A 1 Lofts Conversions Ltd v Revenue & Customs [2010] UKFTT 581 (TC)

FTT-Tax
A 1 Lofts Conversions Ltd v Revenue & Customs
[2010] UKFTT 581 (TC) · 2010-05-11
[1]This is a continuing appeal following the matter having been remitted to the Tribunal by the High Court (Lewison J [2009] EWHC 2694 (Ch) ) to reconsider its decision (VAT 20888) in the light of the judgment given by the learned judge.[2]On 11 May 2010 the Tribunal directed that the issues be confined to those raised by Lewison J in his judgment. Those issues are as follows:(a) How should the contract(s) be construed?(b) Was the written contract, as construed, the true contract between the parties, or was it a sham, or was it otherwise superseded by some different contract?(c) Having determined the parties’ rights and obligations, to whom did the contractors supply their services and what services did A1Lofts supply to the client?[3]We do not find it necessary to set out here in full the relevant facts, which are not only stated in the earlier decision of the tribunal, but are also to be found at paragraphs 2 to 15 of the High Court judgment, however we set out below the relevant points of the main contract as identified by the High Court. There was no finding by the tribunal in the earlier decision that the contract was a sham, and this is not a matter which we need to revisit, given that there was no evidence before us from which we could conclude that it was a sham.[4]The main contract to be construed is the agreement made between A1 Lofts and the client (“the Agreement”).[5]Mr Tritton argued that the contractual arrangements are confined to the documents: not only the Agreement, but also a document called the “Contractors’ Agreement” which is signed between A1 and the contractors. We do not accept that the Contractors’ Agreement is a primary document for the purposes of construction. Mr Tritton submitted that the Contractors’ Agreement should be read together with the A1 Agreement as these two documents evidenced the contractual arrangements between the parties. It was A1’s case that a proper analysis of the arrangements meant that there was only one possible conclusion as to who was obliged to provide the services, which is that the contractors are obliged to provide the building works to the client and the Service Providers (who are not defined – see para 6 below) are obliged to provide specific services as set out in Clause 4 of the Agreement, and A1 is obliged to provide Project Management services. Whilst that may be the situation as between A1 and the contractors, it is not the position between A1 and the client. Our reasons for not considering it a primary document are as set out in our earlier decision and referred to in the judgment of the High Court, namely that the contractors themselves are not identified in the Agreement, and are not directly parties to it. The Contractors’ Agreement does not identify any particular property on which works are to be carried out, nor any particular works. As said by Lewison J at paragraph 11:
“It was no more than an umbrella agreement which did not require A1 Lofts to offer work to the contractor, nor did it require a contractor to undertake work if offered.”
Furthermore at paragraph 13 of the judgment he stated:
“There were no written contracts between the client and the contractors. Although A1 Lofts’ Terms of Business required all invoices to be addressed to the client, the tribunal found that this was not always adhered to.”
[6]The relevant provisions are identified by Lewison J at paragraphs 4-9 of his judgment as follows:
“The Client … hereby appoints A1 Lofts Ltd as Project Management and Agent for the Client in respect of the construction and installation of: … … (“the Works”) At the property … (“the Property”) for the price of … Subject to the Terms of Business (receipt of which the Client acknowledges) and any special conditions detailed overleaf.” “The Terms of Business are contained on a printed form. Among the drafting deficiencies is the fact that almost every cross-reference within the contract is wrong. I have corrected the errors in quoting it. They begin with a number of definitions which include: “the Contractors” – the Architect, Service Providers, tradesmen and other persons engaged by the Project Manager on behalf of and as independent contractors to the Client to fulfil in whole or in part the obligations herein” “the Project Manager” – shall be A1 Lofts Limited which shall throughout the existence of the agreement act as the agent of the Client” “The Service Providers are not defined or identified, but are in fact MM Administration Ltd and MM Logistics Ltd. Clause 2 provides: “The Project Manager, as agent for the Client shall: (a) Prepare and agree with the Client an initial scheme of design for the construction of the Works and generally oversee and co-ordinate the conduct of the Works at the property until completion; (b) Upon receiving the deposit (which shall be non-returnable) and stage payments from the Client pursuant to the terms herein utilise the same for the purposes of making payments to the suppliers, the Service Providers, Contractors and all other persons properly entitled to the same, including the Project Manager either for his own account or on behalf of the Contractors; (c) Upon satisfactory completion of the Works, and the Client having fully complied with the proficiency of the agreement and made payment of all moneys due, issued to the Client the Guarantee.” “Clause 3 requires the Architect “as agent for the Client” to produce plans, and to submit them for approval. He is given authority on behalf of the Client to make certain alterations to the plans. Clause 3(e) provides that the copyright in all plans and specifications will belong to the Project Manager. Clause 4 sets out the obligations of the Service Providers “as independent contractors to the client”
. Clause 5 provides:
“The Contractors, as independent contractors to the Client, shall: (a) Complete the Works in accordance with good building practice and within a reasonable time. In respect of the commencement, carrying out and completion of the Works time shall not be of the essence. (b) In the event that the Contractors shall unreasonably delay the completion of the Works the Client, having complied fully with the provisions of Clause [6], shall have the right to give the Project Manager formal notice in writing requiring the Project Manager to remedy such default as may be specified in the notice with a reasonable time being not less than 30 days from the date of delivery of such notice by registered or recorded delivery post.” “The Contractors are not identified in the agreement either, and are not directly parties to it. Clause 6 sets out the obligations of the Client himself. These include giving access to the Architect, ensuring that clear access can be gained to the property by the Contractors throughout the works; providing necessary services such as electricity, water and drainage, protecting personal property from damage; removing carpeting. They also include paying the Price to the Project Manager in accordance with the provisions of clause 7, time being of the essence. Clause 7 deals with financial matters.

(b) and 7(c)”

. Clause 7(c) says that all invoices issued by the Architect, the Project Manager and the Contractors must be “addressed to the Client” and will be discharged out of moneys in the client account. The invoices will be collated and retained by the Project Manager “as agent for the Client” and on completion of the works the project manager will provide to the Client “a financial statement showing details of all the moneys received from the Client pursuant to the provisions of this agreement”. The financial statement is apparently not required to show disbursements out of the client account. Clause 8 deals with default on payment or other breach by the Client. In that event the Project Manager has the right to suspend the works and to withdraw all contractors from site; by himself or his agents to remove from the property all tools equipment and materials; and to add to the price the sum of £100 for each day’s suspension “being a genuine pre-estimate of loss arising out of the Client’s breach”. Clause 9 provides that on completion of the works and payment of the price the Project Manager will deliver the Guarantee to the Client.

(a) contains an entire agreement clause which says:

“It is hereby acknowledged that the provisions herein constitute the entire agreement and that no reliance is placed on any prior oral or written representations.” “Clause 11 provides: “During the currency of this agreement the Project Manager, the Architect and the Contractors shall be deemed independent contractors working independently of each other and contracting severally with the Client as detailed herein.”
[7]We consider it relevant that the Service Providers (referred to above) are not defined or identified in the Agreement, and therefore the client is unaware that MM Administration Ltd and MM Logistics Ltd are in fact companies which are connected with A1 Lofts, being companies associated with Mr Stephen Mills (the owner of A1 Lofts) and his family. The Architect is A1 Designs Ltd, another associated company which carries out design services for A1 Lofts.[8]We propose initially to attempt to construe the Agreement on its face. It is necessary to establish whether the Agreement by itself has the effect of making A1 Lofts the agent of the client in procuring a loft conversion, and whether it obliges A1 Lofts to provide the client with a completed loft conversion. The Agreement was signed by both Mr Mills and the client following a visit by Mr Mills to the client’s property. We will turn to matters raised at that visit later. On its face the Agreement states that A1 Lofts Ltd is appointed as Project Manager and Agent for the client. The Terms of Business refer to A1 Lofts as the Project Manager who shall act as the Agent of the client. By Clause 3 the Architect (which as stated above is A1 Designs Ltd, although this is unknown to the client) is also required to act as agent for the client.[9]We find the following matters point to the Agreement being inconsistent with agency. The price, which appears on the first page of the Agreement, is determined by Mr Mills on behalf of A1 Lofts without reference to any other party. There is no evidence that at any stage Mr Mills attempted to obtain quotes from different parties and thus provide the client with the best price. This approach of setting the price for the whole of the works without having ascertained whether there were other contractors prepared to do the work for that price is not consistent with agency. In an agency relationship an agent would normally agree the level of his commission and then go out and find the best price for the works from builders and other tradesmen. A1 Lofts agreed the price for the whole works and undertook that the work could be done at that price regardless of the fact that no tradesman had yet agreed to do the job at that or at any price. A1 Lofts was able to do this because it has a panel of tradesmen whose availability it knows and its willingness to do the job at a certain price it can rely on. However, that set of circumstances is not consistent with agency or the fiduciary duties owed by an agent to his principal in an agency relationship such as is alleged in this case.[10]It is the case that an agent holds the power to affect the legal relations of his principal and in doing so he must act in the best interests of his principal at all times. The Agreement purports to commit the client to contracts with third parties to perform building works. If that is the effect of the contract, then it allows A1 Lofts to use the client’s money entirely at its own discretion; the client has no knowledge as to who has paid what for doing the work, whereas, if A1 Lofts were acting as an agent, it would have a fiduciary duty to use that money in the client’s best interests and to his best advantage. According to the Agreement, A1 Lofts selects the contractor and offers him the work at a set price without any scope for negotiation. By simply offering and paying a sum of money to the tradesman, which must be within a range of sums known to be acceptable to the tradesman, A1 Lofts is not necessarily acting in the client’s best interests as it is not looking for the best price for the work. There is therefore a potential conflict of interest between A1 Lofts and the client in that it is in A1 Lofts’ interest that the client will agree the price, even though it may not be the best price available on the market. If A1 Lofts were truly an agent, it would not incur such a conflict with its principal. We accept Mr Smith’s submission that this is not a matter of evidence, but a question of whether the A1 Lofts’ business structure is compatible with it acting as an agent for the client. Mr Smith submitted that the fact that it is incompatible with the fiduciary duties owed in such a relationship shows that the contract should not be construed as one of agency.[11]A further matter relied on by Mr Smith in support of his submission that the Agreement is not compatible with agency, a submission which we accept, is that there is no breakdown of the amounts payable or paid to each party which is available to the client as a matter of course. The ‘commission’ payable to A1 Lofts is not set out in the contract or elsewhere. Mr Mills had given evidence in the earlier hearing that he had informed the client prior to the conclusion of the Agreement that the payment was 4.5% of the contract price. However, a client, Mr Ashley-Hacker, had given evidence that he did not know how the commission was arrived at. In our earlier decision we said the following at paragraph 30:
“The money in the Client Account was put on short term deposit which earned interest, that interest was used to pay for meetings with clients. After completion, any money left over in the Client’s Account would be put on deposit and remain there until the expiry of the guarantee. …” “Mr Mills was adamant that all the clients of A1 Lofts knew precisely what the situation was: namely that the individual contractors would be working directly for them and would be paid out of the Client’s Account. They would have been aware of the existence of MMA, MML and A1 Designs, whose existence was explained to them by him at the initial visit. Whilst we have no doubt that Mr Mills firmly believed that all the clients understood the situation precisely as he does, we are not so satisfied. The documentation does not make the situation clear.”
If this money were being held for the client pending discharge of his liability to the contractors, as one would expect in an agency situation, then A1 Lofts would be liable for any interest accruing. However, no provision was made for this in the Agreement. Clause 7, whilst providing that the Project Manager will provide to the client a financial statement showing details of all moneys received from the client pursuant to the provisions of the Agreement, does not require the Project Manager to show disbursements out of the client’s account. This is inconsistent with A1 Lofts dealing with the client’s money as an agent. It is entirely consistent with A1 Lofts becoming entitled to treat the money as its own once paid by the client.[12]Clause 2(a) (see above) of the Agreement obliges A1 Lofts to prepare the initial scheme of design for the construction of the works, a function which goes beyond the role of an agent. This work must therefore be additional to any agency relationship. In our earlier decision we found as a fact (at paragraph 9) that the initial design work was actually carried out by A1 Designs Ltd, contrary to what is provided for in the contract. As stated above, we had also found that the client would be unaware of the existence of A1 Designs. A1 Lofts is given no authority by the client under the terms of the Agreement to enter into a contract on his behalf for that initial design work.[13]Defining the architect as agent for the client in Clause 3 is inconsistent with the definitions in clause 1, where the architect is within the definition of contractor and is defined as an independent contractor to the client. This contradiction does not matter to A1 Lofts because in fact the architect is A1 Designs Ltd, a company over which it has control, but it might matter to the client. The Agreement by Clause 3 purports to impose on the architect an obligation to act as agent for the client and to perform duties in that capacity, Clause 4 imposes various duties on the Service Providers and Clause 5 seeks to impose duties on the contractors. These clauses seek to impose obligations on persons who are not party to the contract and are therefore without effect.[14]A further matter inconsistent with agency is that Clause 3(d), provides that, in the event that planning consent cannot be procured within a reasonable time, the agreement is voidable at the option of A1 Lofts. This clause in what purports to be an agency agreement is contrary to an agent’s duty to act in the best interests of his principal. If there is a delay in getting planning consent, and the client wishes to go ahead with the work, how can it be said to be in the client’s best interests for A1 Lofts to have the option to end the contract unilaterally, notwithstanding any preparatory work which may have taken place? An agent would not have the power to void a contract on such a basis.[15]Clause 3(e) provides that the copyright in all Plans and Specifications shall belong to the Project Manager. Whether A1 Lofts employed the architect or bought the plans from him or his employer, in either case, ownership of that copyright by A1 Lofts to the exclusion of the client is inconsistent with agency.[16]Clause 5(a) (see para 6 above) provides that the builders shall supply directly to the client, a matter which is not contradicted anywhere else nor is it elsewhere provided that anybody else is to do the building work Clause 5(b) which provides that if the contractors unreasonably delay the works, the client has the right to give A1 Lofts, and not the contractors, notice in writing to remedy the default, is inconsistent with A1 Lofts being an agent, and inconsistent with Clause 5a. The only reason why A1 Lofts should be required to remedy the default as a matter of course is if A1 Lofts is, in fact, liable to supply the works to the client. We do not accept Mr Tritton’s argument that A1 Lofts’ obligation was limited to getting the contractors to remedy the fault. It was A1’s case that the contractors are directly liable to the client and therefore, if A1 were right about this, the client’s remedy should be with the contractors, and the obligation to remedy any defaults should be on the contractors themselves, not, as stipulated in clause 5(b) on A1 Lofts..[17]Clause 9 gives no specific definition of the extent of the guarantee nor what it covers. This is curious in light of Clause 10A, the interpretation clause, which is an entire agreement clause, given that the absence of definition leads to the necessity to look at any earlier representations to discover the extent of the guarantee. We do not consider it necessary in terms of construing the Agreement to decide whether or not clause 10 (the entire agreement clause) would be found to be unenforceable under the Consumer Contracts Regulations on the basis that it apparently prevents a client from relying on the guarantee which it has been offered as an inducement to enter the Agreement. Suffice it to state here that it is a most unusual thing for an agent to guarantee work which it itself is not contracted to undertake, thereby leaving itself open to a potentially very large claim for which it is unlikely to be covered by insurance. The guarantee, taken together with the entire agreement clause, points to A1 Lofts being obliged to provide a completed loft conversion.[18]We were referred by Mr Smith to Bowstead on Agency, 18 th edition at page 181, Article 43, headed ‘Fiduciary Duties’. At paragraph 6-033 it is stated:
“The essence of fiduciary duties has been well expressed in the following statement: ‘A person would be a fiduciary in his relationships with another when and insofar as that other is entitled to expect that he will act in the other’s interests.”
We were surprised by Mr Tritton making the submission that we should not refer to Bowstead. We consider that we are not only fully entitled, but also obliged to interpret the contract in the light of the declaration in the Agreement that A1 is an agent and therefore to look at Bowstead, the leading academic authority on agency. In our judgment the Agreement is not a contract for agency despite it declaring itself to be so on its face.[19]We do not find that the Agreement by itself is in substance a contract for a completed loft conversion, it not being sufficiently clear and unequivocal on its face to construe it without reference to other documentation and representations. We therefore turn to the events prior to the signing of the Agreement to see if they help in construction of the Agreement. In paragraph 9 of our earlier decision we set out what happened before the Agreement was signed in the following terms:
“A1 Lofts advertises in the Yellow Pages and also on its own website. Upon being contacted by a customer, Mr Mills arranges a visit to get details of the work project required. This visit is almost invariably carried out by Mr Mills himself, on behalf of A1 Designs, and includes inspection of the proposed conversion, preparation of an indicative design and preparation of a quote to the customer for the total price of the job, including labour and materials. That quote is presented to the customer on A1 Lofts headed notepaper. It is calculated by Mr Mills on the basis of his experience, and the customer is given no breakdown of the details of how that quote is made up and is unaware of the existence of A1 Designs. There is no negotiation with the customer over the price of the job. For each job there is an order form detailing all the works necessary, a payment schedule and a client agreement (“the A1 Agreement”). Prior to the signing of an agreement with the customer A1 Lofts provides a document which sets out what A1 says it does. In particular at clause 1.2 which is headed “What does a full A1 Lofts Conversion include?”
It sets out the various matters, such as the technical survey, the design, the submission to authorities or approved inspectors, scaffolding and skip hire and, in particular; ‘full structure including floor, stairs, windows, walls …’, carpentry, electrical and plumbing work. In short the document sets out all the work which is required to effect a loft conversion. Under Clause 1.3 headed “About us and what we do” it states as follows:
“A1 Lofts are the loft conversion specialists in your area. We are specialists and therefore have a wealth of knowledge on all related issues such as design, planning, building regulations and of course the construction … “We concentrate on specific areas within London and the Home Counties where we know we have access to a reliable and experienced workforce … “Building a loft conversion is complex and requires careful planning. A1 are unique in that we will manage the whole project for you by using tried and trusted professionals and experienced personnel, from plans through to completion. … “We will not just build your loft conversion we will manage the whole project on your behalf by appointing specialised teams to look after every single stage of the process. You will have access to a pre-survey design team, pre-build client services, drawing build client services, heaters, electricians and plumbers.”
[20]At Clause 9 the document shown to the client gives a guarantee which states in terms:
“Structural work is guaranteed for a period of ten years. Upon completion of the works and receipt of all moneys outstanding, we will issue a written guarantee.”
This clause specifically referring to the subsequent issuing of a guarantee for a period of 10 years, as it does, is something which in our view the client would be able to rely on should any subsequent guarantee issued under the Agreement be for a lesser period. It was submitted on behalf of A1 Lofts that this earlier document was unclear and therefore was not reliable. However, it is clear in respect of the length of the term of the guarantee and that it relates to structural work. The guarantee which the client is actually provided with at the completion of the work states:
“This guarantee is limited in value to a maximum of one-eighth the contract price and is fully transferable to the current owner of the property.”
[21]Whilst it might be expected that the promises contained in this pre-contractual document would be contained in the A1 Agreement, they are not. The document itself gives the clear impression that, whilst A1 Lofts will be appointing sub-contractors to do the work, A1 Lofts themselves will be contracting to build a loft conversion. For example at paragraph 1.1 it is unambiguously stated that:
“A1 Lofts will provide you with a complete new living area without the hassle and expense of moving.”
The document then continues at 1.2 referring to “a full A1 Lofts Conversion”, and states: “ We will not just build your loft conversion ” (underlining added).[22]The combination of the statement in paragraph 1.1 that A1 Lofts will provide a complete new living area and the last paragraph of 1.3 that A1 Lofts “will not just build your loft conversion we will manage the whole project …” suggests very clearly that A1 Lofts are supplying the completed loft conversion.[23]There was no evidence that the client ever saw the Contractors’ Agreement, but it was A1’s case that the client entered a separate contract with the individual contactors for the work. It was the evidence of Mr Ashley-Hacker, at the first hearing, that it would be overstating matters to say that he had a separate contract with them and he had no extra contracts. In re-examination he was adamant that the only contract he signed was with A1 Lofts, he had no other contract, and by saying he had no other contract, he included verbal as well as written contracts. It was unclear exactly what was the nature of contract the client was said by A1 Lofts to have entered with the Contractor.[24]As far as the contractors were concerned, we found in our earlier decision at paragraph 12 that the contractors will have agreed with A1 Lofts a total fee for the job but there will have been no negotiation with them as to the price of the job. The contractor is able to accept the price or reject it. There is no negotiation at all between the client and the Contractor over the price for the contract. However, if extra items are required the contractor is able to negotiate directly with the client for any items over and above those agreed in the initial contract with A1 Lofts. In those circumstances there is a separate contract between the contractor and the client with which A1 Lofts is not associated and from which it takes no cut. The client is at no stage aware of the actual amounts paid to the individual contractors in the A1 Agreement. Although A1 Lofts’ Terms of Business required all invoices to be addressed to the client, we found in our earlier decision (paragraph 13) that this was not always adhered to. Evidence we heard previously from two fitters was that they regarded themselves as working direct to the client. The electrician that we heard from gave unclear evidence about who he would look to if his invoice was not paid. In his judgment Lewison J at paragraph 23 poses the question ‘to whom do the contractors supply the services, do they supply them to the client or to A1 Lofts?’ In Paragraph 51 Lewison J referred to Clause 8 of the A1 Agreement stating that was an unusual clause. He continued:
“The particular feature of it on which the tribunal relied is A1 Lofts’ ability to withdraw the contractors in the event of non-payment by the client. The client’s obligation to pay was its price to A1 Lofts in accordance with the payment schedule. The price included A1 Lofts’ own remuneration. So A1 Lofts did have some interest in payment being made. Nevertheless there is force in the tribunal’s point that if there really was a directly contractual relationship between the contractor and the client, it would primarily be the contractor’s problem rather than A1 Lofts if the client did not pay. This was, as the tribunal said, a pointer towards the conclusion that A1 Lofts were supplying the full package of building services; but it needed to be weighed against the other provisions of the contract.”
In our judgment the contractors were providing their services to A1 Lofts, given not only the above matter, but also the provisions of Clause 5(b) (see para 16) and the fact that on completion of the works the client would sign a completion notice stating that the works “have been completed by A1 Lofts Conversions”.[25]Whilst we do not find that A1 was acting as an agent, the question still remains as to whether or not A1 was supplying a complete loft conversion to the client or something lesser. The obligations of A1 Lofts as Project Manager are set out in Clause 2 of the A1 Agreement. By subparagraph 2(b) it is entitled to receive the deposit from the client and to pay amongst others the contractors. Under Clause 2(c) it is obliged to issue the guarantee to the client. Under the definition in Clause 1(d) “the Contractors” are defined as other persons engaged by the Project Manager on behalf of and as independent contractors to the Client. Whilst this clause contemplates that the Project Manager will engage the contractors on behalf of the client, there is no express clause in the Agreement which authorises A1 Lofts to engage contractors on behalf of the client. As stated above, in our judgment it is not possible to construe the Agreement in isolation from the document shown to the client by A1 Lofts prior to the signing of the Agreement (see paras 19-20 above), and that document states unequivocally that A1 Lofts will ‘build your loft conversion’. This, taken together with the other matters referred to above, in particular the fact that there is no written contract between the client and the contractors; that A1 Lofts undertakes to remedy delay by the contractors which points to the contractors supplying their services to A1 Lofts; that the document signed by the client on completion states that the works “have been completed by A1 Lofts” and the fact that A1 Lofts guarantees the work, indicates thatA1 Lofts undertakes to supply a completed loft conversion. For these reasons the appeal is dismissed.[26]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. MISS J C GORT TRIBUNAL JUDGE RELEASE DATE: 17 November 2010

Cited in 2 later judgments