Contracts must consider all eventualities

It’s important to consider all reasonable eventualities when drawing up a contract.

Failure to do so can prove costly as a building firm discovered in a recent case before the Court of Appeal.

The firm had joined forces with another contractor to set up a residential development company which bought land on their behalf. The builder and the contractor owned equal shares in the development company and so it sold land to them in equal measures.

However, there would be times when one firm received more land than another, usually depending on how busy they were. If they received less in one allocation, it would usually be compensated for in the next allocation.

The problem arose when there were only two areas remaining on a site they had been developing. The builder had received less land than the contractor up to that point. It was therefore agreed that the builder should receive a greater share of the remaining land to redress the balance.

However, it then turned out that planning permission was refused for the remaining land, making it virtually worthless. Neither party had anticipated this. The builder claimed that he should receive a greater share of the next plot to compensate but the contractor refused.

The Court of Appeal has now ruled in favour of the contractor. It held that the builder could have waited to see if planning permission would be granted. Alternatively, he could have reserved his position in the event that it was refused.

He did neither of these things and the contract had no mechanism for readjusting the allocation of the land. This may have been harsh on the builder but it was the effect of the contract as it was drawn up.

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