This was a trial of a number of preliminary issues concerning the liabilities owed by Morgan Sindall Professional Services Ltd (“Morgan Sindall”) following a Business Sale Agreement (“BSA”) under which it absorbed the substantial construction business of AMEC Foster Wheeler Group Ltd (“AMEC”) for the reverse consideration of £44 million. The case proved to be interesting because the existing contracts were not simply novated to Morgan Sindall, and instead Morgan Sindall only assumed responsibility for discharging AMEC's liabilities under those contracts from the date of completion of the BSA, 27 July 2007, until the issue of a Defects Liability Certificate ("DLC") under each contract.
The issues in this case concerned one of the ongoing contracts at the date of the BSA under which AMEC had been engaged to design and build a hotel and apartment complex in Liverpool under an amended JCT contract for the sum of £16 million. The works had been completed defectively and in particular the cladding panels to the building had been installed using screws that were vulnerable to corrosion, and hence were unsuitable for the marine environment. The key concern for Edwards-Stuart J to determine was whether Morgan Sindall could be found liable for AMEC’s defective works which had been carried out prior to the date of completion of the BSA, and this would require a careful construction of the BSA and the building contract originally agreed between AMEC and the employer.
Clause 7.3 of the Business Sale Agreement
Many of the issues in this case stemmed from the wording of clause 7.3 which detailed the liabilities that would attach to Morgan Sindall following the completion of the BSA. Under clause 7.3, Morgan Sindall was to assume the following responsibilities:
“(c) all performance obligations and liabilities arising under or in respect of each of the Completed Contracts and which arise or fall due for performance from and after Completion up until a defects liability certificate ("DLC") is issued in respect thereof together with all liabilities arising from any such performance that is defective or from the acts or omissions of [Morgan Sindall] after Completion in connection with the defects of which [Morgan Sindall] is made aware to the extent [Morgan Sindall] knew or ought reasonably to have known such liability arising in respect of the period from Completion to the issue of a DLC.”
The wording of the clause was, on any view, opaque, and required a substantial amount of judicial attention to unpick the precise remit of the liabilities Morgan Sindall would inherit from AMEC after the completion of the BSA. Edwards-Stuart J started by dividing the clause into a number of sub-clauses, of which two were relevant to the preliminary issues:
(a) “all performance obligations and liabilities arising under or in respect of each of the Completed Contracts and which arise or fall due for performance from and after Completion up until a defects liability certificate (“DLC”) is issued in respect thereof.
(b) “all liabilities arising… from the acts or omissions of [Morgan Sindall] after Completion in connection with the defects of which [Morgan Sindall] is made aware to the extent [Morgan Sindall] knew or ought reasonably to have known such liability arising in respect of the period from Completion to the issue of a DLC.”
Sub-clause (a) concerned the contractual obligations owed by Morgan Sindall under the building contract, and sub-clause (b) was directed towards a wider liability that might be imposed on Morgan Sindall from its knowledge of any defects.
Sub-clause (a): Morgan Sindall’s liability under the building contract
Morgan Sindall’s potential liability under the building contract was unusual because the parties had split the obligations arising under the building contract between those before the date of completion of the BSA, which AMEC would remain responsible for, and those after the date of completion of the BSA, which Morgan Sindall would be responsible for. This would be particularly significant in the context of defective work; if it had been completed defectively before the date of completion of the BSA, then AMEC would remain liable for that defective work, but if there were any contractual obligations in respect of those defects which arose after the date of completion of the BSA, then Morgan Sindall could also inherit liability for those defects.
Edwards-Stuart J considered that Morgan Sindall could be found liable for AMEC’s defective works in any of the following circumstances:
(i) if any of the work was incomplete rather than just defective, the obligation to complete the works would pass on to Morgan Sindall;
(ii) under clause 16.2 of the building contract, Morgan Sindall would be required to remedy any defects identified by the employer in a Schedule of Defects which had to be served no later than 14 days after the expiry of the Defects Liability Period (in this case, a year following practical completion of each section);
(iii) under clause 16.3 of the building contract, the employer could issue instructions for Morgan Sindall to rectify any defects at any time up until the expiry of the Defects Liability Period; and
(iv) under clause 8.7 of the building contract (read alongside paragraph 570 of the Employer’s Requirements), Morgan Sindall would become liable to notify the employer and rectify any defective work if those defects were discovered by Morgan Sindall “during the carrying out of the Works”.
In relation to (i), Edwards-Stuart J was convinced that the defective work was complete and so no liability would attach to Morgan Sindall.
In relation to (ii) and (iii), Morgan Sindall’s liability would depend upon the existence of the employer’s Schedule of Defects or written instructions to Morgan Sindall to rectify an identified defect, neither of which had been presented before the court. As there was no obligation to make good defects unless they had been notified, Morgan Sindall was not liable under (ii) or (iii).
In relation to (iv), the crucial factor was that Morgan Sindall had to have discovered the relevant defective work whilst itself carrying out the Works (as expanded under the amended contractual definition to include any work to make good other defects). Edwards-Stuart J considered that the available evidence suggested Morgan Sindall was no longer carrying out any works on site after around mid-September 2008, and so any knowledge of the defective work after that point would not impose liability on Morgan Sindall under clause 8.7.
Accordingly, liability for the defective work did not attach upon Morgan Sindall under (i)-(iv).
Sub-clause (b): Morgan Sindall’s wider liability from knowledge of the defect
The first precondition to liability attaching under this part of clause 7.3 was that Morgan Sindall was required to have knowledge of the defect. There was also a further precondition that Morgan Sindall knew or ought to have known that a failure to do something after being made aware of the defect would give rise to liability on its part.
In effect, this part of clause 7.3 could be read as imposing a liability on Morgan Sindall for omitting to repair the defects (or take other appropriate action) after becoming aware that a failure to do so could give rise to liability. It was therefore capable of making Morgan Sindall liable for the defective work that it had actual or constructive knowledge of, even if that knowledge had not been discovered during the carrying out the works (as required under clause 8.7 of the building contract).
Although Morgan Sindall had no knowledge of the defects, matters were complicated because as part of the BSA it had absorbed a number of AMEC’s former employees who may have held knowledge of the defective works. Whether this knowledge could be imputed to Morgan Sindall would be a matter of fact and degree based on the normal principles of attributing knowledge to artificial legal entities, but it was not necessary to conduct this analysis in the present case. Whilst Edwards-Stuart J recognised the possibility that Morgan Sindall could have knowledge of the defects under this route, he considered that it would not in any event be sufficient to find Morgan Sindall liable under clause 7.3 because the former AMEC employees would not have known or ought to have known that their knowledge of the defective works could have given rise to liability on Morgan Sindall.
There was a further issue of whether the clause might impose a duty to warn on Morgan Sindall after becoming aware of the defective works. Whilst Edwards-Stuart J considered that this was certainly a possibility, an obligation to warn was different from an obligation to rectify defective works and so would only be significant in relation to quantum and mitigation of losses, rather than Morgan Sindall’s liability to repair the defects.
The Defects Liability Certificate
Edwards-Stuart J also considered the issue of whether a valid DLC had been issued according to clause 7.3, which would have had the effect of putting an end to Morgan Sindall’s potential liabilities after that date. The employer had issued a certificate of Making Good Defects on 18 August 2008, and no point was taken that such a certificate could not stand as a DLC for the purposes of clause 7.3. What was in dispute was whether the certificate of Making Good Defects related to both the apartments and the hotel, or whether it was just in relation to the apartments.
Edwards-Stuart J considered that the certificate was a contractual document that would have to be interpreted according to ordinary principles of contractual construction. Although there was some ambiguity created by the certificate referencing the certificate of practical completion in relation to both the hotel and the apartments, the header of the certificate and the subject line of the email it had been attached to ultimately persuaded Edwards-Stuart J that the proper construction of the certificate of Making Good Defects related only to the apartments.