UK: ´Where to now? Construction case law update´

First given as a seminar on Wednesday 29^th June 2005

This is a selection of construction cases reported in 2005 (thus including a number decided in 2004). The ones chosen are intended to offer clarification or demonstrate development of the law; they are not an encyclopedic collection of every case in the specialist law reports.

The case selection is divided into four sections:

1. Adjudication
2. Arbitration/ADR
3. Construction Contracts
4. Negligence liability

This is the Court of Appeal hearing of the TCC decision on the effect of incorrect identification of a named adjudicator and his subsequent death. AMEC succeeded in its appeal against the judge’s finding of breach of natural justice. The mere fact that a tribunal has previously considered the issue raises no inference of bias and neither the legal advice received by the adjudicator on jurisdiction nor a conversation between adjudicator and AMEC’s solicitors was improper (although the latter will always need careful handling).

This important decision represents the modern position on effect of bias in adjudication and a somewhat more pragmatic approach to natural justice. The decision came after the TCC decision of A & S Enterprises v Kema Holdings [2005] BLR 76 in which the court held that an adjudicator should have given the opportunity to a director of a party to give oral evidence. The BLR editors suggest that, since AMEC, A & S would be decided differently in the Court of Appeal.

Based on a consideration of the case-law on set-off, the court held that the claimant was entitled to summary judgment for the whole amount awarded by the adjudicator. The defendant was not entitled to set-off having regard to the provisions of the Contract. There was also consideration of the adjudicator’s grant of an interim extension of time.

This is a clear indication that the Court of Appeal’s decision in Levolux v Ferson has established that set-off should not be allowed to displace the general principle that an adjudicator’s decision should be enforced as final and binding, pending ultimate resolution in arbitration or litigation. This conclusion could be reached in Balfour Beatty by reference to the contract, although the same result could be reached if necessary by displacing the contrary provision as repugnant to Parliament’s intention.

This concerns difficulties arising in adjudication through the tension between complexity of dispute and the time-limits. It was argued for Birse that the complex nature of the dispute, combined with the conduct of the clients CIB as claimants, created pressure which caused the adjudicator to act unfairly in relation to timetable/ timescales, expert evidence and documentation. CIB was applying to enforce the decision of the adjudicator in their favour. The judge, granting the application to enforce, found that Birse was not prejudiced on the facts, although whether complexity could defeat the process on other facts appears to have been left open.

Although on the facts the judge held that Birse’s position had not been prejudiced by the complexity of the case in relation to the restrictive adjudication procedure, some commentators regard it as supportive of that possibility. Logically, it should be possible to conceive of facts too complex for resolution within both time limits and requirements of fairness. If that is right, the question is where, beyond the facts of Birse, that position is reached.

This is the Court of Appeal’s decision on the appeal from the TCC judgment on agreements in writing. The appeal was on the question of whether a settlement between the two parties to a multi-party dispute would have the effect of releasing one liability to another party. The BLR report also covers the important issue of duration of the right to refer a dispute to adjudication within the meaning of the words "at any time" in s.108 (2)(a) HGCR Act. The Court of Appeal gave this phrase very wide meaning, extending even to a time well after alleged acceptance of a repudiation. The CILL only covers the settlement agreement point.

At one level, this is an addition to the case law on s.107 HGCR Act and RJT Consulting Engineers v DM Engineering, which was the Court of Appeal’s previous major consideration of the issue. However, more novel and potentially more significant was an attempt to answer the question as to when reference can occur; how long does the right last? If ‘at any time’ does mean long after the relationship is over, this gives adjudication the status of a dispute resolution mechanism for disputes at any stage, rather than one only for ‘keeping the project moving’.

This case joins the body of authorities on the Unfair Terms in Consumer Contracts Regulations. In adjudication, these are Westminster v Beckingham, Picardi v Cuniberti and Lovell Projects v Legg & Carver. The court’s view was restrictive of situations where the Regulations might apply.

The case also decides two other significant points, namely that an adjudicator’s ruling on his own jurisdiction does not bind a judge and that a letter of intent referring to the JCT Form would not incorporate the adjudication provisions in that form.

This adjudication case has some factual similarity to Picardi v Cuniberti, albeit on a contractual rather than statutory adjudication . The contract was here considered binding even though unsigned by the employer. The adjudication provisions were freely negotiated and did not contravene the Unfair Terms in Consumer Contracts Regulations 1999.

Picardi v Cuniberti attracted considerable attention in holding that the EU-derived Unfair Terms in Consumer Contracts Regulations 1999 might strike down agreements to re-instate adjudication provisions in an owner-occupier construction contract. The HGCR excludes such contracts from the adjudication regime. But both Bryen & Langley and Westminster restore the balance and confirm that intervention using the Regulations will not normally be allowed where the contract has been freely negotiated.

Arbitration/Dispute Resolution

The Thelwall Viaduct case is concerned with the existence of a ‘dispute’ for the purposes of ICE (5^th) Clause 66 and challenge to the jurisdiction of the arbitrator. At first instance, Jackson J. explored Monmouthshire, Tradax, Ellerine and Halki Shipping and sets out 7 propositions, of which the first also has significance for adjudication: "The word ‘dispute’ which occurs in many arbitration clauses and also in s.108 of the Housing Grants Act should be given its normal meaning".

The case also concerns the scope of the engineer’s decision-making jurisdiction under Clause 66.

The Court of Appeal dismissed AMEC’s appeal, which had sought to argue that there was no dispute or difference capable of reference to arbitration. Jackson J’s analysis of the ‘dispute/difference’ issue was approved by the CA and now represents the established position both on arbitration and on adjudication. The CA view generally was that ICE Clause 66 should not be construed legalistically so as to preclude timely commencement of arbitration proceedings.

In a dispute over the meaning of ‘gross developer’s margin’, it was held that leave to appeal on a point of law should be granted, since the arbitrator’s post-award correspondence revealed a fundamental misunderstanding of the respondent’s case. The arbitrator had failed to decide the point stated in the pleadings which would have constituted serious irregularity had the appeal not been allowed.

Given the policy intention of the Arbitration Act 1996 to restrict legal challenges to arbitrators’ awards, there is interest in most successful challenges on a point of law; this case could also have constituted serious irregularity in the arbitrator’s conduct of the case.

Construction Contracts

This is reckoned to be the first reported case on breach of obligation under a Construction Management Agreement. The client successfully sued its Construction Manager in respect of failure to ensure that individual trade contract packages were workable and complete. The appropriate measure of damages was the increased cost caused by carrying out omitted works as variations. The case is notable for criticism of the failure of an expert witness to revise his opinion in the light of new information.

One of the most interesting aspects of the case, beyond those mentioned, is the application of John Doyle Construction v Laing Management on the global claims issue. HH Judge Wilcox held that "if such a claim is to succeed (the claimant) must eliminate from the causes of the loss and expense element all matters which are not the responsibility of (the defendant)". The test applied by the judge was the ‘dominant cause’ of the contractor’s delay. If this is correct, it will constitute some encouragement to the use of global claims.

Where Bovis had compromised a dispute with the client over alleged negligence by accepting £15 million in lieu of £37 million claimed due under the contract, Bovis could not claim under their professional liability insurance. There was an implied term under such a policy that the assured’s cause of action had been specifically ascertained by a judgment, arbitration award or formal settlement agreement, which had not happened here.

The issue has some similarity to the global claims aspect of the Great Eastern case above. In an insurance claim, but also in any type of claim, the claimant must prove the loss. Here, a global settlement, which included the resolution of a counter-claim, fell well short of providing the proof which Bovis needed to show loss for the purposes of their PI claim.

Emcor Drake & Scull v Sir Robert McAlpine Ltd [2004] All ER (D) 341 CA.

The CA upheld the TCC’s decision that the claimant sub-contractor had only been instructed to carry out works up to a value of £14 million under work orders. In the absence of a formal sub-contract, the defendant’s argument that the sub-contractor had agreed to carry out the whole of the M&E works for £34.25 million would fail.

Bryen & Langley were the successful tenderers in a project to carry out works for the owner, Boston. A letter was sent to the contractors stating that the contract would be in the form of JCT 98. No such contract was ever signed by the owner. The contractors claimed sums due under an interim certificate and when Boston failed to pay in full, they referred their claim to adjudication. However, the Court held that the letter of intent had not incorporated the terms of the JCT form and thus the adjudication provisions were not binding. It therefore followed that the adjudicator had no jurisdiction to determine the dispute.

Where work was done under a letter of intent limiting Mowlem’s entitlement to payment to a maximum of £10 million, the Court refused to imply a term that the contractor would also be paid a reasonable amount for work carried out in excess of that figure. Whereas a term would only be implied as a matter of commercial necessity, it would be contrary to commercial sense if Mowlem could avoid the upper limit on the right to payment by simply continuing with the work and exceeding it. Accordingly, the parties’ relationship was governed by the letter of intent and the contractor’s total entitlement to payment for works carried out under it was £10 million. The owner was not prevented by estoppel or waiver from relying on the terms of the letter of intent.

Emcor Drake & Scull, Mowlem v Stena and Bryen & Langley v Boston all contribute to the body of case law on letters of intent and whether they give contractual or other entitlements in the absence of a formal contract.

Negligence Liability

This is further litigation following the CA decision on incorporation. Here the TCC provided important consideration of the standard of care required of a designer; the case concerned the design and construction of a Philippines power plant. The court re-affirmed that the standard is equivalent to that of professionals such as solicitors, surveyors and accountants, namely, reasonable skill and care.

Suggestions in the first instance decision of Payne v Setchell that the designer is in the same position as a contractor were rejected. On the facts, Ove Arup was in breach of its duty to ensure the suitability of the design, including confirmation of the design assumptions. It had assumed responsibility to its client for economic loss.

This case is important as providing some restriction on the application of Bryan v Maloney. The majority of a seven man court distinguished Bryan v Maloney and some of the judges thought that the principle that a builder of a dwelling house owes a duty to subsequent purchasers should be limited to the specific circumstances of that case. The majority thought that attempts to develop (as opposed to apply) principles from artificially constructed facts should be approached with caution.

It appears that Australia considers that it went too far down the road of tortious liability in Bryan v Maloney and is now imposing limitations which have at least some similarity to the English decision of Murphy v Brentwood. This is especially interesting given the Singapore Court of Appeal decision which follows.

In a ship-building case, the Singapore Court of Appeal declined to give wider significance to the RSP Architects decisions. By not following Murphy v Brentwood, Singapore had allowed a condominium management corporation to sue the developers’ contractors/architects in tort. However in RSP, the Court now held that the application of these cases should be limited to the ‘special factual matrix’ of condominium development under the strata title system.

This leaves the Singapore courts showing a more conservative approach to tortious liability than most common law countries except the UK, although as seen above, Australia is apparently moving in the same direction.

It was held not to be arguable that it was fair and reasonable to impose a duty of care in tort on a sub-contractor in favour of the employer. The contractual structure avoided such an assumption of responsibility. Junior Books v Veitchi should only be followed if a case was identical "to its own particular unique facts."

Remarkably, Junior Books v Veitchi technically still survives, although this case confirms that it is of no practical effect. Although Junior Books imposed a duty of care on a Nominated Sub-contractor to avoid economic loss to the employer, Architype holds that such a duty of care is not even arguable today.

Where a hotel had been destroyed by a fire breaking out in its kitchen, the insurers sought to avoid liability to indemnify on the ground that the kitchen equipment had not been properly cleaned. However, it was held that the defendants had more knowledge of developments in cleaning regimes than the insured hotel owners and could have made clearer their detailed requirements as to cleaning had they wished. Any policy provisions in this respect should be construed contra proferentem.

The application of contra preferentem is fairly typical of the courts’ approach to insurance contracts, although the treatment of insurers as having expertise in technical developments in cleaning regimes seems to place a heavier burden upon them than might have been anticipated.

Design work to a hotel by the defendant structural engineers was completed in March 1997. Cracking had occurred by late 1999 and a claim was issued in contract and tort in September 2003. The contract claim was agreed to be statute barred but the (County Court) first instance judge held that "if cracks first appeared within six years of the issue of proceedings [the claim] is not statute barred". The defendants’ appeal was based on the contention that Murphy v Brentwood had overruled Pirelli v Oscar Faber and Ketteman v Hansel Properties. The Court of Appeal, dismissing the appeal, held that both remain good law and binding in such cases as this, until the House of Lords decides to overrule them

The means of ascertaining the starting point of the limitation period in tort claims for defective construction under the Limitation Act continues to be governed by Pirelli v Oscar Faber. Obviously, this does not affect the Latent Damage Act limitation rules.