waive his rights or simply forgot the right or obligations existed in the first place is irrelevant. It is the intention conveyed to the other party which is the key point. It follows, for waiver by estoppel, the other party must rely on the waiver. If there is no reliance by the other party, then it cannot be said to be unfair for the waiving party to rely on the obligation in the contract.
It is often argued that waiver by estoppel is suspensory only. That could mean that by giving proper notice, matters which had previously been waived and where such waiver had been relied upon by the other party can revert to the status of being enforceable. Clearly, this cannot render past breaches actionable if they have already been waived but future breaches, after the retraction notice has been given, would be.
One way of avoiding the post contract behaviour from affecting the contract is the use of “non-waiver” clauses. These can overcome some of the problems highlighted above; but it will depend on the specific drafting of the provision and the actual facts and circumstances giving rise to the waiver to determine the extent to which the non-waiver clause bites. Paradoxically, a contract which includes a non-waiver provision can often lead to less diligent contract management in the belief that all failures to enforce the contract terms will be excused by the clause.
No matter how well drafted, a non-waiver clause may not work in every situation where post contract conduct has potentially altered the parties rights and remedies under the contract.
The key point to take is that obligations, rights and remedies which are crafted into contracts can be easily lost or undermined if the parties do not enforce those rights when breaches occur or if by inaction or forgetfulness, rights are simply overlooked. Proactive contract management is therefore key which includes regular reviews of how the contract is being applied, whether possible waiver situations have arisen and whether steps need to be taken to protect or re-establish the rights and remedies set out in the contract going forward.
The use of non-waiver clauses may assist and most construction & engineering contracts will normally include such a provision. On a practical level, it makes sense for parties to regularly review the management of their contracts. To the extent a matter of strict contract compliance is not actively enforced or relied upon, it may be prudent to point out to the other party that a particular forbearance is not intended to be a waiver for future breaches. This is, however, unlikely to be of material assistance in relation to any waiver by election scenario because of the one off and irreversible nature of that type of waiver.