Manchester Construction Seminar: Professional Negligence Update

Sian Mirchandani

Richard Liddell

5th July 2017

Barclays Bank v. TBS & V Ltd [2016] EWHC 2948 (QB)

• 15% margin of error

• No break in the chain of causation

• Reliance: implied term

Margins of error… • 5%: simple residential property valuation • 10%: one off commercial property valuation • 15%: exceptional circumstances See K/S Lincoln v. CB Richard Ellis Hotels Ltd [2010] EWHC 1156 (TCC)

• 20%?: difficult and challenging circumstances?

Did Preferred Mortgages v. Bradford & Bingley [2002] EWCA Civ 336 apply?

No. The restructuring of the loan did not break the chain of causation:

• Mortgage had not been redeemed

• Original charge still in place

Bridging Loans Ltd v. Toombs [2017] EWCA Civ 205

Lender lent c. £500k to the Borrower in reliance upon Toombs’ valuation dated November 2006 at £730,000

11 May 2007: Borrower defaulted and Lender issued a demand letter

August 2007: Lender obtained possession of property

16 May 2013: Lender commenced proceedings v. Toombs alleging ‘true value’ at £450,000

Summary Judgment entered: claim statute-barred pursuant to Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (Interest on Damages) [1997] 1 WLR 1627.

(1)

(2)

(3)

(4)

(5)

Bridging Loans Ltd v. Toombs [2017] EWCA Civ 205

Appeal dismissed: • Borrower’s covenant was valueless because it

had defaulted and no evidence adduced by Lender to suggest otherwise

• Proper to hold the Lender to the value of the property it had pleaded based on its own expert evidence especially given that no evidence had been adduced to support an increased valuation

Persimmon Homes Ltd v. Ove Arup [2017] EWCA Civ 373: the applicability of exclusion clauses

“The Consultant’s aggregate liability under this [Agreement/Deed] whether in contract, tort (including negligence), for breach of statutory duty or otherwise (other than for death or personal injury caused by the Consultant’s negligence] shall be limited to [£12m/£5m] with the liability for pollution and contamination limited to £5,000,000 in the aggregate. Liability for any claim in relation to asbestos is excluded”. [Emphasis added]

Persimmon Homes Ltd v. Ove Arup [2017] EWCA Civ 373: the applicability of exclusion clauses

(1) The Consortium’s reading of the exclusion clause was

unworkable and did not reflect business common sense with regards to the relationship between the parties

(2) The meaning of the clause was clear and should be given effect to; and the contra proferentem rule was irrelevant

(3) The Canada Steamship guidelines [Canada Steamship v The King [1952] AC 192] were more relevant to indemnity clauses as opposed to exclusion clauses and were “of very little assistance in the present case”

[per Lord Justice Jackson]

Persimmon Homes Ltd v. Ove Arup [2017] EWCA Civ 373: the applicability of exclusion clauses

“In major construction contacts the parties commonly agree how they will allocate the risks between themselves and who will insure against what. Exemption clauses are part of the contractual apparatus for distributing risk. There is no need to approach such clauses with horror or with a mindset to cut them down. Contractors and consultants who accept large risks will charge for doing so and will no doubt take out appropriate insurance. Contractors and consultants who accept lesser degrees of risk will presumably reflect that in the fees which they agree.”

McGee Group v. Galliford Try Building Ltd [2017] EWHC 87 (TCC)

• Clause 2.21B: “Provided always that the Subcontractor’s liability for direct loss and/or expense and/or damages shall not exceed 10% of the value of this Subcontract order”

• Clause 4.21: The sub-contractor was liable for any “loss, damage, expense or costs suffered by the Main Contractor as a result of any delay in the progress of the main contract works caused by the sub-contractor”.

Disclosure & Production in TCC Cases

Current “menu” of disclosure options at CPR 31.5(7)

Disclosure Working Group (DWG), chaired by Gloster LJ, due to report in the Summer

Technology Assisted Review (TAR)/Predictive coding: expressly

approved in Pyrrho Investments Ltd & Anr v. MWB Property Limited

[2016] EWHC 256 (Ch)

TAR proven to be successful in UK and other jurisdictions (esp. USA), but not always

appropriate or cost effective (depending upon the nature of the case). But construction lawyers should always consider its use,

particularly in cases were the number of documents exceed 50,000

NB. Essential to keep up to speed with the TCC’s proactive and innovative approach to disclosure by considering which disclosure route properly fits the case and making use of relevant technological tools

“of interest” “need to know”

• Scope of duty

• project monitors, Lloyds v McBain • BPE v Hughes Holland

• architects, Lejonvarn v Burgess

• Contribution – Bloomberg v Sandberg, IMI v Delta

Chronology of Lloyds v McBain

3 Feb 2006: McBain retained to act as monitoring surveyor – 2 initial reports Aug 2006 and April 2007. Bank also had valuation of undeveloped site with PP at £1.45m and GDV £3.5m (4 floors)

30 May 2007: facility letter between Bank and borrower “Miracles Signs & Wonders Ltd” for development of a former bingo hall in Willesden as a church

Sept 2007 to March 2009 – McBain issued progress reports. Last one stated insufficient funds to complete development

Sept 2009: Bank demand for repayment, Property possessed and sold. Bank lost £1.4m

2013 referral to adjudication - £288,000 payment to Bank. April 2014 proceedings issued.

June 2015 trial - Oct 2015 – first decision – Feb 2016 trial – Oct 2016 – second decision

(1)

(2)

(3)

(4)

(5)

Lloyds Bank v McBains Cooper Consulting No.1 [2015] EWHC 2372

(TCC): negligent for not advising sooner

(1) D negligent for not telling Bank sooner – insufficient funds (£325,000 short) & £10k mis-used

(2) Bank one-third contributorily negligent

(3) Had Bank been told about £10k, would not have withdrawn facility, would require borrower to pay for this work to 3rd floor

(4) Had Bank been told about shortfall, would have taken advice, led to decision to terminate and call on security in Dec 2008.

(5) Assuming no repayment by borrower, property in Dec 2008 condition would have been marketed Spring 2009 for sale

Lloyds Bank v McBains Cooper Consulting No.2 [2016] EWHC

2045(TCC)

(1) D was giving advice not merely providing information

(2) Bank entitled to damages c. £127,000 plus c. £288,000 received plus interest.

Permission to appeal to Court of Appeal

• 6 Grounds of Appeal - permission on all

• Permission granted by Jackson LJ in May 2017

• Appellant has sufficient prospect of success after BPE v Hughes Holland.

“BPE Grounds”

• Wrong to characterise McBain as giving advice and not merely information

• Wrong to find that all sums advanced since [end Oct 2008 – the date on which Bank should have been told] are within the scope of the duty owed, and so recoverable (less attributable security)

• Wrong to treat Bank’s knowledge as distinct from the knowledge of the manager involved in decision making

BPE Solicitors v Hughes-Holland [2017] UKSC 21 ;

[2017] 2 WLR 1029

SC decision handed down 22 March 2017 (heard 14/15 Dec 2016) aka “Gabriel v Little” Solicitors’ negligence case – SC asked to decide the issue - whether the loss suffered by G was within the scope of Ds’ duty so as to attract damages.

BPE v Hughes Holland – SAAMCo had nothing to do with causation

• Clarification and explanation of SAAMCo

• Two fundamental features of the case:

(1) supply of material taken into account for decision means not liable for decision

(2) case has nothing to do with causation.

• Concept of difference between provider of advice and provider of information. What is the “recoverable loss”?

Adviser retained to make a decision – C can recover all the losses that flow from the resulting transaction Aneco Reinsurance v Johnson & Higgins

C/F

Adviser retained to provide information – D is liable for the financial consequences of the information being wrong

Lejonvarn v Burgess [2017] EWCA Civ 254

• Architect helping friends landscaping their garden – for no fee secured a contractor & provided other services (intended to provide design work for a fee)

• No contract – but ‘professional footing and in a professional context’

• Irrespective of fact that builder did not ordinarily owe a duty of

care

• Architect assumed responsibility and owed duty of care in negligence in respect of the services provided

Lejonvarn v Burgess - Not a case ‘on the cusp’

Hamblen LJ at [78] considering whether ’fair just and reasonable’

“….the judge did consider at [186] whether……appropriate for there to be a duty of care to prevent economic loss. He found that it was so appropriate having regard in particular to the following:

(1) ….not a case of brief ad hoc advice…. a significant project…. being approached in a professional way.

(2) …services.. provided over a relatively lengthy period of time…involved considerable input and commitment on both sides.

(3) …involved significant commercial expenditure [by Claimants].

(4) Neither…saw this as akin to a favour…without legal responsibility.

(5) …although…no consideration [architect] did hope to receive payment for the soft design services….later be provided and… also important to the growth of her new business…..

(6) [architect & husband] had [received] benefits provided by [claimants] beyond the normal bounds of friendship…..the provision of gratuitous services by her should be seen in that light.

(7) …losses allegedly sustained are of a type….expected to flow from a failure to competently perform the services which [architect] was apparently providing.”

Bloomberg LP v Sandberg, Burro Happold, Malling

[2015] EWHC 1858: contribution after expiry of

limitation provision

Section 1(3) of the Civil Liability (Contribution ) Act 1978 :

“(1)…any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise).”

“(3) A person shall be liable to make contribution by virtue of subsection (1) above notwithstanding that he has ceased to be liable in respect of the damage in question since the time when the damage occurred, unless he ceased to be liable by virtue of the expiry of a period of limitation or prescription which extinguished the right on which the claim against him in respect of the damage was based.”

Bloomberg LP v Sandberg - Act overcomes procedural bar

• 2000 Malling installed stone cladding to Building

• Malling/Bloomberg warranty – Clause 6

• 12 years from PC (29 Aug 2000) to bring proceedings

• 2001 tiles fell off

• Role of Sandberg, Buro Happold in 2000-2002 works

• After 12 years expired, cladding tile fell off again

• Bloomberg sued 3 defendant consulting engineers

• They sought contribution from Malling

• Malling pursued SJ/strike out application – relying on Clause 6

• Held to be a claim under section 1(3)

• Only if the limitation clause had “extinguished the right”

• No evidence of such an intention or wording

• Limitation clause was merely a procedural bar

• Malling application failed

IMI v Delta [2016] EWCA Civ 773 ; [2017] Ch 27: contribution after bona fide settlement

Interpretation of section 1(4) of the Civil Liability (Contribution ) Act 1978

“1(4) A person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not he himself is or ever was liable in respect of the damage, provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established.”

IMI v Delta - do facts disclose a reasonable cause of action?

Previously in contribution claims:

• C claims against D1 (main action) / D1 claims against D2 or TP (part 20 claim)

• Arab Monetary Fund v Hashim 28 May 1993, unreported: the proviso in section 1(4) means can still carry out an inquiry into the alleged facts if they concern ‘collateral defences’ i.e. defence arguments that are not inconsistent with the facts alleged by C e.g. when burden of proof lies on D1 and not C (‘confess and avoid, statutory limitation defences).

Now after IMI v Delta:

• The proviso in section1(4) is that a contribution claim made by D1 against D2, following settlement of the main action did not require or indeed permit any investigation into whether D1 was actually liable;

• if the settlement is bona fide, the court does not ask whether D1 was or was not liable to C on the facts, the court only asks if the facts pleaded by C’s particulars of claim disclosed a reasonable cause of action against D1 such as to make him liable in law, in respect of the damage.

Recent Court Judgments on Construction Delay and EOTs

Paul Cowan and Simon Hale

4 New Square

London

5 July 2017

I. Introduction

Main Topics

• Novel issue about EOT operation in a multi-party delay dispute.

• Procedural: use of preliminary issues.

• Review of law and practice on EOTs.

• Current law on the interpretation of contracts and arguments of ‘commercial common-sense’.

• The judgments of the TCC and the Court of Appeal.

II. The Overall Dispute

• Project – design and construction of the Rolls Building, London (home of the TCC, Commercial Court and Chancery Division).

• D&B main contractor already settled with Employer for delay to completion.

• Pursues subcontractors for the delay and alleged consequential losses.

• As was pleaded, main contract delay split into two separate halves (joint liability not claimed):

(i) First half – allegedly caused by M&E problems (EMCOR);

(ii) Second half – allegedly caused by acoustic problems (AECOM).

II. The Overall Dispute (cont’d)

III. The Issue

• Subcontractor claims EOT for the whole delay period.

• Includes delay caused to sub-contract works by others’

works relating to acoustic problems, including during

the later period.

• Instructions from the D&B main contractor to

undertake additional works during the later period

(including removal of installed works to permit

investigation and remedial work on acoustic issues etc.).

• Fundamental issue – how would EOT during the delay

periods affect the Main Contractor’s claim against

EMCOR (which was limited to the first period)?

IV. Preliminary Issue

• First CMC – EMCOR proposed preliminary issue.

• Applied established principles whether to direct preliminary issues (see Steele v Steele [2001] C.P. Rep. 106, and 8.1 of TCC Guide).

• Objective to highlight key weaknesses in Claim / maximize importance of C’Claim, and affects fact / expert evidence to be presented.

• Other parties (eventually) agreed.

• Court directed hearing to take place within a month from the CMC.

• Remitted to Nerys Jefford QC, sitting as Deputy High Court Judge (now Jefford J.).

IV. Preliminary Issue (Cont’d)

“On the assumption that EMCOR is entitled to an extension of

time pursuant to clause 11.3 of the EMCOR Sub-Contract (as

amended) by fixing such revised or further revised period or

periods for the completion of its Sub-Contract Works, does the

EMCOR Sub-Contract (as amended) require:

(a) that such revised or further revised period or periods are

added contiguously to the end of the current period, so as to

provide an aggregate period within which EMCOR’s Sub-Contract

Works should be completed (as contended for by EMCOR); or

(b) that such revised or further revised period or periods are fixed

in which EMCOR can undertake its Sub-Contract Works, which

are not necessarily contiguous but which reflect the period for

which EMCOR has in fact been delayed and is entitled to an

extension of time (as contended for by CCL)?”

V. What is an EOT for?

• Preliminary issue raised the question what is an EOT

for, and how does the basic machinery operate.

• No authority directly on point in respect of the DOM/2

sub-contract terms.

• Review of older authorities (mostly JCT main contract

form EOT).

• Principal among these, Balfour Beatty Building Ltd v

Chestermount Properties Ltd (1993) 62 B.L.R. 1.

• Commercial Court (Colman J.) considering preliminary

issues.

VI. Review of Chestermount

• Contractor had failed to complete works by the

Completion Date.

• Before actual completion, Employer instructed

variations.

• How was EOT to be determined?

• Contractor claimed “gross” EOT: i.e. through to the

actual date on which he could actually finish the work

(when completed the late variations).

• Employer claimed “net” EOT: i.e. adding time

required for the variation works to the pre-existing

Completion Date.

VI. Review of Chestermount

Colman J. went back to the fundamentals of the “contractual purpose of the completion date/extension of time/liquidated damages regime” (page 25).

“The underlying objective is to arrive at the aggregate period of time within which the contract works as ultimately defined ought to have been completed having regard to the incidence of non-contractor’s risk events and to calculate the excess time if any, over that period, which the contractor took to complete the works.” [Emphasis added]

VI. Review of Chestermount

• Nature of the obligation to complete (and liability for delay) –

not for particular problems on particular dates, or the actual date

by which the works could have been finished.

• Contractor has the allocated time period to complete the works,

and EOTs are to be added to that as Relevant Events occur.

• Commenting on the “gross” argument:

“The flaw in the contractor’s argument is that it attributes to the

completion date a function which it does not have under the

contract. … the function of the completion date is to identify the

end of the period of time commencing with the date of

possession within which the contractor must complete the

works, including subsequent variations, failing which he must

pay liquidated damages.” [Emphasis added]

VII. Application of Chestermount

• Basic principle of considerable importance on the pleaded facts

of the Carillion case.

• Duration of Relevant Events occurring during the earlier or the

later periods would be aggregated to the original completion

date.

• Evaluating subcontract critical path / EOT against the backdrop

of Main Contract delay.

• Even if subcontractor was contractually late in the later period,

this was not claimed to have been the cause of the Main Contract

delay during that period.

• Particularly striking where EMCOR was itself being delayed by

the acoustic problems (claimed as the reason for all the Main

Contract delay in the later period).

VIII. The Wording of the Sub-Contract

• Applying a (slightly) different clause in a different (sub) contract,

Chestermount not directly applicable authority.

• Central point: to interpret and apply the DOM/2 clause:

“If on receipt of any notice, particulars and estimate under clause 11.2 the

Contractor properly considers that:

11.3.1 any of the causes of the delay is an act, omission or default of the

Contractor… or is the occurrence of a Relevant Event; and

11.3.2 the completion of the Sub-Contract Works is likely to be delayed

thereby beyond the period or periods stated in the Appendix, part 4, or

any revised such period or periods,

then the Contractor shall, in writing, give an extension of time to the Sub-

Contractor by fixing such revised or further revised period or

periods for the completion of the Sub-Contract Works as the

Contractor then estimates to be reasonable.” [Emphasis added]

IX. Main Contractor’s Arguments

• Subcontract clause is different to Main Contract (not

“Completion Date”, not LADs).

• Subcontract clause does not require EOT period to be

aggregated to the pre-existing “period for completion”.

• Argued that period of delay arising after the expiry of the

“period for completion” should be awarded an EOT during its

own separate time period – i.e. have further, discontinuous

“periods for completion”.

• Suggested idea – sub-contractor only gets relief for the time

period in which it was delayed by Relevant Event.

• Claimed “commercial common-sense” should not allow sub-

contractor to escape liability for the consequences of his

(alleged) delay in the first period.

X. Contract Interpretation

• Clause 11 contains other wording about the operation of the EOT

mechanism (“extend”, “shorter”, “longer”).

• Primary authority on contractual interpretation under English law: –

Supreme Court (led by Lord Neuberger) in Arnold v Brittan [2015]

A.C. 1619, from [14], including the following (at [17] and [20]):

“First, the reliance placed in some cases on commercial common sense and

surrounding circumstances (eg in Chartbrook, paras 16-26) should not be invoked

to undervalue the importance of the language of the provision which is to be

construed. The exercise of interpreting a provision involves identifying what the

parties meant through the eyes of a reasonable reader, and, save perhaps in a

very unusual case, that meaning is most obviously to be gleaned from the

language of the provision.

…while commercial common sense is a very important factor to take into account

when interpreting a contract, a court should be very slow to reject the natural

meaning of a provision as correct simply because it appears to be a very

imprudent term for one of the parties to have agreed…”.

X. Contract Interpretation (Cont’d)

• Subsequent authority from Court of Appeal in Grove Developments Ltd. v

Balfour Beatty Regional Construction Ltd. (2016) 168 ConLR 1.

• Construction case – JCT D&B 2011 main contract. Agreed monthly interim

payments on a schedule of dates running to the planned Date for

Completion. PC only achieved a year later.

• Employer argued no entitlement to interim payments during the period of

delay beyond the specified dates in the payment schedule.

• TCC (Stuart-Smith J.) and Court of Appeal (by majority) agreed.

• Per Jackson LJ – “…this is a classic case of one party making a bad

bargain. The court will not, indeed cannot, use the canons of construction

to rescue one party from the consequences of what that party clearly

agreed.” [para. 39]

• “Commercial common sense can only come to the rescue of a contracting

party if it is clear in all the circumstances what the parties intended, or

would have intended, to happen in the circumstances which subsequently

arose.” [para. 42, applying Arnold v Brittan] [emphasis added]

XI. Judgment in TCC

• Judgment issued about two weeks after hearing in April

2016.

• Issued decided in favour of EMCOR:

“It is, in my judgment, clear that the natural meaning of the clause 11.3 is

that contended for by EMCOR”. [56]

• Addressed main contractor’s ‘culpable delay’ argument:

“In any event, the difficulty with these arguments is that they create a

distinction which is not drawn from the sub-contract between

responsibility for delay and contractual liability. Under clause 12, EMCOR

is only contractually liable for delay if it fails to complete the Sub-

Contract Works within the period or periods for completion, so the

material obligation is what the contract provides in respect of those

periods and not some broader concept of who is factually responsible for

delay to the progress of the works or liability for some other breach of

contract. ” [60] [Emphasis added]

.

XI. Judgment in TCC (cont’d)

“Given that I consider the clause to be clear, following the principles in

Arnold v Britton, I should be slow to depart from that meaning even if I

considered that the result did not accord with commercial common sense.

I do not, however, consider that this meaning does not accord with

commercial common sense. As EMCOR has submitted, this interpretation

of clause 11.3 is practicable and workable and is what a reasonable

person with all the background knowledge of the parties would have

thought the clause meant at the time the contract was entered into.

Carillion's argument in this respect assumes that the sub-contractor may

be in breach for a period of time and then not in breach and so on. I do

not see that the words of the contract can be read to have this effect or

that the putative reasonable person would have thought it had this

meaning at the time the contract was entered into. If it had been intended

to have this unusual effect, I would have expected to see this much more

clearly provided for.” [61] [Emphasis added]

.

XII. Judgment in Court of Appeal

• Carillion sought permission to appeal.

• Granted by Court of Appeal (noting decisions on EOT are mainly first

instance decisions, even Chestermount).

• Appeal heard on 2 February 2017.

• Judgment handed down on 10 February 2017 (by Jackson LJ; Simon LJ

and Flaux LJ agreed).

• Novel issue: “This is a novel argument, which I do not recall ever

encountering, either in practice at the Bar or when sitting as a TCC

judge.” [37]

• The wording of the sub-contract was clear: “In my view, whether one

reads clause 11.3 in isolation or in its full context, the natural meaning of

the words used is that the extension should be contiguous.” [39]

• “The simple phrase “extension of time” in the last part of clause 11.3 has

the natural meaning that the period of time which is allowed for the

work is being made longer”. [39]

XII. Judgment in Court of Appeal

• “Recent case law establishes that only in exceptional circumstances can

considerations of commercial common sense drive the court to depart

from the natural meaning of contractual provisions. ... In Grove the

Court of Appeal applied those principles to a construction contract,

which operated harshly against the interests of a contractor. The court

declined to depart from the natural meaning of the contractual

provisions.” [50] [Emphasis added]

• Recognized the ‘oddity’ argued by the Main Contractor:

“The judge accepted that anomalies of the kind identified by Carillion

may arise. In her view, those possible scenarios were not sufficient to

displace the natural interpretation of clause 11.3. I have come to the

same conclusion. As the judge rightly observed, Emcor’s interpretation

of clause 11.3 is practicable and workable. It accords to what a

reasonable person, with all the background knowledge of the parties,

would have understood the clause to mean on the date when the sub-

contract was made.” [51] [Emphasis added]

XII. Judgment in Court of Appeal

• “I am, perhaps, more troubled than was the judge by the

anomalies to which clause 11.3 may give rise, especially in

a case such as the present where there are multiple sub-

contractors, who are said to have caused delay. On the

other hand, I am in agreement with the judge that these

considerations cannot displace the natural meaning of the

words used in clause 11.” [52] [Emphasis added]

• “This is a case in which the parties, although following the

wording of a standard form sub-contract, have made what

may turn out in particular circumstances to be a bad

bargain for one or other of them. That is no reason to

depart from the natural meaning of the words which they

used or adopted.” [53] [Emphasis added]

XIII. Conclusions

• Novel issue, arising in multi-party dispute, applying EOT in

the context of non-LAD delay claims.

• Orthodox methodology applied (see Chestermount).

• Relevant to main contract / sub-contract situations.

• Also relevant to other situations with non-LAD remedies for

delay – e.g. construction management / management

contracting.

• Requires close analysis of (different) critical paths (main and

sub-contract) and interplay of EOT from one to another

• Underlines strong prevailing Court practice on construction

interpretation – applying the natural meaning of the

contractual language.

4 NEW SQUARE LINCOLN’S INN

LONDON WC2A 3RJ

WWW.4NEWSQUARE.COM

T: +44 20 7822 2000 DX: LDE 1041

E: CLERKS@4NEWSQUARE.COM

Recent Court Judgments on Construction Delay and EOTs

Paul Cowan and Simon Hale

NEC3: Key Features, Pitfalls and the NEC4 Future

Fiona Sinclair QC and Peter Morcos

What is NEC3?

Suite of construction and professional services contracts. Developed and published by ICE (Institution of Civil Engineers).

1st edition 1993 (ECC)

2nd edition 1995 (NEC2)

3rd edition 2005 (NEC3)

Amendments June 2006 & September 2011 (to comply with HGCRA)

Revised April 2013

4th edition 2017 (NEC4)

3 FUNDAMENTAL GUIDING PRINCIPLES:

CLARITY & SIMPLICITY

FLEXIBILITY STIMULUS TO GOOD

MANAGEMENT

Why should I care?

NEC contracts are now the most popular procurement route for UK construction projects (RIBA Survey, Jan 2016: 42% clients use NEC3, 32% use JCT).

The contract for public sector works: Office of Government Commerce

endorsed NEC3 for all government contracts. Key UK projects, including High Speed 1, London 2012 Olympic Games, Crossrail, and Highways England.

Wide use in major projects: < 15% of NEC contracts in UK have project value < £250,000.

WORKS CONTRACTS (1)

The NEC3 Engineering and Construction Contract (ECC)

Until 1993, plain ‘New Engineering Contract’. Title changed to reflect application to construction as well.

For any engineering/construction project where there is a Site to work on.

Has Project Manager (contract administrator) and a Supervisor (testing and defects management). Scope of works is in the ‘Works Information’.

Flexibility - can be used for contractor design.

“Short” version – for low risk, low complexity (not necessarily low value) work.

WORKS CONTRACTS (2)

The NEC3 Engineering and Construction Subcontract

Back to back with the ECC

Project Manager and Supervisor become Contractor; Contractor becomes Subcontractor

Changes to timescales for responses so that communications can travel up and down the contractual chain

Short version – for low risk, low complexity (not necessarily low value)

SERVICES CONTRACTS

The NEC3 Professional Services Contract

Allows project management of professionals (often hard to apply and unnecessary for simple commissions)

Has Project Manager and Services Information.

The NEC3 Term Services Contract

For non-professional services (eg. maintenance services, facilities management, IT services)

Has a Services Manager and Services Information

SUPPLY CONTRACTS

The NEC3 Supply Contract

For supplies with an element of uniqueness ie. made specifically for the project

Design by either Employer or Supplier

Allows project management of supply

Has Supply Manager and Goods Information

The NEC3 Short Supply Contract

For supply of standard manufactured items

No Supply Manager

OTHER CONTRACTS

The NEC3 Framework Contract

For frameworks where

• Quantity of defined goods not known at outset and will be called-off

• Series of projects of defined work type

Avoids need for repeat tenders. Each order is let under another NEC3 contract (eg. Costain v Tarmac, 2017)

The NEC3 Adjudicator’s Contract

A 3-way contract between the parties and the adjudicator

NEC3 contracts have 2 dispute resolution options:

• W1: outside UK &/or not subject to HGCRA (includes time-bars)

• W2: in the UK & subject to HGCRA

KEY FEATURE (1) : MODULAR STRUCTURE

Instructions for building an NEC3 Contract:

1. Choose a contract ‘wrapper’ (ECC, PSC, etc)

2. Build the contract inside it…..

Ingredients:

• Form of Agreement

• Contract Data

• 9 core clauses

• 6 main options (pricing )

• 2 dispute resolution secondary options

• 24 other secondary options

CONSTRUCTING THE CONTRACT

Main Option

(A)

Secondary Option

(X1)

Secondary Option

(X2)

Secondary

Option (X3)

Secondary

Option (X15)

Secondary

Option (X18)

Secondary

Option

(Y(UK)2)

Contract Data Parts 1 & 2

Main Option

(B)

Main Option

(C)

Main Option

(D)

Main Option

(E)

Secondary

Option (Z)

Core Clauses

Must select 1 main

option

All secondary

options

are optional

Essential information

Main Option

(F)

Dispute Resolution

(W1) Dispute Resolution

(W2)

Must select 1 dispute option

m

Contract Documents

I. FORM OF AGREEMENT

II. CONTRACT DATA (the project specific information)

PART 1 (completed by the Employer) - identifies the Parties - describes the Works - The Works Information - The Site Information - Access Dates - Key Dates - Completion/Sectional Completion Dates - Main option - Secondary options - Z clauses - Language and law of the contract

PART 2 (completed by the Contractor)

- The Programme - Contract Completion Dates - Contractor’s Pricing document: Activity Schedule or Bill of Quantities - Schedule of Costs Components

MAIN OPTIONS

Option A: Priced Contract with activity schedule

Option B: Priced contract with bill of quantities

Option C: Target contract with activity schedule / price list

Option D: Target contract with bill of quantities

Option E: Cost reimbursable contract

Option F: Management Contract

Secondary options

X1

Price adjustment for inflation

X2

Changes in the law

X3

Multiple currencies

X4

Parent company guarantee

X5

Sectional Completion

X6

Bonus for early Completion

X7

Delay damages (LADs)

X8

Collateral warranties

X9

Transfer of rights

X10 (PSC only)

Employer’s Agent

X11

Termination by Employer

X12

Partnering

X13

Performance bond

X14

Advanced Payment

X15

Limitation of contractor’s

design liability

X16

Retention

X17

Low performance

damages

X18

Limitation of Liability

X19

Task Order

X20 Key Performance

Indicators

Secondary options contd.

Y(UK)1

Project bank Account

Y(UK)2

HGCRA

Y(UK)3

Rights of Third Parties

W1

Dispute Resolution (HGCRA n/a)

W2

Dispute Resolution

(HGCRA applies)

Z

Additional Conditions of

Contract

KEY FEATURE (2): SIMPLE, CLEAR LANGUAGE

Defined terms – capitalised to avoid replication eg. Works Information

Contract specific terms – in italics and identified in Contract Data

Short sentences and “ordinary” language

Sub-dividing clauses with bullet points – because the aim is to avoid clause cross-references

Present tense

eg. CC 20.1

“The Contractor Provides the Works in accordance with the Works Information.”

? NEC3 contains only one mandatory obligation: CC 10.1

“The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in the contract and in a spirit of mutual trust and co-operation.”

“a triumph of form over substance” Edwards-Stuart J in Anglian Water v Laing

O’Rourke (2010)

Despite “loose language … which can give rise to confusion as to whether … obligations and liabilities actually arise” the NEC3 is “highly regarded … as providing material support to assist the parties in avoiding disputes and ultimately in resolving any disputes which do arise.” Akenhead J in Atkins v Secretary of State for Transport (2014)

KEY FEATURE/PITFALL (3): COMMUNICATION

Each instruction, certificate etc is communicated in a form which can be read, copied and recorded (CC 13.1)

Notification must be in a separate document (CC13.7)

EARLY WARNING NOTICES : issued by Contractor or Project Manager as soon as becomes aware that a matter could (not will)

cause an increase in the price

cause delay

impair performance of works in use

PM enters early warning events on Risk Register (CC16.1) and a Risk Reduction Meeting is called (CC16.3)

Beware failure to give EWN: If Contractor does not give EWN which an experienced Contractor could have given, Contractor loses entitlement to additional time or money which could have been mitigated if he had given EWN (CC61.5)

KEY FEATURE/PITFALL (4): NO PROVISIONAL SUMS!

NEC3 does not allow for the use of provisional sums.

If Employer cannot clearly define part of the Works, that part should not be included in the Works Information.

Because the

Contractor cannot

price or programme

for an unknown.

INSTEAD EMPLOYER SHOULD:

Give as much information in the Works Information as possible, then

Update the Works Information as soon as final requirements known

The updating change to the Works Information is a Compensation Event

KEY FEATURE/PITFALL (5): THE PROGRAMME

Contractor submits a programme to Project Manager at start of project (CC13.1)

CC 31.2: 17 different items of information which must be shown on programme:

eg. float, time allowances, H&S requirements

eg. “a statement of how the Contractor plans to do the work identifying…the resources which he plans to use and other information which the Works Information requires the Contractor to show on a programme”

Contractor submits a revised programme (CC32)

whenever PM instructs him to

whenever Contractor wants to

in any event, at intervals stated in the Contract Data (usually, monthly)

Contractor’s failure to submit programmes:

at start of project → 25% of the price withheld until he does

during the project → PM substitutes his own view of progress when assessing

CEs

KEY FEATURE/PITFALL (6): DEFECTS CORRECTION

Don’t confuse two dates (both in Contract Data Part 1):

“Defects Date” = period during which Contractor is liable to rectify defects (eg. 26 or 52 weeks after completion)

“Defects Correction Period” = how long Contractor has to rectify a particular defect (may differ for different types of defect)

The approach to defects is collaborative:

Supervisor and Contractor notify each other of discovered defects (CC42.2)

Supervisor can instruct Contractor to search for defects (CC42.1)

Contractor corrects a discovered defect whether notified to it or not (CC43.1)

the Supervisor issues Defects Certificate at the later of the Defects Date or the Defects Correction Period (CC43.3) for the last notified defect

Defects Timetable

Defects prior to completion

DCP for defects notified prior to completion

Notified defect 2

DCP 2

Notified Defect 1

DCP 1 Completion Certificate

Defects Date Defects Certificate

KEY FEATURE/PITFALL (7): COMPENSATION EVENTS

Both EoT and L&E are assessed under the ‘compensation events’ procedure (CC60).

CE = an event which changes Prices/Completion Date/Key Dates.

CC60.1 lists 19 compensation events which are not fault of Contractor

eg. change in Works Information (Employer)

eg. weather (neutral)

BUT note also that Employer breach and Employer risk events are also CEs.

Contractor or PM notifies to the other: “an event which has happened or which he expects to happen” and which he believes to be a CE.

Contractor submits a quotation for the CE, giving

details of changes to Prices/Completion Date/Key Date

alterations to Accepted Programme

The PM responds by accepting the quotation, or rejecting it and making his own assessment.

COMPENSATION EVENTS: PITFALL (1) TIMEBARS

Contractor Beware: Contractor has 8 weeks to notify a CE of which he is aware (and which PM has not notified to him), before Contractor loses entitlement to additional time/money (CC63.1)

Exceptions:

CE which results from PM giving instruction/changing an earlier decision/ correcting an assumption

“unless the PM should have notified the event to the Contractor but did not” – the mutual notification requirement creates uncertainty…

PM can undertake own assessment if (a) Contractor fails submit quotation, or (b) Contractor’s assessment is not accepted

Employer Beware: if PM fails to respond to Contractor’s notification of a CE or to a quotation, Contractor may issue ‘reminder’ notices. Continued failure to respond means that quotation is deemed accepted.

Compensation Events - Timetable

PM fails to respond? C notice – 2 weeks

PM fails respond? C notice – 2 weeks

PM’s decision

3 weeks

Notification of CE – 8 weeks from knowledge of the event

C submits quotation PM replies

1 week 2 weeks

COMPENSATION EVENTS: PITFALL (2) ASSESSMENT

Cost impact of a CE = its effect on actual cost of work done and forecast cost of work yet to be done (CC63.1)

The ‘switch date’ is:

date when PM instructed or should have instructed Contractor to submit a quotation (NEC3, 2006)

date when PM issues the instruction etc. which is the CE, or the date when the CE is notified (NEC3, 2013)

BUT what if Contractor has done the additional work by the time that the CE is assessed? Is the effect of the CE on cost assessed using actual costs or costs as they were forecast on the switch date?

Northern Ireland Housing Exec. v Healthy Buildings Ltd [2017] NIQB 43

Where actual costs are known, they should be used in the assessment of a CE.

Chimes with court’s approach to assessment of damages BUT encourages Employer:

to notify or assess CEs late, so that actual costs may be used

to require Contractor to submit quotations on conservative assumptions (risk events falling outside those assumptions are separate CEs)

KEY FEATURE/PITFALL (7): DESIGN FIT FOR PURPOSE

CC 20.1

“The Contractor Provides the Works in accordance with the Works Information.”

→ If the Works Information specifies purposes for the Works, the Works (including their design) must be fit for purpose.

BUT… professional indemnity insurance will not cover an obligation to provide a design which is fit for purpose…

AND… the PSC (Professional Services Contract) only requires the design consultant to exercise reasonable skill and care

SO… select Secondary Option X15: Contractor is not liable for defects in the design if it can prove that it has used reasonable skill and care to ensure the design complies with the Works Information.

KEY FEATURE/PITFALL (8) DISPUTE RESOLUTION

OPTION W1

Where HGCRA does not apply

because outside UK

because not a “construction contract”

Multi-tiered dispute resolution:

negotiation by senior representatives

compulsory adjudication

strict time limits

non-compliance removes right to arbitrate/litigate

Tarmac v Costain (2017)

OPTION W2

Where HGCRA does apply

adjudication “at any time”

KEY FEATURE (9): Mutual Trust and Cooperation

“The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in a spirit of

mutual trust and co-operation” (CC 10.1).

Mears v Shoreline [2015] EWHC 1396 (TCC)

Duty in NEC3 to act in the spirit of mutual trust and co-operation did not prevent a party from relying on an express term of the contract (the entire agreement clause). So the duty does not override express obligations.

Tarmac v Costain [2017] EWHC 319 (TCC)

“It is a form of contractual duty which requires the obliger to have regard to the interests of the obligee, while also being entitled to have regard to its own self-interest when acting.”

Costain v Tarmac [2017] EWHC 319

Dispute Resolution Clauses: the cause of the problem

Framework Contract

Z21.1 Any dispute arising under or in connection with this Framework Contract can be referred to and decided upon by an Adjudicator nominated by the Institution of Civil Engineers. A party may refer a dispute to the Adjudicator at any time.

Supply (Short) Contract

93.1 A dispute arising under or in connection with this contract is referred to and decided by the Adjudicator.

93.3 (1) A Party may refer a dispute to the Adjudicator if the Party notified the other Party to the dispute within four weeks of becoming aware of it and between two and four further weeks have passed since the notification…

(8) The Adjudicator’s decision is binding on the parties unless and until revised by the tribunal and is enforceable as a matter of contractual obligation between the Parties and not as an arbitral award. The Adjudicator’s decision is final and binding if neither party has notified the other within the time required by this contract that he intends to refer the matter to the tribunal.

93.4 A Party may refer a dispute to the tribunal if:

• the Party is dissatisfied with the Adjudicator’s decision or

• the Adjudicator did not notify a decision within the time allowed and a new adjudicator has not been chosen

except that neither Party may refer a dispute to the tribunal unless they have notified the other Party of their intention to do so not more than four weeks after the end of the time allowed for the Adjudicator’s decision.

Contract Data

The tribunal is Arbitration

Clause 10.1

[Costain] and [Tarmac] shall act as stated in this contract and in the spirit of mutual trust and cooperation…

4 March 2015 – DWF for Tarmac assert that remedial works should be limited to the Tarmac Remedial Works.

12 October 2015 - Costain’s letter of claim.

19 October 2015 – DWF reiterate that Tarmac would pay for the Tarmac Remedial Works only.

13 November 2015 - Costain’s solicitor writes: “…given we are following the Pre-Action Protocol, do you agree to refer the dispute to the [TCC] notwithstanding that the supply contract calls for disputes to be resolved by arbitration or adjudication”.

16 November 2015 – DWF respond: “…We will take our client’s instructions on your invitation to depart from the contractual dispute resolution procedure and revert in due course…”.

26 November 2015 – letter of response asserted that a dispute had arisen and that Costain were out of time to pursue it the “Jurisdiction Dispute”.

Relevant chronology (1)

23 December 2015 – Tarmac commence an adjudication on the Jurisdiction Dispute.

5 February 2016 – Adjudicator finds in Tarmac’s favour

7 July 2016 – Costain issues Claim Form

28 July 2016 – Tarmac issues application for stay under s.9 of the Arbitration Act 1996

Relevant Chronology (2)

Did Tarmac lead Costain down the garden path?

Obligation of mutual trust and cooperation…

…would go further than the negative obligation not to do or say anything that might mislead; it would extend to a positive obligation on the part of a defendant to correct a false assumption obviously being made by the claimant, either that clause 93 was not going to be operated or that the time bar provision was not going to be relied on. But beyond that… there can have been no further obligation, because otherwise the provision would have required the defendant to put aside its own self interest.

Whither NEC3 clause 10.1?

• Does cl.10.1 really add anything?

• Akenhead J has observed that it cannot be relied on to prevent a party relying on any express term of the contract – Mears v Shoreline [2015] EWHC 1396 (TCC) at [70]

• Coulson J’s view seems to be that it goes no further than an implied term as in Merton LBC v High Stanley Leach

• Coulson J’s high water mark (an obligation to correct an obvious false assumption) goes no further than existing case-law as to a solicitor’s duties:

• Ernst & Young v Butte Mining [1996] 1 WLR 1605

• Thames Trains v Adams [2005] EWHC 3291 (QB)

NEC4 (1) – a multi-party contract

NEC3 Option X12: Partnering Option Used for partnering between more than two parties working on the same project or programme of projects (eg. Employer, Main Contractor, Employer’s Consultants, Employer’s Suppliers) Enables composition of partnering team to be changed from time to time as projects evolve Brief (only 4 clauses) Includes agreements for joint pursuit of objectives and working towards key performance indicators Partners give early warning to others when aware of matter which could affect the other’s objectives. Common information systems. Payment incentives for achievement of/improvement upon KPI targets.

The NEC4 Alliance Contract Has been published initially in consultative form only

NEC4 (2) – a DBO contract

Procurement of design, construction, operation and/or maintenance from a single supplier

Not a DBFO (design, build, finance and operate) contract

→ not for PFI projects

NEC4 (3) – other changes

Core Clauses: - Employer becomes Client - Gender neutral language - Risk Register becomes Early Warning Register - Contractor’s proposals : Contractor can propose changes in scope or acceleration - Quality Management : Contractor must submit a quality management system and plan - Anti-bribery and corruption clauses

New Secondary Options - for Contractor design (provides for Contractor’s PI insurance and applies standard of skill

and care of a professional designing the works) (currently frequently achieved using Z clauses)

- Dispute Avoidance Board (if HGCRA does not apply) - Collateral warranties (NEC3 Option X8 is only available with PSC) - Early Contractor involvement (Contractor has input to design at tender stage) - Building Information Modelling (BIM)

Final Assessments - PM to issue final assessment of payment within 4 weeks of issue of Defects Certificate (if

PM does not, Contractor can do so) - Assessment becomes conclusive if not challenged by reference to dispute resolution within

4 weeks