Local Government - March 2009
Construction law update
In this update we highlight three construction
law cases dealing with:
- The need to notify insurers promptly
- The effect of delay in a project involving
sectional completion
- Adjudication and oral contracts.
Don’t keep it to
yourself
The recent decision in the case of
Aspen Insurance UK v Pectel highlights the
pitfalls faced by contractors and consultants when deciding whether
to notify insurers about problems which might give rise to a claim
later on.
The facts are these. Pectel, a specialist in
the removal of asbestos from underground facilities, was
engaged by Amec in February 2004 to strip two deep-level tunnels
beneath Manchester which were used by BT for its telecommunications
network. Preparatory work in the cross-over section between the
tunnels was suspended briefly towards the end of March that
year, during which time a fire broke out, causing extensive
damage costing approximately £15m to put right. The fire
started in a fluorescent light fitting, damaged by Pectel during
its preparatory work. The fire’s destruction was exacerbated
by the flammable polythene sheets being used by Pectel to limit the
spread of asbestos dust. The sheets did not meet the required
specification, but that was not known at the time. BT and
Amec started an investigation into the cause of the fire straight
away. They removed Pectel’s equipment for testing and got their
lawyers to interview Pectel’s employees. Pectel asked Amec whether
it should be worried. Amec said no. Six months later, however, BT
obtained a report which condemned Pectel’s materials. BT asked
Pectel to explain how it intended to overcome “this serious
issue”. Pectel did not provide a satisfactory answer. The
matter then went quiet until November 2006, when BT informed Amec
that a claim was imminent. Amec’s lawyers wrote to
Pectel suggesting that Pectel notify its insurers. Pectel ignored
the letter. A few months later, BT served its letter of claim upon
Amec, blaming Pectel for the fire. Pectel passed a copy to
its broker on 9 March 2007. The broker finally told Pectel’s
insurers about the claim two weeks later. Pectel had public
liability cover with Aspen (and other insurers). It was required to
give the insurers “immediate” written notice of any occurrence
which might give rise to a claim, and the insurers’ obligation to
indemnify was conditional upon, amongst other things, observance by
Pectel of all the policy’s terms and conditions. The insurers
refused to cover the claim, citing Pectel’s failure to comply with
those policy requirements. Pectel challenged the insurers’
decision in the commercial court, relying principally on Amec’s
statement made in April 2004 that Pectel had nothing to worry
about.
The judge decided the insurers were right. It
was common ground that “immediate” notice meant “with all
reasonable speed considering the circumstances of the case”. The
fire had been very serious and the repair costs substantial.
The investigation into what started the fire focused upon Pectel’s
work and equipment and t the time of Amec’s reassuring statement to
Pectel, a cause had not then been identified. In fact, the
investigation was barely underway.
In short, Pectel was wrong to have relied upon
Amec’s statement alone and ignored everything else going on around
it. In the judge’s view, a reasonable man would have been unable
to dismiss the possibility that the fire was in some way
connected with Pectel’s work. There was therefore a real
possibility that a claim might be brought against Pectel in due
course and that in order to protect itself, Pectel would seek
an indemnity from its insurers. Accordingly, the judge concluded
that Pectel should have given written notice to its insurers of the
fire and a possible claim by early April 2004.
Does that sound harsh? Well, you might think
so, but bear in mind why the insurers’ obligation to pay out was
conditional upon immediate written notice of a possible claim. The
same or similar language is common in most insurance policies and
it is intended to provide insurers with an opportunity to
investigate a potential claim promptly and to take action to
minimise the extent of any required indemnity. So, don’t make
the same mistake as Pectel. If something goes wrong on a
project, ask yourself this question: is there a real possibility I
might get caught up in a claim (even if I believe that I am not at
fault)? If the answer is yes, it would be wise to notify your
insurers straight away.
Roll up, roll up: the penalty for
delays in sectional completion agreements
A recent
case, Liberty Mercian Limited v Dean Dyball Construction
Limited, clarifies the effect of delays in projects
procured on a sectional completion basis.
Liberty retained Dyball to build a handful of
new retail units, dividing the work into five sections, each with
its own completion date. Section 1 was delayed, for which Dyball
claimed an eight-week extension of time (EoT). However, Liberty
only granted four weeks, alleging culpable delay by Dyball for the
rest, and so it deducted liquidated damages (LADS).
The parties fell out over the effect of the
delay on sections 2 to 5. Liberty awarded a further four weeks for
each subsequent section (reflecting EoT for section 1) but ignored
Dyball’s four-week culpable delay, thereby jeopardising the
completion targets for the later sections and exposing Dyball to
further deductions for LADs.
Dyball argued that it was entitled to a full
eight-week EoT for each subsequent section, that the sectional
completion agreement effectively created a series of separate
mini-contracts and that the cause of the section 1 delay was thus
irrelevant. In short, if the section 1 delay was rolled into
sections 2 to 5 and LADs repeatedly applied, that would penalise
Dyball unfairly.
A persuasive argument? No said the Judge,
because a reasonable person would infer that delay to section 1
must inevitably render late the commencement of the later sections.
While the contract did not state expressly that any culpable delay
to section 1 should be rolled into the later sections that must
have been the parties’ intention. There would be no sense whatever
in construing a sectional completion agreement any other way.
Dyball’s delay clearly had a knock-on effect and thus logically it
was for additional LADs. To find otherwise would allow Dyball to
benefit from its default, which could not be right.
A harsh result? Look at it this way. Sectional
completion is often adopted for high-yield projects like
distribution centres, facilitating a rapid response by the end-user
to changes in consumer demand and allowing key facilities to be
prioritised and delivered promptly. But the other components of the
build cannot be ignored if it is to function satisfactorily as a
whole. The contractor’s task is therefore harder: not only does he
have to meet a series of deadlines for delivering parts of the
jigsaw he has to ensure that all those parts piece together as a
whole on time as well. His opportunity to claw back any slippage is
consequently limited and so caution, not to mention thorough
forward programming, are essential.
Changes in Adjudication…what’s all the
fuss about?
Of all the proposed changes to the
Housing Grants, Construction & Regeneration Act 1996, none is
proving more controversial than the prospect of seeing the
statutory scheme for adjudication applied for the first time to
oral construction contracts.
Commentators argue that the changes will give
way to lengthy, contested hearings with conflicting witness
evidence, and, ultimately, a greater number of challenges to
adjudicators’ decisions in Court. In short, can adjudication remain
workable within the usual 28-day format, or even the extended
42-day version for that matter, if oral contracts are brought
within its scope?
Judge Bowsher in the well-known
Grovedeck case clearly thought not: “Disputes as
to terms, express and implied, of oral construction agreements are
not readily susceptible of resolution by summary procedure such as
adjudication”. His view was later echoed by the House of Lords in
another well-known case, RJT Consulting Engineers:
“That is why a record in writing is so essential. The written
record of the agreement is the foundation from which a dispute may
spring but the least the adjudicator has to be certain about is the
terms of the agreement which is giving rise to the
dispute…”.
But will this change really complicate things?
The recent case of Euro Construction Scaffolding Ltd v SLLB
Construction Ltd might give a clue.
Euro asked the Court to enforce a decision in
its favour requiring SLLB to pay for various scaffolding works that
Euro had implemented to assist SLLB’s construction of a basement
swimming pool. The scaffold had collapsed, causing SLLB to argue
that it had not been fit for its intended purpose, which was to
support the sides of the excavation, even though Euro had assured
SLLB during a telephone conversation that it “could” provide a
sufficiently robust solution to hold back the earth. SLLB contested
the adjudicator’s jurisdiction to decide the matter on the ground
that Euro’s assurance created an express oral term of the contract.
However, a letter written by SLLB to Euro later in the project
suggested that this conversation had been far less specific and
that Euro had merely been asked to confirm whether it could build a
“birdcage” scaffold.
SLLB’s order had been placed orally and it had
no documentary evidence to prove what, if any, requirements had
been made known to Euro. On the other hand, Euro’s quotation for
the works, which was in writing, was not consistent with any
requirement that the scaffold should support the sides of the pool
excavation.
Judge Akenhead, who heard the case, decided
that the Adjudicator had been right to dismiss SLLB’s evidence.
First of all, even if Euro had said that it “could” provide a
solution to retain the earth that was not the language of agreeing
an express term. If Euro had said that it “would” provide the
required solution then that might have changed things. Secondly,
there was real force in the view that other documents available to
him contradicted any suggestion by SLLB that it had told Euro the
scaffold needed to support the sides of the swimming pool. The duty
was therefore on SLLB to show that it had a real prospect of
establishing that an oral term had been agreed but it had not done
so.
Let’s be realistic then. Arguments about
contractual terms are nothing new, although their focus has tended
in the past to be upon whether all the express terms of an
agreement are recorded in writing. But that kind of wrangling, to
which adjudicators are used to and adept at resolving, is not
really any different from an enquiry to determine the terms of an
entirely oral contract. Adjudicators have been and will no doubt
continue to be robust in their decision making and where
common-sense dictates, we can expect their decisions to be upheld
by the Court. Resistance to change is always inevitable but
scratch beneath the surface a little and there really does seem to
be a lot of fuss about nothing where this particular change is
concerned.
Ed Lewis,
Partner
Weightmans LLP