Construction & Engineering Legal Update July 2010

In this months digest we highlight the following recent developments of interest:

• Contract management: National Audit Office Report on the performance of hospital PFI projects
• Professional negligence: Overvaluation not negligent despite errors
• Construction Projects: Recovering costs and losses from professional advisers
• Time limit for making claim for loss and expense held to be a condition precedent
• Entire agreement clause did not prevent rectification
• Why you should question offers which seem too good to be true
• Withdrawal of Part 36 offer
• 74 hours delay in delivering Decision made adjudicator's Decision unenforceable
• The importance of complying with contractual notice provisions

Contract management: National Audit Office Report on the performance of hospital PFI projects

The National Audit Office has published a report on the performance of the maintenance and support services under PFI contracts and how they are managed by NHS Trusts. 

Whilst the report is on hospital PFI contracts, based on our experience in advising on contract management in many PFI projects in the operational phase, we believe it contains some findings and recommendations which will be of relevance to PFI contracts in most sectors.

The report focuses on the stage of the contract once buildings are open for use.  It highlights the challenge for Trusts with operational contracts of making the most of the contract and their relationship with contractors, and ensuring they get the services expected.

We have prepared a short article on the report.  Click here to read the article. 

In K/S Lincoln and others v Richard Ellis CB Hotels Limited (No 2) [2010] EWHC 1156 (TCC), the Technology and Construction Court found that a valuer had overvalued an investment property, but held that the overvaluation fell within a permissible 10% margin of error. Consequently, the valuation was not negligent and the claim against the valuer failed.

This case serves as a reminder that even if there have been errors in arriving at a valuation figure, if the valuation given falls within a range of valuations that could have been given by a reasonably competent valuer, it will not be held to have been negligent.  The acceptable margin of error (to be determined by independent expert evidence) will vary depending on the nature of the asset valued.

Construction Projects: Recovering costs and losses from professional advisers

It has been reported in the construction industry press that Colchester Council is set to take legal action against Turner & Townsend, who were Project Manager and Quantity Surveyor for the Council's Colchester Arts Centre.  Reports say that the Council had previously obtained judgment against the contractor, Banner Holdings, but that Banner is now in administration leaving the Council with little prospect of recovering the amount of its judgment from Banner.

In the current economic climate we are seeing an increasing amount of claims against professional advisers. A link to our note "Construction Projects: Recovering costs and losses from professional advisers" is here.

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Time limit for making claim for loss and expense held to be a condition precedent

In WW Gear Construction Ltd v McGee Group Ltd, the Technology and Construction Court held that, despite some lack of clarity, a bespoke condition precedent was effective.

The contract in this case incorporated the JCT Trade Contract terms (TC/C) 2002 edition with Amendment No 1:2003, although it was further amended by the parties. Clause 4.21 of the contract referred to the matters which gave rise to the Trade Contractor's entitlement to loss and expense.  Sub-clause 4.21.1 set out the procedure which the Trade Contractor had to comply with, as follows:

"provided always that:

.1 the Trade Contractor's application shall be made as soon as and in any event not later than two months after it has become, or should reasonably have become, apparent to him that the regular progress of the Works or any part thereof has been or was likely to be affected as aforesaid, and such application shall be formally made in writing and fully documented and costed in detail, and it shall be a condition precedent to the Trade Contractor's entitlement under this clause 4.21.1 or clause 4.25 that the Trade Contractor has complied fully with all the requirements of this clauses [sic] including, for the accordance [sic] of doubt, the said time period of two months".

Much of the argument between the parties revolved around whether meaning could or should be given to the words "Trade Contractor's entitlement under this clause 4.21.1" on the basis that, on the face of it, there was no entitlement under that sub-clause.

The Judge formed the very clear view that there was an obvious mistake in this part of the sub-clause and that, simply as a matter of construction, what the parties clearly intended was to refer to that part of the overall clause which actually gives rise to an entitlement which is Clause 4.21.

The Judge held that upon a proper construction of Clause 4.21 including Clause 4.21.1 there was a condition precedent to the Contractor's entitlement to recover loss or expense which involved the submission of a written application within the time constraints set out in Clause 4.21.1. The Contractor was required to comply with the provisions of Clause 4.21.1 as a condition precedent to its entitlement to loss and expense.

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In Surgicraft Ltd v Paradigm Biovices Inc [2010] EWHC 1291 Ch the court held that an entire agreement clause did not prevent a claim for rectification.

S validly terminated a contract with P, and in court proceedings sought a declaration that it was not obliged to pay P compensation as a result of the termination.  P claimed that the contract as executed did not reflect what the parties had actually agreed and that it should be rectified to accord with the agreement made.  The contract provisions stated that a change in control would not give rise to compensation to either party.

The contract contained the following entire agreement clauses:

"This Agreement constitutes the entire understanding betwee the parties with respect to the subject matter of this Agreement and supersedes all prior agreements, negotiations and discussions between the parties relating to it"; and

"The signing of this Agreement implies acceptance of all clauses stated herein.

S claimed that this clause meant that rectification was not available at all or, at least, that, in applying the principles of rectification, the court should take account of the fact that the parties had intended to be bound by the document regardless of prior or other intentions.  S claimed that the purpose of these clauses was to provide certainty and to prevent precisely the type of dispute that had arisen.

Having reviewed the authorities, the Judge held that an entire agreement clause in the terms used did not prevent a claim for rectification.  The entire agreement clause was intended to limit possible contractual claims arising from dealings and discussions outside the contract.  The fact that the parties had signed up to the entire agreement clause, and were therefore in law taken to have agreed to it was not, without more, to be seen as an indication of what was the parties' common intention. A claim for rectification was quite different: it proceeded on the basis that the parties had made a mistake in expressing their true agreement.

Having heard the evidence, including evidence of witnesses (which the court will normally expect in any claim for rectification), the Judge concluded that it had always been the parties' intention that P was to receive compensation in the event of termination following a change in control of S.

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Why you should question offers which seem too good to be true

In Traditional Structures Ltd v HW Construction Ltd [2010] EWHC 1530 (TCC), the Technology and Construction Court ordered rectification of a sub-contract. 

This case recognises that if party A to a contract makes a mistake in the terms of a contract, the other party, party B, cannot necessarily do nothing and rely on that mistake if party B knew or ought to have known that party A had made an error.

In response to a tender for steel and cladding works, the Claimant sent the Defendant a tender response which mistakenly omitted a line which set out the costs for cladding. 

In the court proceedings, the Claimant's case was that it had made a mistake in failing to send details of the cladding costs, and it sought a reasonable price for the cladding element of the works and/or rectification of the contract.  the Defendant's case was that it received a tender containing one price, which it accepted for all the work for which the Defendant had invited the Claimant to tender.

The Judge found that:

• any reasonable reader of the tender response would have appreciated immediately that the price quoted related only to the structural steelwork element of the work and services to be supplied, and would thus have been put on enquiry as to what was the price for the cladding element of that work and those services;
• when the Defendant received the Claimant's tender in the form sent, it was aware that it omitted a price in relation to the cladding, and that such an omission was due to a mistake on the part of someone at the Claimant;
• the Defendant failed to draw the mistake to the Claimant's attention;
• the Defendant wilfully and recklessly failed to enquire, (as an honest and reasonable man would), whether the price was to include both steelwork and cladding, shut his eyes to the obvious mistake that had been made and actually knew that a mistake had been made;
• the Defendant's conduct was "unconscionable" in that it went beyond the boundaries of fair dealing, even having regard to the fact that the parties here were involved in an arms length commercial transaction.

The Claimant therefore succeeded in its claim for rectification and for a fair price for the work done.

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Withdrawal of part 36 settlement offers

In Gibbon v Manchester City Council, the court emphasised the need for parties to formally withdraw part 36 offers if they do not wish them to be accepted.  An offer can be accepted at any time unless the offeror has withdrawn the offer by serving notice of its withdrawal and regardless of whether the offeror has subsequently made a different offer.

The onus is on the offeror to take positive steps to withdraw any existing offer if he does not wish it to be available for acceptance

This re-emphasises the need to keep Part 36 offers under review and to withdraw them if the merits of the case change.

74 hours delay in delivering decision made adjudicator's Decision unenforceable

In Lorraine Lee v Chartered Properties (Building) Ltd [2010} EWHC  1540 TCC, the Technology and Construction Court held that an adjudicator's Decision, even though reached in time, was unenforceable because it was delivered too late.

The adjudication was governed by the statutory Scheme for Construction Contracts, clause 19 (3) of which provides:

"As soon as possible after he has reached a decision, the adjudicator shall deliver a copy of that decision to each of the parties to the contract".

The adjudicator had reached his Decision in the afternoon of Friday 13 November 2009, the last day for reaching his Decision.  He contacted the parties by email at 2.48pm that day to say that his Decision was being typed and that he anticipated that it would be issued the following Monday.  The defendant agreed to this, but the claimant did not respond.  The adjudicator delivered his Decision by email at 4.57pm on 16 November.

The Judge found that there was simply no evidence as to why some three days or 74 hours were required by the adjudicator to deliver his Decision. The adjudicator was an Associate Director of a nationally and internationally known firm of quantity surveyors. It was a not unreasonable assumption to make that within such a large firm, prompt typing could have been arranged and the adjudicator could have set aside time for proofreading with a view to communicating the decision within a very much shorter period than three days, even though the weekend was looming. The Judge said there seemed to be no obvious good reason why with some effort and application the decision could not have been communicated on 13 November; and there was no obvious explanation as to why virtually the whole of the working day of 16 November was required before the Decision was sent out. If the Decision had been drafted in long hand, there was no good reason why it could not have been faxed or scanned and e-mailed over to the parties.

The Judge held that a copy of the Decision was not delivered by the adjudicator "as soon as possible" after he reached his decision, so the Decision was unenforceable.

The importance of complying with contractual notice provisions

In Anglian Water Services Ltd v Laing O'Rourke Utilities Ltd [2010] EWHC 1529, the Technology and Construction Court confirmed that where a contract provided for service of communications at a party's "last notified address", service of a notice of arbitration on that party's solicitor would not be valid service unless that party had notified its solicitors' address as the relevant address for service.  It was irrelevant that the notice had been passed on to that party within minutes of it having been received.

This is an important reminder to follow precisely the contractual provisions for service of notices and other communications.

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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).