Professional Documents
Culture Documents
Law Journal
INCORPORATING TECHNOLOGY AND CONSTRUCTION LAW REPORTS
CONTENTS
(2008) 24 Const. L.J. 265–372, T45–T62
Editorial 265
Articles
Address Delivered at the Memorial Service for
Harold Crowter
Paul Darling Q.C. 267
Catching Water in a Net: The Elusive Concept of
“Reasonable Settlement”
The Honourable Mr Justice Coulson 271
NEC3: Construction Contract of the Future?
Nicholas Gould 286
A Critical Evaluation of the Success of Project
Partnering
Simon Brookes 314
Information 365
Technology and Construction Law Reports
Collins v Drumgold T45
Galliford Try Construction Ltd v Mott MacDonald Ltd T52
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Editorial
We publish in full the address delivered at the memorial service for Harold
Crowter. Paul Darling Q.C. painted an affectionate picture of the man he
considered to be the world’s leading quantity surveying expert and arbitrator. It
is a fitting tribute to an exceptional member of the construction law community
who is much missed.
We are pleased to include a paper given by Coulson J. to a joint meeting of
TECBAR and the Society of Construction Law, prior to his elevation to the
High Court bench. The judge tackled the subject of reasonable settlements with
third parties being relied upon as the basis of a claim. The article includes
a detailed review of the relevant case law, including Biggin v Permanite1 and,
more recently, General Feeds Inc Panama v Slobodna Plovidba Yugoslavia2 and
John F Hunt Demolition Ltd v Asme Engineering Ltd.3 The judge sets out the
guidelines that emerge from the case law and, in doing so, identified that a num-
ber of potentially difficult questions in relation to the topic remain unanswered.
The article by Nicholas Gould of Fenwick Elliott provides a timely review of the
NEC3 form. This third generation of the New Engineering Contract has become
the contract of choice of the Olympic Delivery Authority, the body responsible
for procuring the infrastructure, transport and construction for the 2012 London
games. NEC3 is also being used in some particularly challenging procurements,
including the decommissioning of nuclear power stations and the construction
of the Halley 6 Research Station on a moving ice shelf in Antarctica. The
article explains the concepts and workings of NEC3 and includes comment
on litigation that has arisen from NEC type contracts, including Costain Ltd
v Bechtel Ltd.4 The author also considers the present position in English law
on the use of the prevention principle and reviews the decision of Jackson J.
in Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No.2)5
which commented on the competing approaches of Gaymark Investments6 and
City Inn Ltd v Shepherd Construction Ltd.7
Continuing the theme of newer forms of procurement, Simon Brookes sets out
his evaluation of successful project partnering, including a discussion of the
disagreements about the definition of the term as used in the United Kingdom.
The article draws on the views of several commentators on partnering to
conclude that, whilst the process has contributed to the success of projects
on which it has been used, it needs to be more fully embraced by the industry
for its full potential to be achieved.
1 Biggin & Co Ltd v Permanite Ltd [1951] 2 K.B. 314; [1951] 2 All E.R. 191.
2
General Feeds Inc Panama v Slobodna Plovidba Yugoslavia [1999] 1 Lloyd’s Rep. 688.
3 John F Hunt Demolition Ltd v Asme Engineering Ltd [2007] EWHC 1507 (TCC); [2007]
T.C.L.R. 6.
4
Costain Ltd v Bechtel Ltd [2005] EWHC 1018 (TCC); [2005] T.C.L.R. 6.
5 Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No.2) [2007] EWHC 447
(TCC).
6
Gaymark Investments Pty Ltd v Walter Construction Group Ltd (formerly Concrete Constructions
Group Ltd) (2005) 21 Const. L.J. 71, Sup. Ct.
7 City Inn Ltd v Shepherd Construction Ltd [2003] S.L.T. 885; [2003] S.C.L.R. 795.
265
266 Construction Law Journal
In the Construction Act Review, the authors examine the House of Lords’ deci-
sion Reinwood Ltd v L Brown & Sons Ltd8 which, as is often said to be the way
with buses, has followed quickly behind Melville Dundas, the first House of
Lords’ case on the HGCR Act 1996. Again, the House of Lords grappled with
the interplay of JCT standard terms and the Act in relation to payment provi-
sions. After a certificate of non completion was issued, the employer deducted
liquidated damages from a payment which they paid a few days before it was
due. After the payment was made, but before the final date by which it should
have been paid, the architect granted an extension of time that reversed the
employers’ right to deduct damages. In addition to commenting on their Lord-
ships’ conclusions on the entitlement to payment, the authors identify apparent
gaps in the current provisions of the JCT form which have been exposed by the
case.
In our cases section, we report the Court of Appeal’s decision in Aldi Stores
Ltd v WSP Group Plc9 which concerned an attempt to strike out Aldi’s claim
on the basis of abuse of process. The defendant argued that Aldi should have
pursued its claim at the same time as earlier related proceedings brought by other
claimants. At the relevant time, Aldi had not sued WSP but had instead pursued
recovery (ultimately unsuccessfully) from insurers of an insolvent contractor,
against whom Aldi had obtained judgment. As a consequence, Aldi had not
taken part in the trial and compromise of the actions of the other claimants.
Reversing the decision of Jackson J. at first instance, the Court of Appeal held
that there had been no abuse of process by Aldi. It was held per curiam that if
similar circumstances arise in future, the matter must be referred to the court
seized of the proceedings.
In Hamilton v Allied Domecq plc (Scotland),10 the House of Lords dismissed
an appeal in which the appellants argued that a director of the respondent was
under a duty to take reasonable care not to make negligent misrepresentations.
It was held that there was insufficient evidence to warrant a finding that the
director had misrepresented the position.
In the Information section, we include a commentary by Anna Rabin of Jef-
frey Green Russell on the House of Lords’ decision in Melville Dundas, which
includes comment on the subsequent case of Pierce Design International Ltd v
Johnston.11
Two decisions of Coulson J. concerning practice and procedure appear in the
Technology and Construction Law Reports. Collins v Drumgold12 concerned the
procedure to transfer a matter from the county court to the TCC. The judgment
helpfully sets out the approach the TCC is likely to take in considering the crite-
ria set out in CPR 30.3(2). In Galliford Try Construction Ltd v Mott MacDonald
Ltd,13 the applicant sought an order that passages from a witness statement
and related documents that referred to without prejudice negotiations should be
removed from the trial bundles of an imminent trial. In granting the application,
the judge summarised the relevant authorities on without prejudice material.
8 Reinwood Ltd v L Brown & Sons Ltd [2008] UKHL 12, HL.
9 Aldi Stores Ltd v WSP Group Plc [2007] EWCA Civ 1260.
10 Hamilton v Allied Domecq plc (Scotland) [2007] UKHL 33.
11 Pierce Design International Ltd v Johnston [2007] EWHC 1691 (TCC).
12
Collins v Drumgold [2008] EWHC 584 (TCC).
13 Galliford Try Construction Ltd v Mott MacDonald Ltd [2008] EWHC 603 (TCC).
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Address Delivered at the
Memorial Service for Harold
Crowter
By Paul Darling Q.C.
Friends, I have come here today to pay tribute to and celebrate the life of our
dear friend Harold Crowter.
Harold always used to describe me as the clumsiest advocate that ever appeared
in front of him because on no less than two occasions I came into an arbitration
where he was the Arbitrator and managed to fall over something between the
door and my table. I therefore feel a deep sense of achievement that this morning
I have managed to get into this pulpit without falling over.
The task of celebrating Harold’s life has been made much easier by the words
and photographs found on the Order of Service. Indeed, the Order of Service is
very much like a Harold Crowter expert report—detailed, clear, properly spelt
and punctuated and self-evidently right.
Harold has had a very distinguished career.
After school at King Henry’s, at which I am told he was called Sammy, he
worked as a quantity surveyor in the public sector. He qualified as a chartered
quantity surveyor in 1972. He then started to work for Jackson’s, a well-
known building and civil engineering contractor, before being promoted to
chief quantity surveyor and then contracts director at the astonishingly early
age of 29. Two years later, he set up Harold Crowter Associates and after a
start in international project management, the practice’s work moved towards
forensic quantity surveying and dispute resolution. As many here will know,
the practice and Harold, as its Principal, developed a remarkable reputation.
It is no exaggeration to say that he developed into one of the country’s, and
indeed the world’s, leading quantity surveying expert and arbitrator. Harold
always looked out for his friends and he would no doubt now be counselling
against me describing him as the world’s leading quantity surveying expert
and arbitrator on the basis that the congregation contained at least five other
people who believed that those were titles to which they were entitled. But
today Harold, they are accolades that you have, and how richly you deserve
them.
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268 Construction Law Journal
I could entertain you with long lists of the projects in whose disputes Harold
was involved. When one looks at that list, one is immediately struck by its sheer
breadth, the countries, the subject matter and the roles. They ranged from nearly
every facet of the new Hong Kong International Airport to an argument about
whether the ground in South Wales contained rock or soil. I kid you not. The
range is phenomenal and at the risk of again alienating part of this audience,
truly unique.
All of those who were involved in cases with him will have their own happy
memories. For me, I think the happiest memory that I have is of a case about
a tiled floor in a shopping centre in North West England. This required Harold,
sitting as the arbitrator, to decide what it was that was causing the tiles to
chip at their edges or “chittering” as it was called. The parties resolved their
differences, but I am quite clear that Harold was going to find that the cause
of the damage was the 8 inch stiletto heels on which the young ladies who
frequented that shopping centre tottered around.
It was during that arbitration that we also saw the many other facets of Harold
and his approach to life. During a case, it was his practice to take the counsel for
both sides out to dinner together. I remember very clearly John Tackaberry and
I being Harold’s guests in the French restaurant, The Midland, in Manchester.
We were surrounded by the stars of Coronation Street on adjoining tables as
Harold entertained us to good food, good wine and good stories. I had a pupil
with me then and Harold insisted that she too should be his guest to dinner. To
this day that lady, Fionnula McCreedie, remembers and frequently refers to that
kindness, a kindness that was typical of Harold.
In running Crowters, Harold was always part of a team. It is invidious, I know,
to refer to individuals within that team, but I cannot let this occasion pass
without mentioning the contribution of Stan Braybrook, Chris Walker, Jill Ward
and Peter Ho to Harold’s practice. There were many others of considerable
ability who worked with Harold over those years.
However, there was much more to Harold than just being the pre-eminent
quantity surveyor expert and arbitrator. He involved himself in many profes-
sional bodies. He was a very popular and successful Chairman of the Chartered
Institute of Arbitrators, where he made a considerable contribution to the devel-
opment of that important body. Indeed, Sir Anthony Evans, who was President
whilst Harold was Chairman, who is sorry not to be able to be here today,
remembers that Harold made a difficult decision to hold a conference in Can-
cun. This was a brave move but a successful one and one which helped the
development of the Chartered Institute enormously.
He was a highly renowned lecturer on all manner of subjects. Indeed, he is the
only non-lawyer to come and address my Chambers on a legal topic, and we
certainly learnt from that. He ran the arbitration course at the College of Estate
Management with Pauline Makepiece, who is here today. He was also a brilliant
pupil-master to would-be arbitrators. On one occasion I appeared in front of
Harold and four pupils. A bit like the House of Lords but much more charming.
However, there was so much more to Harold’s life than this.
He was as devoted a family man as it was possible to be. He and Ruth had
an enduring and successful partnership. Ruth, you were a tower of strength to
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Address Delivered at Memorial Service for Harold Crowter 269
Harold and never more so than in those last months of his life. As I say, a
remarkable partnership.
He was a fantastic father to his three children. Gaynor, Ashley and Corrin adored
him as did their spouses Richard, Lydia and Richard. Indeed he spoke to me
just before he died of the wedding of Ashley and Lydia which, despite his ill
health and the floods, he had been determined to attend. He was so pleased to
have been there. He was also a very proud grandfather to his five grandchildren
Tom, Anna, Joanna, James and Andrew.
Harold had a very strong faith. Indeed in his latter and darker days, that faith
grew even stronger than it had before and he died in the absolutely rock-sure
belief that he was going to a far better place.
He was active, as you will know, in the Church, and involved in many chari-
table events, notably the Pilgrim Trust (of which he was a stalwart), and which
provided accommodation for the elderly and needy.
With this strong charitable involvement, his family and his career, it is perhaps
surprising that there was time for anything else. But there was. Harold had a very
strong sense of fun. He enjoyed good food and wine and he always knew where
the best restaurant was. He had almost certainly been to it the night before.
He was a massive fan of rugby. Indeed, one of Ashley’s school teams had the
benefit of being sponsored by Harold Crowter Associates and must be one of
the very few rugby teams ever to play with a quantity surveyor’s logo on their
shirts.
One of the many occasions that Harold enjoyed was the Hong Kong sevens and
many people who have spoken to me after his death will always remember him
in the largest available size of the version of the Harlequin shirt for that year,
as he wandered around the stadium meeting friends and colleagues.
When I was asked to give this address, it occurred to me that there would be
many people who would wish to be here to hear it, but who for reasons beyond
their control could not. I therefore sought to identify them in the hope that I
might be able to pass on their condolences. John Uff Q.C., Richard Fernyhough
Q.C., John and Rosie Cock from Hong Kong, Peter Chapman, Colin Wall,
Adrian Hughes, Chris Dancaster, John Simms, Arthur Marriott, Neil Kaplan,
Geoffrey Beresford Hartwell, Nerys Jefford, Alexander Nissen, Julian Lew and
Rowan Planterose. John Simms particularly asks for his good wishes to be
passed. He and Harold did a great deal of work together. Indeed, Harold once
expressed an expert opinion in an arbitration to John that the word “forthwith”
should be equated with the French toute suite. How much the learned arbitrator
bought it, I cannot tell you, but every timetable that the arbitrator then gave in
the case suggested that a particular step should be taken “tout suite” rather than
by a fixed date.
There are three emails I have received about Harold to which I wanted to refer.
The first was from Bob Freeman. With his wife Kath, he met Harold on a plane
travelling to Hong Kong. Harold invited them to his hotel that night. They had
never visited Hong Kong and Harold took them for a lovely meal and guided
tour. Harold met up with them a couple of times during their stay and invited
them to lunch at the Mandarin prior to their departure home. It was, they say,
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
270 Construction Law Journal
a memorable day because Harold invited them to taste the whole wine list. In
his email to me Bob said:
“He was one of the most charming people I have ever met and I am so
sad to hear of his death”.
The second was from a chap in Singapore called Chandron Menon. He was a
pupil on a fellowship course given by Harold. He arrived late and looked around
the room in which he was sat and decided he must be in the wrong place and
said to Harold, the course director:
Chandron told me that that Harold replied with his signature smile and said,
“You will probably be the best of this group then”. Chandron tells me that he
coped with this intimidating experience thanks to Harold.
The third was from Sandra Keys. Her husband, Michael, died of cancer this
year. She says:
I did reflect on whether that was too rich a story to tell on this occasion, but I
decided that it was not because it is a story that reflects the man that we knew
and whom we loved and whom we still love.
As Mrs Keys says, that was the measure of the man.
I was talking yesterday about this address to a colleague in Chambers, Piers
Stansfield, and I asked him what he would say about Harold. He paused, he
looked and he said, “he really was a lovely man you know”. We all knew that
and we all still know it.
It has been our profound privilege to know him.
May he rest in peace.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Catching Water in a Net:
The Elusive Concept of
‘‘Reasonable Settlement’’
By The Honourable Mr Justice Coulson1
Introduction
A, the main contractor, is threatened with a claim for £7 million by B, the
employer. For a variety of reasons, A chooses to settle B’s claim almost
immediately in the sum of £5 million. A then pursues the relevant sub-contractor,
C, for the £5 million that he paid to B, on the basis that his liability to B only
arose because of C’s breaches of the sub-contract. In the subsequent proceedings,
C raises a variety of points concerning the inherently weak nature of B’s original
claim against A and the unreasonably large sum paid by A to B in consequence.
A submits that the £5 million was paid pursuant to a reasonable settlement
and that therefore, provided that he can prove C’s liability to him, that is the
appropriate measure of his loss. Discuss.
This common factual situation involves three different principles which will
often be very difficult for the court to reconcile satisfactorily:
• For reasons of common sense and general policy, the courts will always
encourage the settlement of disputes by any agreed means and at any
time.
• For reasons of convenience and cost, the courts prefer not to make A
have to prove each and every aspect of B’s claim against A as part
and parcel of his subsequent action against C. There is also a general
reluctance to pick over the detail of A’s settlement with B.
• However, wider considerations of justice will often highlight the inherent
unattractiveness of finding C liable to pay a substantially greater sum
to A, than that which was, absent the settlement, the real extent of C’s
liability to A or, perhaps more pertinently, A’s liability to B.
1 This article is based upon a paper delivered to a joint meeting of the Technology and
Construction Bar Association (TECBAR) and the Society of Construction Law on October 30,
2007.
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272 Construction Law Journal
The concept of the “reasonable settlement”, and the frequent recourse to the
Court of Appeal decision in Biggin & Co Ltd v Permanite Ltd,2 has become
the most obvious way in which the courts have endeavoured to resolve these
conflicting principles. In so doing, the courts have set out a number of clear
guidelines on the issues that will arise in the situation postulated above.
However, it has to be acknowledged that a number of potentially difficult
questions in this area have remained resolutely unanswered.
2 Biggin & Co Ltd v Permanite Ltd [1951] 2 K.B. 314; [1951] 2 All E.R. 191.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Reasonable Settlement 273
Biggin v Permanite
“It is open to the defendant to show that the plaintiff was not liable to
pay anything, and therefore could not say that what he did pay was a sum
which he could recover against the defendant.”
Therefore on the face of it, Kiddle v Lovett would appear to be authority for
the proposition that, if A is not in law liable to B, any sums paid by A to B
can never be recoverable against C. However, as we shall see, that is not now
generally taken to be the position. In General Feeds Inc Panama v Slobodna
Plovidba Yugoslavia,5 Colman J. said of Kiddle:
“That case therefore was one where the claim the subject of the settlement
was so hopeless that it was too weak to be left to a jury and accordingly
the cause of the loss was not the defendant’s breach of contract but
the plaintiff’s decision to settle under a mistaken belief as to their own
liability. . . It would now be said that because the claim by Chalkley was
so hopeless that settlement was unreasonable.”
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
274 Construction Law Journal
that liability, as between Biggin and the Dutch Government, had been in issue, at
least at the outset of their arbitration. This is to be contrasted with the conclusion
of Goff L.J. in Comyn Ching & Co (London) Ltd v Oriental Tube Co Ltd 7 when
he referred to Biggin as a case where, “the defendant admitted that he was liable
to indemnify the plaintiff and the only issue was that of quantum”. However, the
point may be academic because, as Judge Hicks noted, Biggin’s claim against
Permanite expressly pleaded that, in the earlier arbitration:
In Biggin v Permanite, the Court of Appeal concluded that the Judge had
been wrong to regard the settlement as irrelevant. Provided that the settlement
was reasonable (even if that settlement was at the upper limit of what might
be considered as reasonable), it was to be taken as the measure of damage.
Somervell L.J. said that the plaintiff had to lead evidence, which could be
cross-examined, as to whether or not the sum paid was reasonable and the
defendant could endeavour to demonstrate that it was not reasonable. He went
on to say that the defendant might be able, in some cases, to “show that some
vital matter had been overlooked”.
In the same case, Singleton L.J. considered that the only issue was concerned
with the reasonableness of the damages and that, if the Judge was satisfied that
the damages were somewhere around the settlement figure, he would be justified
in awarding that figure as damages. He said:
“The question is not whether the plaintiff has acted reasonably in settling
the claim, but whether the settlement was a reasonable one; and, in
considering it, the court is entitled to bear in mind the fact that costs would
grow every day the litigation continued. That is one reason for saying that
it is sufficient for the purpose of the plaintiffs if they satisfy the Judge that
somewhere around the figure of settlement would have been awarded as
damages.”
Subsequent authorities
Fletcher & Stewart Ltd v Peter Jay & Partners 8 was a decision of H.H.
Judge Stabb Q.C., the former Senior Official Referee, upheld by the Court of
Appeal. There, the plaintiff employers had sued the defendant main contractors,
architects and engineers for damages, alleging defective work, which included
electrical work. The main contractors had joined the electrical sub-contractors
as third parties. The plaintiff and defendants reached a settlement under which
(inter alia) the main contractors paid £15,000 to the plaintiff, but the third party
refused to participate in it. The main contractor then sought to recover £15,000
from the third party without proof of more than the terms of the settlement.
Perhaps unsurprisingly, the claim was rejected, it being an apparent attempt by
7
Comyn Ching & Co (London) Ltd v Oriental Tube Co Ltd [1981] Com. L.R. 67.
8 Fletcher & Stewart Ltd v Peter Jay & Partners [1976] 17 B.L.R. 38.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Reasonable Settlement 275
the main contractors to use the settlement in order to bypass the (contested)
issue of the sub-contractor’s liability to the main contractor. As Megaw L.J. put
it in the Court of Appeal:
In Comyn Ching, the employer was Queen Mary College (QMC), who engaged
Minter as main contractors to build two halls of residence. Comyn Ching were
the nominated sub-contractors and were instructed to use a particular steel piping
manufactured by the Oriental Tube Company. Comyn Ching was not persuaded
that the piping would work, so they obtained letters of guarantee from Oriental.
Their fears were realised: the piping failed and had to be replaced completely.
QMC pursued Minter and Comyn Ching for damages for breach of contract.
Those claims were compromised by Comyn Ching, who then pursued Oriental
for the sums paid out in the settlement. Oriental took the point that there could
be no claim against them, not because they had a defence on liability to Comyn
Ching’s claim, but because the college’s original claim against Comyn Ching
had been hopeless, and was therefore unreasonably settled. They argued that,
because Comyn Ching had provided precisely the type of pipe that they had been
instructed to provide by QMC, the employer had no claim against them. At first
instance, Comyn Ching’s claim against Oriental was dismissed on this basis.
However, the Court of Appeal allowed the appeal, on the basis that the letters
of guarantee, provided by Oriental, amounted to an indemnity in respect of
“claims”, which was construed as meaning “all claims having a reasonable
prospect of success”. Thus the Court of Appeal held that a loss would be
sustained in consequence of a claim if it arose from a reasonable settlement of
a claim which had some prospect or a significant chance of success. On that
ground alone, as Brandon L.J. pointed out, the argument that the only claims
covered by the letters were those in respect of which there was a proven legal
liability was bound to fail. Because the decision turned largely on this point of
construction, the discussion of Biggin v Permanite was limited. Although Goff
L.J. identified the two relevant questions (“was it reasonable to compromise?”
and “was the sum claimed reasonable?”) he said:
“In practice I think they will generally be found to merge into one another,
although for example, if a point was one which could be speedily and
cheaply determined, it might not be reasonable as against the indemnifier
to settle, though if there was going to be a settlement, the amount might
be perfectly reasonable . . . Either the settlement as a whole was good as
between Ching and the defendants because it was reasonable, or it was bad
against them, and for the reasons I have already given it was, in my view,
reasonable and therefore good.”
In Stargas SpA v Petredec (The Sargasso),9 Clarke J. (as he then was) was
dealing with the situation in which a claimant sought to recover as damages an
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
276 Construction Law Journal
amount which he had been ordered to pay to a third party by a foreign judgment.
It was not therefore a settlement case at all. However, the Judge addressed the
principle, because it was relevant to submissions that had been made to him
as to the need on the part of the plaintiffs to establish liability. He had some
important observations about the scope of the evidence relevant to the exercise:
10 DSL Group Ltd v Unisys International Services Ltd (No.2) [1995] Masons C.L.R. Rep. 5.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Reasonable Settlement 277
P&O Developments Ltd v Guy’s & St Thomas NHS Trust 11 was a decision of
H.H. Judge Bowsher Q.C. He concluded that there were two reasons why an
agreement that had been made with a person, who was a non-party to the action,
was relevant and admissible. The first was by operation of a rule of evidence, as
part of the policy of the courts to encourage settlement. Thus if a third party’s
claim was settled, proof of that settlement was some evidence of its true value,
although it was not conclusive. The settlement set a maximum value to the
claim. Secondly, he concluded that the settlement was relevant pursuant to the
second limb of Hadley v Baxendale.12 The reasonable settlement of claims was
11
P&O Developments Ltd v Guy’s & St Thomas NHS Trust [1999] B.L.R. 3.
12 Hadley v Baxendale 156 E.R. 145; (1854) 9 Ex. 341.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
278 Construction Law Journal
a matter which the parties may be held to have had in reasonable contemplation
under that rule.
Finally, in this run of cases, there is another building case from 1999, the first
of the numerous decisions in Royal Brompton Hospital NHS Trust v Hammond.
The plaintiff employer settled with the contractor, paying him £6.2 million after
taking into account the employer’s own counterclaim for delay. The employer
then issued proceedings against the professionals and sought recovery of the
sums paid to the contractors. An issue arose as to whether sums expended
by way of settlement were capable of being a measure of damages if issues
of liability, as well as quantum, were compromised in the settlement reached.
H.H. Judge Hicks Q.C. concluded that the principles of Biggin v Permanite were
applicable, regardless of the employer having compromised its counterclaim, and
also regardless of the fact that the compromise included matters of liability as
well as quantum. He also concluded that the fact that the employer was seeking
to recover the settlement sums from multiple defendants did not distinguish
Biggin v Permanite, although he said that it might be open to a defendant in
those circumstances to argue that his liability should not exceed a due proportion
of the settlement figure so as to share in any benefit obtained by the settlement.
Perhaps the most important passage in this typically clear judgment was at [33]:
Also in 1999 was the decision of Colman J. in General Feeds Inc, referred to
earlier. This is perhaps the clearest recent exposition of the scope and limitations
of the principle in Biggin v Permanite and is particularly illuminating on the
overlap between liability and quantum. In that case, the ship owners faced a
claim from cargo insurers as a consequence of a cargo of fishmeal that had been
damaged by fire, heat and smoke. The claim was for US$2.4 million. The cargo
insurers claimed that the damage was caused by bad stowage. The ship owners
said that the fire had been due to the condition of the fishmeal at the time of the
shipment, and relied, in particular, upon the failure to treat it with antioxidant,
in accordance with the prescribed rules. Notwithstanding this defence, the
owners settled the claim brought by the insurers for US$600,000. The owners
then pursued the charterers, alleging that the charterers were in breach of
their contract because the cargo did not meet the contractual description of
“antioxidant treated”. The owners sought to recover the US$600,000, on the
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Reasonable Settlement 279
basis that the settlement payment was loss caused by the charterer’s breach of
contract. However the charterers defended the claim, alleging that there had been
no real risk that the owners would have been held liable to the insurers, because
the evidence indicated that the overheating was not caused by bad stowage, but
by the condition of the cargo at the time of loading. The charterers therefore
said that the owners had caused their own loss to the extent of the US$600,000
and that the settlement agreement was unreasonable.
The arbitrators concluded that the overheating was due to the condition of the
cargo on shipment and not due to bad stowage. They therefore held that the
owners would have had a good defence to the claim brought by the cargo
insurers, on the ground that the fault was not that of the stowage of the cargo
in the ship but the condition of the cargo at the time of shipment. However,
the arbitrators concluded that the charterers were in breach of their contractual
description obligations, and they concluded that the owners were entitled to
US$400,000 (out of the US$600,000 paid under the settlement agreement) by
way of damages. The charterers endeavoured to appeal on the ground that, given
that the arbitrators had found that the cargo insurer’s claim was ill-founded, they
should not have been found liable to the owners in respect of any part of the
sums that the owners had paid in settlement of that ill-founded claim. Colman J.
considered the judgment in Biggin v Permanite and said:
“The effect of this judgment is, in my view that, providing loss attributable
to a payment in settlement is not too remote, the plaintiff must prove that
the fact and amount of the settlement were reasonable in all the circum-
stances. Unless he proves that, he fails to establish that the loss was caused
by the relevant breach of contract by the defendant, if and to the extent
that an unreasonable settlement has been entered into, the loss has been
caused not by the breach but by the plaintiff’s voluntary assumption of
liability under the settlement. Proving the existence of the settlement thus
goes only part of the way to proving the recoverable loss. It would also be
consistent with the duty to mitigate a loss to hold that if and to the extent
that a plaintiff is unable to establish that the settlement on which he founds
his claim has been reasonably entered into, he has to that extent failed to
mitigate his loss.”
Colman J. addressed head-on the situation in which, after A’s settlement with
B, in the proceedings to recover that sum from C, C raised the point that A had,
in truth, no liability to B at all. He said:
“In other words, when properly analysed, the overall exercise which the
court must do is to consider whether the specified eventuality (in the case of
the indemnity) or the breach of contract (in a case such as the present) has
caused the loss incurred in satisfying the settlement. Unless the claim is of
sufficient strength reasonably to justify a settlement and the amount paid in
settlement is reasonable having regard to the strength of the claim, it cannot
be shown that the loss has been caused by the relevant eventuality or breach
of contract. That is not to say that unless it can be shown that the claim is
likely to succeed it will be impossible to establish that it was reasonable to
settle it. There may be many claims which appear to be intrinsically weak
but which common prudence suggests should be settled in order to avoid
the uncertainties and expenses of litigation. Even the successful defence of
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
280 Construction Law Journal
On that basis, Colman J. was able to point out that the claim by the painter
in Kiddle fell on one side of the line (because the claim was hopeless, the
settlement was unreasonable); and the claim in Comyn Ching fell on the other
(because the guarantee covered all claims reasonably brought, even if such
claims might ultimately fail).
In this case,13 decided in June 2007, Kier Whitehall engaged Kier Build to
carry out the design and construction of office premises at Whitehall Place. The
work involved retaining the facade. Kier Build sub-contracted the demolition
of the existing buildings to Hunt who in turn sub-sub-contracted to Asme the
construction of the temporary steel structure to support the existing facades.
There was a fire caused, at least on the assumed facts, by Asme’s works.
The fire damaged those existing facades. The two separate Kier companies,
Whitehall and Build, indicated a joint claim against Hunt for about £250,000.
Hunt settled that claim for £152,500. On analysis, the settlement figure was
made up of £108,987.12 as the losses suffered by Kier Whitehall, and the sum
of £43,512.88 as the losses suffered by Kier Build.
In the subsequent proceedings against Asme, Asme claimed that, whilst Kier
Build could have recovered the £43,512.88 against Hunt under the sub-contract,
Kier Build could never have been liable to Whitehall for the £108,987.12, and
thus could not pass such a claim on to Hunt. Thus it was said that the maximum
for which Hunt could have been liable was the £43,512.88 to Kier Build, and
that therefore the settlement was unreasonable. As to the first point, the Court
concluded that, given the express terms of Kier Build’s contract with Kier
Whitehall, and in particular the exclusion clauses and insurance provisions,
Kier Build did not have a liability to Kier Whitehall. Thus the maximum value
of the Kier Build claim against Hunt was £43,512.88.
The question then arose as to whether, in those circumstances, the mere fact
that Hunt’s liability was capped at an amount that was one third of the amount
of the settlement meant that the settlement was unreasonable. Furthermore,
given that Kier Build/Hunt had no liability to Kier Whitehall, did that mean
that the settlement of a claim on the basis that there was such a liability was
13 John F Hunt Demolition Ltd v Asme Engineering Ltd [2007] EWHC 1507 (TCC); [2007]
T.C.L.R. 6.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Reasonable Settlement 281
14 The Hon. Sir Vivian Ramsey and Stephen Furst, Keating on Construction Contracts (London:
Sweet & Maxwell, 2006).
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
282 Construction Law Journal
Accordingly, to the extent that the issue was a matter of principle (namely,
whether, merely because Kier Build/Hunt had no liability to Kier Whitehall and
therefore no liability for the £100,000 odd, the settlement was automatically
unreasonable) the answer was in the negative. There was no rule or principle of
law that prevented Hunt from claiming the £152,500 against Asme. Whether or
not the settlement between Hunt and the Kier companies was in fact reasonable
was not something that could be determined on the preliminary issues. The
conclusion therefore at [64] was that:
“. . . The mere fact that Hunt settled with the Kier companies when they
had no liability to Whitehall at all (and therefore no liability for two-thirds
of the sum originally claimed and two-thirds of the sum paid) does not, on
its own, render that settlement unreasonable.”
The other issue that arose in Hunt (albeit during the hearing rather than as a
point that had been identified at an earlier stage) was the question whether, if
the settlement was unreasonable, it could still be relied on as at least the starting
point for the assessment of damages or whether, if it was unreasonable, it was
simply irrelevant. Although this is likely to be a matter of fact (at least in most
cases), to the extent that it was a matter of principle, the court’s conclusion
was that a settlement was either reasonable or it was not, and if it was not
reasonable on the facts, then it was likely to have no evidential value. The
amount paid pursuant to an unreasonable settlement agreement would not be
recoverable under the second limb of Hadley v Baxendale, because it would
be unforeseeable. That approach followed the reasoning of Goff L.J. in Comyn
Ching when he said that the settlement was either good or bad: if it was bad it
was difficult to see how it could be relied on at all.
The Court’s particular conclusions on this point were:
“67. If, on the facts, the settlement is unreasonable, then in the ordinary
case, the settlement will become irrelevant to the calculation of the
true measure of loss: as Somervell LJ put it in Biggin v Permanite
itself, if the settlement is reasonable, it is the measure of loss; it
must therefore follow that, at least in the ordinary case, if the
sum paid is not reasonable, it is not the measure of loss. In such
circumstances Hunt would be left to claim the direct losses they
have suffered as a result of ASME’s breach of contract . . .
68. I accept that there may be many cases where the court will
conclude on the facts that, for example, from a settlement made
up of four discrete items, items 1, 2 and 3 were payable by A to
B and item 4 was not. A lesser sum (made up of items 1, 2 and
3 but excluding item 4) may then be identified as the reasonable
sum which was recoverable by A against C. In my judgment
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Reasonable Settlement 283
This second point in Hunt was therefore a novel one: could a settlement that was
unreasonable still be recoverable, at least in part? As the passages set out earlier
make plain, it is perhaps dangerous to set out too detailed a statement of principle
in circumstances where the facts are not being investigated. The conclusion in
Hunt was simply that, if a settlement is unreasonable, then prima facie it cannot
be the measure of loss. However, also for the reasons noted above, it is possible
to see circumstances in which some sort of adjustment to the settlement figure
(such as the subtraction of a particular element of the settlement) might give
rise to a recoverable measure of loss. It should also be noted that, although
this case has subsequently settled, Jacob L.J. gave permission to appeal on this
particular topic because he regarded it as being “of some significance”.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
284 Construction Law Journal
Conclusions
Basic principles
The settlement sum is likely to be recoverable even if, on analysis, A was not
liable to B, provided always that, on the facts known or reasonably known to A,
B’s claim against A had a reasonable prospect of success: see Comyn Ching and
General Feeds. It goes too far to suggest (as perhaps Keating on Construction
Contracts does) that A will always need to establish its liability to B before
being able to recover against C.
If, on the other hand, B’s claim against A was plainly hopeless, such that A
should never have made any offer to settle the claim, then that will give C a
complete defence to A’s claim against C: see Kiddle and the explanation of this
principle in General Feeds. It is worth noting that, as far as I am aware, there
is no reported case, post-Biggin, in which A’s claim against C failed because
B’s claim against A was found to be hopeless, and the settlement therefore
unreasonable.
most unlikely to establish that the settlement was reasonable. At the other end
of the scale, if B’s claim against A was arguable on the basis of the information
available or reasonably available to A, and the costs and time likely to be
incurred in dealing with B’s claim were likely to be significant, then, even if
the entire basis of the claim was questionable, it will be much easier for A to
establish that the settlement was reasonable. The real complications will arise
where A relied on legal advice in settling with B, and that advice subsequently
turns out to be incompetent or wrong (see the discussion, in the context of a
malicious prosecution claim, in Glinski v McIver).15
If the settlement was reasonable, then the sum paid pursuant to that settlement
will comprise the maximum amount that A can recover against C (see P&O).
However it will always be open to C to reduce it (see Biggin v Permanite) or
to argue that he is only responsible for a proportion of the settlement sum (see
DSL and Royal Brompton). The settlement figure is, to borrow Judge Hicks’
memorable phrase, the defendant’s ceiling and the claimant’s floor.
If the settlement was unreasonable then it may fall outside the rule in Biggin v
Permanite altogether and be both irrelevant and irrecoverable: see Hunt v Asme.
Depending on the facts, however, it might be possible for a particular head
of loss within the settlement agreement to be omitted, and the subsequently
reduced amount to be reasonable. However, as per Hunt, if the settlement is
unreasonable, then the court will be keen to guard against a situation in which
C’s liability to A may be increased by reference to the negotiations between A
and B in which C did not participate and which led to a settlement which was
(at least overall) unreasonable.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
NEC3: Construction
Contract of the Future?
By Nicholas Gould*
Introduction
The New Engineering Contract (NEC)1 was first published in March 1993.
Rather than building on existing standard forms, the NEC adopted a new
simple and direct drafting approach, focusing on strong project management
principles.
At this time Sir Michael Latham was carrying out his review of procurement in
the UK construction industry for government. In his final report, Constructing
the Team, he recommended that the NEC—lightly amended—should become
the national standard in not just the private but also the public sector.2 Partly as
a result, and to allow some general tidying up of the drafting, the NEC was re-
branded as the “Engineering and Construction Contract” and its second edition
(NEC2) issued in November 1995. The publisher was in effect attempting to
make it clear that the contract was equally applicable to the wider construction
industry, rather than just the engineering sector.
NEC2 was clearly well received by many sectors of the construction and
engineering industry. It has its critics, but NEC2 has been used by many of
the utility bodies in the United Kingdom, in particular the water industry, and
∗ Nicholas Gould BSc (Hons) LLM (Lond) FRICS FCIArb MCIOB is a Solicitor, CEDR Direct
and Lead Mediator, registered Adjudicator, Chartered Surveyor, visiting Senior Lecturer at King’s
College London, Chairman of the ICC’s International Expertise Subcommittee and Partner, Fenwick
Elliott LLP. Copyright: Nicholas Gould and the Society of Construction Law (SCL) 2007. The views
expressed by the author in this article (originally presented as a paper at the SCL international
conference in Singapore in February 2007 and reproduced with the kind permission of the SCL)
are his alone and do not necessarily represent the views of the Society of Construction Law, or
the editors. Neither the author, the Society or the editors can accept any liability in respect of any
use to which this article or any information, or views expressed in it, may be put, whether arising
through negligence, or otherwise.
1 NEC contracts are published in London by the Institution of Civil Engineers (ICE) (Thomas
Telford Ltd); they are also obtainable via http://www.neccontract.com [Accessed April 7, 2008].
The direct quotations from NEC3 in this article preserve the formatting—capital letters, italicisation
etc—as in the published original.
2 Sir Michael Latham, Constructing the Team (London: HMSO, 1994).
286
NEC3: Construction Contract of the Future? 287
has also been adopted for a large number of substantial projects. For example,
the contract for the Channel Tunnel Rail Link was based upon NEC2, as was
the national procurement project by the National Grid (Transco). NEC2 is being
used by the English National Health Service for its ProCure21 projects.3 The
British Airports Authority has used it for all of its work, most notably adapting it
for use for the new £5bn investment in Terminal 5 at Heathrow. Internationally,
NEC2 has apparently been widely used in South Africa4 ; and in other countries
in the transport, energy, process and mining sectors.
In June 2005, the third edition (NEC3) was published.5 The general approach
remains the same, although there have been some notable changes to a number
of key clauses, considered later in the article. NEC3 was in use soon after
publication, most notably being adopted for the decommissioning of nuclear
power stations; and more recently it has become the contract of choice of the
Olympic Delivery Authority (ODA).
The ODA is the single body that has been created to ensure the delivery of
the venues and infrastructure for the 2012 Games and beyond. In particular,
the ODA is responsible for the planning, designing and building of the
venues, facilities and accommodation and developing the infrastructure to
support these. The ODA is also required to look at issues of regeneration
and sustainability, and to ensure that the permanent structures created for
the 2012 Games are utilised beyond these Games. It is responsible for
the procurement of the contracts for the infrastructure, construction and
transport services being let by the London 2012 Organising Committee.
The ODA released its draft Procurement Policy for consultation on July
11, 2006.6 This outlines the ODA’s requirement that the 2012 Games are
delivered on time and according to budget, in a way that benefits the
community and environment, in keeping with the spirit of London’s Olympic
Bid.
The Office of Government Commerce has also endorsed NEC3; the contract can
therefore be selected if the procurement pathway is to meet the requirements of
Achieving Excellence in Construction.7 NEC3 is also being used to construct the
innovative Halley 6 Research Station—a project being constructed on a moving
ice shelf in Antarctica, said to be very challenging technically because of the
extreme conditions.8
NEC: an overview
The NEC is a major attempt to draft a simple and direct standard form contract
from first principles, without attempting to build on existing standard forms.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
288 Construction Law Journal
The authors of the NEC, gathered under the auspices of the Institution of Civil
Engineers, were principally led by Dr Martin Barnes. The specification prepared
by him in 1987 set out the aims for the NEC:
1. Flexibility.
2. Simplicity and clarity.
3. A stimulus for good management.9
On the basis of these principles, the authors drafted core clauses that apply to
all NEC contracts. The core clauses were then used as the basis for six main
options (each with varying risk allocation and reflecting modern procurement
practice). Under NEC3 there are six lettered main options:
Options A and B are lump sum fixed price contracts. An activity schedule
(breaking down the price into elements or activities comprising the works) is to
be prepared by the contractor, although in practice it will be directed to follow a
particular format. Options C and D operate a pain/gain-share mechanism. Other
NEC3 forms exist, together with published Guidance Notes:
9 See NEC3, “Engineering and Construction Contract Guidance Notes”, downloadable from
http://www.neccontract.com.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
NEC3: Construction Contract of the Future? 289
• Subcontract.
• Short form.
• Professional services.
• Adjudicator’s contract.
One of the most noticeable features of NEC has been its short direct
clauses. The simplicity of language aims to reduce the occurrence of dis-
putes.
The foundations of NEC3 and its predecessors are the nine sections containing
the core clauses. Beyond these, a user selects the appropriate main option
clauses (Options A–F referred to earlier) to produce the contract appropriate
for the chosen procurement pathway. In respect of dispute resolution there
are two options10 and then 15 secondary option clauses (all further considered
later). There are then two further options, one relating to the Housing Grants,
Construction and Regeneration Act 199611 and one which deals with the
Contracts (Rights of Third Parties) Act 1999.12
There are then a series of additional conditions of contract known as Z clauses.
These provide the parties—more usually the employer—with the opportunity to
insert bespoke terms or amendments into the contract.
Two schedules of cost components are then set out. The second one is a shorter
version of the first. The first is for use when Option C, D (target costs) or E
(cost reimbursable) is used, while the shorter schedule is appropriate for any of
Options A to E. The project-specific information (start date, etc.) is contained
in the Contract Data. Part 1 comprises data provided by the employer, such as
the identity of the employer, the project manager, dates, payment intervals and
insurance requirements. Part 2 contains data provided by the contractor, such as
key contact details, information for the risk register and information in respect
of the contractor’s design.
1. General.
2. The contractor’s main responsibilities.
3. Time.
4. Testing and defects.
5. Payment.
6. Compensation events.
7. Title.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
290 Construction Law Journal
13 Clause 16.
14 Contract data, Pt 1, 5 (Payment): “The assessment interval is . . . weeks (not more than five)”.
15
Core cl.50.3.
16 Core cl.51.2.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
NEC3: Construction Contract of the Future? 291
The core clauses in section 7 relate to the employer’s entitlement to plant and
materials, together with the removal of equipment and materials within the site.
Risks and insurances are covered by section 8. The employer’s risks are initially
set out and the contractor’s risks are “the risks that which are not carried by the
Employer”.17 An insurance table sets out the types of insurance required, which
cover the usual provisions. The contractor is to submit certificates demonstrating
that insurance is in place, and if the contractor does not insure then the
employer may insure and pass the cost of such insurance to the contractor.18
Similarly, the employer is to provide the contractor with any insurances taken
out by the employer, and once again the contractor may, if the employer
defaults, take out those insurances and claim the cost of the insurance from
the employer.19
Finally, termination is dealt with at section 9, which set out the reasons and
procedure for termination. In summary, either party may terminate in the event
of insolvency, as defined in cl.91.1. The contractor may terminate if not paid
within 13 weeks of the date of the certificate, while the employer may terminate
if the contractor fails to comply with their obligations, does not provide a bond
or guarantee, appoints a sub-contractor for a substantial piece of work before
the project manager has accepted that sub-contractor and hindered the employer
or others or substantially broken a health and safety regulation.
In the event of suspension of the works, either party may terminate if there is
a default of the other, where work has not restarted within 13 weeks. Clause
91.7 is similar to some force majeure clauses already in use. It provides for
the employer to terminate if an event which neither party could have prevented
and which an experienced contractor at the contract date would have judged as
having a small chance of occurring stops the contractor from completing the
works.
According to the proponents of the NEC, its great strength is that it adopts a
partnering approach whilst also placing great emphasis upon pro-active project
management. There are perhaps three ways that this is clearly demonstrated in
the NEC form.
First, the early warning system is drafted to encourage the identification of
problems and for the parties to work together in order to establish an early
resolution. This provides that a contractor will only be compensated on the
basis that an early warning had been given, based upon the date on which an
experienced contractor would have or ought to have recognised the need to
give a warning. Contractors are therefore encouraged to play their part in the
early warning procedures, in order to avoid inadequate cost recovery for those
problems which materialise later on.
Secondly, all those risks for which the employer is not expressly responsible
under cl.80.1 are risks for which the contractor is liable.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
292 Construction Law Journal
Finally, the target cost option most clearly reflects the early warning pro-active
management approach by affecting the financial bottom line of the parties, in
particular the contractor.
“The Employer, the Contractor and the Project Manager act in the spirit of
mutual trust and co-operation and so as not to prevent compliance by any
of them with the obligations each is to perform under the Contract.”21
The contract, though amended, was based on the NEC form; it was a target cost
contract with a pay and gain mechanism, providing for the Costain consortium to
be paid actual cost less disallowed cost (as defined by the contract). The project
manager (RLE) was a different consortium, whose largest shareholder was Bech-
tel Rail Link Engineering. Many of the RLE personnel who worked on the con-
tract were also Bechtel employees. In February 2005, RLE issued payment cer-
tificate no.47. This valued the work carried out as approximately £264 million,
but disallowed costs of some £1.4 million. In April 2005, payment certificate
no.48 was issued. This increased the total of disallowed costs to £5.8 million.
The Costain consortium alleged that, at a meeting in April 2005, Mr Bassily,
the executive chairman of RLE (and a Bechtel manager), instructed all Bechtel
staff to take a stricter approach to disallowing costs; and to disallow legitimate
costs when assessing the payment certificates. The Costain consortium were
concerned that Bechtel had deliberately adopted a policy of administering the
contract unfairly and adversely to them. Accordingly, the consortium issued a
claim against Bechtel and Mr Bassily, alleging that they had committed the tort
of unlawfully procuring breaches of contract by the employer. The claim which
came to the Court sought interim injunctions, restraining the RLE consortium
from acting in this way in relation to the assessment of the contractor’s claims.
On the evidence before the Court, the judge found that Mr Bassily had, in
fact, been telling Bechtel staff to exercise their functions under the contract in
the interests of the employer, so not impartially. Bechtel argued that they were
obliged to look after the employer’s best interests and that therefore owed no
duty to act impartially in respect of consideration of the payment applications.
Jackson J. disagreed, holding that it was properly arguable that, when assessing
sums payable to the contractor, RLE as project manager did owe a duty to act
impartially as between employer and contractor.
20 Costain Ltd v Bechtel Ltd [2005] EWHC 1018 (TCC); [2005] T.C.L.R. 6; reported by Westlaw
as (2005) WL 3027218.
21
Judge Humphrey LLoyd Q.C. in Birse Construction Ltd v St David Ltd (No.1) [1999] B.L.R.
194; TCC and the Court of Appeal in Baird Textile Holdings Ltd v Marks & Spencer Plc [2001]
EWCA Civ 274; [2002] 1 All E.R. (Comm) 737 both touch on the subject of partnering and on the
terms “trust” and “cooperation”.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
NEC3: Construction Contract of the Future? 293
The judge considered the authorities, starting with Sutcliffe v Thackrah,22 where
the House of Lords had discussed the role and duties of an architect in that
situation. Here Lord Reid said:
“It has often been said, I think rightly, that the architect has two different
types of function to perform. In many matters he is bound to act on his
client’s instructions, whether he agrees with them or not; but in many
other matters requiring professional skill he must form and act on his own
opinion.
Many matters may arise in the course of the execution of a building
contract where a decision has to be made which will affect the amount
of money which the contractor gets. Under the RIBA contract many such
decisions have to be made by the architect and the parties agree to accept
his decisions. For example, he decides whether the contractor should be
reimbursed for loss under cl.11 (variation), cl.24 (disturbance) or cl.34
(antiquities), whether he should be allowed extra time (cl.23); or when
work ought reasonably to have been completed (cl.22). And, perhaps most
important, he has to decide whether work is defective. These decisions will
be reflected in the amounts contained in certificates issued by the architect.
The building owner and the contractor make their contract on the
understanding that in all such matters the architect will act in a fair and
unbiased manner and it must therefore be implicit in the owner’s contract
with the architect that he shall not only exercise due care and skill but also
reach such decisions fairly, holding the balance between his client and the
contractor.”23
Jackson J. noted that these comments had generally been accepted by the
construction industry and the legal profession as correctly stating the duties
of architects, engineers and other certifiers under the conventional forms of
construction contract. The issue here concerned the duty of certifiers in general,
but also the specific duties of the project manager under the present contract.
Four reasons were put forward as to why the contract here was different:
“(i) The terms of the present contract which regulate the contractor’s
entitlement are very detailed and very specific. They do not confer
upon the project manager a broad discretion, similar to that given
to certifiers by conventional construction contracts. Therefore
there is no need, and indeed no room, for an implied term of
impartiality in the present contract.
(ii) The decisions made by the project manager are not determinative.
If the contractor is dissatisfied with those decisions, he has
recourse to the dispute resolution procedures set out in section 9
of the contract. The existence of these procedures has the effect
of excluding any implied term that the project manager would
act impartially.
22
Sutcliffe v Thackrah [1974] A.C. 727; [1974] 2 W.L.R. 295, HL.
23 Sutcliffe [1974] A.C. 727 at 737.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
294 Construction Law Journal
“Mr Boswood [counsel for the defendants] points out that under clause
92.1 the adjudicator is obliged to act impartially. Therefore, he submits,
there does not need to be any similar duty upon the project manager. This
submission has surprising consequences. If (a) the project manager assesses
sums due partially and in a manner which favours the employer, but
(b) the adjudicator assesses those sums impartially and without favouring
either party, then this is likely to lead to successive, expensive and time-
consuming adjudications. I do not see how that arrangement could make
commercial sense.”27
“I do not see how this circumstance detracts from the normal duty which
any certifier has on those occasions when the project manager is holding
a balance between employer and contractor. In Royal Brompton 28 (upon
which defence counsel rely in paragraph 33 of their skeleton argument) the
contractual arrangement was very different from that set up in the present
case. There were architects and others who would carry out the functions
of certification and assessing what was due to the contractor. The role
of Project Management International in the Royal Brompton case was far
removed from that of RLE in the present case.”29
24 Royal Brompton Hospital NHS Trust v Hammond (No. 8) [2002] EWHC 2037 (TCC); 88 Con.
L.R. 1.
25 Costain Ltd [2005] EWHC 1018 (TCC), [39].
26 Costain Ltd [2005] EWHC 1018 (TCC), [43].
27 Costain Ltd [2005] EWHC 1018 (TCC), [46].
28
Royal Brompton Hospital [2002] EWHC 2037 (TCC).
29 Costain Ltd [2005] EWHC 1018 (TCC), [47].
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NEC3: Construction Contract of the Future? 295
In respect of point (iv), he decided that cl.Z.10 was not relevant. He then quoted
cl.Z.11:
He also commented:
“At the moment I do not see how clause Z.11 impacts upon the present
issue. The implied obligation of a certifier to act fairly, if it exists, arises
by operation of law not as a consequence of custom.”30
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296 Construction Law Journal
A risk register has appeared for the first time in this most recent edition of
NEC.34 The risk register will initially contain risks identified by the employer
and contractor, but the risk register will develop as the project proceeds. It
works hand in hand with the early warning process and in conjunction with the
proactive project management approach of the contract.
There are three main objectives of the risk register:
It may be possible to precisely and specifically identify risks that can be added
to the register, or in other instances the risk register may simply contain some
generic risks. The process of identification allows the parties to consider how
those risks might be managed before turning their attention to the time and
cost implications. If Option A or B applies, then the employer will only bear
the costs in terms of time and money if a risk is covered by a compensation
event. Otherwise, the contractor bears all other risks. The approach is similar
for Options C and D (target cost contracts) in that the employer will bear the
risk if the event is one listed in cl.80.1. If not, the employer will in any event
initially bear the risk, but the risk will then be shared through the risk share
mechanism set out in cl.53.
34 Core cl.16.3.
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The contractor is to start on-site on the first access date and is to complete the
work on or before the completion date. The project manager is to certify within
one week of completion the date of completion. The contractor must also carry
out the work such that any condition stated for a key date is met by that key date.
Key dates are distinct from sectional completion dates. If sectional completion
is required, then secondary Option X5 must be included within the contract.
Sectional completion provisions are short, and so the detail of the work to be
carried out and completed in any particular section must be carefully identified
in the contract data. By comparison a key date is:
“ . . . the date on which work is to meet the Conditions stated. The Key
Date is the Key Date stated in the Contract Data and the Condition is the
condition stated in the Contract Data unless later changed in accordance
with this contract.”36
The distinction between a sectional completion date and a key date, therefore,
is that the contractor must simply meet the condition stated in the contract
on or before the key date; while a certified (sectional) completion date means
that the employer must take over those works not later than two weeks after
completion.37
The Guidance Notes to NEC338 state that key dates are applicable for projects
when two or more contractors are working on the same project, albeit under sep-
arate contracts, but with a common employer and most usually the same project
manager. If one contractor’s work is dependent upon the actions of the other,
then the use of key dates within a project programme allows the project manager
to monitor the completion of a particular activity by a contractor for part of the
35 Under NEC3 Option C, disallowed costs are costs which the project manager decides are not
“justified by the Contractor’s accounts and records”; should not have been paid to a subcontractor
or supplier; or were incurred because the contractor did not follow acceptance or procurement
procedures or give an early warning.
36 Clause 11.2(9).
37
Clause 35.1.
38 Summary of NEC3 Engineering and Construction Contract Guidance Notes (NEC Users’
Group); downloadable from http://www.neccontract.com.
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298 Construction Law Journal
works. It is said that key dates can be used to precisely programme timescales
in order to achieve a particular condition, thus allowing other contractors—or
indeed the employer—to proceed to an overall project programme.
In practice, there may be some difficulty in defining precisely what it is that
must be done in order for a contractor to achieve a key date, just as there is
with adequately and properly defining each section, where a particular project is
subject to sectional completion. The difficulty can only be greater in attempting
to define conditions which are something less than the completion of a section,
but which are readily identifiable.
An example of a key date may be the completion of the contractor’s design
in respect of a particular section of the works or a design reaching a defined
stage. The purpose would be to allow others to then carry on with their design
or to commence construction. No doubt with a true commitment to a proactive
project management-based approach, the use of key dates could be invaluable.
Programme
A further important aspect of the core clauses dealing with time is the
contractor’s programme. The programme might be identified in the contract
data and so attached to the contract, or alternatively the contractor may submit
a programme to the project manager for acceptance. The contractor’s programme
must show not only the start date, access dates, key dates and completion
dates, but also planned completion, the order and timing of operations (both
the contractor’s and the work of others), together with provisions for float, time
risk allowances, health and safety requirements and other procedures set out in
the contract.
If the contractor needs access at a particular time and in respect of a particular
part of the site, then that must also be indicated in the programme, together with
dates by which acceptances are needed and information from others as well as
plant and materials and other “things” that are to be provided by the employer.
A statement of how the contractor is to plan and carry out the work must also
be included, together with any other specific information required in the works
information for that particular project.
The project manager has two weeks to either accept the programme or set out
reasons for rejecting it. There are four default reasons set out in cl.31.3: first,
if the contractor’s plans are not practicable; second, if the programme does not
show the information required by the contract; third, if it is not realistic; or,
finally, if it does not comply with the works information. These are the listed
reasons; but it seems that a project manager could set out further reasons for
not accepting the programme. The project manager must certainly set out some
reasons, rather than simply rejecting the programme.
When the contractor submits a revised programme, that programme must record
the actual progress made in respect of each operation and the effect upon the
remaining works. The use of programmes therefore is an active and on-going
management tool. Further, a programme is to be submitted at the completion
of the whole works, thus finally updating the programme to the point where it
becomes almost a record of the as-built works.
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The project manager may request the contractor to provide a quotation for
accelerating the works in order to achieve completion before the completion
date.39 NEC is therefore one of the few contracts that provides express power
for the employer, or rather in this instance the project manager on behalf of
the employer, to request the contractor for a price for accelerating the works.
Nonetheless, any acceleration is of course subject to the contractor submitting
a quotation that is acceptable, and indeed being in a position to accelerate the
works.
Compensation events
Definition
Core cl.60 deals with compensation events. If a compensation event occurs,
which is one entitling the contractor to more time and/or money, then it will be
dealt with on an individual basis. If the compensation event arises from a request
of the project manager or supervisor, then the contractor is asked to provide
a quotation, which should also include any revisions to the programme. The
project manager can request the contractor to revise the price or programme,
but only after they have explained their reasons for the request.
The general scheme of cl.60 is to define those events which are compensation
events. Notice provisions are contained in cl.61 (dealt with in further detail
later); a quotation in respect of a compensation event may then be requested
by the project manager. The contractor can be asked to submit alternative
quotations.40 The contractor should submit its quotation within three weeks of
a request by the project manager. The project manager then replies within two
weeks, either accepting the quote, instructing a further revised quote, notifying
the contractor that the proposed instruction will not be given or notifying the
contractor that the project manager will make their own assessment.41
39 Core cl.36.1.
40
Clause 62.1.
41 Clause 61.3.
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300 Construction Law Journal
“. . .actual Defined Cost of the work already done, the forecast Defined
Cost of the work not yet done and the resulting Fee”.42
Clause 52 deals with defined cost, which provides that, “All the Contractor’s
costs which are not included in the defined cost are treated as included
in the Fee.” The defined cost comprises the rate and percentages that are
set out in the contract data less any discounts, but subject to an additional
fee.
A delay to the completion date is assessed by reference to the planned
completion shown on the accepted programme. The adjustment to the time
for completion is, therefore, based upon assumptions, which may include for
risks associated with the forecasting of any particular event. There is, however,
no change to any adjustment to the time for completion if the assessment turns
out to be wrong.43
NEC3 has adopted a more strict regime for contractors in respect of compen-
sation events, in core cl.61.3:
Clause 61.3 is apparently a bar to any claim, should the contractor fail to notify
the project manager within eight weeks of becoming aware of the event in
question. The old NEC2 formulation of a two-week period for notification has
been replaced with an eight-week period, but with potentially highly onerous
consequences for a contractor. This clause must also be read in conjunction
with cl.60.1(18), which states that a compensation event includes, “A breach of
contract by the Employer which is not one of the other Compensation Events
in this contract.”
Clause 61.3, therefore, effectively appears to operate as a bar to the contractor
in respect of any time and financial consequences of any breach of contract if
the contractor fails to notify.
42
Clause 63.1.
43 Clause 65.2: “The assessment of a compensation event is not revised if a forecast upon which
it is based is shown by later recorded information to have been wrong.”
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The courts have for many years been hostile to such clauses. In more modern
times, there has been an acceptance by the courts that such provisions might
well be negotiated in commercial contracts between businessmen.45 The House
of Lords case of Bremer Handels GmbH v Vanden-Avenne Izegem 46 provides
authority for the proposition that for a notice to amount to a condition
precedent it must set out the time for service and make it clear that failure
to serve will result in a loss of rights under the contract. This seems
relatively straightforward. However, it may not be possible for an employer
to rely upon Bremer in circumstances where the employer has itself caused
some delay. So Bremer is a case where the party seeking to rely upon the
condition precedent was not itself in breach in any respect. An employer
may, therefore, be in some difficulty when attempting to rely upon Bremer
in circumstances where the employer has caused the loss, or a proportion of the
loss.
The courts also interpret strictly any clause that appears to be a condi-
tion precedent. Not only will the court construe the term against the per-
son seeking to rely upon it, but it will require extremely clear words in
order for the court to find that any right or remedy has been excluded.
However, an alternative way of approaching such provisions was high-
lighted in the Scottish case of City Inn Ltd v Shepherd Construction
Ltd.47
Here, the Court of Session considered the requirement on the contractor to
comply with a time-bar clause (in this case a heavily amended JCT80 Private
with Quantities). The contractor had been awarded (by the architect and an
adjudicator) a total nine-week extension of time. The employer argued that
no extension should have been granted and that liquidated damages should be
payable, since the contractor had failed to comply with the time-bar provisions.
Clause 13.8.1 provided:
44 See also H. Lal, The Rise and Rise of Time-Bar Clauses for Contractors’ Claims: Issues for
Construction Arbitrators (Society of Construction Law Paper 142, Sept 2007).
45
See, e.g. Photo Production Ltd v Securicor Transport Ltd [1980] A.C. 827; [1980] 2 W.L.R.
283; [1980] 1 All E.R. 556, HL.
46 Bremer Handels GmbH v Vanden-Avenne Izegem [1978] 2 Lloyd’s Rep. 109, HL.
47
City Inn Ltd v Shepherd Construction Ltd [2003] S.L.T. 885; [2003] S.C.L.R. 795; Outer House,
Court of Session; then appealed to the Inner House (successful on the point that failure to use the
procedures of cl.13.8 was not itself a breach of contract, so the clause could not be treated as
imposing a penalty), [2003] B.L.R. 468.
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302 Construction Law Journal
“If the Contractor fails to comply with any one or more of the provisions of
clause 13.8.1, where the Architect has not dispensed with such compliance
under clause 13.8.4, the Contractor shall not be entitled to any extension
of time under clause 25.3.”
Under NEC3, the contractor must of course be “aware of the event” in order
to notify the project manager under cl.61.3. There will no doubt be arguments
about when a contractor became aware—or should have become aware—of a
particular event, and also the extent of the knowledge in respect of any particular
event. Ground conditions offer a good example. Initially, when a contractor
encounters ground conditions that are problematic, they may continue to work in
the hope that they will overcome the difficulties without any delay or additional
costs. As the work progresses, the contractor’s experience of dealing with the
actual ground conditions may change, such that the contractor reaches a point
where they should notify the project manager. The question arises: should the
contractor have notified the project manager at the date of the initial discovery,
rather than at the date when the contractor believed that the ground conditions
were unsuitable?
The answer must be, in line with the words of NEC3, that the contractor
should give notice when they encounter ground conditions which an experienced
contractor would have considered at the contract date to have had only a minimal
chance of occurring and so it would have been unreasonable to have allowed
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NEC3: Construction Contract of the Future? 303
for them in the contract price, having regard to all of the information that the
contractor is to have taken into account under cl.60.2.49
“Some of the people in the company are mere servants and agents who are
nothing more than hands to do the work and cannot be said to represent
the mind or will. Other[s] are directors and managers who represent the
directing mind and will of the company, and control what it does. The
state of mind of these managers is the state of mind of the company and
is treated by the law as such. So you will find that in cases where the law
49
Clause 60.2 deals with physical conditions.
50 For example HL Bolton Engineering Co Ltd v TJ Graham & Sons Ltd [1957] 1 Q.B. 159, CA.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
304 Construction Law Journal
“Normally the board of directors, the managing director and perhaps other
superior officers of a company carry out the functions of management and
speak and act as the company. Their subordinates do not. They carry out
orders from above and it can make no difference that they are given some
measure of discretion. But the board of directors may delegate some part of
their functions of management giving to their delegate full discretion to act
independently of instructions from them. I see no difficulty in holding that
they have thereby put such a delegate in their place so that within the scope
of the delegation, he can act as the company. It may not always be easy
to draw the line but there are cases in which the line must be drawn.”52
Lord Reid confirms the approach of Denning L.J., but notes that it may be
possible for the directors or senior managers to delegate, in this instance,
fundamental decision-making processes required during the course of the
running of a construction contract. In the absence of such delegation, it is
arguable that those whom must be “aware” are the directors and managers who
constitute the “directing mind” of the company.
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NEC3: Construction Contract of the Future? 305
54 Gaymark Investments Pty Ltd v Walter Construction Group Ltd (formerly Concrete Construc-
tions Group Ltd) (2005) 21 Const. L.J. 71, Sup. Ct Northern Territory.
55
Peak Construction (Liverpool) 1 B.L.R. 111.
56 Multiplex Construction (UK) Ltd v Honeywell Control Systems Ltd [2007] EWHC 447 (TCC);
[2007] B.L.R. 195; 111 Con. L.R. 78.
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306 Construction Law Journal
57
Holme v Guppy 150 E.R. 1195; (1838) 3 M. & W. 387.
58 Dodd v Churton [1897] 1 Q.B. 562, CA.
59
Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 W.L.R.
601, HL.
60 See Multiplex Construction (UK) Ltd [2007] EWHC 447 (TCC) at [56].
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NEC3: Construction Contract of the Future? 307
works. On the other hand, those that did have an effect would be variations under
cl.4.2 and then would be recognised under the extension of time provisions.
Honeywell also argued that Multiplex failed to review the overall programme
or consider and properly award extensions of time. Once again, these did not
render the extension of time provisions inoperative.
Relying on the Australian decision of Gaymark,61 Honeywell argued that a
failure to comply with the clause was sufficient to put time at large. In that case,
the contract provided that the contractor would only obtain an extension of time
if notices had been submitted under cl.19.2 of the contract. That in turn relied
upon Peak Construction v McKinney,62 in which the House of Lords said that
if an employer wished to recover liquidated damages because a contractor had
failed to complete on time, then the employer could not do so where any of the
delay was due to the employer’s own fault or breach of contract. The extension
of time provisions in a contract should therefore provide for an extension of
time in respect of any fault or breach on the part of the employer. Gaymark held
that the inability to give an extension of time because of a contractor’s failure
to provide a notice meant that time was set at large; by contrast, in City Inn,63
the Court concluded that the breach was not the employer’s inability to grant
an extension of time, the loss having instead been caused by the contractor’s
failure to serve an appropriate notice—or indeed to apply its mind to whether
a notice was required.64
Jackson J. also considered the use of “the prevention principle” in Gaymark,65
concluding that it was not clearly English law and that the approach of City Inn 66
was to be preferred. He thought that there was considerable force in Professor
Wallace’s criticisms of Gaymark, noting that contractual terms requiring a
contractor to give prompt notice of delay serve a useful purpose:
61 Gaymark Investments Pty Ltd (2005) 21 Const. L.J. 71, Sup. Ct.
62
Peak Construction (Liverpool) 1 B.L.R. 111.
63 City Inn Ltd [2003] S.L.T. 885.
64 On appeal, the Inner House held that Shepherd was not in breach of contract in failing to issue
notices under cl.13. However, if Shepherd had issued notices, then it might have been relieved of
liability under the liquidated damages cl.23 (see last sentence of [25] of the judgment. As a result,
Shepherd was not “in breach of” cl.13, but had incurred liability under cl.23.
65 Lal, The Rise and Rise of Time-Bar Clauses for Contractors’ Claims (Society of Construction
Law Paper 142, Sept 2007) refers on this point to Ellis Baker, James Bremen & Anthony Lavers,
“The Development of the Prevention Principle in English and Australian Jurisdictions” [2005]
I.C.L.R. 197 at 211; also to I.N. Duncan Wallace, “Liquidated Damages Down Under: Prevention
by Whom?” (2002) 7:2 Construction and Engineering Law 23, where Duncan Wallace holds that
Gaymark represents “a misunderstanding of the basis of the prevention theory” and “a mistaken
understanding of the inherently consensual and interpretative basis of the prevention principle”.
In particular he says of Gaymark : “Neither Bailey J nor the arbitrator . . . discussed or noted the
practical need which justifies a strict notice requirement in all EOT matters (due to the Contractor’s
more intimate knowledge of its own construction intentions and so the critical path significance
of an EOT event and also to give the owner an opportunity as, for example, by withdrawing an
instruction or varying the work—to avoid or reduce delay to completion of which he has been
notified). Nor was there any recognition that, precisely for these reasons, strict notice would be
even more justifiable where random acts or instructions of the owner or his Superintendent . . .
could later be said to be acts of prevention”.
66 City Inn Ltd [2003] S.L.T. 885.
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308 Construction Law Journal
He concluded:
“If the facts are that it was possible to comply with clause 11.1.3 that
Honeywell simply failed to do so (whether or not deliberately), then those
facts do not set time at large.”68
Equity
The contractor wishing a make a claim for a compensation event, like under a
more traditional standard form, may be able to rely upon the equitable principles
of waiver and/or estoppel.69 It may be that the contractor does not serve a formal
notice because, by words or conduct, the employer (or indeed project manager)
represents that they will not rely upon the strict eight-week notice period.
The contractor would also need to show that they relied upon that representation
and that it would now be inequitable to allow the employer to act inconsistently
with it. This approach could be further supported by core cl.10.1, which requires
the parties to act “in a spirit of mutual trust and co-operation”. It would be
somewhat ironic if a contractor did not submit contractual notices, in the spirit
of “mutual trust and co-operation” but the employer at some much later date
relied on the strict terms of cl.61.3.
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NEC3: Construction Contract of the Future? 309
X12 Partnering.
X13 Performance bond.
X14 Advanced payment to the Contractor.
X15 Limitation of the Contractor’s liability for his design to reasonable
skill and care.
X16 Retention.
X17 Low performance damages.
X18 Limitation of liability.
X20 Key Performance Indicators.70
These clauses are relatively short. They simply provide for some instances which
are commonly encountered and therefore may be required in the contract. X1,
dealing with price adjustment for inflation, is only to be used with Options A-D,
but in any event, in the United Kingdom is currently unlikely to be necessary,
given the persistent low inflation for more than 15 years.71 However, the clause
may prove to be widely used in many other parts of the world. X2, for changes
in the law, provides a further compensation event if there was a change in the
law and X3 provides for multiple currencies. Once again, these two secondary
options are more likely to be used internationally.
If a parent company guarantee is required, then X4 can be used. If sectional
completion is required, then X5 is appropriate. An incentive for early completion
is dealt with at X6, and (the most frequently encountered) liquidated damages
is covered by Option X7.
The more lengthy Option X12 deals with partnering. Unsurprisingly, it requires
the parties to work together in a “spirit of mutual trust and co-operation”.72 The
partners are to give an early warning to the others when a partner becomes aware
of a matter that could affect the achievement of any other partner’s objectives.
It would be interesting to test the ramifications of an allegation of failing to
follow this procedure, as cl.X12.2(6) states that the option does not create a
legal partnership between the partners, but does not go as far as stating that the
partnering option is to have no legal effect, as a non-binding partnering charter
might. Option X12 also provides for incentives based upon key performance
indicators (KPIs)—but see also X20, discussed later. A partner can therefore
achieve a financial incentive by reaching its target or improving upon it.
Where a contractor is designing and constructing the works, X15 provides that
the contractor’s liability for design is reduced to one of reasonable skill and care.
The extent to which clauses of this nature work in practice remain to be seen,
given that the focus of the drafting is on a reduction of the design liability to
one of skill and care, without considering that a contractor’s overall liability for
70
Note that Options X8-X11 and X19 are not used.
71 That statement had more force when this article was first written in mid-2006. At the time of
final editing, the base interest rate has increased and decreased several times.
72
Option X12.3(1). In any event, core cl.10.1 requires that the parties “shall act . . . in a spirit of
mutual trust and co-operation”. So the subjective partnering terminology pervades all of the NEC3
forms, and the commanding future tense auxiliary verb “shall” requires the parties to comply. This
is the only clause in NEC3 where “shall” is used.
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310 Construction Law Journal
Z clauses
Additional conditions can be inserted into the NEC through the use of Option
Z. These are often referred to as “Z clauses”: clauses inserted by the parties
either to address matters that are not expressly addressed within the contract,
or to amend the standard clauses of contract. In traditional forms of contract,
like the Joint Contracts Tribunal (JCT), Institute of Civil Engineers (ICE) and
so on, the equivalent would be those clauses inserted as “special conditions” or
those inserted through a “schedule of amendments”.
When considering Z clauses, it is important not to lose sight of the defining
characteristics of the NEC. The NEC is inherently flexible: the combined use of
core and optional clauses provides for a variety of approaches to risk allocation
and consequently the NEC can be adapted for any number of circumstances.
Further, the NEC is intended as a stimulus to good management: rather than
prescribing an outcome for every eventuality, it advocates early collaboration
between the parties using an early warning system, so that there is a proactive
approach to problems as the works progress.
Despite this, some would suggest that the lack of detail contained in the NEC
can lead to ambiguity and that clarity in respect of certain matters should be set
out at the outset, rather than as particular events occur. Accordingly, Z clauses
may typically address the following:
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NEC3: Construction Contract of the Future? 311
The above are only a few examples of the types of issues that are commonly
addressed in Z clauses. Such clauses are not intended to substantially re-
write the standard clauses of contract; indeed, improper use of Z clauses
can be problematic. No doubt it is quite easy for parties to simply “cut and
paste” provisions contained in some “special conditions” or a “schedule of
amendments” into Z clauses, falling back into old habits and thereby defeating
the benefits of using the NEC. Put simply, wholesale amendments to the standard
form through the use of Z clauses should normally be resisted.
Dispute resolution
74 The Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998/649).
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312 Construction Law Journal
This is the default procedure, which can be used by either party where the
HGCRA does not apply. It is not necessary to identify it by selecting an option
in the contract data.
However, if the contract is used in another country where legislation provides
for adjudication or adjudication-backed payment, then there is a high chance
that Option W1 will not comply with the local legislation. If so, the dispute
resolution procedures may be entirely replaced by that local legislation. A truly
international form would have provided for a third option, when Options W1
and W2 are inappropriate, thus placing the onus on the employer to insert a
dispute resolution procedure that complies with the law of the place where the
contract is being carried out. Local branches of the NEC Users’ Group around
the world might then be able to develop short W option clauses for particular
jurisdictions, in order to assist in the wider international use of NEC3.
The party referring the dispute to the adjudicator must include “information”
with the referral. This is presumably the supporting documentation and
explanation of the matter or matters in dispute. Any further information is to be
provided within four weeks of the referral.75 The adjudicator is to decide the
dispute, with reasons, within four weeks of the end of the period from receipt of
the information. The period may be extended by agreement between the parties.
The minimum period for adjudication is therefore eight weeks.
The decision is binding unless or until revised by “the tribunal” (defined in
Part 1 of the contract data). More importantly, the decision becomes final and
binding unless one of the parties notifies the other that they are dissatisfied with
the dispute and intend to refer it to the tribunal.76 If the tribunal referred to in
W1 is to be an arbitral tribunal, then Part 1 of the contract data also encourages
the employer to specify the applicable arbitration procedure and the place where
the arbitration is to be held, as well as the procedure for the appointment of the
arbitrator.
Conclusions
75
Option W1.3(3).
76 Option W1.4(3).
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NEC3: Construction Contract of the Future? 313
do—to capture a framework for the parties to follow—but at the same time
identify who bears which risk in the event that a particular problem materialises.
Mechanisms for resolving disputes during the course of the project or very soon
after a project’s conclusion are becoming more frequent. NEC3 goes further than
simply addressing disputes by way of adjudication, but attempts to introduce a
time-bar for any compensation events that are not notified by the contractor to
the project manager within eight weeks of becoming aware of the event. This
approach, whose effect in law is not yet clear,77 attempts to give the employer
some certainty in respect of the outturn cost of the project by requiring the
contractor to give an early notice and thus alert the employer’s team to additional
costs. This is similar to the International Federation of Consulting Engineers
(FIDIC) contracts,78 also to contracts amended by more sophisticated employers.
Contractors are having difficulty adjusting to this new regime. Many feel that
a warning notice relating to claims leads to a breakdown in the relationship
between the individuals working on the project, thus making the project more
difficult to complete. However, an absence of an appropriate notice might well
mean that a contractor is unable to bring a claim at some later date. It will be
interesting to see how this mechanism is used by the industry in practice—and
how the courts interpret such a clause. Given that many disputes will be resolved
in adjudication and then finally most likely arbitration, it may be some time
before the courts comment definitively on these provisions.
Overall, NEC3 is a contract that is now being adopted by some sectors of the
construction industry within the United Kingdom and internationally. It adopts a
drafting philosophy that many argue supports modern good practice. If the use of
NEC3 continues to develop across further sectors of the industry and internation-
ally, then there is no doubt that it will be the construction contract of the future.
77
See Multiplex Construction (UK) Ltd [2007] EWHC 447 (TCC).
78For example, FIDIC 1999 forms, cl.20.1, discussed by Lal, The Rise and Rise of Time-Bar
Clauses for Contractors’ Claims (Society of Construction Law Paper 142, Sept 2007).
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
A Critical Evaluation of the
Success of Project
Partnering
By Simon Brookes, BSc (Hons), MCIOB, MRICS*
Introduction
Partnering principles
Some within the industry suggest that partnering in the construction industry
came about as a result of the recommendations made by the Latham Report
of 1994, Constructing the Team,1 the principals being further enhanced by Sir
∗
Miller Construction.
1 Latham Report of 1994, Constructing the Team (Evans, 2004) .
314
A Critical Evaluation of Success of Project Partnering 315
2
J. Egan, Rethinking Construction (London: DETR, 1998).
3 For example see: G. Alty, “PPC 2000—a Constructor’s Perspective” (2003) 14(3) Cons. Law
29; R. Dartnell, “PPC 2000—clients wanting their cake and eating it? (2007) 18(3) Cons. Law 23
and D. Evans, “Parallel Partnering: Background and Benefits”, Society of Construction Law Paper
(March, 2004).
4 J. Critchlow, F. Elliott and K. Gidwani, “Partnering: the Mission Impossible?” (2001) 12(2)
Cons. Law 14.
5
D. Mosey, “PPC 2000: The first standard form of contract for project partnering”, Society of
Construction Law Paper (Sept 2001), 1–17.
6 Egan, Rethinking Construction (1998), p.34.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
316 Construction Law Journal
As will be seen later, a theory that has found dissent from many industry
writers.7
Partnering defined
This is an apt description of what the writers define partnering within the
industry to be and can be further enhanced by Rudi Klein where the author
sets out the key characteristics of partnering relationships10 :
• Trust.
• Teamworking.
• No blame culture.
• Transparency (especially in relation to costs, risk allocation and sharing).
• Integrated delivery teams involved from the earliest stage of the project.
• Long term relationships.
• Continuous improvement, using performance measurement systems.
7 R. Klein, “Do we need partnering contracts?”, Society of Construction Law Paper (Sept 2002),
1–10. Critchlow, Elliott and Gidwani, “Partnering: the Mission Impossible?” (2001) 12(2) Cons.
Law 14.
8
M. Bresnen and N. Marshall, “Partnering in Construction: A Critical Review of Issues, Problems
and Dilemmas” in Construction Management and Economics (2000) 18(2), 229–237.
9 J. Bennett and S. Peace, Partnering in the Construction Industry, 1st edn (Oxford: Butterworth-
Heinemann, 2006), p.3
10 Klein, “Do we need partnering contracts?”, Society of Construction Law Paper (Sept 2002),
1–10.
11 J. Bennett and S. Jayes, The Seven Pillars of Partnering: A Guide to Second Generation
Partnering (London: Thomas Telford, 1998).
12 Klein, “Do we need partnering contracts?”, Society of Construction Law Paper (Sept 2002),
1–10.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
A Critical Evaluation of Success of Project Partnering 317
It is quite apparent therefore that the industry has to take huge steps from
its traditional adversarial approach to one that feels a bit like it was thought
up in the sixties, during the decade of free love, to achieve true partnering.
Many writers have confirmed that partnering is the only means by which the
construction industry can grow and succeed.13
However, Dodsworth suggests, “. . . an essential ingredient in the partnering
arrangement is an appropriate dispute resolution procedure which operates as a
problem-solving framework.”14
Surely this is a contradiction to the partnering relationships key characteristics,
as described by Klein?15
It is unclear whether a partnering relationship is best served or hampered by
a legally binding agreement. The result of such an agreement make the key
principals of partnering, as set out by Klein, is unattainable. However, it is
difficult to see how Dodsworth’s proposals for an integral dispute resolution
procedure could be achieved without a contract.
In his report Egan stated, “Effective partnering does not rest on contracts
. . . these should gradually become obsolete”.16 However, many of the writers
disagree with Egan’s sentiment. Deborah Brown feels it foolhardy to enter into
a partnering agreement that has no legal force stating, “Parties to a partnering
agreement beware.”17
An example of the unclear nature of partnering charters is highlighted in Birse
Construction Ltd v St David Ltd (No.1).18 The case shows the problems that can
occur when partnering agreements are found to be part of the contract. “His
Honour Judge Humphrey Lloyd Q.C. made it quite clear that the charter could
indeed affect the parties’ substantive rights.”19
The case of Baird Textile Holdings Ltd v Marks & Spencer Plc 20 provides
evidence of other issues when partnering relationships are unclear:
“Mr Justice Morison dismissed the claim insofar as it was based on contract
and directed that it should proceed to trial insofar as it was based on the
estoppels claim.”21
13 See S. Belshaw, “Partnering—till dispute us do part?” (2001) 12(5) Cons. Law 30 and Evans,
“Parallel Partnering: Background and Benefits”, Society of Construction Law Paper (March, 2004).
14 C. Dodsworth, “Resolving Disputes in a Partnering Environment” (2002) 13(6) Cons. Law 17.
15 Klein, “Do we need partnering contracts?”, Society of Construction Law Paper (Sept 2002),
1–10.
16 Egan, Rethinking Construction (1998), p.34.
17 D. Brown “After the Divorce—Problems with Partnering Agreements” Society of Construction
Law Paper (2001), 1–9.
18 Birse Construction Ltd v St David Ltd (No.1) [2000] B.L.R. 57.
19 Critchlow, Elliott and Gidwani, “Partnering: the Mission Impossible?” (2001) 12(2) Cons. Law
14.
20
Baird Textile Holdings Ltd v Marks & Spencer Plc [2001] EWCA Civ 274; [2002] 1 All E.R.
(Comm) 737.
21 R. Klein, “Partnering—the risk of not having a contract” (2002) 13(7) Cons. Law 27.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
318 Construction Law Journal
It seems obvious that the parties to an agreement should be explicit within their
documents as to whether the agreement should be legally binding. This would
clarify the position of the parties well in advance of a dispute arising.
It is clear that a contract is not a requirement of a successful partnering
arrangement. However, if the project is not a success and disputes arise, the
existence of a valid contract is essential to define the partner’s obligations, or
as Tom Connolly concurs, a partnering approach can result in:
“This form, promoted by Sir John Egan, has attempted to marry partnering
principals to contract conditions and is thus a clear response to the
challenges of, ‘Rethinking Construction.”’24
Mosey and Vickery confirm this in their article, “Partnering Contract is Common
Sense”.25
The scope of this article is limited to the evaluation of the contribution of
partnering to project success and it will not consider in any detail the differences
between the standard forms—this topic would form a report in itself. Suffice
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
A Critical Evaluation of Success of Project Partnering 319
to suggest that each form has alternative methods of formulating the partnering
principals.
Mosey provides evidence for the differences in the forms with the statement:
‘‘A key difference between NEC3 and PPC 2000 lies in the treatment of the
party who fails to meet an agreed deadline. PPC2000 in this respect relies
primarily on peer group pressure. . .NEC provides . . . that if the project
manager decides that work does not meet the required condition . . . then such
additional costs is payable by the contractor”.26
PPC2000 is not universally recognised as the perfect solution and some writers
feel that there is a long way to go:
Klein suggests that to make partnering successful, the different members and
disciplines within the project team must trust each other above all else.28 Tom
Connolly gives a critical view of the outcomes of both the partnering and
competitive approach to procurement:
Whilst:
This seemingly provides evidence that partnering quite often provides little to
contribute to the success of the project.
Klein and others such as Belshaw and Evans,31 disagree and feel that partnering
can contribute greatly to a successful project.
A definition of the success of a project is provided by Connolly where the
objective measures of the project success are listed as:
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320 Construction Law Journal
The majority of the writers on the subject suggest these seven areas of
measurement can be greatly enhanced by the incorporation of partnering into
the contractual relationship.
Another method that can be used to identify the success of partnering
relationships, could be the increased value of work being undertaken using the
procurement route and the potential value of work within the building industry
that could use the method in the future. This is considered further later.
Generally, the growth of partnering within the construction industry over the
past decade has been phenomenal, “21% of those surveyed said that partnering
made up over 50% or more of their companies workload.”33
There appears to be some disagreement over the value of work completed under
PPC2000. The data on this standard form is the most widely published of all
the standard forms of partnering. “The publishers of PPC2000 say that it has
been used to carry out over £8bn worth of work since its publication.”34 The
Royal Institution of Chartered Surveyors are quoted, “PPC2000 has risen to a
6 per cent share of the marketplace—just under £9.5bn.”35 Whichever writer
is correct, they both highlight the growing significance of the contract and
partnering generally.
Although this data provides evidence of the increased growth in the use of
partnering, Mosey and Vickery more specifically report that the demonstration
projects undertake by Sir John Egan’s Strategic Forum have shown that:
‘‘Whilst capital costs across the industry went up during the year 2000 by 2%, on
a range of 334 demonstration projects, they went down 7.1%. Construction time
over the same period generally went up by 1%; however, on those demonstration
projects it went down by 12.9%.”36
They go on to report:
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A Critical Evaluation of Success of Project Partnering 321
Also within the water industry, Thames Water and Severn Trent Water are
adopting partnering means of procurement.38
Furthermore, Procure21 has replaced traditional procurement methods within the
National Health Service (NHS). This has been added to with the introduction
of NHS LIFT for smaller projects.39
The Highway Agency has taken on-board an alliance-risk philosophy, as
opposed to its traditional approach. In the past, the Agency used risk transference
through design and build.40
Finally, the Ministry of Defence has awarded:
Partnering may not be the cure for the industry’s problems, however, it
does appear under certain circumstances to have been a successful process,
confirmation of such can be found in Belshaw’s article42 ; Brown, Klein and
Shells43 are more reticent about the issues. The problems that occur in partnering
relationships will be considered further later in the article.
37 Evans, “Parallel Partnering: Background and Benefits”, Society of Construction Law Paper
(March, 2004).
38 Jenkins, “Partnering: was marriage so bad after all?” Society of Construction Law Paper (March
2006), 1–16.
39
Jenkins, “Partnering: was marriage so bad after all?” Society of Construction Law Paper (March
2006), 1–16.
40 Jenkins, “Partnering: was marriage so bad after all?” Society of Construction Law Paper (March
2006), 1–16.
41 Jenkins, “Partnering: was marriage so bad after all?” Society of Construction Law Paper (March
2006), 1–16.
42 Belshaw, “Partnering—till dispute us do part?” (2001) 12(5) Cons. Law 30.
43 Brown “After the Divorce—Problems with Partnering Agreements” Society of Construction
Law Paper (2001), 1–9; Klein, “Partnering—the risk of not having a contract” (2002) 13(7) Cons.
Law 27; J. Shells, “Saints or Sinners?” (2006) 17(3) Cons. Law, 23–25.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
322 Construction Law Journal
This is agreed with by James and Newman47 and Jones and Harvey.48
These comments on the fair and reasonable allocation of risk are in direct
contrast to those of Professor Stuart Green:
However, it is likely that problems with this arrangement will flow down and
therefore, by the very nature, the parties at the bottom of the chain will find
they are at greater risk.
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A Critical Evaluation of Success of Project Partnering 323
Dartnell concludes:
“Whilst their clients may wish to share the rewards of a successful project
they are not often so keen to share the risks that go with the territory of
any construction contract”.
51
R. Ellis and G. Wood, “Main Contractors Experiences of Partnering Relationships on UK
Construction Projects” (2005) 23 Construction Management and Economics, 317–325.
52 R. Meakin and H. Smith “Multi-party/Multi-contract Procurement” (2002) 13(8) Cons. Law
20.
53 Dodsworth, “Resolving Disputes in a Partnering Environment” (2002) 13(6) Cons. Law 17
at 19.
54
Dartnell, “PPC 2000—clients wanting their cake and eating it? (2007) 18(3) Cons. Law 23.
55 Dartnell, “PPC 2000—clients wanting their cake and eating it? (2007) 18(3) Cons. Law 23
at 24.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
324 Construction Law Journal
the principals have been used as a big stick under which to hit smaller, more
vulnerable parties located further down the supply chain.
In “Know who your friends are?”, Klein lays out a quiz to assess if we are
really partnering:
• Have the partners been involved in the key decisions on risk, manage-
ment, design and costs?
• Have the partners agreed their respective overheads and profits?
• Is there a partnering bank account?
• If so, is each partner paid from the account?
• Is there an insurance policy that underwrites the team (not the individ-
ual)?
• If there is such a policy, does it cover the risk of any financial loss in
excess of the cost plan that was agreed by the team?56
If Klein is correct and the test of true partnering are these six requirements, it is
reasonable to suggest that very few within the industry have truly embraced the
partnering ethos of Latham and Egan. The statistics show that our version of
partnering succeeds, but if we ever truly embrace the principal, the achievements
could be truly out of this world.
Conclusions
This article has looked into the principles of partnering, as built on by authors
such as Egan from the original recommendation made by Latham for a modern
construction contract. The definition of partnering is an area of much debate
within the industry, with Klein’s list of key partnering characteristics providing
a good guide to what should be found within a partnering relationship.
Partnering is in direct opposition to the traditional competitive tendering
approach of construction and although it has its detractors, there are many
who feel it to be the best approach for the 21st century construction industry.
However, it is clear that Egan’s statement in, “Rethinking Construction” aimed
at leading the industry into a new era, where the construction contract was
obsolete. This has proved to be a step to far and currently most writers on the
subject suggest that a partnering contract is essential. This has furthermore
resulted in the introduction of standard forms, most notably the PPC2000
contract which interestingly was heavily promoted by Sir John Egan.
The main purpose of this article has been the evaluation of the potential
contribution of partnering in project success. Two different measures of success
were used. First, the criterion for a successful project, as suggested by Connolly,
was considered and secondly, statistics on the increased use of partnering
contracts were put forward as justification. It is clear within the article that the
use of partnering is on the increase and that the statistics from demonstration
projects show a great deal of success through this procurement method.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
A Critical Evaluation of Success of Project Partnering 325
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Construction Act Review
By Peter Sheridan and Dominic Helps
Introduction
After a lengthy silence from the House of Lords in relation to the Housing
Grants, Construction and Regeneration Act 1996 (HGCR Act), a second
decision, the Reinwood case1 follows very shortly after the inaugural decision in
the Melville Dundas case.2 Again the Lords considered s.111 of the HGCR Act
in relation to the standard wording of the Joint Contracts Tribunal (JCT) standard
form. Melville Dundas dealt with the JCT termination provisions; Reinwood is
concerned primarily with the deduction of liquidated damages.
Lord Neuberger (who was in the minority in Melville Dundas)3 delivered the
main speech, with which Lords Scott, Walker and Brown agreed. Lord Hope,
while agreeing that the appeal should be dismissed, set out his own reasons.
Lord Walker, while agreeing fully with Lord Neuberger, added some comments
of his own. Lord Brown, agreeably but with possibly a hint of inconsistency,
concurred with Lords Hope and Walker as well as Lord Neuberger. Therefore,
Lord Neuberger gave the decision of the House of Lords; Lords Hope and
Walker expressed further views which are of guidance for future cases.
Background
The employer (Reinwood) engaged L. Brown & Sons (Brown) as contractor
for the construction of apartments in Manchester, on terms including the JCT
standard form of building contract, 1998 edition. There were delays and Brown
applied for extension of time. The following chronology is significant:
1
Reinwood Ltd v L Brown & Sons Ltd [2008] UKHL 12, HL.
2 Considered in detail by the writers in “Sections 109, 110 and 111 Revisited: The Melville
Dundas case” (2007) 23 Const. L.J. 444; see also the writers’ discussion of the related Pierce
Design case in “Section 111 and Melville Dundas revisted: the Pierce Design case” (2008) 24
Const. L.J. 95.
3 See “Sections 109, 110 and 111 Revisited” (2007) 23 Const. L.J. 444 for an account of the
robust minority view in Melville Dundas.
326
Construction Act Review 327
The issues
At the time of paying the sum due under the interim certificate, i.e. as at
January 20, Reinwood was entitled to rely on the non-completion certificate
to justify withholding £61,629 liquidated damages. Brown’s argument was that
the extension of time of January 23, crucially granted before the final date for
payment, disentitled Reinwood from relying on the non-completion certificate.
Brown argued accordingly that Reinwood should have paid the whole of the
£187,988 by the final date for payment, i.e. by January 25. Brown argued that
the extension of time extinguished the right to liquidated damages. Since the
entitlement to liquidated damages did not exist by the time of the final date
for payment, Reinwood was deprived by that time of the right to rely on the
non-completion certificate.
Brown’s arguments did not succeed in the House of Lords, as indeed they had
not in the Court of Appeal. If the two preconditions characterised as [a] and
[b] above in sub-cl.24.2.1 are satisfied, cl.24.2.1.2 entitles the employer to give
notice under cl.30.1.1.4 (the provision for giving a withholding notice in respect
of interim payment). Lord Neuberger stated:
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Construction Act Review 329
It was true that, by virtue of sub-cl.24.1, the effect of the extension of time
was to “cancel” the non-completion certificate, upon which Reinwood’s right
to deduct depended, but not retrospectively, as Lord Neuberger stated:
5
Reinwood Ltd [2008] UKHL 12, HL at [40].
6 Reinwood Ltd [2008] UKHL 12, HL at [43]–[47].
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
330 Construction Law Journal
A further compelling part of the analysis in both the Court of Appeal and the
House of Lords is that there is no significant detriment, in the normal course
of events, to the contractor. This is because, although the employer is entitled
to withhold the liquidated damages in the situation that arose in Reinwood,
the employer must repay those damages (as also happened in Reinwood ) (sub-
cl.24.2.2).
Sub-clause 24.2.2 does not stipulate when the employer must repay the
liquidated damages where there is an extension of time. The Court of Appeal
decided that it must be within a reasonable period, which would mean a matter
of days. The House of Lords, however, decided that s.110(1) is engaged. Under
s.110(1), every construction contract must provide an adequate mechanism for
determining what payments become due and when; and must provide for a final
date for payment in relation to any sum which becomes due.
Since sub-cl.24.2.2 does not provide when the repayment of liquidated damages
becomes due or a final date for payment, the House of Lords found that the
Scheme for Construction Contracts steps in, in particular paras 7 and 8 of
Part II. After the grant of the January extension of time, the contractor could
have applied for repayment, whereupon the sum would have become due after
seven days, and the final date for payment would have been 17 days thereafter.
This interesting departure from the Court of Appeal also seems to be a departure
from Lord Hoffmann’s dictum in the Melville Dundas case7 that “the concept
of a ‘final date for payment’ applies only to interim payments.”8 As noted in
the Construction Act Review previously in relation to the Melville Dundas case,
Lord Hoffmann’s dictum was surprising as it had always seemed to the writers
that the concept of a “final date for payment” applies both to interim payments
and any other sum which becomes due under the contract. That view appears
now to have been taken by all the law lords in the Reinwood case.
This part of the decision also indicates a lacuna in the JCT standard form.
No doubt the JCT drafting committee will wish to effect changes so that its
provisions are HGCR Act-compliant and not reliant on the Scheme to make
good the absence of a provision as to when repayment is to be made.
One of the contractor’s arguments in the Reinwood case was that the January
extension of time had cancelled the effect of the December non-completion
certificate by January 25, which was the date by which the interim certificate
had to be paid. Lord Neuberger drew a distinction between the final date for
payment and the date on which payment became due:
“In my opinion, 25 January was the ‘final date for payment’, not the date
on which payment became due. A sum becomes due under a certificate
when it is issued, and the ‘final date for payment’ is the date by which
failure to pay can have serious consequences for the employer. As my
noble and learned friend, Lord Walker of Gestingthorpe, observed during
the argument, the function of the ‘final date’ is akin to making time of the
essence of the payment as at that date. It is fair to say that the contract is
not completely clear on this issue. However, section 110(1) required this
7
Melville Dundas Ltd (In Receivership) v George Wimpey UK Ltd [2007] UKHL 18, HL.
8 Melville Dundas [2007] UKHL 18 at [21].
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Construction Act Review 331
contract to specify both a date ‘when payments become due under [it]’
and ‘a final date for payment’ and this requirement is inherent in section
110(2). As the contract has to comply with that requirement, it seems to
me that it must be construed as so complying unless it is impossible to
do so. I have no difficulty in reading clause 30.1.1.1 as having the effect
of rendering a payment under a certificate due as at the date of its issue;
indeed, it is otherwise hard to see the purpose of the word ‘final’ in that
clause.”9
The House of Lords accordingly clarified that, as appears from the wording of
s.110, there is a date when payment is due and a later final date for payment.
A payment is due at the earlier date, although in practice the consequences
of non-payment or late payment are effective from the later final date. Money
payable in pursuance of an interim certificate has to be paid when it is due; the
obligation is not merely to pay by the final date for payment.
Lord Neuberger also considered what the position would have been if the
January extension of time had been granted after service of the withholding
notice, but before the employer had actually paid out on the interim certificate.
He did not decide the point, stating “we should only express a view on it if the
answer is tolerably clear”10 ; in fact he found there were arguments both ways,
stating:
“There is undoubtedly a case for saying that the employer should not have
succeeded on those facts. There is plainly a difference between paying in
reliance on a withholding notice which is accurate at the time of payment
and paying in reliance on such a notice which is no longer accurate at the
time of payment. Further, clause 24.2.3 seems to refer to clause 24.2.1[b],
but not to clause 24.2.1.2, which tends to suggest that it may not be possible
to rely upon a withholding notice under the latter clause once the certificate
of non-completion on which it is based is cancelled.
However, there are arguments the other way. The principle that a
withholding notice, valid when it is served, should be able to be relied
on in relation to the payment to which it relates, even after its basis has
been undermined, appears at least arguably consistent with the policy of
the 1996 Act as discussed above. Further, the points that an employer could
face practical difficulties in relation to payment where an extension of time
is granted shortly before the final date for payment, and may unfairly lose
his right to rely on a new certificate of non-completion because of the time
limit in clause 24.2.1, appears to apply to a case where the extension of
time is granted before actual payment pursuant to an interim certificate
almost as much as it applies where the extension is granted after payment.
In these circumstances, while it is generally desirable to give as much
guidance as possible to the meaning and effect of a provision such as
clause 24, I consider that it would be wrong to express a view on this
outstanding question.”
9
Reinwood Ltd [2008] UKHL 12, HL at [49].
10 Reinwood Ltd [2008] UKHL 12, HL at [51].
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332 Construction Law Journal
Apart from Lord Neuberger’s speech, Lord Hope’s was the other of some
substance, in which he agreed, “after some initial hesitation” that the appeal
should be dismissed. Lord Hope stated that s.111 is the provision at the heart
of the case and focused on the reference in s.111(1) to an “effective” notice.
Section 111(2) sets out the requirements for an effective notice:
Lord Hope stated that a withholding notice enables a payee who considers that
the proposal to withhold is not in accordance with the contract to refer the
dispute to adjudication. Lord Hope stated that the meaning which is conveyed
by the word “effective” is that, if the contractor does not refer the question
to adjudication, the employer will not be in default if the amount of which
they have given notice is withheld from the amount stated as due in an interim
certificate.
It is not clear that Lord Hope meant literally that a mere reference to adjudication
would alter the effectiveness of a withholding notice; it is possible that he meant
to refer to an adjudicator’s decision following a reference.
There are two different types of challenge that a contractor may make in respect
of the validity of a withholding notice. One is that the withholding notice does
not, in form, comply with the requirements for an effective notice under s.111
of the HGCR Act. That is to say, the notice fails to specify one or more of
the following: the amount to be withheld, the ground for withholding, or if
there is more than one ground, each ground and the amount attributable to
it, or the notice is given later than the prescribed period before the final date
for payment. If the withholding notice does not, in form, comply with all of
these requirements, then the notice is invalid and ineffective, it is submitted,
regardless of any reference to adjudication.
The second type that a contractor may make in respect of the validity of a
withholding notice, which is in form effective, is in respect of the substantive
merit of the withholding, for example that the ground specified is not valid in
accordance with the contractual terms, or not made out on the facts, or wrong as
to quantum. It is submitted that an employer may rely on such a notice unless
and until an adjudicator (or other tribunal) finds it to be invalid on the merits.
As noted earlier, this may be what Lord Hope meant when he referred to the
contractor referring the question to adjudication. If so, Lord Hope’s approach
may help to provide an answer to the question posed by Lord Neuberger but
left undecided by him and by the House of Lords. If the January extension
of time had been granted after service of the withholding notice, but before
the employer had paid out on the interim certificate, then, it is suggested that
provided the employer had served a withholding notice that was valid in form,
the withholding notice should still be effective. The withholding notice would
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Construction Act Review 333
be prima facie valid until an adjudicator decides otherwise. Given that, as Lord
Neuberger rightly pointed out, there are justice-driven considerations both ways,
there is something to be said for the greater certainty of this approach. However,
in view of the deliberate absence of a view on this point by the House of Lords,
it has to be accepted that the position is uncertain.
The only satisfactory answer to this issue is for the contract to spell out the
position. This issue again is an area which should receive the attention of the
JCT drafting committee, since Lord Neuberger has highlighted another area of
uncertainty which the current terms do not resolve. In the meantime, employers
will note the advantage in paying the certified sum less the amount in the
withholding notice at a date earlier than the final date for payment, if the
employer apprehends that the architect may grant an extension of time before
the final date for payment.
Conclusions
(1) the employer may normally withhold liquidated damages from payment
due under an interim certificate, where the two preconditions [a] and
[b] in sub-cl.24.2.1 are met and the employer has served a withholding
notice under sub-cl.30.1.1.4;
(2) where the architect grants an extension of time before the final date
for payment, but the employer has paid (earlier than the final date for
payment, as in Reinwood ), the extension of time has no effect on the
proposition at (1) above;
(3) where the architect grants an extension of time before the final date for
payment, but the employer has not yet paid, whether proposition (1)
above applies is uncertain: the JCT terms do not set out the position
and the House of Lords declined to give the answer;
(4) there are two areas for the JCT to consider further express provision
arising from the Reinwood decision:
(a) provision for a due date and a final date for the repayment of
liquidated damages when an extension of time is granted and gives
rise to the need to repay liquidated damages;
(b) the position at (3) above: does the employer proceed to withhold
the liquidated damages, or must they pay the certified sum without
deduction?
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Cases
Edited by Andrew Burr, Kim Franklin, Julian Holloway and Susan
Lindsey from transcipts of the judgments
Aldi Stores Ltd v WSP Group Plc, WSP London Ltd and Aspinwall
& Co Ltd
Facts: In 1993 and 1994, Laporte Industries Ltd (Laporte) entered into agreements for
lease with Aldi Stores Ltd (Aldi) and B&Q Plc (B&Q) under which it agreed to construct
stores at Dallow Road, London.
In 1994, Laporte entered into a building contract with Holmes Plc (Holmes) for the design
and construction of the buildings. Holmes entered into agreements with WSP Property
Plc and WSP London Ltd (WSP) for the design and construction of the building and
with Aspinwall & Co Ltd (Aspinwall) for specialist consultancy services for engineering
and environmental services. Holmes employed Norwest Holst Soil Engineering Limited
(Norwest Holst) as ground improvement contractor. Aldi and B&Q obtained collateral
warranties from Holmes, WSP and Norwest Holst.
The buildings were completed in 1995 and leases entered into with Aldi and B&Q.
Subsequently, Laporte sold its reversionary interest to Grantchester Properties (Luton)
Limited and Grantchester Retail Parks Plc (Grantchester).
In 1997 and 1998, differential settlement occurred to the buildings leased by Aldi and
B&Q. Aldi was advised that the settlement was caused by the vibro-compaction of the
site. As a result, a series of actions were commenced in the Technology and Construction
Court (TCC) as detailed later.
In June 2001, Aldi commenced proceedings against Holmes, claiming £3.01 million as
damages for breach of warranty. Holmes subsequently joined WSP and Norwest Holst
as Part 20 defendants. However, it was not until November 2002 that Aspinwall was
joined by Norwest Holst, and then by Holmes in January 2003, as a Pt 20 defendant.
In May 2002, B&Q commenced proceedings against Holmes, claiming £26 million as
damages for breach of warranty. Holmes joined WSP and Norwest Holst as Part 20
defendants. Again, it was not until November 2002 that Norwest Holst joined Aspinwall.
334
Cases 335
“If satisfaction of the two judgment sums is not obtained, then it may be that our
client may wish to call upon other causes of action available to it and we will keep
other parties apprised in that regard.”
On the same day, Aldi’s solicitors wrote to the clerk to Judge Bowsher Q.C. about a
hearing due to take place in the B&Q and Grantchester actions. They made suggestions
as to how orders in the actions should be drafted, so that it was clear whether the order
impacted on Aldi. They made clear Aldi’s interest in the following terms:
“We continue to receive correspondence from all of the parties involved in [the
Part 20 proceedings in the other actions]. We have no objection to being copied
in on that correspondence, especially as our client currently maintains an interest
in relation to this matter dependent on the outcome of its attempts to enforce the
judgment”.
On September 4, 2003, Aldi’s solicitors sent an email to the solicitors for the parties in
the B&Q and Grantchester actions and the Pt 20 proceedings stating:
“We are evidently not exchanging statements because of the state of the proceedings
between Aldi and Holmes. But given that our client may wish to commence
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
336 Construction Law Journal
The trial of the B&Q and Grantchester actions and the Pt 20 proceedings in the Aldi
action commenced on January 12, 2004. A settlement was, however, agreed in the second
week of the trial. As a result, the actions were stayed by an order of January 22, 2004.
Aldi were not invited to participate in the settlement discussions and were not a party
to the settlement agreement.
1. The costs incurred by the parties in the Aldi, B&Q and Grantchester actions
were in excess of £7.5 million: the costs up to and including a full trial of the
present action would be about £2.5 million.
2. It would be unjust and oppressive for WSP and Aspinwall to be subjected for a
second time to an expensive and time consuming action.
3. It was obvious by April 2003 that Aldi would face a serious contest with the
excess layer underwriters. At that stage, it would have been perfectly feasible
for Aldi to rejoin its action and the B&Q and Grantchester actions at a later
stage—the judge managing that litigation would have allowed Aldi to do so.
The involvement of Aldi in those actions would not have increased its length.
4. Whilst Aldi’s strategy of proceeding against the excess layer insurers might have
succeeded, it was for Aldi to take the risk on this.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Cases 337
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
338 Construction Law Journal
• i) In 1993 and 1994, Laporte Industries Ltd (Laporte) entered into agreements for
a lease with the appellants (Aldi) and B&Q Plc (B&Q) under which it agreed
to construct stores at a site at Dallow Road, Luton—the site had previously
been used by Laporte to deposit chemical waste from its nearby plant.
• ii) In 1994, Laporte entered into a building contract with Holmes Plc (Holmes) for
the design and construction of the buildings and into agreements with the first
and second respondents (to whom I shall refer together as WSP) and the third
respondents (Aspinwall) for specialist consultancy services for engineering
and environmental services respectively. Holmes employed Norwest Holst Soil
Engineering Ltd (Norwest Holst) as the ground improvement contractor. Under
the terms of complex contractual arrangements, Aldi and B&Q became entitled
to warranties from Holmes, WSP and Aspinwall to the effect that they had
properly performed their obligations; in the case of WSP and Aspinwall this
related to their respective professional duties of skill and care; the warranties
were supported by professional indemnity insurance for £5 million. These
warranties were executed under seal by these companies in 1994 and 1995.
• iii) The buildings were completed in 1995. Laporte entered into a 25-year lease
with Aldi and a lease for a similar term with B&Q. The freehold reversions
were subsequently transferred to Grantchester Properties (Luton) Ltd and to
Grantchester Retail Parks Plc (Grantchester).
• iv) Aldi and B&Q commenced trading from their stores in 1995. In 1997 and 1998,
differential settlement to the buildings leased by Aldi and B&Q began to occur
and caused damage to the buildings. Aldi were advised that the settlement
had been caused by the vibro-compaction of the site; they were also advised
that vibro-compaction was an unsuitable method of ground improvement and
had not achieved its objective. There appears now to be little dispute that
the differential settlement was caused by the unsuitability of the site and the
method of compaction.
• v) On June 22, 2001, Aldi commenced an action in the Technology and
Construction Court (TCC) against Holmes claiming damages for breach of
warranty and negligence; its claim was for £3.01 million. Holmes joined the
second respondents (one of the WSP companies) and Norwest Holst as Pt 20
defendants in August 2001. In the Pt 20 claim, Holmes alleged that there had
been breaches of the various warranties given to Aldi and B&Q.
• vi) B&Q commenced an action against Holmes in May 2002 in the TCC; its store
was considerably bigger and its claim was for £26 million. Holmes issued Pt
20 claims in that action against one of the WSP companies and Norwest Holst
in July 2002. Grantchester commenced actions against WSP and Norwest Holst
in September 2002.
• vii) It was only in November 2002 that Aspinwall were joined by WSP into the
action commenced by Aldi and B&Q. Between then and early 2003, Aspinwall
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Cases 339
and WSP were made parties by B&Q and Grantchester to their actions and to
some of the Pt 20 proceedings in the B&Q and Grantchester actions. Aspinwall
were made, along with the first respondents (the other WSP company), Pt 20
defendants to the Aldi action by Holmes in January 2003. Subsequently another
company, Keller Ltd, which had acted as ground improvement specialists,
became party to the actions.
• viii) Holmes had gone into administration on February 5, 2002. Nonetheless it had
the required professional indemnity insurance under a cost inclusive primary
layer for £2 million and for a second layer of £3 million excess of £2 million.
The primary layer agreed to indemnify Holmes and instructed solicitors to act
on behalf of Holmes; the Aldi claim attached to one year and the B&Q claim
to a different year. However, the position of the excess layer underwriters
was different; by July 2002, they had reserved their position and Aldi were
informed of this.
• ix) Aldi pursued its claim vigorously against Holmes who continued to be
represented by solicitors instructed by the primary layer underwriters until April
11, 2003; it claimed only against Holmes and never made WSP or Aspinwall
defendants to its claim. It is clear that Aldi’s quantum claim against Holmes
was, from an early stage, treated separately from the remainder of the Aldi
action and the other actions. Thus:
a) On March 16, 2002, Aldi obtained judgment against Holmes on certain
liability issues.
b) On July 26, 2002, Aldi obtained judgment on further liability issues.
Directions were given at a pre-trial review before Judge Bowsher Q.C. for
a preliminary issue on quantum to be tried on October 1, 2002 with the
remaining issues for trial in March 2003; the Pt 20 defendants to that action
were to be bound by the result and were given permission to attend the trial.
A case management conference (CMC) was heard on the same date in the
B&Q action and a trial of the quantum issues between B&Q and Holmes
was fixed for March 2003.
c) On October 1, 2002, Aldi obtained judgment by consent on the preliminary
issue on quantum; in essence Holmes accepted Aldi’s contention that it was
bound under the terms of the lease to keep the store in substantial repair.
d) On November 29, 2002, there was a further CMC before Judge Bowsher
Q.C. in all the actions; the trial of the quantum of Aldi’s claim was adjourned
to June 3, 2003. It was ordered that Holmes’ Pt 20 claim in the Aldi action,
the B&Q action and the Grantchester actions were to be tried together on a
date to be fixed; the CMC was adjourned to January 17, 2003.
e) At the adjourned CMC in all the actions on January 17, 2003 Judge Bowsher
Q.C. made directions for the trial of the remaining issues of quantum in
Aldi’s claim against Holmes. The order provided that the other parties were
not to be bound by or required to attend the quantum hearing. This was
because WSP and Aspinwall contended that the measure of damages was
different and therefore different issues would arise. The date for the trial of
the Pt 20 proceedings in the Aldi action and the other actions was fixed for
January 12, 2004, with an estimated length of just over six weeks; mediation
was recommended for early June 2003.
f) On January 24, 2003, Holmes were ordered by consent to make a further
interim payment to Aldi in the sum of £1.3 million; this was agreed on the
basis that it was likely to be the sum that would exhaust the primary layer
of Holmes’ cover; in fact the sum was too low and a further payment of
£0.131 million was made to Aldi in August 2004.
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340 Construction Law Journal
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Cases 341
The solicitors for the excess layer underwriters responded to say that they were
still investigating.
• xii) On June 11, 2003 Aldi’s solicitors wrote to the solicitors for all the parties
in the B&Q and Grantchester actions and the Pt 20 proceedings in the Aldi
action, pointing out that Aldi’s present intention was to enforce the judgment
obtained against Holmes against the excess layer underwriters. They added:
‘If satisfaction of the two judgment sums is not obtained, then it may be
that our client will wish to call upon other causes of action available to
it and we will keep other parties apprised in that regard.’
• xiii) On the same day the solicitors wrote to the clerk to Judge Bowsher Q.C., the
judge managing the litigation, about a hearing due to take place on June 13,
2003 in the B&Q and Grantchester actions and the Pt 20 proceedings; they
made a suggestion as to how orders in the actions should be drafted so that it
was clear whether any order impacted on Aldi. They made clear Aldi’s interest
in the following terms:
‘We continue to receive correspondence from all of the parties involved in
[the Part 20 proceedings and the other actions]. We have no objection to
being copied in on that correspondence especially as our client currently
maintains an interest in relation to this matter dependent on the outcome
of its attempts to enforce the judgment.’
• xiv) Aldi commenced proceedings against the excess layer underwriters in the
Commercial Court; on August 6, 2003, the solicitors for the excess layer
underwriters wrote to the solicitors for Aldi setting out detailed reasons why
underwriters were avoiding the policy for non disclosure in relation to the
Dallow Road site and other matters; the letter set out detailed allegations about
Holmes’ knowledge of those matters. A defence reflecting that position was
served on September 1, 2003.
• xv) On September 4, 2003, Aldi’s solicitors sent an email to the solicitors for the
parties in the B&Q and Grantchester actions and the Pt 20 proceedings stating:
‘We are evidently not exchanging statements because of the state of the
proceedings between Aldi and Holmes. But given that our client may wish
to commence proceedings in the future depending on success or otherwise
in prosecuting its claim against Insurers under the 1930 Act, we would
be grateful for sight of a copy of the witness statements exchanged in
due course.’
• xvi) Despite Aldi’s request for early disclosure from the excess layer underwriters,
the excess layer underwriters did not provide disclosure until December 2,
2003. Aldi carried out inspection of the documents on December 12, 2003.
• xvii) In the meantime, the parties in the B&Q and Grantchester actions and the Pt
20 proceedings in the Aldi action were preparing for the trial in January 2004,
the estimate for which had been increased to 12 weeks. On December 8, 2003,
Norwest Holst amended its pleadings to allege that three named employees of
WSP were aware in 1994 of, and deliberately concealed, (or ought to have been
aware of) the significant risk that vibro-compaction might not be sufficient to
prevent the buildings being damaged as a result of differential settlement. Aldi
have made it clear that it will not take this point against WSP and Aspinwall.
• xviii) The trial of the B&Q and Grantchester actions and the Pt 20 proceedings
in the Aldi action commenced on January 12, 2004 at the largest available
court in London with eight separately represented parties, each with leading
counsel. There were to be 38 witnesses of fact, 14 experts on liability and 16 on
quantum; the trial bundle comprised 81 volumes. A settlement was, however,
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
342 Construction Law Journal
agreed in the second week of the trial; the actions were in consequence stayed
by an Order of January 22, 2004. Aldi were not invited to participate in the
settlement discussions and were not a party to the settlement agreement.
• xix) In April 2004, leading counsel advised Aldi that its claim against the excess
layer underwriters was likely to fail; Aldi accepted that advice. In December
2004 Aldi formally settled the proceedings with the excess layer underwriters
on the basis that underwriters would refund the premium: a sum of just over
£8,000.
• xx) In June 2004, Aldi’s solicitors wrote to WSP and Aspinwall stating that Aldi
intended to proceed against them, setting out the basis for the claim and
attached a draft pleading. The response of WSP’s solicitors was to make it
clear that they would apply to strike out the claim on the basis it was an abuse
of process. Aspinwall’s solicitors subsequently adopted the same position.
• xxi) On October 18, 2005 Aldi issued these proceedings against WSP and Aspin-
wall in the TCC in Birmingham; the proceedings were served on February 17,
2006. The action was subsequently transferred to the TCC in London.
3. The basis of Aldi’s claim in these proceedings is that WSP and Aspinwall were in
breach of the warranties given under seal as they had failed to exercise all reasonable
skill and care in relation to the foundations and the vibro-compaction; those breaches
had caused the differential settlement. Aspinwall and WSP have not filed defences, but
their contention was that the damage was not caused by their breach of warranty; that, if
they were liable, the measure of damages was not the same as the measure of damages
applicable to the claim against Holmes.
4. An application was made by WSP and Aspinwall to strike out the present claim on
March 16, 2006. Jackson J. acceded to that application. I refer to his reasons for doing
so at paras 13 and 14 below, but it is convenient at this stage to set out further findings
he made:
• i) The costs incurred by the parties in the Aldi, B&Q and Grantchester actions
were in excess of £7.5 million; the costs up to and including a full trial of the
present action would be about £2.5 million [51].
• ii) It was obvious by April 2003 that Aldi would face a serious contest with the
excess layer underwriters [80]. Whether it could succeed depended on witnesses
and knowledge not within its control. When Aldi received underwriters’ letter of
August 6, 2003 (referred to at para.2.xiv) above), it was still possible that Aldi
might win that action, but its prospects of success were not better than even [81].
• iii) It would have been perfectly feasible for Aldi to rejoin its action and the B&Q
and Grantchester actions at a late stage—September 2003; the judge managing
that litigation would have allowed Aldi to do so [75(v)] and [77]. The involve-
ment of Aldi in the action would not materially have increased its length [77].
• iv) No response by WSP and Aspinwall to the letters of June 11 and email of
September 4, 2003 from Aldi’s solicitors was appropriate:
‘On both of those dates it was still perfectly feasible that Aldi might
rejoin the main action. In the event, this did not happen. As January 2004
approached, and still Aldi made no move, the applicants (who were all
advised by experienced counsel and solicitors) no doubt took comfort
from the rule in Henderson v Henderson.’ [82].
• v) There was no impropriety or culpable conduct on the part of Aldi [76].
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Cases 343
6. It is, however, helpful to refer to the judgment of Clarke L.J. in Dexter Ltd
(In Administrative Receivership) v Vlieland-Boddy [2003] EWCA Civ 14, where he
summarised the principles to be derived from Johnson v Gore-Wood at [49]–[53].
‘49 . . .:
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
344 Construction Law Journal
7. Although Mr Thomas Q.C. on behalf of Aldi accepted that the approach was to be
a broad merits-based judgment, he contended that there was an essential or threshold
requirement before that broad merits-based judgment could be applied. The threshold
requirement was that there had to be a sufficient degree of identity between the defendants
to the original action and the defendants to the new action which the defendants were
seeking to strike out; without such a degree of identity, the abuse application was bound
to fail and the court would never reach the stage of making the broads merits-based
judgment. It followed that as Aldi had only brought its action in 2001 against Holmes
and had not made any claim against WSP and Aspinwall, the present proceedings brought
in 2005 were against different parties; there was no identity at all between either of them
and Holmes.
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Cases 345
8. The submission was founded on a passage in the speech of Lord Bingham in Johnson
v Gore-Wood. Counsel for Mr Johnson had argued that his client could bring the claim
as he had not been the plaintiff in the first action against the defendants; this argument
was rejected on the basis that a formulaic application of the rule would be mistaken.
The plaintiff in the first action had been the corporate embodiment of Mr Johnson who
had made the decisions and given the instructions on its behalf; he could have brought
his claim at the same time. Lord Bingham observed that the correct approach was that
formulated by Sir Robert Megarry V.C. in Gleeson v Wippell & Co Ltd [1977] 1 W.L.R.
510 at 515:
‘Second, it seems to me that the substratum of the doctrine is that a man ought
not to be allowed to litigate a second time what has already been decided between
himself and the other party to the litigation. This is in the interest both of the
successful party and of the public. But I cannot see that this provides any basis for
a successful defendant to say that the successful defence is a bar to the plaintiff
suing some third party, or for that third party to say that the successful defence
prevents the plaintiff from suing him, unless there is a sufficient degree of identity
between the successful defendant and the third party. I do not say that one must
be the alter ego of the other: but it does seem to me that, having due regard to
the subject matter of the dispute, there must be a sufficient degree of identification
between the two to make it just to hold that the decision to which one was party
should be binding in proceedings to which the other is party. It is in that sense that
I would regard the phrase “privity of interest” . . .’
9. Mr Thomas Q.C. contended that, as the passage in the judgment of Sir Robert Megarry
had been expressly approved by the House of Lords, then, as it had been made clear
by Sir Robert Megarry that there had to be a sufficient identity between the defendants
if an abuse of process application was to succeed, it could not succeed in this case as
there was no identity between the defendants to the original claim and the present claim.
Aldi had brought proceedings only against Holmes; WSP and Aspinwall were entirely
different companies.
10. I cannot accept this argument. Lord Bingham made clear in his speech that the
approach should be a ‘broad merits-based judgment’ and not formulaic. It is clear he was
approving the passage in the judgment of Sir Robert Megarry as the ‘correct approach’
and not as a statement of rigid application. The fact that the defendants to the original
action and to this action are different is a powerful factor in the application of the broad-
merits based judgment; it does not operate as a bar to the application of the principle.
This was plainly the view of Clarke L.J. in Dexter in the passage I have set out with
which I agree.
11. Mr Thomas Q.C. also contended that as a matter of law, a distinction had to be
drawn between previous litigation where the case was settled and previous litigation
where the case proceeded to judgment. The submission was based on a passage in the
speech of Lord Millett in Johnson v Gore-Wood at 59. However, Lord Bingham made
clear at 32–33:
‘An important purpose of the rule is to protect a defendant against the harassment
necessarily involved in repeated actions concerning the same subject matter. A
second action is not the less harassing because the defendant has been driven or
thought it prudent to settle the first; often, indeed, that outcome would make a
second action the more harassing.’
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346 Construction Law Journal
It seems to me clear that no distinction should be drawn as a matter of law between cases
where the original action concludes by settlement and where it concludes by judgment.
The course of the original action and whether it resulted in a settlement or a trial are but
part of the facts to be considered alongside all the other facts.
12. Although separately represented before Jackson J. and in this court, there was no
material difference in the argument presented as to why these proceedings were an abuse
of process. It can be summarised:
• i) The allegations made by Aldi in these proceedings were essentially the same as
those made by Holmes against them in the original actions.
• ii) By bringing the actions against Holmes, it was almost inevitable that Holmes
would bring Pt 20 claims against WSP and Aspinwall.
• iii) There had been nothing to prevent Aldi pursuing those claims in its original
action; it had brought that action and it was in that action that the claims should
have been pursued.
• iv) Aldi was well aware of the principle that the claims should all have been brought
in one action, as was apparent from the letters from its solicitors to the solicitors
for the excess layer underwriters set out at paras 2.x) and 2.xi).
• v) There was no factor, such as impecuniosity, that excused or justified Aldi from
failing to bring the claim in the original action. Aldi had not done so, because
it had deliberately decided to take no further part in the action; instead it had
pursued its own interests and proceeded against the excess layer insurers. That
provided no excuse or justification. Although it was claimed that the decision
made by Aldi to bring a claim against excess layer underwriters might have
produced a potential benefit to WSP and Aspinwall in that it would relieve
them of having to meet the claim, the benefit was illusory as the underwriters
would be subrogated to the claims. In any event WSP and Aspinwall should
not have to bear the risk of Aldi’s decision to act in this way by not bringing
the claim in the original action.
• vi) Aldi should have realised that the proceedings against excess layer underwriters
faced clear difficulties by the summer of 2003; Aldi should not have assumed
that, if it was unsuccessful in that action, it would be entitled to exercise its
rights against WSP and Aspinwall.
• vii) Aldi could and should therefore have rejoined the action in the autumn of 2003.
• viii) If the present claim was allowed to proceed, Norwest Holst would be joined
and thus the three named employees of WSP who faced the serious allegations
(to which I have referred at para.2.xvii) would face them again.
• ix) The trial of these proceedings would re-litigate at a cost in excess of £2.5 million
the issues which had been the subject of the original actions which had cost in
excess of £7.5 million.
• x) Aldi had delayed for almost two years between April 2004 when it accepted
advice that the claim against excess underwriters was unlikely to succeed and
February 2006 when it served the claim form in the new action. In consequence,
the trial of the new action would not take place until 2008 or 2009—some 15–16
years after the alleged professional negligence had occurred.
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13. Jackson J. in essence accepted the contentions of WSP and Aspinwall as correctly
addressing the material considerations. He identified at [75] of his judgment seven factors,
including the fact that the resources of the TCC would be devoted, for a second time, to
trying the same allegations. He concluded that, applying the approach set out in Johnson
v Gore-Wood, the balance came down firmly in favour of WSP and Aspinwall. It would
be unjust and oppressive for them to be subjected for a second time to a very expensive
and time consuming action. It would also be an abuse and misuse of the process of
the TCC to bring a second and substantial action which alleged the same breaches of
professional duty by the same firms. He observed:
‘It is the policy, and indeed the duty, of this court to achieve, so far as possible,
the efficient, just and cost effective disposal of all litigation which is brought. This
policy serves the interests of the business community, in particular the construction
industry and building owners, who are the principal users of this court. Re-litigation
on the scale which Aldi now proposes flies in the face of that policy.’
14. He accepted that Aldi’s strategy of proceeding against the excess layer underwriters
might have succeeded and that this might have enured to the benefit of WSP and
Aspinwall as well as Aldi. But it was for Aldi to take the risk on this; it was not
right for them to reap the potential benefits of a chosen strategy, but inflict upon WSP
and Aspinwall the risk of a second action.
15. In their argument before us WSP and Aspinwall made substantially the same
submissions on the facts as they had made before Jackson J. In addition WSP submitted
that the decision made by the judge was a decision based on the exercise of judgment
akin to the exercise of discretion; an appellate court should only therefore reverse on the
limited grounds applicable in such a case. Aspinwall, although accepting that the decision
to be made by the judge was not strictly the exercise of discretion, submitted that the test
in Johnson v Gore-Wood was not amenable to a simple right or wrong approach. The
judge had approached the matter by the application of the correct principles, gave weight
to the relevant factors and reached a decision well within the ambit of the balancing
exercise. This court should not therefore interfere with the exercise of that balance.
WSP and Aspinwall relied on Browne v Associated Newspapers [2007] EWCA Civ
295; [2007] 3 W.L.R. 289 where this Court had observed in relation to the grant of an
interlocutory injunction that the balancing exercise which a judge had to carry out was
similar to the exercise of a discretion upon which judges could properly reach different
conclusions; that therefore an appellate court should not interfere unless the judge had
erred in principle, taken into account immaterial facts or reached a conclusion which was
plainly wrong (see [45] of the judgment of the Court). They also relied upon a passage at
page 22 in the speech of Lord Bingham in Johnson v Gore Wood where he referred to the
speech of Lord Diplock in Hunter v Chief Constable of the West Midlands [1982] A.C.
529 and upon [37] of the judgment of Peter Gibson L.J. in Dexter where he had said:
‘In these circumstances, where the judge, in whom the discretion to strike out
a claim is vested, has correctly directed himself as to the law, this court cannot
properly interfere with that exercise of discretion unless the applicant shows that
the judge, in making his assessment, omitted to take account of material facts or
took account of immaterial facts or was otherwise plainly wrong.’
Conclusion
16. In considering the approach to be taken by this court to the decision of the judge,
it was rightly accepted by Aspinwall that the decision to be made is not the exercise of
a discretion; WSP were wrong in contending otherwise. It was a decision involving the
assessment of a large number of factors to which there can, in such a case, only be one
correct answer to whether there is or is not an abuse of process. Nonetheless an appellate
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348 Construction Law Journal
court will be reluctant to interfere with the decision of the judge where the decision rests
upon balancing such a number of factors; see the discussion in Assicurazzoni Generali
v Arab Insurance Group [2002] EWCA Civ 1642; [2003] 1 W.L.R. 577 and the cases
cited in that decision and Mersey Care NHS Trust v Ackroyd (No.2) [2007] EWCA Civ
101 at [35]. The types of case where a judge has to balance factors are very varied and
the judgments of the courts as to the tests to be applied are expressed in different terms.
However, it is sufficient for the purposes of this appeal to state that an appellate court
will be reluctant to interfere with the decision of the judge in the judgment he reaches
on abuse of process by the balance of the factors; it will generally only interfere where
the judge has taken into account immaterial factors, omitted to take account of material
factors, erred in principle or come to a conclusion that was impermissible or not open
to him. In this case, I consider that the judge, despite the weight that must be accorded
his view given his great experience in this type of litigation and the conspicuous success
with which he has managed the TCC, reached a decision which was impermissible by
taking into account factors which he should not have done and omitting factors which
he should have taken into account.
17. I approach the issue on the basis that the claims Aldi now wish to pursue against WSP
and Aspinwall could have been brought by Aldi in the original action it brought against
Holmes. However, as was made clear in Johnson v Gore-Wood, the fact that a claim could
have been raised in the original action does not mean it is necessarily abusive to raise
it in a second action. It is necessary to consider whether in all the circumstances Aldi is
abusing the process of the court by seeking to raise the issues it could have raised before.
18. First, it is important that Aldi had not behaved in anyway that was culpable, let alone
improper, even though neither impropriety nor culpability is a necessary finding before
a claim can be struck out. Aldi had made a judgment that it would be in its interests to
try and make a recovery against excess layer underwriters on the judgment that it had
obtained rather than to continue to participate in the action by bringing claims against
WSP and Aspinwall. In my view that was a decision which was open to Aldi as a sensible
and cost effective way of proceeding in the light of the fact that (a) the trial of the Aldi Pt
20 claims and the B&Q and Grantchester actions would last several weeks; (b) the costs
would be considerable, given the fact there were eight separately represented parties; (c)
the issues which WSP and Aspinwall were raising on their liability and on quantum were
issues that Aldi had not been concerned with in its claim against Holmes; (d) the interest
of Aldi in monetary terms was a fraction of that of B&Q. Aldi had been singularly
successful in the strategy it had pursued against Holmes and its success was a factor
which the judge failed to take into account in judging Aldi’s decision on its strategy.
19. A criticism of Aldi can be made that it should have reassessed the strategy when the
underwriters made their defence clear in August 2003. If it had done so and decided that
it should have abandoned its claim against underwriters in September 2003, it would
have been in a position on the judge’s finding (which was not challenged) that at that
stage it could have rejoined the original action. However at that stage Aldi had not had
discovery in the action against the excess layer underwriters and, in my judgment, it
would be very difficult for prudent advisers to say in the circumstances of the defence
raised by underwriters that the claim should be abandoned until after discovery. I do
not consider that it can sensibly be suggested that Aldi should have rejoined the original
action and continued to pursue the action against underwriters at the same time. In the
circumstances it was, in my view, a judgment sensibly open to Aldi in the autumn of
2003 not to bring claims against WSP and Aspinwall at that stage by seeking to rejoin
the original action. The judge did not take this into account.
20. In contrast to these private interests of Aldi, there are the private interests of WSP
and Aspinwall—the desire to have finality in the dispute relating to the Dallow Road site,
the costs incurred in the original actions, the likely costs of the present action, the delay
that has occurred (and which has been exacerbated by Aldi’s action in not commencing
these proceedings promptly), the anxiety under which the three named employees are
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going to be placed (as it is likely that Norwest Holst will be joined) and the general
effect on WSP and Aspinwall of facing allegations of professional negligence.
21. However, WSP and Aspinwall were made aware by Aldi that Aldi had a claim
over against them and that it might be pursued. The judge was, in my view, wrong
in considering that the letters of June 11, 2003 and the email of September 2003 did
not require a response. If WSP and Aspinwall were concerned that the prospect of a
second action might cause them oppression or vexation, they could have responded to
that correspondence in terms putting Aldi on notice of their position and applying to the
court if necessary—see [29]–[31] below.
22. Nor, in my judgment, were WSP and Aspinwall entitled, as the judge found, to take
comfort from the rule in Henderson v Henderson when they entered into the settlement
agreement. The principles set out in Johnson v Gore-Wood are clear—the question of
whether there is an abuse of process is a broad merits-based judgment. They could and
should have made their position to Aldi clear. They decided not to do so, no doubt, on the
basis that it was better not to provoke Aldi into action. They settled in full knowledge
of the fact that there might be a second claim, as was the case in Toth v Ledger, an
unreported decision of this court given on December 21, 2003, a few days after the
decision in Johnson v Gore-Wood. The judge was in my view wrong in reaching the
contrary conclusion. The way in which this case settled was therefore a highly material
consideration.
23. The judge accepted the contention of WSP and Aspinwall that it was important to take
into account the fact that it was almost inevitable that as a result of Holmes’ action, WSP
and Aspinwall would be brought into the litigation. He was wrong to do so. As I have
set out at para.2.vii) the first respondents (one of the WSP companies) and Aspinwall
were not brought into the action until some 18 months after Aldi had commenced
proceedings. The claims by Holmes against the first respondents and Aspinwall were
made in circumstances where Holmes had accepted liability to Aldi; furthermore, in the
CMC on January 17, 2003, the directions given in respect of the quantum claim in the
action between Aldi and Holmes were expressed in terms that any decision would not
bind WSP or Aspinwall in the Pt 20 proceedings.
24. The factors which I have set out are largely the private interest factors. As was
made clear in Johnson v Gore-Wood, the public interest extends not only to finality and
preventing a party being vexed twice, but also to economy and efficiency in litigation.
The judge considered that the decision of Aldi not to bring its claims against WSP and
Aspinwall in the original action was an abuse or misuse of the process of the TCC. I do
not see how the mere fact that this action may require a trial and hence take up judicial
time (which could have been saved if Aldi had exercised its right to bring an action in a
different way) can make the action impermissible. If an action can be properly brought,
it is the duty of the state to provide the necessary resources; the litigant cannot be denied
the right to bring a claim (for which he in any event pays under the system which
operates in England and Wales) on the basis that he could have acted differently and so
made more efficient use of the court’s resources. Although the judge was self evidently
right in saying that it was the duty of the TCC to achieve the just and cost effective
disposal of litigation and that this served the interests of the business community, he
was wrong to find that the action brought by Aldi flew in the face of that policy. As
I seek to explain at [29]–[31] below, the problems that have arisen in this case should
have been dealt with through case management.
25. Furthermore, there is a real public interest in allowing parties a measure of freedom to
chose whom they sue in a complex commercial matter and not to give encouragement to
bringing a single set of proceedings against a wide range of defendants or to complicate
proceedings by cross-claims against parties to the proceedings. That freedom can and
should be restricted by appropriate case management.
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26. Although, as I have set out at [8] above, I consider that there is no rule of law that
there cannot be abuse of process unless the defendants who are sued in the further action
have a sufficient identity with the defendants in the original action, it is nonetheless a
factor that the original action was brought by the claimant against one party and the
second is being brought against completely different parties. I do not think that it helps
the analysis to examine the summary of the principles put forward by Clarke L.J. that
in the circumstances of this case the position is closer to that of B rather than C. The
fact was that Aldi was not vexing or harassing these defendants a second time.
27. In circumstances such as these where Aldi had not brought a claim against WSP
and Aspinwall and there are good reasons why Aldi acted as it did, I have come to the
conclusion, weighing all the factors I have set out, that bringing this action was not a
misuse or abuse of the process of the court. The burden was on WSP and Aspinwall to
prove that it was and they failed to do so.
28. As I have set out above, the judge failed to take into account a number of factors
which he should have taken into account and was wrong as to some he took into account.
Each of these led him to the impermissible conclusion that Aldi were abusing the process
of the court. For these reasons, I would therefore allow this appeal and dismiss the
application made by WSP and Aspinwall. I would hope that when the first CMC takes
place, the court will carefully examine why it is estimated that this litigation will cost in
excess of £2.75 million when the sum in issue is considerably less. The requirements of
the CPR and the principles of proportionality would suggest that a much more economic
way should be found to litigate the issues in this action.
29. I also wish to add a word as to the approach that should be adopted if a similar
problem arises in the future. In circumstances such as those that arose in this case, the
proper course is to raise the issue with the court. Aldi did write to the court, as I have set
out at para.2.viii), but not in terms that made it clear what the court was being invited to
do. WSP and Aspinwall knew of Aldi’s position and were before the court on numerous
occasions; they did nothing to raise it.
30. Parties are sometimes faced with the issue of wishing to pursue other proceedings
whilst reserving a right in existing proceedings. Often, no problem arises; in this case,
Aldi, WSP and Aspinwall each in truth knew at one time or another between August
2003 and the settlement of the original action in January 2004 that there was a potential
problem, but it was never raised with the court. I have already expressed the view that
it should have been. The court would, at the very least, have been able to express its
view as to the proper use of its resources and on the efficient and economical conduct of
the litigation. It may have seen if a way could have been found to determine the issues
applicable to Aldi in a manner proportionate to the size of Aldi’s claim and without
the very large expenditure that would have been necessary if Aldi had to participate in
the trial of the actions. It may be that the court would have said that it was for Aldi
to elect whether it wished to pursue its claim in the proceedings, but if it did not, that
would be the end of the matter. It might have enquired whether the action against excess
underwriters could have been expedited. Whatever might have happened in this case is
a matter of speculation.
31. However, for the future, if a similar issue arises in complex commercial multi-party
litigation, it must be referred to the court seized of the proceedings. It is plainly not
only in the interest of the parties, but also in the public interest and in the interest of the
efficient use of court resources that this is done. There can be no excuse for failure to
do so in the future.”
Wall L.J. added as follows:
‘‘32. I have had the advantage of reading in draft the judgments prepared by Longmore
and Thomas L.JJ. I agree with both, and like them, I would allow this appeal.
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Cases 351
33. The only two comments which I wish to add are that, firstly and self-evidently, my
experience of this category of litigation is limited to cases which have reached this court.
Accordingly, I readily acknowledge both the judge’s ‘unrivalled experience’ identified
by Longmore L.J. in [37] below, and his conspicuous success in managing the TCC to
which Thomas L.J. refers in [16] of his judgment. I am nonetheless wholly satisfied that
in this instance the judge was wrong, as a matter of law, to strike out Aldi’s claim on
the ground that it was an abuse of process.
34. When I first read the papers in preparation for the argument on this appeal, I was
struck by two points in particular. The first was the fact that the judge had found in
terms in [76] of his judgment that there had been ‘no impropriety or culpable conduct
on the part of Aldi’, a phrase which he prefaced by the words ‘of course’. The second
was the fact that, as it seemed to me, the course steered by Aldi throughout this complex
litigation was; (a) commercially reasonable; (b) forensically legitimate; and (c) reasonably
transparent. In these circumstances, I found it difficult, at first blush, to understand how,
within the principles identified by Lord Bingham of Cornhill in Johnson v Gore-Wood,
Aldi’s conduct in launching the current proceedings could properly be described as an
abuse of process.
35. I thus listened to the argument with interest, and at its conclusion found myself in
complete agreement with Longmore and Thomas L.JJ. that the appeal should be allowed.
36. My second comment is that, whilst acknowledging my lack of experience in this
category of litigation, I would nonetheless wish particularly to associate myself with
everything which Thomas L.J. says in relation to case management in [29] to [31] of
his judgment.”
Longmore L.J. added as follows:
‘‘37. I agree with Thomas L.J.’s reasoning and conclusions. Since we are differing from
a very experienced judge who has unrivalled experience in handling heavy litigation, I
will shortly say what has compelled me to this conclusion.
38. First, the question of abuse or no is not a matter of the court’s discretion in the
normal sense of that word. If Peter Gibson L.J. meant to say that it was in [37]
of Dexter v Vlieland-Boddy, it was not part of the ratio in that case which could
equally well have been decided by reference to the principles set out at [16] in Thomas
L.J.’s judgment. It would be troubling if two different judges could come to different
conclusions on whether the same facts constituted an abuse of process and yet both be
right.
39. Secondly, however desirable it maybe, from the point of view of the court, that
all possible actions arising from the same state of facts, should be brought at the same
time, it can be a recipe for complex and unwieldy litigation. The interests of the court
are, of course, relevant but the judge in [76] of his judgment appears to have regarded
those interests as almost the most important factor in the equation. This does not seem
to me to be right in a case where the parties could have brought the matter before the
court at a time between June 2003 and the settlement of the B&Q and Grantchester
actions in January 2004 but chose not to do so, no doubt for their own good commercial
reasons. This failure is, in my judgment, more attributable to WSP and Aspinwall than
to Aldi who had made their intentions clear in their letters of June 13 and September
4, 2003. The judge said ([82]) that no response was appropriate. In one sense that may
be right since no one is ever bound to reply to another person’s intimation of intention.
But it seems to me to be inappropriate to make no response at that stage but then at
a later stage, when intentions turn into action, to assert that that action is an abuse of
process.
40. I also agree that the judge did not adequately take into account the facts:
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• i) that it could not be said that Aldi had behaved in any way culpably or
improperly;
• ii) that Aldi’s own position was a difficult one, faced as they were with a assertion
of non-disclosure by underwriters which could not be satisfactorily assessed
before discovery in the underwriting action;
• iii) that although WSP and Aspinwall had been impleaded in the B&Q and
Grantchester actions, they had not been sued by Aldi at all, before June 2004.
‘. . . there will rarely be a finding of abuse unless the later proceeding involves
what the court regards as unjust harassment of a party.’
It might be fair to say it is harassing for WSP and Aspinwall to have to face a second
action; I cannot see that it is unjust when they are facing a claim from Aldi for the first
time.
42. I also agree with [29]–[31] of Thomas L.J.’s judgment. The parties should have raised
the possible difficulties of a further set of proceedings with the court at a stage when the
matter could have been sorted out in a proper way at a Case Management Conference and
not left it to fester in a way that has now made the difficulties problematic, time-wasting
and expensive at a later stage.”
Facts: The pursuers in this case originally sought damages for losses resulting from
having been induced by negligent misrepresentation to enter into a contract with a
subsidiary company of the defenders. The first pursuer (H) held approximately one
third of the shares in the second pursuers (a joint enterprise of his and a Mr Kalo),
which intended to develop a mineral water project. The pursuers invested in a company
(Gleneagles), holding 97 per cent of the equity. Further investment by the defenders
was secured after protracted negotiations, whereby the defenders would acquire overall
management and control of the company, as well as responsibility for the distribution of
the mineral water. However, the business did not prosper and Gleneagles was put into
administration. The value of the pursuers’ minority shareholding was thereby reduced to
nil. Counsel for the pursuers submitted that this loss resulted from detrimental reliance
upon a misrepresentation made by one of the respondents’ directors (B), who had been
given authority to make representations on their behalf. The pursuers submitted that,
but for this misrepresentation, they would have sold the shares to another company.
On August 1, 2003, the Lord Ordinary held in favour of the pursuers, awarding the
first pursuer damages of £1 million and the second pursuer damages of £2 million.
The defenders reclaimed and, on November 1, 2005, the Second Division allowed the
reclaiming motion and assoilzied the defenders. In the House of Lords, the appellants
averred that B was under a duty to take reasonable care not to misrepresent the strategy
that would be followed and, in the alternative, that B was under a duty to take reasonable
care to make clear to H that the active use of facilities to penetrate the “on-trade”
(the licenced trade in hotels, restaurants and public houses) must await (and perhaps
be contingent upon) the successful development of the brand in the “off-trade” (the
off-licence trade in supermarkets and other retailers).
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Cases 353
Held :
(1) That, on the evidence, B had not voluntarily assumed responsibility and no
duty of care therefore arose to tell H about the defenders’ distribution strategy,
if it differed from the one favoured by H.
(2) That the evidence adduced did not provide a sufficiently clear basis for the
Lord Ordinary’s finding that B led H to believe that he agreed with H that
Gleneagles should try to penetrate the on-trade, as well as the off-trade, from
the beginning.
Lord Rodger of Earlsferry delivered the opinion of the House of Lords as follows:
“My Lords,
1. I have had the advantage of reading in draft the opinion of my noble and learned
friend Lord Rodger of Earlsferry, and for the reasons he gives I too would dismiss the
appeal.
Lord Scott of Foscote
My Lords,
2. I have had the advantage of reading in draft the opinion of my noble and learned
friend Lord Rodger of Earlsferry, and for the reasons he gives I too would dismiss this
appeal.
Lord Rodger of Earlsferry
My Lords,
3. The first pursuer, Mr John Stewart Hamilton, and his business associate, Mr Kalo, were
at one time shareholders in the Highland Spring company which successfully developed
the well known brand of mineral water, based on a spring in the area of the village of
Blackford in Perthshire. For a number of years Mr Hamilton held a senior position in
the company, but eventually left as a result of a dispute.
4. The Gleneagles Maltings Company also owned premises and water rights in the
village of Blackford, but it lacked the capital to develop them. Mr Hamilton was
introduced to Gleneagles Maltings and, from his knowledge of the area, he advised
that the water sources in question were unsatisfactory for commercial development. He
considered, however, that two big springs on the Gleneagles Estate were suitable for
such development if the necessary rights could be acquired.
5. Mr Hamilton and Mr Kalo were shareholders in Stebbings Inc, the second pursuers, a
company incorporated in Panama. To take the potential development of the big springs
forward, Gleneagles Maltings agreed to sell its premises and spring to the Gleneagles
Spring Waters Company Limited (Gleneagles) in return for a 3 per cent shareholding
in Gleneagles, the remaining 97 per cent being held by Stebbings Inc. (The 3 per cent
holding was eventually bought out and does not feature further in the story.) By about
1990, Gleneagles had concluded potentially valuable agreements for the supply of water
from the springs on the Gleneagles Estate and had begun producing a small quantity
of water to be sold under the Gleneagles brand name. But the company was not in a
position to take the development of the business forward by itself.
6. One possibility was that Gleneagles would sell out completely to another company,
such as Evian. Another was that it would enter into a distribution deal with another
company that would provide the necessary distribution network for Gleneagles water.
The third possibility was that Gleneagles would join with another company that would
invest in Gleneagles, but would also provide a suitable distribution network.
7. Mr Hamilton considered that Gleneagles water should be marketed as a high quality
brand. He therefore favoured following the example of Perrier who had first successfully
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354 Construction Law Journal
established their brand in hotels, restaurants and public houses—the ‘HORECA’ Hotels,
Restaurants and Catering sector, or ‘on-trade’. They had then used this success to build
up their ‘off-trade’ sales in supermarkets and other grocery and off-licence outlets. The
general idea was that, if you had enjoyed drinking the product in a congenial atmosphere
on an evening out, this experience would persuade you to select the product when you
later saw it on the shelves of your supermarket. Mr Hamilton favoured a similar strategy
for Gleneagles water.
8. On Mr Hamilton’s view, therefore, it was critical to have the necessary arrangements
in place from the outset for distributing the water to the on-trade. So, when contemplating
the various possible business strategies under which the pursuers would retain an interest,
the arrangements for distribution were important for him. In particular, this was so
when—after a potential buy-out had fallen through—he decided, in December 1991, to
try to find a company to take a stake in Gleneagles.
9. Mr Derek Douglas of Fraser & Partners (Business Managers), who had already been
involved in the affairs of Gleneagles, put together a Business Plan. At Mr Hamilton’s
suggestion Mr Douglas contacted the defenders, who were then known as Allied-Lyons.
Allied-Lyons was interested and one of their directors, Mr David Beatty, was asked to
carry on discussions on their behalf. Initially, he was corporate development director
of their subsidiary, The Hiram Walker Group Ltd, which ran their wines and spirits
division, but in March 1992 he became deputy chairman of J. Lyons and Co Ltd (Lyons),
a wholly owned subsidiary of the defenders, which ran their food manufacturing sector.
The defenders admit on record that Mr Beatty was given authority to bind them and to
make representations on their behalf in his discussions with Mr Hamilton, who acted
both in a personal capacity and for the second pursuers.
10. In fact, to begin with, Mr Hamilton’s discussions were with Mr Stan Walters whom
Mr Beatty had asked to evaluate the commercial and financial prospects of Gleneagles.
Mr Beatty may have been present, however, for part of a meeting towards the end
of March 1992. From then onwards the discussions were between Mr Hamilton and
Mr Beatty.
11. In their pleadings, the case for the pursuers was that in the course of their discussions:
‘Mr Beatty repeatedly represented that the defenders’ distribution arrangements and
facilities would be made available in the knowledge that the pursuers were placing
reliance on the said representation. . .’
‘Having considered the evidence on this critical point I am satisfied that Mr Beatty
did not communicate to Mr Hamilton that this was his strategy. On the contrary,
I am satisfied that Mr Beatty led Mr Hamilton and Mr Douglas to believe that
he agreed with Mr Hamilton that Gleneagles should try to penetrate the on-trade
from the beginning as well as the off-trade and that the defenders’ distribution
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Cases 355
arrangements and facilities for both the on- and off-trades would be made available
to Gleneagles. Had it been otherwise I am satisfied that Mr Hamilton would not
have entered into the Agreement of 24 November 1992.’
As the Lord Ordinary says, a subscription agreement was concluded on November 24,
1992 under which Lyons became the majority shareholders in Gleneagles, the pursuers
together retaining a minority shareholding.
13. Thereafter, preparations got underway for the development of Gleneagles water.
After some trials, the product was eventually launched on the market in March 1994. Mr
Beatty had retired early in 1993 and so had nothing to do with the business after that.
Leaving all kinds of other matters on one side, the defenders accept that, when Mr David
Potter was seconded to Gleneagles in about August 1993, his brief was to promote the
product initially in the off-trade. Development in the on-trade would follow later. Again,
the Lord Ordinary stated his conclusion shortly, at [58]:
‘In any event, whatever the reason all I can say is that on the evidence the defenders
did not assist Gleneagles in getting access to Britvic or to the on-trade in general.’
14. Unfortunately, the business of Gleneagles did not prosper and in February 1998
Gleneagles was put into administration. By that time the pursuers’ shareholding was
virtually worthless.
15. In their pleas-in-law in the present proceedings, the pursuers claim damages by way
of reparation for the loss and damage which they say they suffered as a result of the fault
and negligence of Mr Beatty, for which the defenders are liable, in inducing them to enter
into the subscription agreement. Although these pleas-in-law are not very informative,
the pursuers’ case before both the Lord Ordinary and the Inner House was based on
alleged negligent misrepresentation by Mr Beatty in the course of his discussions with Mr
Hamilton which led to the subscription agreement. As I have pointed out, the specifics of
that alleged misrepresentation developed somewhat between the drafting of the pursuers’
averments on record and the formulation of their case after proof. Essentially, they
claimed that, relying on what Mr Beatty had told Mr Hamilton, they entered into the
subscription agreement on the basis that Lyons would assist them, from the outset, to
have their product distributed to the on-trade through Britvic. This did not happen and
the business failed, so making their shareholdings virtually worthless.
16. On August 1, 2003 the Lord Ordinary held in favour of the pursuers. Having
considered the various factors involved in the failure of Gleneagles’ business, he
concluded, at [78]:
The Lord Ordinary awarded the first pursuer damages of £1 million and the second
pursuer damages of £2 million.
17. The defenders reclaimed and on November 1, 2005 the Second Division (the Lord
Justice Clerk (Gill), Lord Hamilton and Lord Marnoch) allowed the reclaiming motion
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356 Construction Law Journal
and assoilzied the defenders: 2006 SC 221. The Lord Justice Clerk drew attention to
a number of potential difficulties in the pursuers’ case relating to causation. But the
decision of the Division was that the Lord Ordinary had erred in holding that, on the
evidence, the pursuers had proved the misrepresentation by Mr Beatty on which their
entire case hinged. The pursuers have appealed to your Lordships’ House.
18. Both in the appellants’ written case and in his helpful submissions at the hearing,
Mr Clark sought to argue that, not only was Mr Beatty under a duty to take reasonable
care not to misrepresent the strategy that would be followed, but he was, alternatively,
under a duty to take reasonable care to make clear to Mr Hamilton that the active use
of facilities to penetrate the on-trade must await, and perhaps be contingent upon, the
successful development of the brand in the off-trade. Mr Clark referred to this alternative
formulation as a ‘duty to speak’. It is convenient to address it first.
19. Mr Clark accepted, of course, that Mr Hamilton and Mr Beatty had been engaged in
an arm’s length commercial negotiation with a view to a possible subscription agreement.
Such an agreement was not a contract uberrimae fidei and so no duty of disclosure would
normally arise. But, even assuming that Mr Beatty knew or ought to have known that
Mr Hamilton regarded access to the on-trade from the outset as essential, was he under
a duty of care to make clear that the first stage would be for distribution to the off-trade,
with distribution to the on-trade only following later?
20. Doubtless, if Mr Beatty knew that this was Mr Hamilton’s position, a failure on
the part of Mr Beatty to speak might be regarded as morally questionable. But that is
different from saying that he was under a legal duty to speak.
21. In Peek v Gurney (1873) L.R. 6 H.L. 377, a prospectus for an intended company
was issued by promoters who were aware of the disastrous liabilities of the business
of Overend & Gurney which the company was to purchase. The prospectus made no
mention of a deed of arrangement under which those liabilities were, in effect, to be
transferred to the company. The appellant bought shares in the company and, when it
was wound up, he was declared liable as a contributory and had to pay almost £100,000.
He sought an indemnity against the directors, alleging misrepresentation and concealment
of facts by the directors in the prospectus. His action failed because he had not in fact
relied on the prospectus but had purchased the shares in the market. In the course of his
speech, however, Lord Cairns expressed his agreement with the observations of Lord
Chelmsford and Lord Colonsay that mere silence could not be a sufficient foundation
for the proceedings. He continued, at 403:
22. Mr Clark accepted that something more than mere silence would usually be required
to found a delictual claim for damages, but he argued that in certain circumstances a
duty to speak would arise. In such cases a failure to speak would be negligent in law and
a claim for damages could arise. For support, he pointed to the passage in the decision
of the Court of Appeal in Banque Financiere de la Cite SA (formerly Banque Keyser
Ullmann SA) v Westgate Insurance Co (formerly Hodge General & Mercantile Co Ltd)
[1990] 1 Q.B. 665, 794H–795A where Slade L.J. said:
‘We can see no sufficient reason on principle or authority why a failure to speak
should not be capable of giving rise to liability in negligence under Hedley Byrne
principles, provided that the two essential conditions are satisfied.’
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Slade L.J. had already identified the two essential conditions as being ‘that there has been
on the facts a voluntary assumption of responsibility in the relevant sense and reliance
on that assumption.’ He added, at 794E–F: ‘These features may be much more difficult
to infer in a case of mere silence than in a case of misrepresentation.’
23. My Lords, the simple truth is that Mr Clark was unable to point to anything in the
facts or evidence to show that, in this particular commercial negotiation, there had been
any voluntary assumption of responsibility on the part of Mr Beatty. Nor have I been
able to find any. In these circumstances the Banque Keyser decision does not provide
a basis for holding that Mr Beatty was under a duty of care to tell Mr Hamilton about
the defenders’ distribution strategy if it differed from the one favoured by Mr Hamilton.
Mr Clark did not suggest that such a duty could be founded on anything other than a
voluntary assumption of responsibility. The alternative way of putting the pursuers’ case
must therefore be rejected. So, if they are to succeed, it can only be on the basis that
there was a negligent misrepresentation by Mr Beatty.
24. The first thing to be decided is what, if anything, on the evidence, Mr Beatty actually
said which could amount to a misrepresentation. It is convenient to identify the Lord
Ordinary’s conclusion on this matter by setting out again the passage from the end of
[45] of his opinion, together with further passages from [46] and [47]. Having referred
to Mr Beatty’s evidence that the initial move was always going to be into the off-trade,
the Lord Ordinary continued in [45]:
‘Having considered the evidence on this critical point I am satisfied that Mr Beatty
did not communicate to Mr Hamilton that this was his strategy. On the contrary,
I am satisfied that Mr Beatty led Mr Hamilton and Mr Douglas to believe that
he agreed with Mr Hamilton that Gleneagles should try to penetrate the on-trade
from the beginning as well as the off-trade and that the defenders’ distribution
arrangements and facilities for both the on- and off-trades would be made available
to Gleneagles. Had it been otherwise I am satisfied that Mr Hamilton would not
have entered into the Agreement of 24 November 1992.’
After explaining the position adopted by the solicitor advocate for the defenders in her
closing submissions, the Lord Ordinary continued in [46] and at the beginning of [47]:
‘Mr Beatty’s strategy certainly was that initially distribution would be to the
grocery sector, the off-trade, and that would be done through the defenders’ food
manufacturing sector, which in practice was Lyons Tetley, and in the event there
was assistance from Lyons Tetley in certain areas, although not distribution on the
evidence. However, as I have found, that was not what Mr Beatty represented to Mr
Hamilton was the defenders’ strategy and, in any event, his own strategy envisaged
attempting to penetrate the on-trade at a later stage. (How that was to happen was
not explored.)
47. What I have found Mr Beatty did represent to Mr Hamilton is essentially the
case that the pursuers make in the first sentence of article 4 of the condescendence.’
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
358 Construction Law Journal
however, the Lord Ordinary is just reflecting the way that the pursuers’ case developed in
the course of the proof, and he should be regarded as holding that Mr Beatty represented
that Lyons would follow a strategy in which Gleneagles would be assisted to penetrate
the on-trade as well as the off trade ‘from the beginning’. Certainly, in his submissions
before the House, Mr Clark accepted that, in order to succeed, the pursuers had to show
that Mr Beatty had represented to Mr Hamilton that this strategy would be followed
from the beginning.
26. Before turning to look at the evidence, it is useful to stand back and notice what the
pursuers’ case really amounts to. As Mr Hamilton acknowledged in cross-examination,
in the documentation making up the subscription agreement, which was revised by solic-
itors for both sides, there is quite simply nothing said about the distribution strategy that
is to be followed. On any view, this is a striking omission if, from Mr Hamilton’s point of
view, that strategy was a key element in his decision to enter the agreement. Therefore,
in substance, the pursuers are arguing that, though nothing was said about the matter
in the subscription agreement, Lyons were actually under an obligation to follow that
distribution strategy. Prima facie, one might have expected commercial men to frame
their agreement in a more businesslike manner so as to cover the point, if this was what
they intended.
27. The position is all the more striking when two further aspects of the context of the
alleged representation by Mr Beatty are considered.
28. First, Mr Beatty was just a few months away from retirement and must have
known that he would not be the person in charge of distribution by the time that the
business was up and running. So he was by no means well placed to make authoritative
pronouncements about the distribution strategy that would be followed.
29. Secondly, and more significantly, Mr Hamilton’s position in evidence was that access
to the on-trade was to be through the distribution network of Britvic—Britvic Soft Drinks
Ltd. That company was owned by Britvic Holdings Ltd, 90 per cent of the shares in
which were held by Britannia Soft Drinks Ltd (Britannia), the other 10 per cent being
held by Pepsi. Bass Plc had a majority shareholding in Britannia, with a subsidiary of the
defenders, Allied Breweries Ltd, and Whitbread Plc, holding approximately 25 per cent
each. In his evidence in chief Mr Hamilton said that, at the time of their negotiations, Mr
Beatty had been a director of Britannia. But it emerged in cross-examination, and was
confirmed when Mr Beatty gave evidence, that, in fact, he had never been a director of
that company. However the misunderstanding may have arisen, it seems at least possible
that Mr Hamilton’s belief that Mr Beatty was on the board of Britannia may have
coloured his understanding of what Mr Beatty said about access to the on-trade through
Britvic, as opposed to access through companies in the defenders’ group. The evidence
of both Mr Hamilton and Mr Douglas showed that, certainly so far as the companies in
the defenders’ group were concerned, on the day the subscription agreement was being
finalised, Mr Beatty was at pains to make sure that Mr Hamilton understood how little
Lyons could do to provide Gleneagles with distribution through them.
30. In fact, however, access to Britvic’s distribution network was never going to be easy.
As the shareholding shows, the dominant force in Britannia was Bass and Mr Walter gave
evidence that they were very protective of their own products. The potentially difficult
climate is shown by the fact that the conclusion of an agreement between the pursuers
and defenders was delayed from June until November 1992 because of a problem which
had arisen between the defenders and Britannia. The evidence about that problem was a
little vague. It seems, however, that, by reason of the arrangement under which Allied
Breweries held their shares in Britannia, the defenders were precluded from themselves
engaging in the bottled water market. A solution was eventually found about the end of
October 1992. On November 3, the defenders’ main board gave approval for the deal
with the pursuers to go ahead. In the ensuing subscription agreement, the solution was
reflected in cl.7.6 which allowed Lyons to transfer all their shares to Britannia at any
time before the end of 1993.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Cases 359
31. Against that background I turn to consider the evidence about the alleged
representation by Mr Beatty. The Second Division reversed the Lord Ordinary’s finding
that Mr Beatty had represented that Lyons would follow a strategy in which Gleneagles
would be assisted to penetrate the on-trade as well as the off-trade from the beginning.
Essentially, the Division did so on the ground that, properly analysed, the evidence as
set out in the transcript did not support the finding. Before the House it was not disputed
that the Division had been entitled to interfere with the Lord Ordinary’s finding, if indeed
the evidence did not justify it.
32. In his examination in chief Mr Hamilton gave evidence that Mr Beatty had made his
representation about the strategy to be followed at a meeting in the offices of Maclay
Murray & Spens on May 4, 1992. The pursuers’ pleadings contained an averment to
similar effect. But, in her cross-examination of Mr Hamilton, Mrs Swanson, the solicitor
advocate for the defenders, pointed out that Mr Beatty had not been present at that
meeting. In re-examination, having referred to his diary, Mr Hamilton concluded that
the occasion in question might actually have been a visit by Mr Beatty to Blackford on
May 27. In his opinion, the Lord Ordinary in effect held that Mr Hamilton’s evidence
of what Mr Beatty had said was reliable, even though he had been mistaken about the
occasion on which Mr Beatty said it.
33. At the hearing of the reclaiming motion, the defenders’ counsel submitted that Mr
Hamilton’s mistake about the date and place tended to suggest that the Lord Ordinary
should not have relied on his recollection of what was said. Lord Marnoch considered
that, at the very least, this was a matter that must be taken into account when assessing
the reliability of his evidence. Since there was nothing to show that the Lord Ordinary had
taken the point into account, Lord Marnoch considered that the matter was at large for
the Division and he, for his part, would have found it difficult to attach any importance
at all to Mr Hamilton’s evidence on the point: 2006 SC 221, 257, [122]. By contrast,
while aware of these criticisms of Mr Hamilton’s evidence, Lord Hamilton proceeded
on the basis that, so far as it went, it was both truthful and accurate: 2006 SC 221, 246,
[97]. The Lord Justice Clerk agreed with both Lord Hamilton and Lord Marnoch. In
adopting his approach, Lord Hamilton had regard to the fact that, in cross-examination,
Mrs Swanson had adopted what he described, at 243, [88], as:
Considering the opportunity which the Lord Ordinary had to observe Mr Hamilton giving
evidence, and considering also the attitude adopted by Mrs Swanson at the proof, I prefer
to approach the matter in the same way as Lord Hamilton. Proceeding, therefore, on the
assumption that Mr Hamilton’s evidence is to be regarded as truthful and accurate so far
as it goes, what does he say that Mr Beatty said on the matter?
34. The first important passage comes in his evidence in chief where he was asked what
he had said to Mr Beatty about why the pursuers wanted to go into the deal with the
defenders:
‘That Allied was bringing the power of its distribution to this deal, and we were
bringing the technology of the water business.
Yes. When you spoke about it bringing its power of distribution, did you discuss
within that concept any particular area of distribution, to any part of the trade?
Were you looking at retail, at HORECA or what?
We were very definitely discussing HORECA.
Discussing HORECA?
Yes.
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360 Construction Law Journal
‘. . .to the extent that, had he got it in his Water Division, would there be a problem
in getting Britannia for the distribution in the HORECA trade?
I was given an assurance that that would not be a problem once he had got the
matter resolved, and it was really a courtesy to sort out the problem with Britannia,
and he was choosing his moment, his timing and his method of handling it with
the other parties.
Right. So there was the shareholding problem?
Yes.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Cases 361
But, on the back of that, on the back of whatever deal he struck with Britannia on
shareholding. . ..?
Yes.
There was the understanding from him. . .?
Yes.
That once the deal was in place you would get access to the HORECA trade?
Yes.’
Mr Clark said that there was no suggestion of a gap in time between any deal over
Britannia and the pursuers getting access to the on-trade. The simple fact, however, is
that the passage does not contain anything which shows Mr Beatty actually saying that
the strategy would be that Gleneagles would have access to the on-trade as well as to
the off-trade from the beginning.
37. Mr Clark also drew attention to a passage in the cross-examination of Mr Hamilton:
‘Isn’t that the case that when you were discussing distribution with Mr Beatty he
talked about distribution through the existing sales networks that we have talked
about previously, the spirits division or the food division, and said that Britvic
would be a possibility, but he didn’t give you any guarantees in that regard?
I have never had written guarantees, nor have I asked for them, but I have had
discussions in which David Beatty told me that he was in fact organising the whole
position to get us into Britvic, and it was being done by this device of presenting
the option to Britvic to make the investment directly, or to take over the investment.
This was part and parcel of his negotiating strategy.’
Again, whatever the exact import of the passage may be, there is nothing which actually
points to Mr Beatty having said that the defenders would arrange distribution to the
on-trade through Britvic from the outset.
38. Mr Clark indeed acknowledged that there was only one place in the transcript where
he could point to any specific words which might suggest that Mr Hamilton had referred
to distribution to the on-trade being envisaged from the outset. The passage in question
comes in Mr Hamilton’s re-examination:
‘Now, before I come on to the completion meeting, if I may move back very briefly
to the May, you have indicated that you can’t say precisely which—you have told
us there were several meetings in May?
Yes.
You can’t say precisely which meeting in May you spoke to David Beattie?
That is correct.
Yes, but you spoke in chief about having put it to him—made it quite clear to him
that you needed access to the on-trade; is that right?
Yes.
To Britvic?
Yes.
And what is your recollection at that meeting of his response?
Basically he understood that this was a component of getting the company off the
ground.
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362 Construction Law Journal
Yes. And did he say anything to you about his ability to do so, or anything of that
nature, can you recall?
I have the, or had the, impression that this was something that he could achieve
and deliver from the way he presented to me. To try to put specific words at this
stage, I really couldn’t do.
Are you satisfied in your own mind, however, you put it to him that this was a
necessary component . . .?
Yes.
. . . of the deal you wanted to do?
Yes.
Yes. And did he demur to that in any way?
He—there was an acceptance that this was a fact, that we needed this in the deal.’
39. Both Lord Hamilton, 2006 SC 221, 248, [102], and, indeed, Mr Clark in his
submissions at the hearing, seemed to think that the significance of the evidence was
somehow reduced because it was given in re-examination. For my part, I would attach
no particular importance to that factor: the value of evidence depends on its quality, not
on the stage at which it is given.
40. On the other hand, I note that the question which elicited the important answer asked
what Mr Beatty’s ‘response’ had been to Mr Hamilton saying that they needed access to
the on-market. A response can come in various forms. Perhaps unsurprisingly therefore,
the very first word of Mr Hamilton’s reply (‘Basically’) immediately shows that he is
not purporting to recall exactly how Mr Beatty responded—far less to give the exact
terms of anything which Mr Beatty might have said. Mr Hamilton is just recalling that
the purport of Mr Beatty’s response was that he understood that access to the on-trade
was a component of getting the company off the ground. A measure of interpretation by
Mr Hamilton may well be involved.
41. Lord Hamilton considered, 2006 SC 221, 248, [102], that:
“‘getting the company off the ground” could equally refer to making Gleneagles a
commercially viable entity (the ultimate objective), as it could to the strategy to be
adopted from the outset to achieve that end.’
I doubt that. If, as Lord Hamilton thought and as may well be the case, Mr Hamilton
was giving his interpretation of Mr Beatty’s response, then his interpretation would
undoubtedly have been that Mr Beatty was saying that there would be access to the
on-trade from the outset. So Mr Hamilton would have used the words ‘off the ground’
with that meaning. On the other hand, if Mr Hamilton was purporting to recall some
specific words of Mr Beatty, I do not agree that they could ‘equally’ refer to the ultimate
objective of making Gleneagles a commercially viable entity. The phrase ‘off the ground’
is a comparative newcomer to our language and must be a somewhat decayed metaphor
from flying. Whatever its ultimate destination, a plane, or indeed a bird, gets off the
ground at the beginning rather than at the end of its flight. In my view the more natural
meaning of the evidence would be that Mr Beatty understood that access to the on-trade
was to be a component of the strategy from the beginning.
42. Nevertheless, as Lord Hamilton notes, it is interesting to see that, after this particular
answer, with a little further prompting, the witness said that there was an acceptance by
Mr Beatty that the pursuers needed this in the deal. Yet, the one thing that is certain
is that neither this or anything else about distribution was to be found in the deal as
finalised in the subscription agreement.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Cases 363
43. Weighing up all these considerations, I do not regard this passage, even on its face,
as providing a sufficiently clear basis for the Lord Ordinary’s finding that, by what he
said, Mr Beatty led Mr Hamilton and Mr Douglas to believe that he agreed with Mr
Hamilton that Gleneagles should try to penetrate the on-trade as well as the off-trade
from the beginning. It is much too oblique an answer. If it was to be the linchpin of the
pursuers’ case, the answer should have been clarified.
44. I am reinforced in that view by the fact that, as Mr Keen Q.C. pointed out, when
senior counsel came to cross-examine Mr Beatty, he did not put it to him that he had
said that access to the on-trade would be a component of getting the company off the
ground. Nor did he challenge his recollection that the strategy would be to concentrate
on the off-trade and then move on to the on-trade:
‘And did you also discuss or do you remember rather whether you discussed the
benefit of a branded presence in the HORECA trade which would give a spin-off
into the branded retail sales? Do you remember discussing that?
I was always aware that Mr Hamilton had aspirations that the brand ought to be
distributed in what I would call the on-trade as well as the off-trade. That was
never in dispute.
Yes, your position yesterday, your recollection yesterday was that there was an
agreement almost from the outset that you would concentrate on the off-trade and
then move on to the on-trade?
Absolutely.
Now, to the best of your recollection, that was your understanding at the time, is
that the position?
Yes.
So, presumably, one would have to be in the on-trade for a period of months or a
period of years. . .?
The off-trade.
In the off-trade for a period of months or a period of years before one makes
serious impact on the on-trade. You were envisaging brand building through the
supermarkets and such things and then on the platform of that you would move
into the on-trade because people, having seen it in the supermarket, you could say
to the pubs and hotels, look, this is something that is very popular in the off-trade,
you should be stocking it. Was it that sort of arrangement you envisaged?
That was the way I envisaged it.
So the on-trade in a sense might be a couple of years down the line, is that really
it?
It could be and, if it came forward earlier, then that is fine.
But it was the secondary step?
As far as I was concerned, it was the least volume, the most difficult and carried
with it the least amount of consumer awareness. People tend to order water in the
on-trade and they get water. It doesn’t really matter to the restaurateur, the pub
owner or indeed the consumer what they get. If they go to a supermarket, they
have a choice and they pick up the brand of their choice and that is the way I saw
this operating.
I see, and you are clear about that recollection?
Absolutely.’
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364 Construction Law Journal
45. The Lord Ordinary accepted, at [15] of his opinion, that Mr Beatty was a credible
witness, but made no overall assessment of his reliability. He also noted, at [45], however,
that it was not suggested to Mr Beatty that he was mistaken in giving this unqualified
evidence that the initial move was always intended to be into the off-trade. That being
so, it is hard to resist the conclusion that, if Mr Beatty had in fact represented that
there would be simultaneous distribution to the on-trade and off-trade from the outset,
he would have been not merely negligent, but dishonest. Of course, there is no hint
of an allegation of dishonesty or fraud in the pursuers’ pleadings or in their conduct
of the case. Moreover, as Lord Marnoch noted, any such conclusion would seem to be
inconsistent with the certificate of credibility which the Lord Ordinary gave Mr Beatty:
2006 SC 221, 259, [125]. All this confirms that it would not be safe to rely on the
single answer in Mr Hamilton’s re-examination as a basis for finding that the pursuer
has established the necessary misrepresentation by Mr Beatty.
46. For these reasons, which are, in very large measure, the same as those given by the
Second Division, I am satisfied that the evidence did not warrant the Lord Ordinary’s
finding that Mr Beatty misrepresented the position to Mr Hamilton. I would accordingly
dismiss the appeal. The appellants must pay the respondents’ costs.”
For the pursuers: Alistair Clark (instructed by Simpson & Marwick, Edinburgh).
For the defenders: Richard Keen Q.C. and Douglas Fairley (instructed by Maclay Murray
& Spens, Edinburgh).
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Information
Insolvency and payment under the Construction Act: the House of
Lords finally decides
The facts: Melville Dundas Ltd (in Receivership) v George Wimpey UK Ltd 1 [is
a case about a contractor (MD), which was employed by housebuilder George
Wimpey UK Ltd (GWUK) in respect of a housing development in Glasgow.
The contractor entered into a construction contract valued at approximately
£700,000 on March 20, 2002. The contract incorporated the terms of the Joint
Contracts Tribunal (JCT) Standard Form of Building Contract with Contractor’s
Design 1998 Edition, amended to suit use in Scotland. Although the contract was
governed by Scottish law, the relevant provisions argued in this case were JCT
provisions which were unaffected by the Scottish Supplement to the contract,
so the decision in this case does not turn on peculiarly Scottish provisions of
contract.
The Housing, Grants, Construction and Regeneration Act 1996 (commonly
known as the Construction Act) applies to Scottish construction contracts.
Therefore, the contract provided for monthly applications for interim payments
and specified a final date for payment in respect of each interim amount, due
14 days after receipt by GWUK of the application.
On May 2, 2003, MD lodged an interim application for payment. GWUK should
have paid MD the amount due on or before May 16, 2003. It did not. Neither
did GWUK serve a withholding notice to MD in accordance with s.111 of the
Construction Act, identifying the sum being withheld from payment. On May
22, 2003, MD went into administrative receivership.
The JCT provisions provided that GWUK could terminate MD’s employment
under the contract if an administrative receiver was appointed. GWUK exercised
this right on May 30, 2003. Termination brought into effect cl.27.6.5.1 of the
contract which provided as follows:
1 Melville Dundas Ltd (in Receivership) v George Wimpey UK Ltd [2007] UKHL 18; [2007]
1 W.L.R. 1136. See also Construction Act Review above on p.326.
365
366 Construction Law Journal
The payment position under the Construction Act (in respect of construction
contracts, to which it applies) can be summarised as follows:
certain circumstances apply and the parties are free to agree the amounts
of the payments and the times at which they become due (s.109).
2. Every construction contract must provide an adequate mechanism for
determining what payments become due under the contract and when.
It must also provide a final date for payment in respect of every amount
which becomes due and the parties are free to decide how long the
period is between when the sum becomes due and the final date for its
payment (s.110).
3. A party to a construction contract may not withhold payment after the
final date for payment of an amount due under the contract, unless they
have given an effective notice of intention to withhold payment. The
parties are free to agree in their contract how long before the final date
for payment any withholding notice under the Construction Act must
be given (s.111).
If the parties do not agree the matters listed in the points above, the relevant
aspects of the Scheme for Construction Contracts apply.
On October 22, 2004, the Lord Ordinary, Lord Clarke, decided that cl.27.6.5.1
did allow GWUK to withhold payment, even of certified sums, where the final
date for payment had passed and MD’s claim was dismissed.
Lord Clarke took the view that the Construction Act’s provisions were intended
to deal with cash-flow questions arising out of continuing, non-determined
construction contracts and the contract’s provisions at cl.30 dealing with interim
payments satisfied the Construction Act’s requirements. However, cl.27 dealt
with an entirely different situation and the Construction Act did not attempt
to deal with this. This was a matter on which the parties were free to reach
agreement and did reach agreement, the effect of which was that the final date
for payment was altered and as such had not yet arrived. Any questions of further
payment would have to be dealt with after the post-completion accounting
exercise had been carried out.
MD appealed.
The Appeal was decided on December 15, 2005 by Lords Nimmo Smith,
Mackay of Drumadoon and MacLean. The parties’ arguments at appeal are
summarised as follows.
MD claimed that the final date for payment of May 16, 2003 had passed without
any withholding notice being served, the amount due was overdue on and
from May 17, 2003 and nothing which happened (including the appointment
of administrative receivers and subsequent determination of MD’s employment
under the contract) after that date could affect its right to receive payment or
entitle GWUK to withhold payment.
GWUK contended that the payment sought by MD had accrued within the 28-
day period prior to the appointment of a receiver and, by virtue of cl.27.6.5.1,
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
368 Construction Law Journal
the sum was not due for payment at all. GWUK had proceeded with the works
following termination and an account was to be drawn up post-completion. The
sum sued for fell to be included in that account and the final date for payment
in respect of that sum changed to become the date when a positive balance was
found to be due to MD following the completion of that accounting exercise.
Norwich Union (NU), the surety under the performance bond taken out at the
outset of the contract, argued that Lord Clarke had been correct in his assessment
that the Construction Act only applied to on-going contracts. Denying the
employer the right to withhold payment in circumstances such as those in
the present case, meant NU were denied the protection afforded by cl.27 of
balancing what would probably end up being additional costs to complete the
works against sums otherwise due to the contractor, leaving the employer to foot
the whole increased bill. NU was a party to the case because if GWUK were held
liable to make the payment, GWUK was likely to make a claim under the bond.
Their Lords stated that the sum claimed for became overdue for payment on
May 17, 2003 and MD could have taken immediate steps to enforce payment. If
NU and GWUK were correct in their arguments, then this would deprive MD of
a right it had already gained to enforce payment by retrospectively altering the
final date for payment. Their Lords found no clear contractual provision in the
contract to this effect. They further agreed that cl.27.6.5.1 did not contain any
provisions which would allow the parties to ascertain a final date for payment
and, as such, a final date may never even arise. The clause went no further than
to provide for the preparation of a final account.
It was held that the contract did not alter retrospectively the final date for
payment but allowed GWUK to withhold, in certain circumstances, an amount
due after the final date for payment thereof. The correct interpretation of the
contract provisions read with the Construction Act’s provisions, which continued
to apply even after MD’s employment was terminated, was that s.111 applied
to prevent GWUK from relying on cl.27.6.5.1 to MD’s detriment.
GWUK appealed.
The House of Lords gave a three to two majority decision, allowing GWUK’s
appeal, on April 25, 2007. Lords Hoffman, Hope of Craighead and Walker of
Gestingthorpe formed the majority opinion. It was held as follows.
Comment
I find the decision of the majority of the House of Lords strange. Whilst I can
see the points their Lords are making have some logic in circumstances where
the contractor is insolvent, I am disturbed by the fact that their comments are
made with the benefit of hindsight in relation to the fact of MD’s insolvency.
Without any knowledge of MD’s insolvency, which would have been the case
during the first two weeks of May 2003, GWUK was either obliged by statute to
serve a valid withholding notice under s.111 or make the payment of the amount
applied for by interim application by May 16, 2003, the final date for payment.
What I find particularly hard to understand is how their Lords have come to
a finding that it would not have been possible for the employer to serve a
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
370 Construction Law Journal
withholding notice by May 11, 2003 (the date by which a withholding notice
should have been served in normal circumstances) as, they say, the earliest that
the employer would have known that it was entitled to withhold the interim
payment was when the receivers were appointed on May 22. Not so, if the fact
of the insolvency is taken out of the equation altogether, as it should be given
that it occurred after the final date for payment.
This decision effectively condones the employer’s action, or inaction, of not
serving a withholding notice within the prescribed time limits in the contract,
and as a result of the subsequent insolvency of the contractor, getting out of its
obligation to pay the whole amount due.
The effect of the House of Lords’ judgments in this case should be applied
in the future in limited circumstances, namely contractor insolvency allowing
termination. It is difficult to see how circumstances other than insolvency might
cause their Lordships to reach such a decision.
With this judgment in mind, though, it should be remembered that if a contractor
is in difficult financial circumstances, a payment delay by an employer may be
the final straw which leads to insolvency. In these circumstances, employers may
“cause” insolvency and then benefit from it, by withholding an interim payment.
If a contractor is in financial difficulties and a payment is not made, the contrac-
tor should consider resorting to its right to suspend performance of obligations
under a construction contract for non-payment, which is permitted under s.112
of the Construction Act 1996. Properly suspending performance, then seeking
payment in adjudication, could allow the recovery of interim payments.
The decision has created an element of uncertainty in that if one party to
a construction contract is able to demonstrate a real injustice caused by the
Construction Act 1996, which was not considered expressly by Parliament when
enacting the Act, there may be room for argument. The differences between the
judgments, including the arguments put forward by the two dissenting Lords,
will no doubt have a part to play in future actions brought in reliance of the
judgment made in this instance. Identifying exactly what the ratio of the decision
is, and whether it would apply in slightly different circumstances, will take more
than a passing reference in correspondence during an adjudication or prior to
adjudication.
The judgments in this case cannot be easily condensed, but the final effect
of the decision is clear: the employer was able, in these circumstances, to
withhold monies, despite not serving a withholding notice before the final date
for payment. Not so in the subsequent case of Pierce Design International Ltd
v Johnston 2 which was decided on July 17, 2007. The determination of a JCT
Standard Form of Building Contract with Contractor’s Design 1998 Edition by
the employer in that case, did not allow the employer to escape the consequences
of its failure to serve the withholding notices required by the Construction Act
1996 and the building contract. Some distinguishing features in that case from
Melville Dundas are that:
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Insolvency and Payment Under the Construction Act 371
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Technology and
Construction Law Reports
Collins v Drumgold
T45
T46 Construction Law Journal
Coulson J.:
1. 1. This is an application by the second defendant to transfer this action from
the Cambridge County Court to the Technology and Construction Court in
London. The application is supported by all the other remaining defendants,
namely the fifth, sixth and seventh defendants. The application is resisted by
the claimants, who have provided a detailed letter through their solicitors setting
out their objections to this course. That letter is dated March 7, 2008 and I have
necessarily considered it in detail in reaching the conclusions set out below.
2. Applications to transfer cases into the Technology and Construction Court are
not uncommon, but there remains a certain amount of confusion and uncertainty
as to both the procedure to be adopted and the principles which govern such an
application. That confusion has been apparent in this case. For those reasons, I
hope that it will be helpful, once I have summarised the nature of this claim,
to set out both the correct procedure on a transfer application, and the relevant
guidelines that will govern whether or not such an application is successful.
6. A very large number of pleadings have been exchanged between the parties.
Miss McCafferty, who appears for the second defendant this morning, has
explained that this has been largely due to the difficulties that the defendants
have had in obtaining clear particulars from the claimants as to the detail of
their case. It appears that this may have been because the action was started at
a stage when the problems at the properties were still being investigated.
7. Disclosure has taken place. However, the pleadings have only just closed and
there are, as yet, no witness statements and no experts’ reports. As to this latter
point, I note from the existing court orders that permission has been given
to the parties to call architectural, engineering and valuation expert evidence.
Miss McCafferty estimates that there may be seven different experts already
instructed, with the scope for at least two more (although I would be hopeful
that, with careful case management, that number will reduce). There is currently
a further case management conference (CMC) fixed for June 2008. There is
currently no provisional date for the trial of the action.
(c) Complexity
I accept Miss McCafferty’s submission that complexity will be the critical fac-
tor in the vast majority of transfer applications. It certainly is here. I consider
that, on any view, this is a complex case involving, as it does, interrelated
issues of law, geotechnics and standards of care and professional duty. I have
summarised those complexities at [5], [6] and [7] above. On the basis of that
summary, it seems to me that this is overwhelmingly a case for transfer. I
should also note that the claimants’ solicitor’s letter of March 7, does not seek
to make any suggestion to the contrary.
costs of the parties. Indeed, I would be hopeful that the transfer might actually
reduce those costs.
16. I did consider whether the fact that these proceedings had been extant for some
time meant that it could be said that the application to transfer was made too late
and that it would be unfair, in view of the claimants’ opposition to the appli-
cation, for the application to be allowed over two years after the proceedings
started. However, I put that point to Miss McCafferty and she has demonstrated
that in this case, although it has been going on for some time, the action is still
at a relatively early stage. As I have already said, there are no witness statements
and no experts’ reports. In addition, the pleadings have only just closed. That is
a reflection of the delays which have occurred as a result of the historical prob-
lems with the lack of particularity in the claimants’ case. In those circumstances,
it seems to me that it could not be said that this application was made too late.
17. For all those reasons, therefore, and in particular because of the types of claim
being made in this case, their value and, in particular, their complexity, I am
in no doubt that this action should be transferred to the TCC in London.
18. It is important to record that no part of my analysis should be taken in any way
as a criticism of the conduct of this case thus far by Cambridge County Court. I
note that at some county courts there will be a specialist TCC judge or judges,
and that might well be a factor on any application to transfer out of such a court.
However, that does not arise here because I am told that there is no such judge in
Cambridge. Furthermore, in busy county courts such as the one in Cambridge,
there is a huge range of work to be done, and considerable pressures on the
judges and their lists. They are not always able to allow parties in a long running
and complex case like this all the court time, particularly in respect of case man-
agement, that in other circumstances, they would be keen to offer. In the right
case, a specialist court like the TCC is able to provide a service which can meet
the particular needs of the parties in accordance with the overriding objective.
19. For all those reasons, therefore, I consider that this case should be transferred
from the Cambridge County Court to the TCC in London. It will be assigned
to one of the Senior Circuit judges here.
Commentary
C1 As any lawyer knows, the bedrock of the work dealt with by the Technology
and Construction Court (TCC) is that of building disputes. As Colman J. said in
relation to the Commercial Court in Lumbermens Mutual Casualty Co v Bovis
Lend Lease Ltd [2004] EWHC 1614 (Comm), [2004] 2 C.L.C. 778; (2004) 154
N.L.J. 1107:
“. . . if one looks at the type of dispute which the Commercial Court nor-
mally determines one does not include within it building disputes. It is
perfectly true that there are frequently cases in this court about ship build-
ing and the construction of oil-rigs. But essentially, disputes concerned
with the details of the construction of buildings on land are not dealt
with in the Commercial Court and never have been. And when they come
before this court it has been for many years the practice to transfer them
to, originally, the Official Referee’s court, and now to the TCC.”
The position is more complicated where other issues arising out of a building
dispute, such as the effect of insurance policies (as was the case in Lumber-
mens) have to be decided. It may be appropriate in such a case for those issues
to be decided elsewhere with the building issues being heard by the TCC.
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C2 Nevertheless, despite this approach being widely accepted within the legal
profession, reported cases on transfers to the TCC are few and far between. And,
as Coulson J. pointed out in his judgment in Collins, there remained a certain
amount of confusion and uncertainty as to both the procedure to be adopted
and the principles which govern such an application. One of the reasons for
this may well have been that intuition would suggest that a transfer would be
dealt with by the court before which the claim is currently proceeding, rather
than the court to which the transfer is asked to be made. In fact, as is made
clear by the learned judge’s decision, the application for a transfer to the TCC
should be made to the TCC.
C3 The case concerned damage to houses in Romford allegedly caused by the
action of heave on the foundations. The claimant house owners began their
proceedings against the defendant contractor, architect, engineer and solicitor
in the Cambridge County Court. The contractor applied to the TCC in London
for a transfer to that court, giving notice of having done so to the county court.
It was suggested on behalf of the house owners that the application should have
been made to the county court. They relied on CPR 30.2(3), which provides
that an application for an order under CPR 30.2(1) or (2) must be made to the
county court where the claim is proceeding. CPR 30.2(1) states that a county
court may order proceedings before it to be transferred to another county court,
and CPR 30.2(2) that if proceedings have been started in the wrong county
court, a judge of the county court may order that they be transferred to the
county court in which they ought to have been started. It follows, as Coulson
J. pointed out at [10], CPR 30.2(3) is concerned solely with transfers from one
county court to another.
C4 A county court is entitled to order the transfer of any proceedings before it to
the High Court by virtue of s.42(2) of the County Courts Act 1984. However,
the requirement in CPR 30.5 that an application for the transfer of proceedings
to a specialist list must be made to a judge dealing with claims in that list means
that only the TCC can deal with an application for a transfer from a county
court to the TCC. TCC claims form a specialist list by virtue of CPR 60.2(1).
The confusion and uncertainty referred to by Coulson J. probably also arose
from the fact that CPR 30.5 appears to be dealing with transfers within the High
Court and there being no specific mechanism in the rules for a transfer from a
county court directly into a specialist list. It would, of course, be a laborious
process for a claim to have to be transferred firstly from the county court to
the High Court and then into a specialist list, and the solution arrived at by
Coulson J. of an application within the specialist list under CPR 30.3 and 30.5
is clear and convenient.
C5 The balance of the judgment in Collins is concerned with the approach likely
to be taken to transfers to the TCC from county courts. Building on the first
five criteria (listed at [12]) identified under CPR 30.3(2) as matters to which
the court must have regard when considering whether to make an order for a
transfer between a county court and the High Court, Coulson J. set out at [14]
the approach that the TCC will tend to adopt, namely:
• A dispute which is, or arises out of, or has a connection with a type
of claim identified in the Part 60 Practice Direction as suitable for the
TCC will be appropriate for transfer subject to other factors.
• Although financial considerations can be of importance, what will often
be critical is the complexity of the issues.
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H4 (1) The relevant paragraphs and documents dealt with genuine negotiations
between the parties and the material was without prejudice because the
first meeting had been without prejudice and the subsequent agreement
that all discussions from that point forward would “move beyond the
without prejudice stage” was a clear acceptance that everything that
had happened before was regarded by both parties as having been
without prejudice.
H5 (2) The fact that two of the documents had been disclosed and offered for
inspection did not amount to a waiver and even if it had, the disclosure
had been an obvious mistake and it would be wrong and unfair to find
that privilege had been lost: Al-Fayed v Commissioner of Police of the
Metropolis (No.1) [2002] EWCA Civ 780 applied.
H6 Julia Dias appeared for the claimant contractor, instructed by McGrigors LLP.
Robert Howe appeared for the defendant engineer, instructed by Fishburns.
Katie Powell appeared for the third party sub-contractor.
Coulson J.:
1. This is an application by the defendant for an order that paras 39 to 48 inclusive
of the witness statement of Mr Joseph Martin, signed and dated December
14, 2007, be excised and that the documents which are referred to in those
paragraphs be removed from any trial bundles. The grounds for the application
are that the material in the paragraphs and the documents relate to without
prejudice discussions, in respect of which privilege and/or admissibility has not
been waived. The application is opposed by the claimant on the ground that the
material is not without prejudice. The third party also opposes the application.
The third party’s emphasis is on the fact that, in relation to one letter and one
series of notes of a meeting (which I shall explain further below), the privilege
or the admissibility has been waived by the defendant in any event.
The claim
2. The underlying dispute in this case concerns a major building project in
Birmingham. The claimant was the design and build contractor. The defendant
was engaged by another entity, not the claimant, to provide engineering services,
including major elements of the design. The claimant claims that, in breach of
its common law duty of care:
(a) the defendant did not give the claimant proper advice as to how to
deal with forces exerted by the ground against a pile wall. That is
apparently referred to in the pleadings and in the trial documents as
the “pile wall bracing issue”; and
(b) the defendant failed to give proper advice about the best way of
supporting the existing façade of the building, which was being
retained. That is referred to in the documents as the “hospital façade
issue”.
3. The defendant denies the claims and denies that it owed the claimant any duty
of care at common law. If there was such a duty, it denies that there was any
breach. Because the underlying issues relate to steelwork, the defendant has
also issued third party proceedings against the steel work subcontractor.
4. The claim in the action is said to be worth in the region of £10 million. The
trial is due to take place before Aikenhead J., starting on April 2, 2008, with
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5.1. General
(a) “The without prejudice rule is a rule governing the admissibility of
evidence and is founded upon the public policy of encouraging litigants
to settle their differences rather than litigate them to a finish”: Lord
Griffiths in Rush & Tompkins Ltd v Greater London Council [1989]
A.C. 1280 at 1299.
(b) “. . . parties should be encouraged so far as possible to settle their
disputes without resort to litigation and should not be discouraged
by the knowledge that anything that is said in the course of such
negotiations (and that includes of course as much the failure to reply
to an offer as an actual reply) may be used to their prejudice in the
course of the proceedings”: Oliver L.J. in Cutts v Head [1984] 1 All
E.R. 597 at 605–606.
(c) The without prejudice rule “has a wide and compelling effect”: Robert
Walker L.J. (as he then was) in Unilever v Proctor & Gamble [2001]
1 W.L.R. 2436 at 791.
5.2. Negotiations
(a) The without prejudice rule excludes “all negotiations genuinely aimed
at settlement, whether oral or in writing”: Rush & Tompkins.
(b) The privilege cannot apply unless there is a dispute which is genuinely
the subject of settlement negotiations: Barnetson v Framlington Group
Ltd [2007] EWCA Civ 502.
(c) There is a distinction to be drawn between true negotiations and the
mere assertion of each side’s case or the making of criticisms of
the other side’s case. The without prejudice rule does not apply to
a communication which does not unequivocally indicate the maker’s
intention to negotiate: Buckinghamshire County Council v Moran
[1990] Ch. 623.
5.4. Waiver
(a) The listing of a without prejudice letter in Pt 1 of Sch.1 of a party’s
list of documents, certainly under the old Rules of the Supreme Court,
“does not have the effect of rendering the document admissible if it
is otherwise inadmissible”: Lord Bingham in Sampson v John Boddy
Timber Ltd, unreported, March 7, 1994, HC.
(b) “The fact that a party cannot or does not claim privilege from
production does not necessarily mean that the document will be
admissible. In the nature of things without prejudice communications
will usually be within the knowledge of, and if in writing in the
possession of, both parties. They are nevertheless inadmissible unless
their exclusion is waived by both parties. Mr Wingate-Saul again relied
upon the analogy of legal professional privilege. Once again I think
the analogy is a false one. Legal professional privilege is the right of a
client to withhold documents or to refuse to divulge communications
. . . there is no rule that such documents or communications cannot be
adduced in evidence by someone else. It follows that a waiver of legal
professional privilege against production will automatically entitle the
opposing party to use the document in evidence. A communication
without prejudice, however, remains inadmissible whether tendered by
plaintiff or defendant. Even if the opposing party has the document, as
he usually will, he can make no use of it”: Hoffmann L.J. (as he then
was) in Forster v Friedland, unreported, November 10, 1992 CA (Civ
Div).
(c) Where a document covered by legal professional privilege has been
offered for inspection by mistake, it will generally be too late for a
claim of privilege unless it resulted from an obvious mistake: Al-Fayed
v Commissioner of Police of the Metropolis. A mistake is likely to be
held to be obvious if it would have been obvious to a reasonable
solicitor in his position that a mistake had been made.
The issues
6. It seems to me that, from the helpful written and oral submissions provided by
Counsel, the issues which I have to decide on this application are these:
(a) Are paras 39 to 48 of the statement and the documents referred to there
dealing with negotiations between the claimant and the defendant?
(b) If so, is that material without prejudice?
(c) If so, has any relevant privilege or admissibility question been waived
by the defendant?
I deal with each of those issues below.
Throughout the relevant period, it is important to note that the project was still
progressing on site, so that the parties were principally concerned with finding
solutions to the difficulties in order to bring about the completion of the work as
promptly as possible. However, it is also clear from the material before me that
the alleged problems with the design, and the consequences of those difficulties,
were well known and apparent to both sides. Thus, during the period with which
I am concerned, namely November 2000 to May 2001, it was plain:
(a) that the problems were considered by the claimant (as the design and
build contractor) to be significant and serious and were leading to the
incurring of significant costs which they had not anticipated;
(b) that the claimant alleged that the defendant’s design was defective; and
(c) that the defendant, for its part, had a large claim for unpaid fees which
included fees for work done in an attempt to resolve the problems.
I deal further below with some of the detailed parts of paras 39 to 48 and the
documents referred to there.
Issue 1—negotiations
8. On behalf of the claimant, Miss Dias submits that, because no claim had been
formulated against the defendant during this period, there could have been no
negotiations and thus the whole application is misconceived. As it is succinctly
put at para.41 of her written submissions:
“Until 18th May [when the Claimant’s formal claim was presented to the
Defendant] there was nothing to settle and that is really the short answer
to the application.”
In her written submissions, Miss Dias made the point that, from the claimant’s
perspective, the meetings and the documents which are the subject of this
application were largely concerned with the outlining of the claimant’s case to
the defendant via Mr Martin. In her oral submissions this morning, Miss Dias
expanded on that argument, and said that in actuality the discussions were not
really dealing with the defendant’s potential liability for the design problems at
all, and were instead concerned with other and more general matters. Therefore,
she submitted, the controversial parts of Mr Martin’s statement were simply
setting out the background prior to the presentation of the formal claim on May
18, 2001. As she put it, they were setting out the “rules of the game”. It is,
however, worth noting that, in Mr Martin’s statement, he does not deal with
any of the events from May 18 onwards.
9. It seemed to me that, if that submission was right, it gave rise to the question
as to why Mr Martin was bothering to set out these details at all. If the process
between November and May merely consisted of statements and restatements
of the claimant’s position, why bother to go to the effort of repeating it all over
again in a witness statement? If these were simply matters of background, were
they really relevant at all?
10. To consider these questions, I therefore turned back to consider in greater
detail the controversial paragraphs of Mr Martin’s statement. In doing so, it
quickly became apparent precisely why the claimant was seeking to rely on
that material. It is seeking to rely on this evidence because, according to Mr
Martin, Mr Wilson of the defendant made an express admission not only as to
the defendant’s liability to the claimant, but also as to the costs of any extra
work necessary. What he says in para.43 is that, at the meeting on November 10,
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which is at the heart of this application, Mr Wilson accepted that “it looked as
though I might be right” about the defendant’s liability for the extra costs, and
at para.45 he goes on to say that Mr Wilson acknowledged that “our significant
costs would be honoured”.
11. In other words, the relevant material has been included in Mr Martin’s statement,
albeit at rather inordinate length, because, far from it being a recital of
each side’s position, and far from it being concerned with matters that were
unconnected with the claim at trial, Mr Martin was seeking to rely on what
happened at the meeting and thereafter as giving rise to important admissions
on the part of Mr Wilson. It seems to me that that is wholly contrary to the
suggestion that what was being discussed at the meeting was either irrelevant to
the claims or that all that was happening was a statement or restatement of each
side’s case. It seems to me that admissions of the sort now apparently relied on
by Mr Martin can only arise out of detailed negotiations between the parties. It
matters not that the claim had not been formulated. It is common, particularly
in the construction industry, for high-level executives from those companies
involved in potentially expensive difficulties on site to try and resolve those
differences before they spiral out of control. Accordingly, it seems to me that
the reason why the claimant wishes to rely on this material is the best possible
evidence that what was happening at these meetings, and in these documents,
was a process of high level negotiation.
12. If there was any doubt about that, I note that Mr Wilson’s evidence in his
witness statement is to explain, in some detail, how and why these meetings
and this written material related to negotiations between the parties on (as he
puts it) a “without prejudice basis”. On behalf of the defendant, Mr Howe
submitted that it was noteworthy that there was no material from the claimant
to contradict that statement, namely that this material arose out of negotiations.
I accept that submission. It is true that I have before me both the statement for
the trial from Mr Martin, as well as the statement that was put in as part of the
earlier adjudication, but on the critical question of fact for me, namely whether
or not there were negotiations between the parties, it seems to me clear that
Mr Wilson’s evidence on that point is not contradicted by Mr Martin in either
statement. Therefore, again on the material available to me, it seems clear that
the relevant evidence arose out of negotiations between the parties.
13. For those reasons, I reject the claimant’s first proposition. It seems to me that
the discussions between the parties were not simply restatements of each side’s
case: if they were, I consider that they might well be inadmissible on the
grounds of irrelevance. It is plain, both from Mr Martin’s detailed evidence,
and the fact that the claimant wanted to rely on his alleged admissions, that
what was happening was a process of negotiation. Therefore, I conclude that
the material related to genuine negotiations between the parties to try and head
off at the pass the potential problems on site. Parties are to be encouraged to
adopt such a course, particularly in the construction industry where disputes on
long running projects can prove to be very expensive if they are not resolved
early on.
facie that would mean that the material was without prejudice and therefore
inadmissible. It is also common ground that the fact that, for example, the
letters are not marked “without prejudice” is irrelevant to this issue.
15. It is right, however, to note in the present case that there are specific reasons
why I must conclude that these meetings were without prejudice and that the
documents too are inadmissible for that reason. The first is that, in his statement
in the earlier adjudication, Mr Martin expressly acknowledged that Mr Wilson
had asked for the meeting on November 10 to be without prejudice. I note
that that same statement has not found its way into Mr Martin’s statement for
the purposes of the trial. Although there was a suggestion that Mr Martin was
saying that, although he knew Mr Wilson thought the meeting was without
prejudice, he, Mr Martin, did not, I cannot accept that submission. It seems
to me plain, looking at the documents in the round, that this was a without
prejudice meeting and was so treated by both men.
16. Secondly, again there is no dispute that, on May 18, 2001, when the claim was
formally presented, Mr Martin asked for and received the defendant’s agreement
that all discussions from that point forward would “move beyond the without
prejudice stage”. It seems to me that that is a clear acceptance that everything
that had happened before that, i.e. from November 2000 onwards, was regarded
by both parties as having been without prejudice. Accordingly, this is another
reason why I must conclude that the material in question is without prejudice.
17. It is right to note that, in the course of her clear submissions, Miss Dias asked
that the Court should look at the detailed contents of paras 39 to 48 and indeed
the individual documents to which reference is made there. As to the statement
itself, it is a little difficult to subject paras 39 to 48 to a chronological or clear
editing exercise, given that those paragraphs jump around rather in dealing with
Mr Martin’s recollection of the meeting and one or two of the other documents.
An editing exercise is therefore not straightforward. Moreover, in accordance
with the principles referred to above, and particularly what Robert Walker L.J.
said in Unilever, it would not be appropriate to undertake that exercise in any
event. In essence, these paragraphs refer mainly to the meeting on November
10, and the alleged admissions that were made.
18. As to the individual documents, I deal with those briefly as follows:
(a) The letter of November 6, 2000 was, said Miss Dais, “critical to any
understanding” of the meeting on November 10. For the reasons that
I have given, that meeting was without prejudice. Therefore, on the
basis of that submission, it would seem to me, prima facie, that that
letter too should also be regarded as being without prejudice and,
therefore, inadmissible, although the defendant has recently indicated
that it would waive the privilege in that document.
(b) The letter of November 27, 2000 is plainly inadmissible because this is
Mr Wilson’s own recollection and notes of the meeting on November
10.
(c) The manuscript minutes of the meeting on December 4 are difficult
to read and, again, jump about between a variety of different matters.
However, they refer repeatedly to claims which, in the context of this
case, appear to be those claims as to the design being formulated by
the claimant against the defendant. They are plainly dealing with the
disputes which now form the subject matter of this trial and which
were the subject matter of the discussions on November 10. For that
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Issue 3—waiver
20. The final point is whether the disclosure of the letter of November 27, 2000
and the notes of the meeting on December 4, 2000 (one in a list and one in a
supplementary list), and the offer of those documents for inspection, amounts to
a waiver. It is plain that this point relates only to those two documents and does
not, therefore, affect the relevant passages in Mr Martin’s witness statement.
21. The first point that arises is a matter of principle. Mr Howe relies on
Rush & Tompkins v GLC and Forster v Friedland to say that questions of
inadvertent disclosure of without prejudice material simply do not arise. He
relies on the latter case to demonstrate the difference between legal professional
privilege (and the inadvertent waiver of such privilege) on the one hand, and
without prejudice privilege (and the impossibility of inadvertent waiver of such
privilege) on the other.
22. In answer to that, Miss Powell submitted that all but one of the authorities relied
on by the defendant are based on the old disclosure rules under the Rules of
the Supreme Court, and not Civil Procedure Rule (CPR) 31.6. She submitted
that the new rules are very different to the old and do not admit of inadvertent
disclosure at all. She argued that, once a document is included in the list, then,
subject to the obvious mistake point that I shall come on to, it is admissible.
23. The post-CPR authority to which Miss Powell properly drew to my attention
is a decision by Mr Roger Kaye Q.C. (sitting as a deputy judge of the High
Court) in Smith Group Plc v George Weiss (Friday March 22, 2002, Chancery).
In that case, precisely this argument was advanced to the learned judge and he
said:
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“The claimants submit that the new procedure under the Civil Procedure
Rules has altered that position and now renders, in effect, the inclusion of
a document in a list of standard disclosure admissible in evidence. I do
not agree. It is plain that the rules contemplate that a document might be
included to which objection could be made.”
I agree with that statement of general principle. I do not consider that the
changes in the disclosure rules, and in particular the new way in which
disclosure is to be undertaken, as set out in the CPR, have altered the
fundamental rules dealing with the admissibility or otherwise of without
prejudice material. I certainly do not accept the proposition that the CPR has
had the effect (inadvertent or otherwise) of reversing, or of rendering of no
effect, the statements of principle in, for example, Rush & Tompkins v GLC and
Forster v Friedland. More specifically, I do not consider that the differences
between the old rules and the CPR are such that a completely different regime
must now apply. In consequence, it seems to me that, in accordance with those
authorities, there has been no waiver. However, if I am wrong about that, it is
appropriate to go on and deal with the position as to obvious mistake, as set
out in Al-Fayed.
24. Even on that basis, I have concluded that the without prejudice privilege in the
letter of November 27 and the notes have not been waived. These documents
were produced as part of a very long disclosure exercise. The letter of November
27 contains Mr Wilson’s account of the meeting on November 10, which was
agreed to be without prejudice. On this basis, for such disclosure to be retracted,
it is necessary for the defendant to demonstrate that the disclosure was an
obvious mistake. In my view, disclosure was an obvious mistake, and it would
be wrong and unfair now to find that privilege had indeed been lost.
25. As far as the claimant’s solicitor is concerned, I note that the question of the
admissibility of this material had arisen in the adjudication, at which time the
defendant had expressly reserved its right to say in any subsequent litigation
that this material was inadmissible. It seems to me, therefore, given that this
letter directly dealt with a meeting which, on Mr Martin’s own case, Mr Wilson
had asked to be without prejudice, it must have been apparent to the claimant’s
solicitor that disclosure was indeed inadvertent and a mistake. A reasonable
solicitor in his position could not have reached any other conclusion.
26. I accept that the third party’s solicitor is in a slightly different position, but
that, of course, is because he was not involved in either the discussions in
2000/2001 or in the subsequent adjudication. However, it seems to me that I
have to consider the position in relation to the reasonable solicitor who has read
and is familiar with the various detailed aspects of the case, including this very
dispute about the privileged nature of the material. In those circumstances, it
seems to me that a reasonable solicitor should have known that the documents
had been disclosed by mistake.
27. For all those reasons, therefore, I grant the second defendant’s application that
the statement of Mr Martin should be modified so that the relevant paragraphs
are excluded. In addition, for the reasons that I have stated, the documents that
I have identified in para.18 above are documents which should not be included
in the trial bundles.
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Commentary
C1 The disclosure of a privileged document must be every solicitor’s nightmare.
Nevertheless, the consequences of doing so have been mitigated by a number of
decisions, of which this is the latest example. The without prejudice rule, which
prevents parties to a dispute resolution procedure from referring to what was
said as part of negotiations on that basis to settle their disputes, was reviewed
by the House of Lords in Rush & Tompkins Ltd v Greater London Council.
The usefulness and desirability of such a rule in the conduct of litigation was
acknowledged in that and other cases. Perhaps its most colourful description is
that of Kekewich J. in Kurtz v Spence (No.2) (1887) L.R. 36 Ch. D. 770 at 241
as follows:
“I shall not attempt to define the words ‘without prejudice’—but what
I understand by negotiations without prejudice is this: The plaintiff or
defendant—a party litigant—may say to his opponent: ‘Now you and
I are likely to be engaged in severe warfare; if that warfare proceeds,
you understand I shall take every advantage of you that the game of war
permits; you must expect no mercy, and I shall ask for none; but before
bloodshed let us discuss the matter, and let us agree for the purpose of
this discussion we shall try to be more or less frank; we will try to come
to terms, and that nothing that each of us says shall ever be used against
the other so as to interfere with our rights at war, if, unfortunately, war
results”’.
C2 The courts are thus generally alert to preserve the sanctity of such negotiations
and will not allow attempts to use material relating to them. In Galliford,
Coulson J. had to deal with three interrelated points: the nature of the
communications between the parties, whether they were conducted on a without
prejudice basis and whether there had been a waiver of the right not to have
the relevant material referred to in the litigation.
C3 The consideration of first of these points led into an area similar to that
so often traversed in proceedings to enforce adjudication decisions, namely
whether there was a dispute between the parties. It was argued on behalf of
the contractor that there could be no negotiations between the parties until the
contractor’s formal claim was presented to the engineer, which was long after
the communications which were the subject of the application. The discussions,
on this argument, were not really dealing with the engineer’s potential liability
at all, and were instead “concerned with other and more general matters” ([8]).
But, as Coulson J. pointed out at [11] it is common in the construction industry
for high-level executives to try to resolve differences before they spiral out of
control, and it did not matter that a claim had not been formulated. The reason
why the contractor wished to rely on the material was as giving rise to important
admissions on the part of the engineer’s director. That was the best possible
evidence that what was happening at the meetings and in the documents was a
process of high-level negotiation. Had the discussions simply been restatements
of each side’s case, they might well have been inadmissible on the grounds of
irrelevance ([13]).
C4 The second point, whether the negotiations were without prejudice, turned on
the specific facts. In an earlier statement in adjudication between the parties, the
contractor’s director had expressly acknowledged that the engineer’s director
had asked for the first meeting to be without prejudice ([15]). In addition, once
the contractor’s claim had been formally presented, the parties had agreed that
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
T62 Construction Law Journal
from then on all discussions would move beyond the without prejudice stage.
It followed that the original meeting had been without prejudice and the parties
had accepted that everything from that meeting was regarded by both as having
been without prejudice ([16]).
C5 The final point was whether there had been a waiver by the engineer in
relation to two documents which had been disclosed. It was suggested that
under the new rules set out in CPR 31.6, once a document had been included in
a list then, subject to an obvious mistake, it was admissible ([22]). Coulson J.
agreed with the statement of general principle in Smith Group Plc v Weiss that
the rules contemplated that a document might be included to which objection
could be made and held that the differences between the old rules and the CPR
were not such that a completely different regime should now apply ([23]). If
that were wrong, disclosure of the documents had been an obvious mistake and
the engineer would still be entitled to rely on the without prejudice rule ([24]).
C6 This decision is an example of the courts seeking to arrive at a common sense
solution to the unintended consequences of a procedural error. Its importance
lies in the conclusion that the new regime of the CPR does not place the party
responsible for the error in a worse position than that under the old rules.
(2008) 24 Const. L.J. No. 4 Sweet & Maxwell Ltd and Contributors
Index
Abuse of process costs
striking out failure to mediate, T15–T26
construction claims, 334–352 expert reports, 22–29
Adjudication limitation clauses
construction contracts ICE conditions of contract, 208–220
statutory definitions of construction pre-action protocols
operations, 47–60 consulting engineers’ claim for fees,
decisions T1–T9
delay, 30–46 Technology and Construction Court
enforcement case management, 87–94
interest, T9–T14 transfer of proceedings, T45–T52
Administrative receivership Construction contracts
Standard Building Contract adjudication
interim payments, 365–371 delay in communicating decisions,
Admissibility 30–46
mediation statutory definitions of construction
without prejudice communications, operations, 47–60
238–252 construction claims
Agreements costs following failure to mediate,
writing T15–T26
letters of intent, 221–237 expert reports, 22–29
Arbitrators damage to property
obituaries negligence causing flooding, 60–73
Harold Crowter, 267–270 damages
black hole cases, 10–21
Bias letters of intent
civil procedure update, 22–29 “agreements in writing”, 221–237
Breach of contract Technology and Construction Court
damages case management, 87–94
black hole cases, 10–21 Construction industry
pre-action admissions mediation, 79–86
withdrawal, 252–264 settlement
Case management reasonableness, 271–285
Technology and Construction Court Construction projects
construction claims, 87–94 partnering, 314–325
Causes of action Consulting engineers
damages fees
black hole cases, 10–21 pre-action protocols, T1–T9
Certificates Contract terms
surveyors JCT contracts
validity, T27–T44 interim payments, 95–102
Commercial arbitration minerals
judicial decision-making validity of surveyor’s certificate,
limits of courts’ interference, 3–9 T27–T44
Complex or lengthy cases Standard Building Contract
construction claims interim payments, 365–371
striking out for abuse of process, Contractors
334–352 damage to property
Construction claims negligence causing flooding, 60–73
complex or lengthy cases Contractual liability
striking out for abuse of process, damage to property
334–352 negligence causing flooding, 60–73
Judges Non-compliance
Technology and Construction Court pre-action protocols
case management, 87–94 construction claims, T1–T9
Judicial decision-making
commercial arbitration Obituaries
limits of courts’ interference, 3–9 arbitrators
Jurisdiction Harold Crowter, 267–270
adjudication Partnering
delay in communicating decisions, construction projects, 314–325
30–46 Pre-action admissions
statutory definitions of construction withdrawal, 252–264
operations, 47–60 Pre-action protocols
Leases construction claims
minerals civil procedure update, 22–29
validity of surveyor’s certificate, consulting engineers’ claim for fees,
T27–T44 T1–T9
Legal methodology Prejudice
Civil Liability (Contribution) Act pre-action admissions
interpretation, 189–207 withdrawal, 252–264
Legal professional privilege Privileged documents
expert reports, 22–29 witness statements
Letters of intent without prejudice communications,
construction contracts T52–T62
“agreements in writing”, 221–237 Quantity surveyors
Limitation clauses obituaries
ICE conditions of contract Harold Crowter, 267–270
construction claims, 208–220
Limitation periods Reasonableness
pre-action admissions settlement
withdrawal, 252–264 construction industry, 271–285
Liquidated damages Scotland
JCT contracts duty of care
withholding payments and negligent misrepresentation,
extension of time, 326–333 352–364
Lodgment of documents Standard Building Contract
Technology and Construction Court
use of fax and email, 184–185 interim payments, 365–371
Settlement
Mediation construction industry
construction claims reasonableness, 271–285
costs, T15–T26 mediation
construction industry, 79–86 without prejudice communications,
settlement 238–252
without prejudice communications, Specialist lists
238–252 Technology and Construction Court
Minerals transfer of proceedings, T45–T52
expert determination Standard Building Contract
validity of surveyor’s certificate, interim payments
T27–T44 statutory interpretation,
Negligence 365–371
damage to property Statutory interpretation
contractual liability, 60–73 Standard Building Contract
design and build contracts interim payments, 365–371
damages, 103–183 Stay of proceedings
pre-action admissions pre-action protocols
withdrawal, 252–264 non-compliance, T1–T9
Negligent misrepresentation Striking out
duty of care abuse of process
damages, 352–364 construction claims, 334–352
Non-completion certificates Surveyors
JCT contracts certificates
liquidated damages, 326–333 validity, T27–T44
witness statements
Technology and Construction Court without prejudice communications,
case management T52–T62
construction claims, 87–94 Withdrawal
lodgement of documents pre-action admissions, 252–264
use of fax and email, 184–185 Withholding payments
transfer of proceedings JCT contracts
specialist lists, T45–T52 contract terms, 95–102
Third parties liquidated damages, 326–333
damages
black hole cases, 10–21 Standard Building Contract
Transfer of proceedings interim payments, 365–371
Technology and Construction Court Without prejudice communications
specialist lists, T45–T52 design and build contracts
Validity witness statements, T52–T62
certificates mediation
surveyors, T27–T44 settlements, 238–252
Variation Witness statements
limitation clauses design and build contracts
construction claims, 208–220 without prejudice communications,
T52–T62
Waiver Writing
mediation agreements
without prejudice communications, letters of intent, 221–237
238–252