UK: Construction Snapshot

Last Updated: 20 February 2008
Article by Joanne Kelly

Welcome to Issue Five of Construction Snapshot, the regular briefing note from Manches' Construction Group.

We hope that you find this briefing note informative.

Biffa Waste Services Limited & Biffa Leicester Limited v Maschinenfabrik Ernst Hese GmbH & Others

Practice Points:

  • Liquidated Damages are an exhaustive remedy for delay.
  • Warranties cannot be used to obtain "double recovery" from the party in breach.

This case concerns liability for a fire that broke out during the course of the construction of a recycling plant. The facts were as follows:

Leicester City Council entered into a PFI Contract with Biffa Leicester Limited (BLL) for the collection, recycling and disposal of Leicester's domestic waste. BLL entered into a contract with Biffa Waste to build the required recycling plant. Biffa Waste, in turn, sub-contracted various packages of works, some of which were further sub-contracted. Specifically, the recycling plant necessitated the construction of a Ball Mill which breaks down waste material into smaller material as part of the recycling process. Maschinenfabrik Ernst Hese GmbH (MEH) was responsible for providing this and signed a main agreement with Biffa Waste and provided a warranty to BLL. During the commissioning phase of the facility it became apparent that the Ball Mill needed certain modifications and during such modifications, a fire broke out which resulted in the delayed completion of the plant. BLL and Biffa Waste issued proceedings against, amongst others, MEH.

The experts involved in the case were all in agreement as to the cause of the fire – the welding and grinding sparks created during the modification works. MEH's contract with Biffa Waste contained a provision for liquidated damages for delay. It said:

"If [MEH] fails to comply with the Time for Completion .... [MEH] shall pay to the Employer ..... liquidated damages for such default." The clause went on to say that :

"The payment...... of such damages ..... shall be without prejudice to any other right or remedy of the Employer." BLL's warranty with MEH also contained a provision not uncommon in such agreements limiting the liability of MEH to that which would have existed had BLL been named as Employer under the main agreement.

Biffa Waste's losses ran to greater than the amount provided for in the liquidated damages provision of the main agreement. In order to attempt to claw back its total losses, Biffa Waste argued that the liquidated damages provision imposed an exhaustive remedy for a "simple" delay only i.e. a delay which is only caused by MEH's failure to complete on time rather than as a result of any other breach of obligation under the contract. As such, Biffa Waste claimed that it was entitled to claim unliquidated damages for delays caused by such other breaches. This proposition, it claimed, was further supported by the fact that the payment of liquidated damages was without prejudice to any other right or remedy of the Employer. BLL ran a similar "simple delay" argument under the warranty.

MEH argued that Biffa Waste's recovery was limited to the cap on liquidated damages in the main agreement, which stood at 7.5% of the contract sum and, in relation to the warranty with BLL, BLL could not recover anything as the liquidated damages in the main agreement were intended to satisfy any damages for delay recoverable by BLL and Biffa Waste.

Mr Justice Ramsay agreed with MEH. The wording in the main agreement that liquidated damages were "without prejudice to any other right of remedy of the Employer" refers to a nonmonetary right or remedy such as the right to terminate. He also found that it is not possible to distinguish between a "simple" delay and a delay caused by some other breach. He said that for liquidated damages to only apply to a simply delay would not make commercial sense and that the advantage to both sides of certainty in such circumstances would be diluted. Further, whilst MEH was liable to BLL under the warranty, such liability was limited to that recovered under the main agreement and BLL could not recover anything more. To do so,would result in double recovery and BLL's claim was, accordingly, stayed.

Nigel Witham Limited v Mr Robert Leslie Smith (1) and Miss Jacqueline Isaacs (2)

Practice Points

  • Timing is everything when employing mediation or ADR
  • The court will use its discretion when deciding on costs if a successful party has unreasonably failed to mediate The facts were as follows:

The Defendants ("Hoteliers") own adjacent hotels in Brighton, The Ascott and The Arlanda. In 2004 they decided to link the two together and to redesign the interior to allow for, amongst other things, a common reception area and a gym/spa area at the rear ("the Project").

Witham was engaged to carry out the concept design. This design was carried out in late 2004-early 2005.

In March 2005 the parties entered into a second agreement ("the Supplemental Agreement") covering the detailed design and project management of the building works. Progress on the detailed design was slower than had been expected, and was suspended altogether between early October 2005 and January 2006 because of the Hoteliers' budget difficulties.

The Project resumed in early 2006, but tensions between Witham and the Hoteliers began to surface and the relationship broke down completely. Witham sought just under £100,000 by way of unpaid fees. The Hoteliers defended the claim and, instead, contended that Witham had been overpaid to the tune of around £14,000.

Despite the relatively small amounts at stake, the issues between the parties were numerous and they still managed to take up 5 full days of the court's time. The court noted that it was questionable whether such an "elaborate and expensive process could be justified" when the sums in dispute were comparatively The Hoteliers claimed that Witham had unnecessarily delayed the Project, had failed to communicate with them or inform them of progress (or lack of it), and had exceeded the stated fees without warning. Further, they claimed that in late April 2006 Witham had stopped work under the Supplemental Agreement and refused to start again on anything other than, in the Hoteliers' opinion, more onerous terms. The court agreed with the Hoteliers.

After 5 days of arguing, Witham got nothing and the Hoteliers were awarded £1683. Then came the issue of costs. The Hoteliers' costs totalled £123,433.85 and they wanted them back.

In the run up to trial Witham repeatedly suggested mediation but the Hoteliers refused on account of the fact that both sides claims had not been fully exposed. Witham submitted that the Hoteliers had been unreasonable in failing to mediate and that this should be reflected in the costs order.

The court held that the Hoteliers had not deliberately avoided mediation, but instead noted that the Hoteliers had remained open to mediation, once details of Witham's claim were made clear. Witham did not set out the detail of its claim until some time after the termination (and even then, the claim was radically amended prior to commencing proceedings). Consequently, it was not unreasonable for the Hoteliers not to mediate without knowing the extent of the claim made against them.

The court went on to note that finding the right time for mediation or ADR in cases of this sort is a fine art. His Honour Judge Coulson QC said: "the trick is to identify the happy medium: the point when the detail of the claim and the response are known to both sides, but before the costs that have been incurred in reaching that stage are so great that a settlement is no longer possible".

He directed Witham to pay majority of the Hoteliers' costs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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