Author: Tola Odedoyin and Justin Mendelle

We continue our look back at some of the more interesting or lesser reported cases from last year – in the spotlight this week, GB Building Solutions Limited (GB) v SFS Fire Services Limited (SFS).

Background

In 2009, GB Building Solutions Ltd (the main contractor) was engaged as a design and build contractor for an office development in Manchester. It engaged SFS Fire Services Ltd (the sub-contractor) to design and install the development’s fire prevention sprinkler system.  Both parties entered into an amended JCT 2005 design and build sub-contract.  Due to an apparent fault with the water sprinkler system, flooding at the site caused damage, with GB claiming in excess of £600,000 for losses incurred as a result of the flood.

Clause 6.6.1 of the sub-contract conditions contained within it, a provision which stated that the joint names insurance policy that applied to GB would also name SFS as an insured.  The joint names insurance policy would cover SFS up until the Terminal Date.  In bringing its claim, GB claimed that the flooding occurred after the Terminal Date and therefore SFS was liable for the losses suffered.  In contrast, SFS raised a defence stating that because the meaning of practical completion under the sub-contract is to be given the meaning of practical completion as defined within the schedule of modifications, the flooding therefore occurred before the Terminal Date.  A dispute arose concerning the correct interpretation of when practical completion was considered to have occurred, for the purpose of ascertaining whether the flood occurred before or after the Terminal Date.

The key clauses from the sub-contract in relation to this dispute centred on the definition of practical completion, as this confirmed when the transfer of risk moved from the main contractor to the sub-contractor.  Within the standard sub-contract conditions, clause 6.1 defined the Terminal Date as:

the date of practical completion of the Sub-Contract Works or, in respect of a Section, of such works in the Section as determined in accordance with clause 2.20” (emphasis added).

Clause 6.1 reads as the Terminal Date being when the sub-contract works are practically complete in accordance with clause 2.20 that the main contractor and sub-contractor have to go through in order to confirm practical completion of the sub-contract works has been achieved.  However, the design and build sub-contract conditions as modified by the schedule of modifications defines “Practical Completion” as:

the issue of the Certificate of Practical Completion pursuant to the Main Contract.” (emphasis added)

The issue for the court, was whether the undefined definition of practical completion in clause 6.1 could be interpreted to mean the same as the defined term in the schedule of modifications and what effect that would have.

Decision

The court agreed with the arguments raised by GB, pointing out that the uncapitalised definition of practical completion in clause 6.1 could not be taken to mean the same as the capitalised definition of “Practical Completion” under the schedule of modifications.  Despite SFS raising the argument that the schedule of modifications takes precedence over the sub-contract conditions and therefore the definition of practical completion in clause 6.1 should be given the same meaning as in the schedule of modifications, the court opposed this interpretation of the clause and concluded that practical completion was achieved when the sub-contract works were practically complete under clause 6.1.

HHJ Davies acknowledged that whilst there was some ambiguity presented by the bespoke amendments to the JCT standard form document in providing two contrasting definitions of practical completion, the usual tools of contract interpretation apply.  Specifically, relying on the recent case of Wood v Capita Insurance Services Limited, he stated that “the court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement.”  In saying this, HHJ Davies considers interpreting “such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type” and the “iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated.”

In reaching his judgment, HHJ Davies was content that there was no ambiguity between the two phrases as “they are not the same”, accepting the claimant’s submission that “it would have been perfectly easy to have amended clause 6.1 so that it defined the Terminal Date as “the date of Practical Completion”, if that had been intended,” but because that was not what had been intended, it was understood that each clause “simply applies in different circumstances.”  As such, he concluded that the flooding occurred after the Terminal Date and therefore the risk transferred to SFS.

Implications

It’s easy to say but difficult to achieve – say what you mean! Far too often, both clients and lawyers are guilty of over-complicating matters, drafting convoluted clauses or provisions which are inconsistent with each other. The advice is straightforward – aim for simplicity and always seek to phrase things in the most clear and logical way possible.


As 2018 kicks off, we thought we’d take a look back over a few of the key decisions from last year – this is the first in our series. In MT Højgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd and another [2017] UKSC 59, the Supreme Court, in a significant judgment for the construction industry, allowed E.ON’s appeal and restored the first instance decision of Edwards-Stuart J in the Technology and Construction Court.

Background

E.ON appointed MT Højgaard A/S (“MTH”) under a contract dated 20 December 2006 to design, build and install two offshore wind farms. Unfortunately, some of the turbines developed significant faults shortly after construction was completed and costly repairs were necessary.

This litigation concerned who should be liable for the costs of those repairs and involved a detailed examination of the documents and obligations that formed the contract between E.ON and MTH. The basis of the dispute was whether or not MTH was under a fitness of purpose type obligation which was contained in a technical schedule in the contract. This had the effect of a warranty that the turbine component would not fail within a certain timeframe (20 years). This was despite obligations on MTH elsewhere in the contract to exercise reasonable skill and care and to comply with an international standard (J101) – which as it turned out, was erroneous and even if met, was insufficient to ensure the standard in the technical document was achieved.

E.ON’s tender documents included a set of Employer’s Requirements, which in turn had a set of Technical Requirements within them. It was clear from the Technical Requirements that E.ON wanted a design which would ensure the wind turbines would last for 20 years without the need for repair or refurbishment. The Technical Requirements also stated that the successful contractor would have responsibility for identifying any changes which needed to be made to the designs to ensure that they met a higher fitness for purpose threshold. These references indicated that these requirements were a minimum for the contractor to comply with. J101 was also a required standard to be met in the design and build project.

MTH submitted a tender based on these requirements, which E.ON accepted. The parties subsequently entered into a binding contract for MTH to ‘design, fabricate and install the foundations for the proposed turbines’. The Employer’s Requirements (including the Technical Requirements) and J101 formed part of the contract.

Once MTH had completed the works, it was discovered that there was an inaccuracy in J101, which meant that significant remedial works were required to MTH’s works. MTH did not consider that they should be liable for the cost of these works, as they had complied with the international standards and did not accept that the Technical Requirements placed them under a fitness for purpose obligation.

Decision

The Supreme Court concluded that MTH was liable for breaching the fitness for purpose obligations, which obliged them to deliver foundations that would have a minimum life of 20 years. This was in spite of the fact that (i) the mistaken variable (J101) was an industry standard that E.ON themselves had requested (ii) E.ON accepted the tender on the basis of the design that MTH had submitted and (iii) the design obligation on MTH was stated to be one of reasonable skill and care.

Implications

This is potentially an enormously significant decision for the construction industry. From an employer’s perspective, the case gives clear support for the position that if the technical requirements (properly incorporated into the contract) contain fitness for purpose obligations, then notwithstanding reasonable skill and care obligations elsewhere in the contract, the contractor will be required to meet the higher standard.


Authors: Amy Brown

Background

In 2007, Mr Dhanoa, operating through his four companies (the “Claimants”), engaged Fosters (the “Defendant”) as architects to design a luxury 5-star hotel at London Heathrow. According to Mr Dhanoa, he told Fosters that the scheme must be designed within a budget of £70 million. Just a few months later, costs consultants EC Harris costed the design at £195 million. Mr Dhanoa then increased his budget to £100 million, allegedly in reliance upon Fosters telling him that the scheme could be ‘value engineered’ down to that figure.

Planning permission was obtained but it became apparent that it was impossible to reduce the cost of the design to £100 million and Mr Dhanoa failed to secure funding for the project. He (in the name of his companies) brought a claim for professional negligence against Fosters seeking loss of profits and losses incurred in procuring a new design that was capable of construction within budget. An alternative claim for restitution was also pleaded.

Fosters denied both that a budget existed and that they had advised, or even believed, that value engineering could succeed in achieving a costing of £100 million. The court found in favour of the Claimants on both these matters of fact. It then went on to consider whether Fosters had breached any duties that it owed to Mr Dhanoa and whether these had caused him any remediable loss.

Decision

The court found that Fosters had been professionally negligent in two respects. Firstly, in failing to ascertain and consider the budget in its design and secondly, in failing to advise Mr Dhanoa that its design could not be value engineered down to £100 million.

Failure to consider the budget as a key requirement or constraint

The Deed of Appointment between the parties imposed a contractual duty upon Fosters, in the performance of its duties, to

“…use all the skill, care and diligence to be expected of suitably qualified and experienced architects undertaking services the like of those undertaken by the Consultant in relation to projects of the scale and character of the Development…” (Clause 8.1)

In determining the scope of Fosters’ duties, the court interpreted the Appointment as requiring all of the RIBA Work Stages A-L. Stage A involved identifying the client’s requirements and possible constraints on the development. Stage B required the preparation of a Strategic Brief confirming those key requirements and constraints, either by the client itself or on their behalf. Fosters denied that the Strategic Brief was part of its obligations in this project and one was not prepared.

Whether or not Fosters had responsibility for the Strategic Brief did not matter to this court. It held that, in any event, Fosters were obliged to identify the key requirements and constraints of the project as part of the scope of its obligations. Mr Dhanoa’s budget was “plainly a constraint” and arguably a requirement too. The RIBA Architect’s Job Book, referred to by both expert architects, confirms that the budget is a key constraint. It states that an architect must “obtain from the client the project requirements, budget and timetable”. An architect exercising reasonable skill and care should have regard to this Job Book.

The court also found support for this analysis in the wording of clause 8.1 (set out above). In its view, the “scale and character of the Development” can only be established if the existence, or absence, of a budget is also established.

Fosters’ argument that it was not responsible for costs advice did not assist it. The court acknowledged that costs advice was to be provided by separately appointed quantity surveyors however, it would not allow Fosters to “excuse itself from performing the services required in Stages A and B by saying the budget equates to costs, and costs are nothing to do with them as an architect”. Further, the cost implications of Fosters compliance with its obligations did have to be taken into account in the design. If a particular element would increase the cost substantially, it had a duty to advise Mr Dhanoa of that.

The experts effectively identified two types of project. A “brief led” project which costs the scheme after it has been designed to brief and a “budget led” project which requires the design of the scheme to match the considered budget. The court stated that,

“…it does not matter which of those two routes is adopted for any particular project, but what cannot and should not be done by an architect exercising reasonable care and skill is that a key requirement and constraint of the client is simply wholly ignored

The court found that this is what Fosters had done. It appeared to have skipped the early design stages A and B, failing to identify and then confirm Mr Dhanoa’s budget as a key constraint.

Negligent advice as to ‘value engineering’

The court did not consider value engineering to be a form of costs advice requiring a quantity surveyor. Rather, it is the making of changes to a design to reduce the cost of building it. The court found as fact that Fosters had advised Mr Dhanoa that the cost of the design could be value engineered down to £100 million. Both experts agreed that such advice was negligent since such a vast reduction of cost to this level would not have been possible.

Even if that finding was wrong, the court pointed to evidence that Fosters knew Mr Dhanoa intended to proceed with the hotel project on the understanding that it was possible. It held that Fosters had a duty to advise Mr Dhanoa that it could not be done. The court re-stated evidence by the Claimant’s expert witness that,

“…in failing to advise Mr Dhanoa that this cost reduction could not be achieved without substantially changing their design and/or reducing the amount and/or quality of the accommodation, [Fosters] failed to use reasonable care and skill.

Causation and remedies

The court concluded that none of Fosters’ work was capable of being reused by newly appointed architects and the Claimants would have to start from scratch in procuring a design for the hotel. The sums expended were used as a measure of the sums that would have to be expended again to achieve the scheme. As a result, the court awarded Mr Dhanoa compensatory damages to the amount paid to Fosters under the contract (approximately £3.6 million).

The loss of profits claim, however, failed for a lack of causation. The court held that the effective cause of Mr Dhanoa failing to construct and open the hotel for business was the restrictions that were placed on borrowing following the financial crisis. From mid-2008, banks were no longer offering sizeable funds and instead requiring greater equity to be provided by the borrower. The amount Mr Dhanoa had already injected into the project was not sufficient to meet the new requirements such that even if Fosters had produced a design costing £100 million, Mr Dhanoa was unlikely to have secured the necessary funding.

The court reached the same conclusion by considering an alternative question – was the inability to obtain funding as a result of the financial crisis, a type of harm from which Fosters had a duty to keep the Claimants harmless? The court considered recent Supreme Court case Hughes-Holland v BPE Solicitors [2017] 2 WLR 1029 and its guidance on SAAMCO[1]. It reiterated the point made by the Supreme Court that a defendant does not have legal responsibility for a client’s decision to enter a transaction where it is supplying material which the client will take into account in making its own decision on the basis of a broader assessment of the risks. In these circumstances, liability will only extend to the consequences of that information being wrong. Only where a defendant is advising against the full range of risks, could it be liable for the full losses caused by a transaction. In this court’s view, neither situation applied to Fosters. Although the professional services encompassed advice in some respects (e.g. value engineering), the scope of the retainer was to design the scheme and provide architectural services. Fosters were not engaged to advise on the business viability of the hotel, nor was the Fosters Scheme part of the information Mr Dhanoa was considering in deciding whether to proceed with the project. The Fosters Scheme was itself the project. There was no duty on Fosters to hold the Claimants harmless against a failure to secure funding.

Although it was not required to consider the alternative claim in restitution (given its award of damages for breach of contract), the court did comment on the possibility of a return of the sums paid to Fosters on the basis of no consideration. In its provisional view, “the failure of consideration [by Fosters] was total, given the budget was such a key requirement and constraint, and given the Fosters Scheme so spectacularly ignored this point entirely.”

Implications

This case stresses the importance of architects having regard to budget when scoping and designing a project. Even where there is no budget mentioned in the architect’s appointment, it is part of their duty to ascertain whether such a constraint exists and if so, to keep this in consideration when preparing the design. This duty extends also to correcting any known misconceptions that the client may have that their budget can be achieved. The appointment of independent cost consultants does not excuse architects from these duties.

Whether or not an architect is found to have acted negligently in their duties however will turn on the facts of each case. This judgment arises from significant findings of fact that Fosters both knew and wholly ignored Mr Dhanoa’s budget. The contemporaneous evidence was strong and concessions were made by Fosters’ own expert in the course of the trial. In addition, the court was critical of the attitude adopted by the defence which involved attacking the other side’s credibility.

Whilst this case provides helpful insight into the scope of an architects duty, it remains to be seen how readily these types of breach will be found and how far such duties may extend to other construction professionals.

[1] South Australia Asset Management Corp v York Montague Ltd [1997] AC 191


Authors: Justin Mendelle and Tola Odedoyin

Update

After the 2016 judgment in Lulu Construction Ltd (“Lulu”) v Mulalley & Co Ltd, the door on recovering costs in adjudication was ajar. The recent unreported case of Enviroflow Management Limited v Redhill Works (Nottingham) Limited may have closed it.

The issue is how the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”) and the Late Payment of Commercial Debts (Interest) Act 1998 (as amended by the 2013 Regulations) (together the “Late Payment Act”) interact in the context of parties trying to recover costs in an adjudication.

The Lulu case concerned enforcement proceedings of an adjudicator’s decision. Before this case, it had generally been accepted that adjudication costs could not be recovered under the Construction Act. However, Lulu sought recovery under the Late Payment Act.

Issue

The issue the court was concerned with was whether the adjudicator had jurisdiction to make such an award for costs under the Late Payment Act.  The court found in favour of Lulu and stated that the adjudicator did have jurisdiction. The question however remained: are adjudication costs recoverable under the Late Payment Act? Section 108A of the Construction Act makes it clear that an adjudicator cannot determine that one party is responsible for the other party’s costs, unless both parties have agreed to this in writing. Conversely, Section 5A of the Late Payment Act implies a term into contracts that states that where the contract does not provided an adequate remedy for late payment of a debt, a party recovering a debt under the Act can recover any sums reasonably incurred in recovering the debt. The phrase ‘any sums reasonably incurred’ has been argued as being applicable to the costs of adjudication.

In Enviroflow Management Limited v Redhill Works (Nottingham) Limited, the claimant sought to recover adjudication costs under the Late Payment Act.  Mrs Justice O’Farrell concluded that the adjudicator did not have jurisdiction to make an award for such costs. The reason this case brought about a different result to Lulu was because the building contract in question was an oral contract.  She held that whilst the Late Payment Act implied certain terms into the contract, “such an implied term was caught by s.108A of the 1996 Act and was ineffective unless an agreement had been made in writing” (emphasis added).

The key point here is that it looks as if the implied terms of the Late Payment Act cannot be relied upon without more i.e. without expressly incorporating them into the relevant construction contract. To date, this is not a practice that we have seen.

Implications

Whether the costs of an adjudication can be recovered are potentially unclear.  Nevertheless, we appear to be going back to what has long been understood to be the standard position – both sides bear their own costs.

1 2 3 5