UK: A Sad, But Salutary Lesson

Last Updated: 12 August 2013
Article by Philip Boulding QC MA LL.B (Cantab)

The case of Walter Lilly & Co Ltd v Mackay in the Technology and Construction Court represents a sad, but salutary lesson in how not to organise and progress an expensive, substantial and complicated construction project.

Background

The dispute had already raised issues of interest to the legal profession.

In Walter Lilly & Co Ltd v Mackay [2012] EWHC 649 TCC the court had to consider whether in response to an application for disclosure, correspondence with Knowles Ltd, a claims consultancy that employed personnel with legal qualifications and which had been retained by the defendants to provide 'contractual and adjudication advice' was covered by legal professional or legal advice privilege.

The principal judgment on liability also contains interesting findings on substantive matters such as extension of time and head office overheads, and such procedural matters as the weight to be given to matters not put in cross-examination and to the recovery of sums paid in a settlement.

The separate judgment on costs also considers the granting of indemnity costs on the basis of the defendants' behaviour and the rejection of a Part 36 offer.

However, this article focusses on what Akenhead J. referred to as "a number of issues which may be of interest to the construction industry and specialist legal practitioners ... those include global claims and concurrent delays".

The action

The claimant contractors Walter Lilly (WLC) had entered into a contract under the JCT 98 (Without Quantities) edition with a development company (DMW) the site owners, for the construction of three luxury houses in London. There were significant delays and the owners, notably Mr. Mackay, became involved in bitter disputes with their consultants, at one stage appointing Knowles to maintain vigilance over them.

WLC issued proceedings against Mr Mackay and DMW regarding extension of time which it claimed and money that it alleged it was owed.

Concurrent delay

Unlike the Architect, who prior to Practical Completion must make the best assessment possible of likely future delay resulting from the Relevant Events in question, a court or arbitrator has the advantage, when reviewing the question of what extensions were due, of knowing what actually happened.

The court or arbitrator would then have to decide on a balance of probabilities what delay had actually been caused by the relevant events.

However, the judge emphasised that "The Court should be very cautious about taking into account, in the exercise of determining what delays were caused by what events, theoretical possibilities as to what one party or the other might have done (but did in fact not do)".

After referring to Balfour Beatty Building v Chestermount Properties (1993) 32 Con LR 137, the judge warned that in the context of a contractual approach to extension of time, one could not simply carry out a purely retrospective exercise, identifying the last of a number of events delaying completion and saying that this caused the overall delay to the Works.

What had to be considered was what critically delayed the Works as they went along.

The greatest interest lies in what the judge contributed to the "substantial debate...as to how what is called concurrent...causes of delay should be dealt with" since "most of the debate in cases in this country and elsewhere has revolved around extension of time clauses similar to those contained in Clause 25 where the Architect has to grant an extension of time which is fair and reasonable'".

The judge extracted from the case law two lines of thought which he described as "The English and Scottish schools".

The former derived from Henry Boot Construction v Malmaison Hotel (1999) 70 Con LR 32, to the effect that the contractor is entitled to a full extension of time for the delay caused by two or more events, provided that one of them is a relevant event.

The latter derived from City Inn v Shepherd Construction [2010] 136 Con LR 51, to the effect that the contractor only gets a reasonably apportioned part of the concurrently caused delay.

After reviewing recent case law including De Beers v Atos Origin (2010) EWHC 32764 and Adyard Abu Dhabi v SD Marine Services [2011] 136 Con LR 190, the judge came down in favour of the 'English School'.

Where there is a contractual extension of time clause of this kind and delay is caused by two or more effective causes, one of which is a Relevant Event, the contractor is entitled to a full extension of time. His reasoning included the following points:

  • Many of the Relevant Events would otherwise amount to acts of prevention.
  • Straight contractual interpretation indicated strongly that if the Relevant Events have delayed the Works, the contractor is entitled to an extension of time for the whole period of delay caused. There was nothing in the wording of Clause 25 to suggest a reduction in the extension of time once causation has been established.
  • The fact that the Architect has to award a 'fair and reasonable' extension does not imply apportionment in concurrent delay cases, since the relevant test is one of causation.

Although the judge was prepared to grant 'persuasive' weight to the Scottish City Inn case, he made the important finding that it was inapplicable in the English jurisdiction.

The view that the contractor only gets a reasonably apportioned part of the concurrently caused delay as an extension of time is thus incorrect in English law under this contractual provision or anything resembling it.

Requirements for loss and expense claim

  1. The judge concluded that there were essentially two conditions precedent:

    • the making of a timely application to the Architect
    • the provision of details of the loss or expense to enable ascertainment to be made
  2. In considering the contractual provision, it must be borne in mind that most of the matters giving a contractor entitlement were the 'fault' or at least the risk of the employer, such as variations or late provision of information or instructions. It is necessary to consider what the words mean, without construing them against the contractor.

    The application to the Architect could be made either when the contractor had incurred or was likely to incur, i.e. it could be prospective (before loss or expense incurred) or retrospective (after loss or expense incurred).

    For time related preliminary costs, the contractor could wait until it was clear that the loss or expense had been incurred, so that if the delay had not yet happened, the application need not be made until the extended preliminary costs were actually sustained.

    For similar reasons, the Architect may not have to ascertain the loss or expense until actually incurred; this is important in that loss of head office overhead and profit related to delay will generally not be incurred until the actual delay beyond the original completion date begins to accrue.
  3. The parties had disagreed about what information needed to be provided at the first and second stages. The judge regarded it as "difficult and undesirable to lay down any general rule as to what in every case needs to be provided", which is unsurprising since every case will depend upon its own facts.

    It is, however, appropriate to bear in mind what information the Architect already has, for example, from having attended meetings or receiving numerous applications for extension of time.

    All that is required is that the Architect is reasonably put into a position to form an opinion on whether direct loss and/or expense has been or is likely to be incurred because the regular progress of the works has been affected. So the contractor could, arguably, get away with providing less information if the Architect is already well provided.

    The application need not be expressed in money terms; quantification is optional rather than mandatory.
  4. Entitlement to heads of loss and expense claim would not be lost because some of the loss details were not provided. The contractor only has to submit details 'reasonably necessary' for the ascertainment of the loss or expense. It is not necessary to submit all backup accounting information, where the contractual provision does not ask for it, as here. An offer to allow inspection of records by Architect or Quantity Surveyor could be enough for these purposes.
  5. The judge was unwilling to construe the claims procedure strictly against the contractor, given that the grounds for the claims depended on the fault or risk of the employer. The judge did not accept as essential a long list of items proposed by the defendant's expert as standard in every case.

    He regarded this as akin to saying that every conceivable detail must be provided and all evidence deployed; the requirement was only for 'such details...as are reasonably necessary'. In this case, there was a very detailed breakdown of preliminary activities, including site staffing, temporary accommodation, telephones, site labour, temporary services and various sundries with rates or prices individually shown and loss and expense for preliminary items could be valued by reference to these.
  6. The judge rejected the defence view of what is meant by 'ascertain' in the context of a loss and expense claim, preferring the meaning 'to determine or discover definitely or, more archaically, with certainty'.

    Ascertainment would not necessarily require a large amount of detail or supporting documentation; the contractor is not required to prove its claim 'beyond all reasonable doubt' which would not be a sensible or commercial interpretation of the contract provision.

    The fact that the Architect/Quantity Surveyor has to be put into a position to be satisfied that all or some of the loss and expense is likely to be or has been incurred does not mean that they have to be 'certain' in that sense: ultimately, a tribunal will decide the issue on the balance of probabilities.

It is worth noting, as an aside, the judge's view that claim preparation costs could 'in principle' be a valid head of loss and expense, a point on which considerable doubt has existed.

Global claims

The defendants contended that WLC's claim for preliminary costs was a 'global' claim and thus not recoverable.

This resulted in the judge considering the well-known case law on the subject from Crosby v Portland UDC (1967) 5 BLR 121 to John Doyle Construction v Laing Management (2004) Scot CSOH 141 and Petromec v Petroleo Brasilerio [2007] EWCA Civ 1371.

The judge warned that care was needed in utilising the expressions 'global' or 'total' cost claims.

Some of the cases, like Wharf Properties v Eric Cumine {1988] 45 BLR 72, concerned linking actual delay and the causes of delay; simply because a contractor claims all costs which it has not yet been paid does not make the claim a 'global' or 'total' cost claim.

What is commonly referred to as a 'global' claim is a contractor's claim which identifies numerous potential or actual causes of delay and/or disruption, a total cost on the job, a net payment from the employer and a claim for the balance between costs and payment attributed, without more and by inference, to the causes of delay and disruption relied on.

The judge was wholly unconvinced that WLC's claim could be categorised as 'global'. His analysis and conclusions on global cost claims are of considerable interest more generally. They were as follows:

  1. Claims by contractors for delay and disruption related loss must be proved as a matter of fact. The contractor has to demonstrate on a balance of probabilities three elements:

    • that events occurred which entitle it to loss and expense
    • that those events caused delay/ disruption
    • that such delay/disruption caused the contractor to incur loss/expense or loss/damage.
    The contractor does not have to show, as a matter of principle, that it is impossible to prove cause and effect in the normal way or that the reason for the impossibility is not the contractor's fault.

    Subject to any contractual restrictions on how claims are to be brought, the contractor merely has to prove its claim on the balance of probabilities.
  2. Once the conditions precedent of the claims procedure are satisfied – and the claim will be barred if they are not – the contract does not prevent the ascertainment of direct loss/expense by appropriate assessments.
  3. It is open to contractors to prove the three elements above with whatever evidence satisfies the tribunal and the requisite standard of proof.

    There is no set way to prove these elements. For example, a claim could be supported or even established by admission evidence or detailed factual evidence which precisely linked reimbursable events with individual days or weeks of delay or with individual instances of disruption and which then demonstrated with precision what that delay or disruption eventually cost.
  4. There is nothing in principle 'wrong' with a 'total' or 'global' cost claim, but there are added evidential difficulties, which the claimant contractor will have to overcome.

    The contractor would generally have to establish on a balance of probabilities that the loss it has incurred, i.e. the difference between what it has cost the contractor and what it has been paid, would not have otherwise occurred.

    It will need to demonstrate that its accepted tender was sufficiently well priced to make a net return and that there are no other matters actually occurring which caused the loss, other than those relied on in the pleaded case.

    It is not the case that where a 'global' or 'total' cost claim is advanced, the burden of proof transfers to the defendant, although it is always open to the defendant to raise issues or adduce evidence that the tender was so low that the loss would have occurred anyway or that other events, not relied on by the claim or which were the 'fault' or risk of the claimant occurred and may have caused or did cause all or part of the loss.
  5. The fact that one or a series of events, unpleaded or the risk or fault of the contractor, caused or contributed, or cannot be proved not have done so, to the 'total' or 'global' cost, does not necessarily mean that the contractor cannot recover anything.

    It all depends on the impact of those events or factors. For example, where a contractor's global loss was £1 million, where it can prove that it would have probably made a net return but for an overlooked and unpriced £50,000 item in the accepted tender, its claim would not fail simply because of the underpriced tender.

    The result of the underpricing would simply be the reduction of the 'global' loss by £50,000 because that would be the sum that the contractor would be unable to prove would have been incurred in any event.

    Similarly, if in such a situation events occur during the course of the project which are the fault or the risk of the claimant contractor and which caused loss or cannot be demonstrated not to have done so, this would not result in the rejection of the overall claim, except to the extent that those events actually caused loss.

    Where the tribunal can deduct from the 'rolled up' or 'total' or 'global' loss elements, for which the contractor cannot recover loss, what is generally left is the loss attributable to the events for which the contractor can recover.
  6. There would be no need to go down the 'global' or 'total' cost route if the actual loss attributable to the individual loss can be readily or practically determined. However, conversely a tribunal may be more sceptical about the 'global' cost claim if the direct linkage approach is readily available but is not deployed, although this would not mean that the claim should be rejected out of hand.
  7. The argument advanced by the defendant that a 'global' claim should not be allowed where the contractor has himself created the impossibility of disentangle-ment of the elements of the claim is wrong and unsupported by authority. In principle, unless the contract expressly disallowed global claims, they may be permissible on the facts and subject to proof.
  8. In this case, even if it were the law that a 'global' claim could not be allowed unless it was impracticable or very difficult for the claimant to allocate every penny of loss to each pleaded and established event, the position was that it was impracticable or very difficult for WLC.

    This was because the project was seriously disorganised administratively on the defendants' side, with remarkably little design at the outset, hundreds of variations, hopelessly late provision of information and instructions and a substantial level of discord between defendants and most of their professional team most of the time.

    On this basis, it seems that contractors are being given a 'cautious green light' to advance 'global' or 'total' cost claims, provided that they are aware of and comply with the judge's qualifications set out above.

    Nevertheless, a well-advised contractor should still submit a claim where every possible attempt has been made to link specific losses with specific events.

    A contractor should only consider going down the 'global' path if the more conventional (and safer) path to recovery really cannot be achieved.

Conclusion

So far as concurrent delay is concerned, the 'English School' of thinking means that where a delay is caused by two or more effective causes, one of which is a 'Relevant Event' under the contract, the contractor gets a full extension of time.

The Scottish School preference for apportionment will not govern an English case. Requirements for loss and expense claims will be viewed pragmatically by a tribunal; the contractor does not have to prove its case 'beyond all reasonable doubt'. Ascertainment of loss and expense means that such details as are reasonably necessary must be supplied.

Global claims are not wrong in principle, although they carry with them added evidential difficulties for the claimant contractor to overcome. Who created the need for the global approach is not relevant; in the Walter Lilly case, the judge attributed it in any event to the defendants' serious administrative disorganisation.

The Walter Lilly case is a sad story for the parties involved but this does not at all reduce the interest and instruction available from studying it.

The articles and papers published by Keating Chambers are for the purpose of raising general awareness of issues and stimulating discussion. The contents must not be relied upon or applied in any given situation. There is no substitute for taking appropriate professional advice.

This material is prepared for Chambers by our Director of Research and Professional Development, Professor Anthony Lavers (LL.B. M.Phil Ph.D. D.Litt MCI.Arb FRICS Barrister) Visiting Professor of Law, Oxford Brookes University.

www.keatingchambers.com

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