January 8, 2019

Projects & Construction Law Update - Quarter 1 2019

Cases

Commencing works without a formal agreement...

Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd [2018] EWCA 2222

All too often, construction works are commenced without the parties having finalised the terms of their engagement.  In this case, the Court of Appeal had to determine whether or not an architect's liability with respect to design was limited, in circumstances where the works had been completed without the parties having finalised a formal agreement to govern the works.  The contractor sought approx. £40 million in damages from the architect, so the issue of a liability cap was crucial to the architect's case…

AMEC was engaged as a specialist concrete sub-contractor on two large construction projects. It appointed Arcadis to perform certain design works.  After completion, the works relevant to one of the projects were found to be defective – so much so that the structure may need to be demolished and rebuilt.  While AMEC settled its dispute with the main contractor, it sought damages of £40 million from Arcadis, alleging that the defects related to design. The Court had to consider (i) whether the parties had been working to an agreed set of terms; and (ii) if those terms included a cap on Arcadis' liability.

Initially, in early 2001 (and prior to the design and works commencing), the parties agreed to work under a framework / protocol agreement, which would be intended to govern all projects for which Arcadis was engaged by AMEC.  During negotiations, multiple rounds of correspondence (and draft terms) were exchanged between the parties. However, no agreement governing the works was ever finalised.  Despite this, works commenced in March 2002 and were completed by way of extensions to a financial limit put in place around the same time.

In the decision at first instance, Coulson J held that, while a "simple contract" had been formed between the parties, no specific term had been agreed limiting Arcadis' liability for defects.  Arcadis appealed and the Court of Appeal overturned the decision of the TCC.

In reviewing the correspondence exchanged between the parties, the Court of Appeal focused on an email dated 8 November 2001 in which AMEC's commercial director sent Arcadis a draft protocol agreement and a detailed set of terms and conditions. Throughout the judgement, these were referred to as the "November terms".  Clause 2A of the terms provided a limit to Arcadis' liability, being the lesser of '(a) the reasonable direct costs of repair, renewal and/or reinstatement of any part of the Sub-Contract Works…' and '(b) the sum stated in Schedule 1' (which was unhelpfully left blank).

Other critical correspondence included a further set of terms which were circulated in January 2002. These terms sought to vary the November terms and proposed a limit of liability in the sum of £110,000. Neither party could produce a full set of documents circulated at that time but evidence was produced, in the form of an internal memorandum, showing there were specific discussions regarding the scope of the liability clause.  Due to the lack of documentary evidence, and a clear absence of agreement between the parties, the Court found that these terms could not override the November terms.

Correspondence between the parties in March 2002 was also examined.  Again, draft terms were issued which sought to make amendments to Clause 2A.  However, the Court again decided that none of these further sets of terms exchanged between the parties had been "clearly and unequivocally accepted" by Arcadis.  By May 2002, there was still no sign of agreement on the revised Clause 2A, which was further evidence for the Court that the November terms remained unchanged by the negotiations.

Ultimately, the Court agreed with Coulson J that a "simple contract" had been formed between the parties in November 2001 and this was the "interim contract" that the parties were working to. This "interim contract" was unaltered by any of the later draft terms circulated from January-May 2002. Acceptance of the terms was fulfilled by conduct (the works being performed and paid for) and the correspondence between the parties created a legal relationship between them. Most importantly, the Court concluded that the November terms and the originally drafted Clause 2A limiting liability was an agreed term. 

In concluding that the November terms had been both offered and accepted, the Judge addressed AMEC's argument that clause 2A(b) of the November terms was incomplete given that the capped sum referred to at Schedule 1 had been left blank in the protocol agreement. The Judge said that although this argument "had some force", as Clause 2A(a) was sufficiently certain and complete, and Arcadis were no longer relying on Clause 2A(b) in their submission to the Court of Appeal, it no longer carried any weight.

Gloucester LJ concluded that the decision of the TCC should be overturned to "align with commercial common sense". She said that Arcadis would never have agreed to terms without a cap on liability had they known they were the final terms of the contract.

This case highlights the risk for contractors and consultants of commencing works before finalising written terms.  Of course, best practice dictates that parties should not commence works until the agreement has been finalised and executed. Failing that, contractors should ensure that interim terms have been clearly agreed and that both parties are certain as to the set of terms they are working to. As always, parties should keep an accurate record of all correspondence and meetings.  Contractors and consultants should be particularly careful to avoid unexpected obligations and ensure they have agreed a limitation on liability.

Read the full judgment here.

Allocating ground condition risk? Double check the scope of work…

Clancy Docwra Ltd v E.On Energy Solutions Ltd [2018] EWHC 3124 (TCC)

In this case, a sub-contractor sought declarations from the TCC as to what would amount to a variation instruction under an amended JCT contract.  The TCC was required to consider the scope of work that had been agreed and determine whether or not instructions issued by the contractor fell within that scope.  Despite an argument by the contractor that the sub-contractor had undertaken to carry out "all civil works" and a clause allocating ground condition risk to the sub-contractor, the TCC determined that express exclusions in the schedules meant that the instructions constituted variations to the scope.

E.On was a contractor involved in a substantial residential development in central London.  It sub-contracted Clancy Docwra Ltd (CDL) to excavate the necessary trenches and install the pipework for the project.  CDL was engaged via a JCT sub-contract with bespoke amendments, including additional clauses 2.1.7 to 2.1.10 (dealing with site risk and ground conditions) and certain numbered documents which were incorporated into the contract.  Importantly, clause 2.1.7 stated that the sub-contractor was deemed to have inspected and examined the site and its surroundings and to have satisfied itself as to the nature of the ground, the sub-surface and the sub-soil, the form and nature of the site and the extent, nature and difficulty of the sub-contract works.

After starting the work, CDL encountered adverse ground conditions and, in particular, underground brick walls and brick rubble.  A dispute arose between the parties when E.On instructed CDL to investigate a concrete heading to identify its contents and/or a route around it. CDL formed the view that the proposed excavation was too dangerous and stopped work.  E.On was of the view that the sub-surface conditions were at CDL's risk and gave notice of a specified default. 

CDL's position was that, on true construction of the sub-contract, the "sub-contract sub-works" were defined by the numbered documents, which required the works to be carried out in a "clear and unobstructed corridor" and expressly excluded certain types of work (which E.On's instructions required).  If CDL was required to carry out works that did not form part of the sub-contract works they needed to be treated as a variation, which would have both time and costs consequences. 

E.On's case had two limbs.  Firstly, it argued that the sub-contract works were defined in the scope of works document which included "all civil works".  Secondly, the proper interpretation of the sub-contract terms placed the risk of unforeseen ground conditions on CDL.

CDL referred the dispute to adjudication, seeking declarations as to the ground conditions which would require a variation instruction and an adjustment of the sub-contract sum on the correct interpretation of the contract and, in the alternative, for the rectification of the sub-contract.  The adjudicator did not make a determination in CDL's favour so CDL commenced proceedings.

The TCC found in CDL's favour, holding that the sub-contract works did not include the matters that were specifically excluded by the numbered documents (particularly by CDL's tender submissions and post-tender minutes).  It followed that, if the contractor instructed the carrying out of work that had been expressly excluded, it was instructing a variation as it was adding to the sub-contract works.

Regarding the allocation of risk for ground conditions, E.On relied on the meaning and effect of clauses 2.1.7 -2.1.9 to argue that CDL took on all the risk of ground conditions.  However, the court disagreed, finding that the starting point was the definition of the sub-contract works, as determined by the numbered documents.  It held that clause 2.1.7 could not allocate the risk of carrying out additional work to CDL which had been expressly excluded from the sub-contract works, and to construe the sub-contract or the numbered documents otherwise would not give effect to what the parties had agreed.

Ultimately, the TCC held that the sub-contractor was entitled to a declaration that if it was instructed to carry out work where it encountered ground conditions requiring work that had been specifically excluded by the numbered documents, such work should be treated as a variation of the sub-contract.  The TCC also agreed to a declaration that clauses 2.1.7 to 2.1.9 of the sub-contract did not preclude the sub-contractor from claiming an adjustment to the sub-contract sum for such a variation.

This judgment highlights the importance of ensuring consistency between contractual provisions and the content of any other contractual documents, as well as the need for careful drafting when defining the scope of works.  Just because a contract contains a provision that seeks to allocate all ground risk to a contractor / sub-contractor, this does not mean that the contractor / sub-contractor will be responsible for any additional work resultant from a ground condition, if that work does not form part of the original scope of works (e.g. by specific exclusion).

Read the full judgment here.

Penalty doctrine considered in solar EPC case

(1) GPP BIG FIELD LLP (2) GPP LANGSTONE LLP v SOLAR EPC SOLUTIONS SL [2018] EWHC 2866 (Comm)

In this case, two of the main issues in dispute were the applicability of the force majeure provisions and the enforceability of the liquidated damages regime, both of which were in question when determining the contractor's liability for delay.  This is an important decision for solar EPC contracts as the contractor's guarantor was found liable for both the delay damages and resultant price reduction.

GPP Big Field (GPP) engaged Prosolia (now insolvent) to construct five solar plants, on an EPC basis, under five separate contracts. Construction on four of the plants was delayed, resulting in the employer bringing a claim for damages for late completion against Prosolia's parent company, which was acting as its guarantor.

One of the issues in contention was whether clause 25.1, which was materially similar across each contract and which obliged the guarantor to pay "delay damages", was a penalty.  Mr Richard Salter QC, relying on Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67, and adopting the summary of Lionel Persey QC in ZCCM Investment Holdings plc v Konkola Copper Mines plc [2017] EWHC 3288 Comm, stated that the correct test for a "penalty" was whether the sum stipulated to be a consequence of the breach of contract was "exorbitant or unconscionable" when taking into account the employer's interest in the performance of the contract.  

It was found to be common ground that the obligation to pay delay damages is a secondary obligation arising from non-performance of the primary obligation to carry out the works in accordance with the relevant programme.  Therefore, the liquidated damages regime potentially fell within the penalty doctrine. 

The guarantor argued that clause 25.1 constituted an unenforceable penalty as (i) the clause expressly used the term 'penalty', indicating that the clause was drafted to be punitive rather than compensatory; and (ii) the rate of £500 per day was not a genuine pre-estimate of the losses likely to be suffered because the same rate had been applied across all the contracts (despite each plant having different outputs) and had been "lifted without discussion" from a separate contract.  It was the guarantor's position that there had been no discussions during negotiations regarding the rate of liquidated damages and, it was in fact the case that, GPP could not produce evidence of spreadsheet calculations which it alleged the parties had discussed.

Despite the above, on the facts, Mr Richard Salter was satisfied that the specified sum "does not exceed a genuine attempt to estimate in advance the loss which [the employer] would be likely to suffer from a breach, and that the sum is not in any way extravagant or unconscionable in comparison with the legitimate interest of [the employer] in ensuring timely performance".  While there was a conflict of evidence between the parties as to whether or not the rate had been discussed during negotiations, Mr Richard Salter considered that the parties were experienced and sophisticated commercial parties with equal bargaining power and were deemed capable of assessing the commercial consequences of the damages provisions.  In addition, although there was an express reference in the provisions to the sum as a "penalty", this was nothing more than an "equivocal indication" and it was the substance of the matter that needed to be assessed.  Accordingly, the guarantor's argument that the clauses were unenforceable as penalties was rejected. 

The guarantor also put forward the defence that the delay was due to a force majeure event (i.e. protests carried out by local residents) and thus it was not liable in any event.  Some of the local residents had objected to parts of the works being undertaken, physically blocking construction. The guarantor argued that the protests amounted to a "disturbance, commotion or civil disorder or acts…of sabotage", and thus came within the definition of a force majeure event (in accordance with clause 23.1), which prevented the contractor from progressing the works. 

Mr Richard Salter rejected this argument, finding that the delay was in fact caused by the contractor's assessment that, due to the protests, it would be unable to get the planning permissions and consents required for its originally intended substation location and cable route.  Under the terms of the contract, it was the contractor's responsibility to obtain these and, therefore, the risk that these would not be obtained was on the contractor.

In any event, the contractor had not given sufficient notice of a force majeure event as required by the contract. As well as not satisfying the time requirements, notice was not provided in writing. Therefore, sufficient notice had not been given.

This case reinforces the Makdessi approach as the correct test for assessing whether or not liquidated damages (in a particular case) constitute a penalty.  Practically, it serves as a reminder of the importance of properly documenting discussions and calculations regarding the agreed rate of liquidated damages (which could have proved helpful in this case to further support GPP's position) as well as ensuring that formal notification procedures are strictly complied with – though neither of these issues went to the heart of the case (at least in this instance).

Read the full judgment here.

Regulatory updates

New "Building Better, Building Beautiful" Commission announced

Over the past few months, think tank "Policy Exchange" has run a series of events focusing on showcasing the importance of beauty in the built environment.  These events have occurred in the wake of the planning rulebook being re-written.  The combination of the two have triggered the Government to focus on ensuring that buildings are of sufficient quality and fit with the needs and expectations of the communities they are built in.

On 3 November 2018, in a move to drive the importance of building better homes, Communities Secretary Rt Hon James Brokenshire MP announced the establishment of the Building Better, Building Beautiful Commission, (with writer and philosopher, Sir Roger Scruton, at the helm), which will seek to champion beauty in the built environment and promote better design and style of homes, villages, towns and high streets, and most importantly, respond to the needs of the community.

The commission will gather evidence from both the public and private sector to develop practical policy solutions in order to promote its objectives. It is hoped that, if the planning system can encourage and support the quality of buildings, there will be less resistance from locals when the construction of a new building is proposed.

When speaking about the commission, Brokenshire said that feedback from the public indicated that they do not feel new houses are of sufficient quality for future generations.  It is clear that the Government views the establishment of this new commission as an important step towards maintaining high levels of quality in the construction industry.

If you would like to read further, the draft terms of reference for the commission can be found here.
 

High Rise Combustible Cladding Ban

On 29 November 2018, the Government set out the Building (Amendment) Regulations SI 2018/1230 before parliament, banning the use of combustible materials in external walls of certain high rise buildings which are over 18 metres. The new regulations cover residential flats, hospitals, residential care homes, dormitories in boarding schools and student accommodation.

The amendments came into force on 21 December 2018, but are subject to a transition period.  The amended regulations do not apply where (i) a building notice or an initial notice has been given to a local authority before 21 December 2018; and (ii) the building work commenced before this date or starts within a period of two months after this date.  Commencement of works has been defined as:

  • excavation for strip or trench foundations or for pad footings;
  • digging out and preparation of ground for raft foundations;
  • vibrofloatation (stone columns) piling, boring for piles or pile driving; and
  • drainage work specific to the building(s) concerned

In some cases, applications will be in respect of a number of buildings on a site. In such circumstances, it is the commencement of work on the first of the buildings within the application which determines whether all the building work can take advantage of the transitional provisions.

The government circular can be accessed here.

Public Procurement (Amendment etc.) (EU Exit) Regulations 2019

The draft Public Procurement (Amendment etc.) (EU Exit) Regulations 2019 were published on 13 December 2018 and will make amendments to EU-derived UK procurement legislation in the event of a no deal Brexit. The draft Regulations may be amended or withdrawn if there is a withdrawal agreement and so are not yet in force. The draft Regulations can be accessed here.

Some examples of the main amendments proposed under the draft Regulations to reflect that the UK would no longer be an EU member state are set out below:

  • UK e-notification service: the draft Regulations replace the requirement under the UK procurement regulations to send notices to the EU publications Office, with a requirement to submit notices to a new UK e-notification service.
  • Transfer of functions: currently, the European Commission (EC) reviews the main financial thresholds for public procurement every two years to ensure that they are in line with the thresholds laid down in the Government Procurement Agreement. The draft Regulations transfer the EC's function to the Minster for the Cabinet Office.
  • Abnormally low tenders and state aid: the UK procurement regulations deal with the relationship between abnormally low tenders (ALT) and state aid. Currently, where the UK contracting authorities establish that a tender is abnormally low as a result of the bidder receiving State aid, it may reject that bidder if the aid is not compatible with the internal market within the meaning of Article 107 of the Treaty on the Functioning of the European Union. The draft Regulations remove the right to exclude a tender on the basis that it is abnormally low due to state aid completely.  The government considers that it would be disproportionate to expect UK economic operators to comply with both UK and EU state aid regimes, where contractors from other countries would not.  
  • On-going procurement (transitional provisions): generally the draft Regulations will apply prospectively even in relation to procurements that have already started. The draft Regulations provides for some exceptions to this, for example, if the application of the draft provisions to on-going procurements could produce "unfairness". 

Clyde & Co 'In The News'

Robert Meakin, partner, was quoted in Construction Manager, commenting on offsite manufacturing and how it will affect the construction industry at large. Readers can read the full article here

Upcoming events

Firm Foundations: Year in Review Launch event 

Thursday 31st January 2019  | St Botolph Building, 138 Houndsditch, London EC3A 7AR