Construction & Engineering Legal Update August 2010

Extensions of time: causation, concurrent delay events and critical path analysis 

What approach should an architect (or other decision maker) take when considering what extension of time to award for completion of works where there are concurrent delay events, none of which is a "dominant" cause of delay?  Can such concurrent employer-risk delay events and contractor-risk delay events be apportioned between them?  Is a critical path analysis necessary to evidence an entitlement to an extension of time?  These were some of the questions determined by the Extra Division, Inner House of the Scottish Court of Session ("the court") in the recent appeal in City Inn Limited v Shepherd Construction Limited.

The contractual clause in this case was clause 25 of the JCT Standard Form of Building Contract (1980 edition).  This provided that if the Architect was of the opinion that a Relevant Event (an employer risk) was the cause of delay he was to give an extension of time which he considered to be "fair and reasonable".

It had been found as a matter of fact that both Shepherd and City Inn were responsible for causes of delay to the completion of the works.  City Inn claimed that Shepherd was not entitled to any extension of time because each party's delays ran concurrently.

Lord Osborne (with whom Lord Kingarth agreed) set out propositions for the proper approach to be taken to the application of clause 25 as follows:

1. Before any claim for an extension of time can succeed, it must plainly be shown that a relevant event is a cause of delay and that the completion of the works is likely to be delayed or has in fact been delayed by that event.
2. The decision as to whether the relevant event has a causative effect is an issue of fact which is to be resolved by the application of principles of common-sense.
3. The decision-maker can decide an issue of causation on the basis of any factual evidence acceptable to him. While a "soundly based "critical path analysis may be of assistance, the absence of such an analysis does not mean that a claim for extension of time must necessarily fail.
4. If a dominant cause can be identified as the cause of some particular delay in the completion of the works, effect will be given to that by leaving out of account any cause or causes which are not material. Depending on whether or not the dominant cause is a relevant event, the claim for extension of time will or will not succeed.
5. Where a situation exists in which two causes are operative, one being a relevant event and the other some event for which the contractor is to be taken to be responsible, and neither of which could be described as the dominant cause, the claim for extension of time will not necessarily fail. In such a situation, it will be open to the decision-maker, whether the architect, or other tribunal, approaching the issue in a fair and reasonable way, to apportion the delay in the completion of the works as between the relevant event and the other event. The background to the decision making, in particular, the possibility of a claim for liquidated damages, as opposed to one for extension of time, must be borne in mind and approached in a fair and reasonable manner.

It should be noted that although the third judge, Lord Carloway, agreed with Lord Osborne's overall Opinion in favour of Shepherd, (including the use of a common sense approach to causation) he disagreed on the question of whether the architect could apportion.  His firm view was that the contractual provisions did not permit apportionment where there were two potentially operative causes of delay, and that where the contractor can show that an operative cause of delay was a Relevant Event, the contractor is entitled to an extension.

The decision is not binding on English courts, but it will be persuasive. It indicates that architects or other decision makers (including the courts) may take a common sense approach to analysis of the causation of concurrent delay events when none of those events could be said to be the "dominant cause" of delay. 

It is likely, however, that there will still be disputes as to whether a particular event was the dominant cause of delay and disagreements as to whether the Opinion of Lord Osborne or that of Lord Carloway  should be preferred when considering whether an apportionment should be made.

 

"Best endeavours", "reasonable endeavours" and "all reasonable but commercially prudent endeavours" - is there a difference? 

In the recent High Court decision in CPC Group Limited v Qatari Diar Real Estate Investment Company, the court had to consider an obligation to use “all reasonable but commercially prudent endeavours”.

Parties to a contract will often qualify an undertaking to achieve an objective by reference to the use of “reasonable endeavours”, “best endeavours”, “all reasonable endeavours” or a similar qualification.  The precise meaning of any such obligation will depend on the interpretation of the contract as a whole set against the factual background.

An obligation to use best endeavours requires: “at least …doing … all that reasonable persons reasonably could do in the circumstances”.  In IBM United Kingdom Ltd v Rockware Glass Ltd it was held that an obligation to use best endeavours to obtain planning permission required a purchaser: “to take all those reasonable steps which a prudent and determined man, acting in his own interests and anxious to obtain planning permission, would have taken”.  Such an obligation therefore involves taking all reasonable steps to achieve the result, which could involve significant expenditure.  A requirement to incur expenditure that would bring about financial ruin, or that would be in “utter disregard for the interests of shareholders” would not be reasonable.

By contrast, an obligation to use reasonable endeavours is less onerous than one to use best endeavours.  An obligation to use reasonable endeavours to achieve an aim probably only requires a party to take one reasonable course, not all of them, and allows that party to balance its contractual obligations against all relevant commercial considerations.  Also, a party would not necessarily have to sacrifice its commercial interests in order to discharge its obligation.  What in fact amounts to reasonable endeavours will depend on all the circumstances, and may need to be determined by reference to expert evidence. 

Clauses requiring the use of “all reasonable endeavours” have received less judicial interpretation. The courts have indicated that such clauses probably represent a middle position between “best endeavours” and “reasonable endeavours”. Such an obligation requires a party to go on using reasonable endeavours until the point has been reached when all reasonable endeavours have been exhausted.   However, in Rhodia International Holdings Ltd v Huntsman International LLC, it was held (obiter) that an obligation to use all reasonable endeavours could equate to using best endeavours.  In the CPC Group case, CPC argued that this meant that the defendant's obligation to use “all reasonable endeavours” was to be equated with an obligation to use “best endeavours”, so that the defendant should have, if necessary, subordinated its own financial interests to obtaining the desired result.

The judge disagreed.  Referring to the Court of Appeal decision in Yewbelle Limited v London Green Developments, he held that an obligation to use “all reasonable endeavours” was not equivalent to a “best endeavours” obligation, and does not always require a party to sacrifice his commercial interests. In the CPC Group case, the matter was even clearer, because the contract itself contained other indications that the defendant was not to be required to sacrifice its commercial interests. The relevant clause made that clear by using the added words “but commercially prudent” in the phrase “all reasonable but commercially prudent endeavours”.  As a consequence, the defendant was permitted to consider its own commercial interests, and required to take all reasonable steps, provided they were commercially prudent. 

If a party is asked to undertake an obligation to use “all reasonable endeavours” to achieve an objective, and wants to ensure so far as possible that it can take into account and not sacrifice its own commercial interests, it should in future follow the approach in the CPC case and seek to agree an “all reasonable but commercially prudent endeavours” clause.

 

Adjudicator bias?

In an application to enforce, by way of summary judgment without a trial, an adjudicator's decision in Fileturn Ltd v Royal Garden Hotel Ltd the court had to consider the defendant's allegation of apparent bias on the part of the adjudicator, Mr Sliwinski.

Until he left them in 2004, Mr Sliwinski had worked as a director at Alway Associates.  During that time, a Mr Silver was also a director of Alway Associates, but they worked from different offices.  Mr Sliwinski eventually set up his own practice in dispute resolution in 2004, which included acting as an adjudicator. 

The existence of the previous association of Mr Sliwinski and Mr Silver whilst they were both directors of Alway Associates, together with the fact that Mr Sliwinski had acted as an adjudicator in about 10 adjudications in which Alway Associates had acted for one of the parties, gave rise to the defendant's allegation of apparent bias. (Mr Sliwinski had conducted about 250 adjudications over the last 10 years).  Mr Silver had also requested the appointment of Mr Sliwinski as adjudicator on about 12 occasions, although the judge found that Mr Sliwinski was unaware of this.

The test for apparent bias is whether the informed and fair-minded observer, having considered the relevant facts, would conclude that there was a real possibility that the adjudicator was biased

The judge decided that it was unlikely that the fair-minded and informed observer would conclude that Mr Sliwinski's involvement with Alway Associates between March 2001 and February 2004 might give rise to a continuing bias 6 years later in favour of a party represented by Alway Associates.  The defendant therefore had no real prospect of succeeding at trial on its argument based on apparent bias and judgment was given in favour of the the claimant.

 

 Retention of title clause ineffective where contract allowed "revolving stock" sales

In Bulbinder Singh Sandhu (trading as Isher Fashions UK) v Jet Star Retail Ltd (trading as Mark One) (in administration) a contract contained a retention of title clause.  The clause was intended to protect the supplier in the event of the buyer's insolvency by stating that the supplier retained ownership in the stock until all monies owed by the buyer had been paid. 

However, the contract also allowed the buyer to sell the stock before settling amounts due to the seller. The contract was for the supply of stock as part of the working capital of a business for resale, as distinct from items such as tools and equipment that are not for resale where a retention of title is often in place and effective. The court held that this made the retention of title clause ineffective. Accordingly, the supplier's claim against the administrators for wrongfully selling the stock failed.

 

Procure 21+ finally launched  

The Department of Health announced the launch for the new ProCure 21+ framework on 3 August 2010.  It replaces the existing ProCure 21 framework, which comes to an end in September, commencing 1 October 2010.

It is claimed that the new framework will save the NHS over £200m in procurement costs and deliver works more quickly.  Four of the contractors on the new framework remain the same, namely Kier, Integrated Health Projects (Vinci/Sir Robert JV), Interserve and Balfour Beatty.  The two new contractors are Willmott Dixon and Healthcare Partnership Solutions (Miller). 

The DoH states that ProCure 21+ will “streamline and simplify” procurement for refurbishment and new build projects.  There is also the promise of greater transparency and clear, understandable performance data for benchmarking of the framework contractors.

The construction contract which will form the basis of all ProCure 21+ projects has been updated. The NEC3 contract will be used.  There are a number of key differences from the old framework, of which users need to be aware.

Failure to finalise contract terms resulted in unlimited liability

Since RTS Flexible Systems Limited v Molkerei Alois Müller Gmbh & Company KG (UK Production) which we commented on in April this year, another recent reported case has highlighted the dangers of proceeding with contract works or supply without having first finalised contract terms.

In  GHSP Inc v AB Electronic Ltd, the parties failed to conclude the written terms of their contract.  GHSP's written terms would have imposed unlimited liability on AB. AB's terms would have excluded any liability for consequential loss or damage and restricted liability to certain works of rectification or repair.

GHSP sent several purchase orders, each of which stated that its contractual provisions were to be incorporated.  AB sent several acknowledgements which stated that its terms were to apply.  Due to commercial pressure from the ultimate purchaser, AB's supply of equipment to GHSP started before their written contract was finalised. It was later discovered that the equipment was defective, resulting in substantial losses.

The issues for the court were whether the equipment had been supplied on the terms of GHSP's purchase order, on AB's terms and conditions or on "some other terms and if so which?".  The parties agreed that if if neither set of terms was incorporated into the contract, because there was plainly a contract for the supply of the equipment which was performed, in the absence of such express terms the contract would be governed by and incorporate the implied terms of the Sale of Goods Act 1979, including the implied term that the "goods supplied under the contract are of satisfactory quality".

In most cases where there is a "battle of the forms", there is a contract as soon as the last set of terms is sent and received without objection being taken to those terms.  In some cases the battle is won by the party who "fires the last shot". However, the conduct of the parties must always be considered, as well as the objective interpretation of the documents, and acceptance by conduct can always be inferred.

The evidence was that in negotiations both parties had made it very clear that they were not prepared to contract on the basis of the other's contract conditions.  The judge held that there was no evidence of express acceptance of written contract terms, nor any conduct which indicated an acceptance of written contract terms.  Consequently,  the contract was held to incorporate the implied terms of the Sale of Goods Act 1979.  AB was therefore exposed to unlimited liability, subject to any other defences it may have to the claim.

 

If you require any further information about any of the items mentioned, or if you have been forwarded this update by a colleague and would like to receive it direct, please contact David Kirkpatrick, Associate Solicitor and Professional Support Lawyer for the Construction & Engineering Department (0370 194 1663. email david.kirkpatrick@bevanbrittan.com).