The recent case of Squibb Group Ltd v (1) London Pleasure Gardens (2) London Borough of Newham  EWHC 3275 (TCC) demonstrates that contractors cannot rely on funders to pay outstanding fees where an employer runs into financial difficulty.
In December 2011, London Pleasure Gardens Limited ("LPG") was granted a lease to develop the Pontoon Dock Site in Silvertown with a view to hosting revenue-generating events before, during and after the London Olympics. The London Borough of Newham ("Newham") funded LPG through a £3mn loan.
LPG contracted with Squibb Group Ltd ("Squibb") to carry out ground works at the site under an amended JCT Construction Management Trade Contract 2011 (the "Contract"). Newham was involved in negotiating the Contract and proposed step-in rights that were included for its benefit.
Whilst Squibb completed the work properly and on time it was left out of pocket as LPG went into administration shortly after the Olympics commenced owing Squibb £174,000. Squibb went to court, arguing that it had a collateral contract with Newham whereby Newham had guaranteed LPG's payments to Squibb under the Contract. It argued that the collateral contract had arisen either via Newham's involvement in the Contract negotiations or by representations made in meetings following LPG's failure to pay, at which Newham agreed to pay Squibb £250,000 of the then outstanding sum of £424,000.
At trial, Stuart-Smith J found that the Newham's negotiation of the Contract as funder did not result in the creation of a collateral contract between Newham and Squibb. Although Newham was named in the Contract, it was not subject to any express provisions requiring it to guarantee payment to Squibb. Newham's ability to propose terms was not sufficient to create a collateral contract, as Squibb had the right to reject these at any time.
Squibb's alternative argument, that a collateral contract arose during meetings between the parties, also failed. After listening to evidence from witnesses who had attended the meetings, the court held that although Newham had agreed to pay £250,000 of the £424,000 owed, it had not agreed to guarantee all sums owing under the Contract. In fact, since Newham had paid the £250,000, it owed nothing further to Squibb.
The morals of the case are clear: when relying on a funder to guarantee an employer's breach, a contractor must ensure that this is expressly set out in the in contract. Where subsequently seeking such a guarantee, make certain that any discussions are clearly recorded and make efforts to formalise the parties' intentions as soon as possible. Finally, do not assume that the involvement of a funder is a sure sign that the project will succeed!