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Construction case law update - October 2014

 


By Charles Thompson


Oksana Mul v Hutton Construction Limited [2014] EWHC 1797 (TCC)

Synopsis

Akenhead J held that the “appropriate deduction” which is to be made from the Contract Sum at clause 2.30 of the JCT Intermediate Form of Contract (2005), and which applies where the Contract Administrator notifies the Contractor that defects are not to be rectified by the Contractor during the contractual rectification period, means a deduction which is reasonable in all the circumstances.

Facts

Ms Mul, the Employer, engaged Hutton Construction Limited, the Contractor, to carry out substantial extension and refurbishment works at her property. Practical Completion was certified on 14 May 2010 with a substantial list of works said to be incomplete or defective. The Employer paid the Contractor the final sum certified by the Contract Administrator. However, extensive further works were carried out by third party contractors engaged by the Employer. Thereafter, the Employer issued proceedings against the Contractor for damages for defects (of over £1m) and overpayment.

Clause 2.30 of the JCT Intermediate Form of Contract (2005) provides that:

Any defects, shrinkages or other faults in the Works or a Section which appear and are notified by the… Contract Administrator to the Contractor not later than 14 days after the expiry of the Rectification Period, and which are due to materials or workmanship not in accordance with this Contract, shall at no cost to the Employer be made good by the Contractor unless the… Contract Administrator with the consent of the Employer shall otherwise instruct. If he does so otherwise instruct, an appropriate deduction shall be made from the Contract Sum in respect of the defects, shrinkages or other faults not made good.

In the Contractor’s Defence and Counterclaim it pleaded that it had been ready, willing and able to carry out remedial works both during and after the rectification period. The Contractor also contended that, in any event, pursuant to clause 2.30 all the Employer was entitled to during the rectification period was an “appropriate deduction” which was to be calculated by reference to the contract rates/priced schedule of works. The Employer contended that appropriate deduction meant a deduction that was appropriate in all the circumstances.

Held

Akenhead J found, as a preliminary issue, that appropriate deduction meant a deduction which is reasonable in all the circumstances and can be calculated by reference to one or more of the following (amongst possibly other factors):

  • The Contract rates/priced schedule of works/Specification; or
  • The cost to the Contractor of remedying the defect; or
  • The reasonable cost to the Employer of engaging another contractor to remedy the defect; or
  • The particular factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works.

Commentary

This is the only authority on the interpretation of clause 2.30 of the JCT Intermediate Form of Contract (2005) and it is to be welcomed for that reason.

At paragraph 28, Akenhead J refers to the Pearce & High and Woodlands Oak line of authority and reiterates that, if the Employer acted unreasonably in not giving the Contractor an opportunity to remedy the defects, it will probably have failed to mitigate its loss and will be limited to recovering what it would have cost the Contractor. At first blush, that does not sit easily with Akenhead J’s finding that an appropriate deduction under clause 2.30 may well be calculated by reference to the cost to the Contractor. Of course, if it is reasonable to employ a third party to remedy the defects within the rectification period, it is not easy to envisage a circumstance in which the Employer’s recovery should be limited to the cost to the Contractor. However, and equally, if the Employer chooses to leave the defects and live with them, it is submitted that the appropriate deduction ought ordinarily to be based on the cost to the Contractor as it has been denied its right to remedy the defects.

It might be said that the potential variation in outcomes could be solved simply by interpreting clause 2.30 as meaning a deduction based on the contract rates and prices. However, such certainty would produce a windfall to the Contractor in some scenarios and to the Employer in others given the nature of contractual pricing.

Whilst the Judgment does not necessarily give complete guidance on clause 2.30 it is submitted that the decision is correct as a matter of interpreting the JCT Intermediate Form of Contract (2005).

Peter Kellie and Kelly Kellie v Wheatley & Lloyd Architects Limited [2014] EWHC 2886 (TCC)

Synopsis

On 3 July 2014 HHJ Keyser QC gave judgment dismissing the Claimants’ professional negligence claim against the Defendant; the claim was dismissed on the basis that there had been no breach of duty and, even if there had been, there was no loss. This Judgment dealt with some of the costs consequences arising out of the case.

Facts

The underlying claim was issued before the CPR were amended to provide for costs management. Nevertheless, the case was subject to costs management under the broadly similar Pilot Scheme that was in operation in the TCC and had equivalent wording to CPR 3.18. HHJ Havelock-Allan QC approved the Defendant’s costs budget in a sum of £91,700; the same Judge had refused to approve a budget in excess of £140,000 on the ground that it was disproportionate. The Defendant submitted a schedule before HHJ Keyser QC showing that the actual costs incurred by it in defending the claim were  £166,469. The Defendant sought costs on the indemnity basis.

In essence, the Defendant was attempting to circumvent the Costs Management Order by seeking to recover costs significantly in excess of that which would be considered proportionate on a standard assessment.

Held

HHJ Keyser QC departed from Coulson J’s decision in Elvanite Full Circle Ltd v AMEC Earth & Environment (UK) Ltd 2013] EWHC 1643 (TCC) that: “as a matter of logical analysis”, an approved budget was: “the relevant starting point for an assessment of costs on an indemnity basis as well as for an assessment on the standard basis”.

Coulson J reached that conclusion for two reasons: first, he said that the costs budget represents the parties’ estimate of all the costs that they think that they will incur and is not based on any particular form of costs assessment; secondly, such an approach would provide certainty and prevent successful parties arguing for indemnity costs in every case.

In making his decision, HHJ Keyser QC set out the following relevant provisions of the CPR:

“When reviewing budgets, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.” (Practice Direction 3E—Costs Management paragraph 7.3);

“In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –
(a) have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and
(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.” (CPR 3.18)

HHJ Keyser QC found that it was not an accident of drafting that CPR 3.18 referred only to standard assessment.

He concluded that Coulson J’s first reason above was not in play where the budget was not approved as submitted. Indeed, given that costs budgeting involves a consideration of proportionality, he held that it could not be assumed that a budget set a limit for what costs were reasonable either. In respect of Coulson J’s second reason, HHJ Keyser QC said that this was an impermissible extension of the aims of the costs management regime which he said was not intended to: “give litigants an expectation that they will not incur a liability for disproportionate costs pursuant to an order for costs on the indemnity basis”; he added that any concern that all successful litigants would apply for indemnity costs could be met by proper scrutiny of such applications.

Commentary

In the Elvanite case Coulson J’s comments on the costs management regime were obiter, as indeed were HHJ Keyser QC’s comments here, as he refused to award costs on the indemnity basis. Thus, we are left with two inconsistent first instance decisions on the relevance of a costs budget to an application for indemnity costs.

However, given HHJ Keyser QC’s focus on the wording of CPR 3.18 and the fact that it refers only to assessment on the standard basis, it is respectfully suggested that his approach is to be referred.


By Sri Carmichael


Laing O'Rourke Construction Ltd (formerly Laing O'Rourke Northern Ltd) v Healthcare Support (Newcastle) Ltd [2014] EWHC 2595 (TCC)

Synopsis

The TCC held that in determining whether a certificate of practical completion should be issued, if an independent tester reasonably considered that a departure from the criteria had not had and would not have any material adverse impact on the ability of the employer to enjoy and use the buildings for the purposes anticipated by the contract, then he may conclude that the completion criteria had been met and certify practical completion. It was contrary to business efficacy and commercial common sense that a technical or minor breach could or should prevent practical completion. 

Facts

The dispute arose out of the construction of facilities at two hospitals in Newcastle for the Second Defendant, an NHS Foundation Trust (“the Trust”). The Claimant Contractor entered into an agreement dated 4 May 2005 with the First Defendant (“HSN”) to design and build the facilities (“the Construction Contract”). HSN entered into an agreement with the Trust on the same day by which it agreed to design, build and finance the redevelopment of the facilities and to provide other related services (“the Project Agreement”). Under the Project Agreement, it was agreed that upon completion of the project the Trust would pay a charge to HSN for the use of the facilities over a period of 35 years.

The Construction Contract and the Project Agreement both contained provision for an independent professional to act as the Independent Tester, who had various obligations to inspect and certify the construction works.

The works under the Construction Contract were to be carried out in nine phases. Phases 1 to 7 involved the various clinical facilities and had been completed. However, the Independent Tester refused to issue a Certificate of Practical Completion for Phase 8 of the works on the basis that it had identified, and continued to identify five areas of the works which the Trust had complained of as follows: (a) certain toilet areas were said to be too small; (b) there was insufficient daylight in some of the offices by reference to the requirements of the relevant British Standard; (c) window restrictors had not been fitted in accordance with the Room Data Sheets; (d) the link bridge steelwork between the buildings had not been provided for in the drawings and should be removed; and (e) there was a dispute about the maximum room temperatures permitted by the contracts.

The dispute between the parties was whether the Trust was correct in asserting that any breach of contract relating to the quality or conformity of the works required the Independent Tester to withhold the completion certificate. The Claimant contended that the obligation of the Independent Tester when certifying Practical Completion of a Phase was confined to addressing the specific defined Completion Criteria set out in the agreements, which were linked to the Trust’s general enjoyment of the buildings, rather than ensuring compliance with every single element in the full contractual description of the Works.

Held

The TCC found in favour of the Claimant Contractor. On the true construction of the Construction Contract and Project Agreement, if the Independent Tester reasonably considered that a departure from the criteria had not had and would not have a material adverse impact on the Trust’s enjoyment and use of the buildings for the purposes anticipated by the Construction Contract, then it could conclude that the criteria had been met.  The Project Agreement did not provide that any breach of the specification, however technical or minor, would prevent the certificate from being issued and it was contrary to business efficacy and commercial common sense that a technical or minor breach could or should prevent completion. Importantly, the certificate would not prejudice the Trust's entitlement to claim damages for defective work (even if minor) and therefore its rights in this respect were protected.

Commentary

The case provides useful guidance on the question of how complete a building must be before practical completion is certified. The TCC decision has reinforced the view that the ill defined term of “practical completion” is usually taken to mean that the works must be completed so as to permit beneficial occupation but that minor defects will not impede a certificate of practical completion being granted. In all cases, this is a matter of fact and degree.


Hunt v Optima (Cambridge) Ltd [2014] EWCA Civ 714

Synopsis

Architects' certificates; Assumption of responsibility; Collateral warranties; Duty of care; Negligent misstatement

The Facts

Optima built two blocks of flats in Peterborough and engaged Strutt & Parker (“S & P”) to carry out inspections of the building in the course of development and to produce “Architects’ Certificates” (“Certificates”) in respect of the flats for the benefit of the purchasers and their lenders. Before contract the purchasers were told that they would be receiving Certificates on completion.

The buildings were constructed between 1 September 2002 and 10 December 2003, and S & P carried out some ten inspections of the works, providing Optima with Certificates as to the stage of construction of the flats. S & P also provided Certificates for the purchasers attesting to the satisfactory construction of the flats. In the event, the building works were carried out badly and the inspections were carried out negligently. Eight of the purchasers sued Optima and S & P.

The case against S & P was put in three ways. First, it was said that the Certificates contained enforceable warranties. Second, the Certificates were said to amount to negligent misstatements, which gave the claimants a cause of action in tort. Third, it was said that Mr Egford, who signed the Certificates on behalf of S & P, owed the Claimants a duty of care to carry out the professional services referred to in the Certificates with reasonable skill and care for the purpose of the subsequent production of the Certificates.

At first instance, Akenhead J held that all of the Claimants were entitled to damages from S & P on account of the erroneous content of the Certificates provided to them. The TCC found that the Claimant purchasers were owed two duties: (a) a general duty to carry out inspections with an architect’s skill and care; and (b) to provide accurate certificates. The judge also held that the Certificates had contractual force and therefore served as warranties between the consultants and the Claimants.

In the case of two of the Claimants, the Certificates signed by S & P were executed before the date of the sale agreement between them and Optima; S & P did not seek to appeal the judgment against it in their favour. However, in respect of the remaining six Claimants, the Certificate signed by S & P was not provided to the relevant Claimant until after, sometimes long after, the exchange of contracts and the execution of the lease of the flat concerned. The Judge held that the fact that the Certificates had been received by the Claimants after contract and completion was no obstacle to the recovery by them of damages from S & P; the Claimants “did rely on the Certificates or at the very least on the fact that the Certificates would be coming sooner or later”. S & P, the appellants, contended that in this respect Akenhead J was in error.

Held

The Court of Appeal held that the negligent statements relied on were the statements contained in the signed Certificate eventually provided to the relevant Claimant, therefore the Claimants could not have relied on such statements in committing themselves to the agreements to purchase because those statements were not then in existence. At best they could be said to have relied on an understanding either (i) that there was a Certificate already in place; or (ii) that they would receive a Certificate on or after completion. Any understanding of the former type was erroneous and was not shown to have resulted from anything said by or on behalf of S & P. Any understanding that they would receive a Certificate on or after completion emanated from what the Claimants were told by their solicitors.

In respect of construing the Certificates as collateral warranties, the Court of Appeal held that whilst S & P clearly owed contractual duties to Optima, no such contractual duty could be implied between the consultants and third parties so there could be no action against the consultants in tort. This finding was reached on the basis that the basic elements of a contract had not been established between the consultants and the claimants, and the certificate made clear on its face that it was not a promise or guarantee.

Finally, the Court of Appeal held that a separate duty arising by reason of the Certificates in respect of the work of inspection “would be of an extraordinary character”.

Commentary

This case, overturning the decision at first instance, is an important decision concerning the duties owed by professionals when issuing documents to third parties, such as purchasers and lenders. The Court of Appeal has clearly taken a restrictive view as to the duties owed to third parties and has reaffirmed that an action for negligent misstatement will only be successful if a claimant can prove that it suffered losses directly as a result of its reliance on a professional’s negligent misstatement.