2012 brought us celebrations and excitement in the form of the Jubilee, Olympics and Paralympics. Now that the whirlwind of activity has calmed down, it's time to take stock of what else 2012 had to offer. Well, for those negotiating and administering construction contracts, we have selected a number of important decisions from the courts providing guidance and assistance on construction contracts, their negotiation and operation. Granted, there's no glamour but it's all useful.

Walter Lilly & Company Ltd v Mackay & DMW Developments Ltd [2012] EWHC 1773 (TCC)

This judgment serves as a comprehensive review of the authorities and guidance on the correct approach to calculating extensions of time, ascertaining loss and expense and advancing global claims. It is likely to be the main authority on these issues, so is an essential reference point for parties bringing and resisting such claims.

The facts

The proceedings concerned responsibility for defective work and delays to a new-build residential project. The contract was based on the Joint Contracts Tribunal (JCT) 1998 Edition Without Quantities, as modified by the Contractor's Designed Portion, Without Quantities. The project commenced in 2004 and completed in 2008, two years late.

Walter Lilly (WL) claimed an extension of time, return of liquidated damages and sums wrongly deducted for alleged defects, loss and expense relating to delay and the outstanding unpaid value of the works. Mackay argued that WL had been overpaid, had no entitlement to an extension of time or the repayment of liquidated damages and that a sum approaching £2 million was due to Mackay in respect of defects.

Extensions of time

The most important aspect of the decision is that it has confirmed the English court's approach to concurrent delay. In simple terms, concurrency is where two (or more) events have both caused the same delay, and one of those events is the Employer's responsibility (a "Relevant Event" under a JCT contract as was the case here) and the other is the Contractor's.

Akenhead J considered two competing approaches to determining responsibility for concurrent delay. In the 2010 case of City Inn Ltd v Shepherd Construction Ltd [2010] BLR 473, it was held that responsibility for concurrent delay could be apportioned according to each party's culpability. Akenhead J rejected this approach, holding that the courts cannot imply a fictitious obligation to apportion delay simply because the Contract Administrator is under a duty to award a "fair and reasonable" extension, because the test is primarily one of causation.

The judge in Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd (1999) 70 Con LR 32 accepted an agreement between counsel (recording no reasoning in the judgment) that where there are competing causes of concurrent delay, one the responsibility of the employer (say a Relevant Event) and the other the fault of the contractor, the contractor will be entitled to a full extension of time. This approach was followed recently in Adyard and Abu Dhabi v SD Marine Service [2011] EWHC 848 (Comm) and was here upheld, with reasoning, by Akenhead J. The reasons he gave were:

  • Relevant Events may amount to acts of prevention and it would be wrong in principle to allow the employer to recover liquidated damages and deny the contractor an extension of time in those circumstances; and
  • the contract (JCT) allowed the contractor an extension of time for delay caused by a Relevant Event and did not go on to deprive him of that extension in a concurrency scenario.

Other noteworthy comments from the judgment were as follows:

  • The debate as to whether a prospective or retrospective delay analysis is preferred is moot because "if each approach was done correctly, they should produce the same result" (although, this is arguably an oversimplification).
  • Snagging works will not be a cause of delay unless there is an excessive amount of them.
  • The court should be cautious in assessing the weight it gives to "supposedly contemporaneous views of persons who [do] not give evidence".

Loss and expense

Akenhead J considered the proper application of a typical loss and expense clause and drew several conclusions:

  • Entitlement to claim loss and expense will not be lost where some details are not provided. The Court will interpret the clause in a way that avoids absurdity; e.g. you will not lose a right to claim a £1 million loss because you cannot substantiate £10 of that loss.
  • Providing the "detail" of the loss/expense does not necessarily require the contractor to provide all the backup accounting information.
  • The clause only requires the contractor to submit "reasonably necessary"details. It does not say how they are to be provided, so if the contractor offers to let the Quantity Surveyor (QS)/Architect inspect its records, that may suffice.
  • The loss and expense clause does not need to be interpreted strictly against the contractor because many of the contractual grounds that would give rise to a claim for loss/expense are the fault or risk of the employer.
  • The QS/Architect are not strangers to the project and this has a bearing on the degree of information that needs to be provided.
  • The clause cannot imply a higher standard of proof than that which the ultimate tribunal requires (balance of probabilities): the QS/Architect only need to be "satisfied that all or some of the loss and expense claimed is likely to be or has been incurred", i.e. they do not have to be certain.
  • In relation to loss of overhead and profit, the court does not have to be certain that the overheads and profit have been lost, only that the loss and expense claimed had actually been incurred as a result of delay or disruption. WL's evidence that it had declined other tendering opportunities because a number of its employees were still engaged on the Unit C project and could not be made available for other projects, was sufficient.

Global claims

The judgment confirms that global claims are not wrong at law and provides valuable clarification on the principles that apply to them.

  • Subject to any contractual provision restricting global claims, the contractor must prove that (1) an event occurred which entitled it to loss and expense, (2) that event caused delay/disruption, and (3) the delay/disruption caused financial loss.
  • A contractor does not have to prove it is impossible to prove causation and loss in the usual way, or that it is not his fault that he has had to resort to making a global claim.
  • Provided the contractor meets any conditions precedent to claiming for loss and expense, any appropriate assessment can be used to ascertain the amount.
  • There is nothing "wrong" with making a global claim, but the contractor will face substantial evidential difficulties, i.e. it will have to prove that its tender was priced well enough to have made a net return and that no other factors occurred that could have caused the loss. This does not mean that the burden of proof shifts to the defendant.
  • The fact that one or a series of events/factors for which the contractor is responsible caused or contributed to a global loss does not necessarily cause the claim to fail. If the amount can be quantified, then it will be deducted from the total claim. For example, a global claim would not fail because the contractor failed to price for one item in its tender, but the value of the claim would be reduced by the underpriced amount as that loss may have arisen in any event.
  • The court can treat global claims with scepticism, but should not reject them out of hand.

The argument that global claims should not be awarded where the contractor has himself created the impossibility of disentanglement is incorrect.

Commentary

Concurrent delay, loss and expense and global claims are the typical material of construction claims and disputes. This landmark judgment should be a reference point for anyone making or responding to such a claim. This is particularly the case as WL applied to the Court of Appeal for leave to appeal the decision of Mr Justice Akenhead. The application was dismissed.

The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012] EWHC 2137 (TCC)

This case provides a stark warning about the dangers of relying on letters of intent (LOI) and not completing formal contract documentation.

Ampleforth Abbey Trust (AAT) engaged Turner & Townsend (TT) to project manage the construction of a new girls boarding school, which had to be open in time to receive pupils the following academic year. Kier, the contractor, commenced work under a LOI drafted by TT. In the end, a building contract was never executed and the works were completed under eight separate LOIs.

The project was significantly delayed. AAT demanded liquidated damages (LADs) and Kier cross-claimed for an extension of time and additional payment. The contractor denied liability for LADs on the basis that a building contract had never been executed and the series of LOIs did not provide for LADs. AAT and Kier eventually settled and, as part of the settlement, AAT had to accept that it would not recover LADs. AAT then pursued TT for the losses it suffered in having to settle on less favourable terms with Kier than it would have done had the formal contract been in place.

AAT had to prove (and did) that:

(1) TT owed AAT a duty to exercise reasonable skill and care for the purpose of procuring an executed building contract from Kier. TT had failed to exercise reasonable skill and care in its duty "to take the steps reasonably required of a competent project manager for the purpose of finalising the contract". Failure to do so will not automatically amount to negligence, but it was clear that "something went wrong with the project". In particular, TT failed to take adequate steps to resolve the issues preventing execution, to put pressure on Kier or to advise AAT of the need to ensure the contract was executed;

(2) if it had received the correct advice on the legal merits of an executed building contract, AAT would have acted on that advice;

(3) there would have been a real or substantial chance that Kier would have signed the contract including the LADs provision;

(4) the signed contract would have materially improved AAT's position against Kier; and

(5) AAT would have taken advantage of this.

As part of its defence, TT attempted to rely on a clause in its appointment that limited its liability to such as was covered by its professional indemnity insurance policy, subject to a cap of the lesser of (1) the fees paid to TT (£111,321) or (2) £1 million. However, this did not help TT. The clause was held to be invalid on the basis that it was unreasonable, pursuant to section 3 of the Unfair Contract Terms Act 1977.

It was not reasonable because it required TT to maintain Professional Indemnity Insurance (PII) cover of £10 million (the cost of which, as a matter of commercial reality, would be borne by AAT), yet its liability was limited to less than £200,000. In effect, AAT had paid for access to £10 million of insurance cover and it was unreasonable to deny them access to it.

Commentary

The case is noteworthy for three reasons:

  • It is another reminder of the dangers of LOIs.
  • The court analysed the remit of a project manager and concluded that much of the role is largely about common sense and commercial judgment, rather than a kind of specialist expertise. The reality though is that a project manager's obligations will be unique to each case, so employers should incorporate a comprehensive and clearly defined schedule of services into their appointments. The case also highlights the importance of ensuring that a sufficiently experienced, resourced and commercially aware project manager is appointed.
  • Employers may now be tempted to use the level of PII cover as a negotiating tool to increase any cap on liability. However, there are good reasons why a professional may need cover in excess of its liability cap, e.g, if their insurance is in the aggregate and cover needs to be available for claims on other projects.

This case is probably not the last word on the issue, so employers and professional advisers should be wary and keep an eye on any further developments.

This judgment may encourage more claims against project managers by disgruntled clients. However, those tempted to rely on it should compare it with Sweett (UK) Ltd v Michael Wright Homes Ltd (2012) where Sweett, the Employer's Agent, did discharge its duties by putting the necessary steps in place for a bond to be executed.

The November edition of our Accountability alert series discusses the background to this case in more detail.

ENER-G Holdings Plc v Hormell [2012] EWCA Civ 1059

Notices are vital to the operation and administration of contracts. Failing to follow notice provisions can cause you to lose an entitlement to certain rights, such as to withhold payment, terminate a contract or claim an extension of time. Consequently, it is vital to know how the notice provisions in your contract work. In this case, the Court of Appeal provided guidance concerning the interpretation of notice provisions, which are so common in construction contracts.

A share purchase agreement (SPA) stated that a "notice may be served by delivering it personally or by sending it pre-paid recorded delivery post to each party".

Ener-G (the buyer) served a Notice for Breach of Warranty (Notice) on Mr Hormell (the seller) in two ways:

  • On 30 March 2010, a process server left the envelope containing the Notice in Mr Hormell's front porch. Mr Hormell opened and read the Notice that afternoon.
  • Later that day, a second Notice was posted to Mr Hormell by recorded delivery. Under the contract, this was deemed received two days later on 1 April 2010.

Ener-G later commenced court proceedings. Under the terms of the SPA the Claim Form had to be served within 12 months of the Notice. A process server left the Claim Form in Mr Hormell's post box on 29 March 2011, but he did not receive it until he returned on 2 April 2011.

So, the questions were:

  1. When was the Notice served?
  2. When was the Claim Form served and was it within 12 months of the Notice?

The answers were:

  1. The process server served the Notice on 30 March 2012.
  2. The Claim Form was deemed to have been served on 1 April 2011, out of time.

In reaching its decision the Court of Appeal considered the meaning of "delivering it personally" and whether the means of service in the clause were exclusive. It held that "deliver personally" meant that the Notice had to be served on the person of the recipient, which it had not been. However, the methods of service in the relevant clause were permissive as opposed to exclusive. This was because the word "may" could not be read as meaning notices could only be served in one of the stated ways. The clause allowed a party to choose to serve by other means, which included leaving it for Mr Hormell's attention.

Commentary

This case illustrates a number of key points:

  • The importance of precise and consistent drafting. If the parties wish to limit the ways in which notices can validly be served, they must say so by, for example, using "shall" instead of "may".
  • It is necessary to ensure that "personal service" is effective by actually giving the notice to the addressee or to an individual authorised to receive notices at the addressee company and not just by leaving it for their attention.
  • Contracting parties must remember that failure to comply with notice provisions could cause them to lose rights and benefits afforded to them by the contract and so should follow them to the letter.
  • Service of important documents should not be left until the last minute.
  • If you serve a document by more than one method, the first effective means is the one that counts. It appears that you cannot retrospectively choose to rely on the method which is most favourable to you.

Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd & Anil Salgaocar [2012] EWCA Civ 265

This case is important because it demonstrates that a contract can be concluded by something as informal as an email.

Three parties were involved with the charter of the ship. The contract was based on a standard form and negotiated mainly by email. The claimant agreed to provide the ship, the first defendant agreed to take delivery of it and the second defendant agreed to fully guarantee the charter.

When the terms were agreed, copies of the contract were circulated but not signed. The first defendant then refused to take delivery of the ship.

The Claimant argued that the exchange of emails and documents passing between the parties was sufficient to establish a guarantee and made a claim under the guarantee. The Defendants argued that the email chain and draft documents were too disjointed and insufficient to constitute a guarantee within the meaning of the Statue of Frauds 1677.

Ordinarily, there is no need for a contract to be in writing or to be signed. Provided there is offer, acceptance, consideration and an intention to create legal relations, there will be a contract. However, certain types of contract do have to be in writing and guarantees are one of them. The Statute of Frauds 1677 provides that for any action to be brought upon a guarantee, the guarantee must be in writing and signed by the guarantor.

Was the chain of emails and draft documents enough to meet the criteria? The Court of Appeal said yes, upholding the High Court's earlier decision. The Statute of Frauds 1677 contains no express indication that the "guarantee in writing" has to be in one single document. Commercial contracts are often concluded by an exchange of numerous emails. There was no objection in principle to referring to a sequence of negotiating emails or documents to identify a guarantee. This accommodates contemporary business practice.

What is crucial is that the parties must have intended to be bound by the communications. If they did not, they should have made sure their communications were "subject to contract". On the facts, the parties intended to be bound by the terms agreed in the emails.

Further, when a person's name appears on an email, even if it is not in his/her full name, but an initial, or a nickname, that generally indicates that it is sent with his/her authority. It also suggests that he/she is taking responsibility for, and assents to, the contents of the email and the other documents in the sequence. Consequently, it will suffice as a signature.

Commentary

Those negotiating contracts need to be aware of the following:

  • relatively informal documentation and electronic signatures can amount to concluded contracts - even guarantees; and
  • to reduce the risk of being caught out by an email exchange when there is no intention to create legal relations at that stage, each email should be marked "subject to contract".

Ampurius Nu Homes Holdings Ltd v Telford Homes (Creekside) Ltd [2012] EWHC 1820 (Ch)

The phrases "due diligence" and "reasonable endeavours" are typically found in construction contracts. This case provides some useful guidance as to their meaning.

The facts

Ampurius (a development company) engaged Telford to construct four commercial blocks on a mixed use development in London and agreed to take long leases over the blocks. The contract obliged Telford to carry out its works with due diligence and use reasonable endeavours to procure completion by the target date.

The works commenced in March 2009, but Telford then put work on hold for two of the four blocks because of funding problems. Ampurius had wanted all four blocks completed together, believing that it would be difficult to sell the commercial units if construction work was ongoing over the rest of the development. As a compromise, the parties agreed on separate target completion dates for blocks A/B and C/D, seven months apart.

In July 2009 Telford put blocks A/B on hold, saying that further funding was conditional on 85 pre-sales being made and this had not happened because of the "credit crunch".

On 5 November 2009, Ampurius' solicitor wrote to Telford, submitting that Telford was in repudiatory breach of its contractual obligations (1) to procure that the works were carried out with "due diligence" and (2) to use its "reasonable endeavours" to procure completion of the works by the target date. The letter stated that Ampurius was "currently considering whether to exercise its option to accept the repudiatory breach".

Telford replied that there was no breach of contract and that it had every intention of being bound by the contract. Negotiations followed, but to no avail. Ampurius argued that Telford was in repudiatory breach of contract and sought the return of its deposit for the units of £420,000.

The decision

The court held:

  1. "Due diligence" connotes both due care and "due assiduity/expedition". Telford put its works on hold for months and could not confirm when they would resume. The lack of funding explained, but did not eliminate, the breach, which was serious enough to amount to a repudiatory breach. Cessation of the works on blocks A/B defeated "the commercial purpose of the venture".
  2. Using reasonable endeavours to secure funding did not discharge Telford's duty to use reasonable endeavours to procure the works by the target dates. The obligation covered matters directly related to the physical conduct of the works, thereby excusing delay where there was, for example, inclement weather. It did not extend to other matters, such as having the financial resources to do the work at all. Telford was in breach because of a deliberate decision to stop works on blocks A/B.
  3. Ampurius had accepted Telford's repudiatory breach. Although Ampurius did not accept the repudiation until October 2010 (almost a year after it first identified it in its letter of 5 November 2009), the delay did not amount to affirmation of the contract, so Ampurius had not lost the right to bring it to an end. These cases always depend on their particular circumstances. Here, the negotiations between November 2009 and October 2010 were always without prejudice to the contention that there had been a repudiatory breach that Ampurius could accept.
  4. Ampurius got its deposit back, but not its wasted costs because it had not been able to prove that it would have made a profit from the contract sufficient to cover the expenditure.

Commentary

While the comments on "due diligence" and "reasonable endeavours" were obiter (non-binding), they provide useful guidance as to how the court will interpret such clauses.

The decision is also a helpful demonstration of how the court will analyse a repudiatory breach. It also serves as a reminder that a party can lose the right to accept the guilty party's breach through delay or an action that affirms the contract. If there is any delay, the innocent party should take care to reserve its position on a regular basis until it has decided whether or not to accept the breach (although there is no guarantee that this will be sufficient).

Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417

Here the Court of Appeal gave some guidance as to the meaning of a commonly used phrase in construction contracts "all reasonable endeavours". It confirmed that, in effect, an "all reasonable endeavours" obligation is as onerous as a "best endeavours" obligation.

In 2005, low-cost airline Jet2.com entered into an agreement with Blackpool Airport Ltd (BAL), which required BAL to use best endeavours to promote Jet2's service and "all reasonable endeavours to provide a cost base that [would] facilitate Jet2.com's low cost pricing".

As with most budget airlines, Jet2 operated a number of services at unsociable hours, some of which fell outside BAL's published operating times (which were not included in the contract). Nevertheless, BAL provided the ground support services that Jet2 required for a few years. It was an uneconomical arrangement for BAL, so in 2010 its new owners decided to stop doing this, forcing Jet2 to divert some flights and incur losses.

A dispute arose as to whether BAL had fulfilled its obligation to use all reasonable endeavours to provide the services in circumstances where it was not commercially viable for them. The High Court, and the majority of the Court of Appeal, said "no". BAL had to provide all the facilities and services that Jet2 needed to continue with its low-cost strategy, which was based on the airline being able to operate flights at unsociable times (when consumers would expect to pay lower fares). The absence of any clause limiting Jet2's flight times demonstrated that the parties did not intend to be restrained by BAL's published operating times.

The courts distinguished cases in which the obligation to use all reasonable endeavours to obtain an outcome was dependant on third party co-operation (e.g. their consent). This is because it is accepted that the obligor is not expected to make personal sacrifices to obtain the third party's consent. BAL was not dependant on a third party; it simply did not want to provide an unprofitable service.

Commentary

It appears that a party in BAL's position is only entitled to consider its own commercial interests up to a point. That point will vary depending on the context of each case. Here, BAL was expected to put itself to some financial expense to provide a costs base that would facilitate Jet2's low cost pricing strategy. The court's logic was that Jet2 would not have agreed that BAL could limit or abandon its duty just because it was no longer commercially sensible for BAL to honour it.

Interestingly, the court held that "all reasonable endeavours" would not require BAL to continue operating the loss-making services for the full 15 years contracted for, but declined to indicate how long a period would have been reasonably expected.

The key points to note are:

  • a party under an obligation to use "all reasonable endeavours" cannot avoid the obligation because it would be costly or inconvenient to fulfil it (unless performance relies upon third party cooperation); and
  • to all intents and purposes "best endeavours" and "all reasonable endeavours" are synonymous. The "all reasonable endeavours" obligation is not a compromise between a "best endeavours" and a "reasonable endeavours" obligation.