LIABILITY FOR THE LANE COVE TUNNEL COLLAPSE

In the recent case of Thiess Pty Ltd and John Holland Pty Ltd v Parsons Brinckerhoff Australia Pty Ltd  [2016] NSWSC 173, the Supreme Court of New South Wales considered the liability of the geotechnical  engineer  in relation to the collapse of a section of the Lane Cove Tunnel. The Court found that the geotechnical engineer  breached  its contractual obligation.

The geotechnical engineer argued that any breach of its contractual obligations would have had no causal effect. However, the Court rejected this argument and stated that the geotechnical engineer had a primary commercial obligation to ensure that all design requirements were met.

The court apportioned a third of the liability for damages to the geotechnical engineer in the amount of $6,898,333.00.

Background

The Lane Cove Tunnel Project (the Project) involved the construction of road tunnels under the Pacific Highway at Artarmon , New South Wales. At approx imately 1:40am on 2 November 2005, a roof in a section of the tunnel (known as the MCAA) partly collapsed, which resulted in serious loss of propert y and propert y damage.

The plaintiffs, Thiess Pty Ltd and John Holland Pty Ltd (TJH) were jointl y responsible for the design and construction of the tunnel and commenced proceedings on the basis that the four defendants were negligent in exercising their respective roles . The four defendants were:

  • Parsons Brinckerhoff Australia Pty Ltd and ACN 006 475 056 Pty Ltd (formerly Parsons Brinckerhoff International (Australia) Pty Ltd) (together PB), who were responsible for the structural design of the works ;
  • ACN 061 447 621 Pty Ltd (formerly PelIs Sullivan Meynink Ltd (in liq)) (PSM), the geotechnical engineer responsible for monitoring ground conditions  in the tunnels; and
  • URS Australia Pty Ltd CURS), the Independent Verifier appointed to verify the first and second defendant's designs.

During the course of the proceedings , TJH settled all claims against PB and URS. However, TJH claimed that PSM breached its contractual obligations by failing to review and report on the suitability of PB's designs in the changing conditions of the tunnels.

PSM denied these allegations and alleged that the damage w as caused through a combination of PB's inadequate designs and TJH's negligent construction of the tunnels. Furthermore, PSM argued that the construction , especially the rockbolting and shotcreting were deficient , which caused the collapse .

Decision

The Court held that PSM had breached its contractual obligations  in reviewing and reporting on the suitabilit y of PB's designs in the changing conditions of the tunnels . PSM's obligations were found to extend far beyond the assessment of ground conditions,1 they extended to the recommendation of adequate supporting mechanisms for the relevant ground conditions that were encountered and then recording this through tunnel mapping procedures.2

In apportioning liability, His Honour found that not only did PSM fail in its assessment and recommendation for alternative designs; it also failed to communicate changing ground conditions to PB.3 Had PSM assessed the design whilst taking into consideration the changing ground conditions , it should have raised with PB the adequac y of the design. Had PSM done so, it is likely that PB would have reviewed the design and implemented alternative and adequate design measures , which may have prevented the collapse .5

His Honour stated that:

'The observational approach to design was an essential feature of the project. It was intended to ensure that the support design chosen at any given point was and remained suitable having regard to the ground conditions actually encountered. It was, in a very real sense, intended to guard against what happened in this case: namely, the ongoing utilisation of a support design that was inappropriate to the conditions in which it was applied'.6

The Court dismissed PSM's allegation that TJH was solely or partially responsible for the collapse . It found that TJH had not acted negligently in any relevant way in its construction of the tunnels as it could not be shown that TJH departed from the design in the  MCAA downdrive.7

Ultimately, the Court found that although PB had primary responsibility, the breaches of PSM were significant.8 Therefore , the Court held that the responsibility should be apportioned two thirds to PB and a third to PSM. PSM was ordered to pay damages amounting  to  $6,898,333 .00.

What this means for you

This case illustrates the importance of parties understanding their roles and responsibilities under a construction contract. In this case, the geotechnical engineer's obligations extended far beyond the assessment of ground conditions . Its responsibility encompassed an assessment of the design, whilst taking into account the changing ground conditions and communicating all of this information to the designers .

ASSIGNMENT OF  CONTRACTUAL WARRANTIES: CAN THE ASSIGNMENT EXTEND TO WARRANTIES BREACHED BEFORE ASSIGNMENT?

Assignment regularly arises in the context of construction contracts so it is important to understand their legal effect. In a recent case in the New South Wales Supreme Court, Tzaneros Investments Pty Ltd v Walker Group Constructions Pty Ltd,1 the party who had been assigned the benefit of contractual warranties provided by the contractor, sued the contractor for breach of those warranties as a result of defects. The contractor accepted that the works were defective but argued that they fell outside the scope of the assignment and therefore that it had no liability to the assignee.

Assignment of contractual rights

In simple terms , contractual assignment usually involves the transfer of the benefit of one or more contractual rights from a contracting party (the assignor) to a third party (the assignee) . The assignment allows the third party to enforce those rights against the other contracting party as if it were a party to the contract in the first place. The contract between the original parties otherwise remains in full force and effect.

There are several reasons why contractual rights may be assigned . For example, it is common for assignment to be considered when an owner sells infrastructure that it contracted to have designed and built, and if done properly, it will enable the new owner to have the same rights as the original owner with respect to contractua I rights (such as warranties as to design, construction and fitness for purpose), and to pursue those rights if they are breached . This can be particularly important in the case of (latent) defects.

Tzaneros Investments Pty Ltd v Walker Group Constructions Pty Ltd

This case concerned the construction of a container terminal on land owned by the Sydney Ports Corporation (the Land). In 2003, P&O Trans Australia Holdings Ltd (P&O), who was lessee of the Land, entered into a contract with Walker Group Constructions Pty Ltd (WGC) for the design and construction of 5 warehouses , and associated work, which included laying pavements in between and outside of the 5 warehouses (D&C Contract) .

In the D&C Contract, WGC gave certain warranties as to standard of workmanship and fitness for purpose. The D&C Contract also provided that neither party could assign any right or benefit under the contract without the other 's prior approval .

After the works were completed , P&O's leasehold interest in the land was transferred to Tzaneros and P&O entered into a Deed with Tzaneros purporting to assign WGC's warranties under the D&C Contract. WGC consented to the assignment of the warranties Tzaneros in the following terms:

... [WGC] hereby acknowledges that ... the benefits of the building warranties contained in the Contract will pass to Tzaneros Investments Pty Ltd from the sale date ...

... In accordance with clause 9.1 of the Contract, Walker  Group Constructions hereby consents to, and accepts the assignment of the building warranties to Tzaneros Investments from the sale date.

After the pavement was laid, cracks and spalling began to appear. By the time of the litigation, some pavements had been repaired (with Tzaneros contending that the repairs were inadequate), and some had been replaced.

Tzaneros' claim based on the assigned warranties

Tzaneros commenced proceedings in the Supreme Court of New South Wales based on breach of the contractual warranties purportedly covered by the assignment in the Deed. Tzaneros claimed nearly AU$15 million in damages from WGC and other parties as a result of the defects . A key issue was whether assignment of the benefit of the contractual warranties allowed Tzaneros to pursue its claim against WGC.

The parties' arguments

WGC accepted that the concrete pavement was defective, and that the warranties provided under the D&C Contract had therefore been breached .

However, WGC argued that the cause of action (for breach of warranty) had accrued before the assignment was effected, and that the terms of assignment were not broad enough to extend to such causes of action. Put another way, WGC argued that if a warranty had been breached before the Deed was executed, the entitlement to sue on that warranty had not been assigned to Tzaneros , and remained with P&O, the principal under the D&C Contract.

Tzaneros argued that the assignment was not limited in this way, permitting it to pursue WGC for breaches of the warranties under the D&C Contract , irrespective of whether or not they accrued before the assignment was effected .

Decision

Dealing first  with the terms  of the assignment, Ball J  observed that the Deed provided that 'the Assignor as beneficial owner and for valuable consideration ...assigns to the Assignee absolutely all of the benefit of the Building Warranties' (emphasis added) .

His Honour found that the provisions in the Deed dealing with assignment had to be construed in the context of P&O and Tzaneros entering into the Deed when they were aware that there had been cracking in the pavements and therefore must have contemplated a claim against WGC for breach of warranty . Further, His Honour concluded that the ordinary and natural meaning of the words 'all of the benefits of the Building Warranties' included the right to sue in respect of breaches that had occurred before the date of the assignment. His Honour opined that had the parties intended to limit the assignment to breaches arising after the assignment was effected, 'they would have said so specifically'.

WGC argued that it did not consent to the assignment in such broad terms . Specifically, WGC relied on the fact that the Letter provided that consent to the assignment was granted 'from the sale date '. This argument failed for two reasons . First, His Honour opined that the consent could not impact the scope and found that 'either WGC consented to the assignment or it did not' and that the letter clearly operated as the consent required by clause 9.1 of the General Conditions of the D&C Contract. Second, his Honour held that on a proper construction of the letter, 'from the sale date' could not be 'interpreted as placing a limit on the consent insofar as the scope of the assignment is concerned'. Instead,that date was interpreted as identifying the date from which the assignment would take effect.

His Honour accordingly held that the assignment allowed Tzaneros to sue WGC for breaches of the contractual warranties that occurred before the date the assignment was effected. Tzaneros' claim against WGC for breach of warranty succeeded , resulting in damages being awarded.

Concluding  remarks

The Supreme Court of NSW found that neither the assignment nor the consent was limited only to causes of action that accrued after the assignment took place. The assignment was broadly construed.

The result turned on the terms of the assignment and consent , along with the surrounding circumstances. Indeed, the fact that the assignment was construed in broad terms is perhaps unsurprising in light of those things. Nevertheless, this case serves as an important reminder that any limitations a party wishes to place on the scope of the assignment need to be clearly identified, and that particular care must be taken when consent is being considered and provided.

This article was also published in the March 2016 issue of the Construction Newsletter published by Herbert Smith Freehills' Tokyo office.