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Can G4S keep its Olympics money?

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So can G4S keep its money despite its London Olympics security debacle? G4S chief executive Nick Buckle, when he appeared before the House of Commons home affairs committee, seemed to know very little about what had brought about the “humiliating shambles” – but he knew this:  Yes, he expected to keep the £57m “management” fee in the contract. “We’ve had management in place to plan the contract and we will have management on venue to help run the venue.”

He underlined the point: “We’ve managed the contract and we’ve had management on the ground for two years … We are still expected to deliver a significant number of staff to the Olympics.”

But what is the legal position? The logic of Buckle’s argument seems to be that the outcome of the “management” – failure to fulfil the terms of the contract – is irrelevant. This was incomprehensible to members of the committee, among them Lorraine Fullbrook, who said: “If you contract to deliver a service and you don’t actually deliver it – first of all I don’t think you should claim a management fee … but you also have to pay for your cockups.”

Mrs Fullbrook is, sadly, labouring under a naïve misapprehension – that we should pay people who do their jobs and not pay people who fail to do so, as one commentator put it.

It is true that there is, in contract law, a concept of repudiatory breach, and it is potentially pretty strict. The fact that the contract was not “strictly and precisely performed” (as, would seem to be the case with Locog’s G4S contract) is sufficient for the other party to consider there has been a repudiatory breach. The non-breaching party (Locog here) can accept the breach as terminating the contract, not pay out on it and claim damages  – assuming there are no clauses in the contract itself preventing its termination in this way.

One might even go further, as Mrs Fullbrook would like, and suggest the contract has not merely been “not strictly and precisely performed” but that there has been a fundamental breach in the contract, that the very essence of it has not been delivered – sufficient security staff to run the Olympic Games at a time when security is of utmost importance.

The idea of fundamental breach had a brief vogue among the judiciary around the 1950s when Lord Denning stalked the land. The case of Karsales v Wallis is a classic of its kind.

The plaintiff had examined a car but on delivery found it defective. An exclusion clause in the contract had indicated there was “no condition or warranty that the vehicle was roadworthy, or as to its age, condition or fitness for purpose”. This outraged Denning who found that there was a fundamental breach sufficient to render the exclusion nul since what had been delivered “was not, in effect, a car”. The point is that the exclusion clause should not be allowed to contradict the subject matter of the substantive contract.

‘In my view it is not right to say that the law prohibits and nullifies a clause exempting or limiting liability for a fundamental breach or breach of a fundamental term. Such a rule of law would involve a restriction of contract and in older cases I can find no trace of it’ – Lord Dilhorne

But judges have tended to reject the doctrine of fundamental breach and even deny that any such doctrine exists. Let us take a famous example (and some readers with a knowledge of contract law may guess where we are going with this). Photo Productions Ltd had a factory and hired a night patrol service. Their main worry for the premises was fire and theft. Far from protecting the building, the security guard burned a large part of it down. (He later pleaded guilty to malicious damage and was imprisoned for three years.)

The defendant security company denied “want of care and failure to use due diligence as employers” and relied on an exclusion clause in the contract which said: “Under no circumstances shall the company be responsible for any injurious act or default by any employee of the company unless such act or default could have been foreseen and avoided by the exercise of due diligence on the part of the company as his employer.” It also excluded liability for damage including fire unless caused by the “company’s employees acting within the course of their employment”.

While not burning down a factory might be seen as a fundamental term of a contract to provide security for that factory, the exclusion clauses were held sufficient to exempt the security firm from liability. It was held that the guard was not “acting within the course of their employment” by lighting a fire (“What this man did had nothing to do with what he was employed to do,” according to the security company’s lawyers) and that the exclusion clause implied Photo Productions should have insured against the guard’s potential failings.

And which security company was it that supplied this incompetent guard? Why, it was Securicor Transport Ltd. Securicor, of course, merged in 2004 with Group 4 Falck – and is now known as G4S.

Now, we cannot say that any of this is necessarily relevant to the Olympics situation. We do not know what requirements, exclusions or penalties are in the Locog-G4S contract. It may be that providing 7,000 guards rather than 10,400 is not a breach as such and that, as Buckle implied, G4S is fulfilling its contract (or paying for its “cockups”) by paying for the military staff to fill the gaps (at military wages, not the mediocre sums offered to its own employees). In particular the contract seems to have been broken down to its components – so G4S won’t be paid for staff not supplied but, on the face of it, will be paid for “management” under a separate heading.

But the point is that the law does not recognize our commonsense notion of contract – that we should pay people who do their jobs and not pay people who fail to do so, particularly when the contracts are between two big powerful organizations as here. Thus Viscount Dilhorne in Suisse Atlantique: “In my view it is not right to say that the law prohibits and nullifies a clause exempting or limiting liability for a fundamental breach or breach of a fundamental term. Such a rule of law would involve a restriction of contract and in older cases I can find no trace of it.”

Judges, as far as possible, will keep a contract on foot even when it would seem clear that it is not in conformity with the original intentions of the parties. Whatever is in the contract, duly interpreted by a judge, is the intention of the parties. That one side got a bad bargain and the other side deeply regrets taking on the contract in the first place (as Buckle told MPs) is irrelevant.

No contract is going to be able to foresee every likelihood and the G4S situation is a warning as more and more significant public services (including some of those of the police) are outsourced. Contracts do not necessarily protect equal contractees from under-performance and hence are even less likely to protect the public since, for the most part, the public is the subject of the contracts rather than being party to them. We would be unwise to put too much trust in private contracts for our social needs.

Karsales (Harrow) Ltd. v. Wallis, [1956] 1 W.L.R. 936
Suisse Atlantique Societe d’Armemente SA v Rotterdamsche Kolen Centrale NV [1967] 1 AC 361
Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827

Judgment in Photo Productions:
Held, allowing the appeal,
(1) that the doctrine of fundamental breach by virtue of which the termination of a contract brought it, and, with it, any exclusion clause to an end was not good law; that the question whether and to what extent an exclusion clause was to be applied to any breach of contract was a matter of construction of the contract and normally when the parties were bargaining on equal terms they should be free to apportion the risks as they thought fit, making provision for their respective risks according to the terms they chose to agree.
(2) That the words of the exclusion clause were clear and on their true construction covered deliberate acts as well as negligence so as to relieve the defendants [Securicor] from responsibility for their breach of the implied duty to operate with due regard to the safety of the premises.

Wilberforce L noted that Parliament had passed the Unfair Contract Terms Act 1977 to regulate contracts between those of unequal bargaining power, adding “This Act applies to consumer contracts and those based on standard terms and enables exception clauses to be applied with regard to what is just and reasonable. It is significant that Parliament refrained from legislating over the whole field of contract. After this Act, in commercial matters generally, when the parties are not of unequal bargaining power, and when risks are normally borne by insurance, not only is the case for judicial intervention undemonstrated, but there is everything to be said, and this seems to have been Parliament’s intention, for leaving the parties free to apportion the risks as they think fit and for respecting their decisions.”

About alrich

Journalist and blogger on legal and financial/economics issues

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