Where do the liabilities Belong? PCSAs and continuing obligations

The recent decision in Belong (Construction) Limited v. Seddon Construction Limited is a cautionary tale that parties who move from pre-construction arrangements into a main contract should not assume that earlier rights, liabilities or defaults have disappeared, and that the main contract is the only record of responsibility between the parties.

Liabilities can be left lingering, and remain enforceable, after entering into the main building – not everything has been overwritten by the new contract.  This article considers the implications of the case on how to approach these types of arrangements and what to be mindful of when drafting.

Pre-Construction Service Agreements (PCSAs)

PCSAs are commonly used to bridge the period before the main building contract is agreed. They allow employers to obtain early contractor input, surveys, design advice, investigation work and buildability input, while giving contractors a route into the main contract.

They are similar to Letters of Intent (LOI), although PCSAs are for a defined scope of work with a formal contractual backing unlike the vaguer LOI. They can be an attractive way of getting a scheme ready to commence, while avoiding risks of entering into contract before one or both parties are ready. They also allow negotiations on a main contract to continue simultaneously to the PCSA works / services (usually with the PCSA contractor, but sometimes with others).

One risk is to treat the PCSA as an interim or preparatory measure only like an LOI, that is then discarded once complete. This case clarifies that risk.

The Facts

Belong, the employer, was dissatisfied with an adverse adjudication decision that Seddon, the contractor and appointed under a JCT Standard Building Contract (the “Main Contract”), was entitled to an extension of time in relation to opening up and testing of air sealing works.

Belong challenged this determination via a Part 8 claim on the interpretation of key contractual provisions of the PCSA.

Seddon, the contractor, had originally been engaged under a PCSA after a previous contractor became insolvent. Its pre-construction role included appraising, surveying and inspecting the partially completed works, including issues relating to opening up and inspecting of air sealing works. When air sealing works later had to be instructed during the Main Contract works, Seddon sought an extension of time. The Contract Administrator originally rejected that claim on the basis that the need for those works arose from Seddon’s earlier failure to comply with its PCSA obligations.

The PCSA appended the then draft form of JCT Standard Building Contract which would form the Main Contract (but which was still under negotiation), the “Proposed Contract Documents”. These contained an obligation to perform these works, but the eventual Main Contract entered into did not.

Seddon argued that the opening up and testing obligation contained in the PCSA and included in the Proposed Contract Documents did not appear in the final version of the Main Contract as executed, and under the PCSA the parties’ respective “rights and liabilities” in respect of the PCSA were subsumed into and to be subject to the Main Contract.

In contrast, Belong argued that it had a valid contractual right to complain about Seddon’s failure to comply with the open up and testing obligation as contained in the PCSA and had not lost the right to rely on Seddon’s lack of performance of that obligation as a result of its subsequent subsuming into the Main Contract.

The PCSA

The dispute turned on the sub-clauses of clause 2 of the PCSA. Clause 2 used different language in different places:

• That the “obligations” under the PCSA would end on entering into the main contract (clause 2.1 of the PCSA);
• That before execution of the Main Contract the “rights and obligations”, shall be governed by the provisions of the PCSA supplemented by the Proposed Contract Documents (the draft Main Contract), and where a conflict exists, the Proposed Contract Documents would prevail (clause 2.2 of the PCSA); and
• On execution of the Main Contract, the respective parties’ “rights and liabilities” would be “subsumed into and be subject to” the Main Contract (clause 2.3 of the PCSA).

The decision

The court had to determine

1. whether there the use “obligations” and “liabilities” was in any way determinative or distinguishable; and
2. if it was, whether such language was sloppy usage by the drafter or carefully crafted for an intended consequence; and
3. the answer as to what subsuming of the PCSA means (hint, it’s in the dictionary apparently!).

In short, the court said that Belong did not lose the right to rely on the “liabilities” under the PCSA, just because the “obligation” to which it related was not in the Main Contract.

Since the PCSA was drafted by Belong’s lawyers, the judge concluded that the choice of wording was deliberate rather than sloppy. Upon entering into the Main Contract, the judge decided that clauses 2.1 and 2.2 meant the obligations to test and open up had ended, but that clause 2.3 meant liability for any failure to do so continued.

In deciding this, the court noted that there is a distinction between (i) an “obligation” – a primary obligation to do something, i.e. the opening up and testing works – and (ii) a “liability” – “a secondary obligation under a contract to being under a liability for breach of a primary obligation”.

In considering the ‘subsumption’ issue, the judge relied on the faithful Oxford English Dictionary which defines “subsumed” as being “to take up or absorb (a concept, thing, person, etc.) into another, esp. one which is larger or higher; to include in”. The judge decided that “subsumed” therefore does not mean the original contract entirely loses independent existence, it has instead become part of the larger thing. “Subsumed” under clause 2.3 thus meant that any primary obligations remaining under the PCSA had been superseded by the Main Contract, but that the rights and liabilities remain unaffected.

The Court therefore rejected the argument that “subsumed into and subject to” meant extinguished: accrued rights and liabilities were taken up into the Main Contract and governed by its machinery, rather than erased altogether. That interpretation was supported by the existence of limitation wording in the PCSA, which contemplated claims under the PCSA after practical completion of the works under the main contract. If the PCSA had ceased to matter entirely, that clause would have been irrelevant.

Therefore, Belong, as a consequence of Seddon failing to perform their obligation under the PCSA, had a right of recourse under the Main Contract; i.e. denying entitlement to an EOT even where there was no corresponding obligation under the Main Contract (and a corresponding right to claim LADs for the resulting delay).

Why this matters?

Because PCSAs often sit at the edge of the parties’ attention once the main contract is signed, but in practice, may contain the very obligations that explain why the contractor was appointed, what investigations it was expected to carry out, and how the employer intended to derisk the project before committing to the main contract. It should not – unless there are clear words to achieve that – be treated as a document that simply falls away once the main contract is signed.

It also confirms that properly drafted PCSA rights may survive and be relied on later. Clearly, pre-construction services can carry real downstream consequences, even where the final building contract does not repeat the same obligation in identical terms. If the intention is that accrued claims are released or superseded, that should also be stated expressly.

If parties want pre-construction defaults to affect later entitlements to EOT or loss and expense, the drafting should be kept broad. If they do not, they should avoid broad wording that may allow earlier PCSA conduct to be used as a bar to later claims under the main contract.

Conclusion

For employers, the case is a reminder that PCSA obligations can be valuable risk-allocation tools. Where the contractor is asked to investigate, review or satisfy itself about existing works, site conditions, boundaries and such like, the employer should consider whether breach of those obligations should affect future EOT, loss and expense, liquidated damages or final account issues. In any case, it should ensure that liabilities for breach of the PCSA do not end when the later contract is entered into.

For contractors, the risk is the opposite. A contractor may think that once the main contract is signed, the PCSA falls away – but this case shows that won’t necessarily be the case. If that is intended, clear wording needs to be included, and if it’s not contractors need to beware of lingering liabilities.