Recent construction cases round-up 6

Our regular review of recent cases covers legal advice privilege, the Working Time Regulations 1998, unilateral mistake, contract formation, and 'without prejudice' communications.

Three Rivers District Council & Others v Bank of England

In our last bulletin (Construction law, May 2004), Peter Long explained the Court of Appeal's decision in March 2004 in the ongoing litigation between the Bank of England and the creditors of the Bank of Credit and Commerce International (BCCI).

This case concerned the scope of legal advice privilege. The Court of Appeal held that communications between the Bank and its lawyers on the manner in which evidence was presented to the Bingham inquiry was not protected from disclosure by legal advice privilege.

After a four day hearing in July 2004, the House of Lords overturned the Court of Appeal's decision, allowing the Bank of England's appeal. This means that the documents will now be covered by legal advice privilege and are therefore undisclosable. Detailed reasons have not yet been given but sighs of relief are likely to be heard from lawyers and clients alike. We will report further when the full judgment is handed down.

Redrow Homes (Yorkshire) Limited v Wright [2004] EWCA Civ 469

This case concerned a dispute as to whether bricklayers, engaged by Redrow Homes (Yorkshire) Ltd and Redrow Homes (North West) Ltd, were workers for the purposes of the Working Time Regulations 1998, in order to determine whether they were entitled to holiday pay.

The case turned upon whether the bricklayers had undertaken to do the work specified in the contract 'personally' (a term stipulated in the Regulations above). The bricklayers argued that they entered into or worked under a contract, whereby each of them undertook to perform personally any work for Redrow. However Redrow argued that the men were not workers within the meaning of the Regulations because there was no obligation for them to do the work personally; moreover, one of the conditions of the contract (Condition 6) plainly contemplated that work may be done by others.

The argument centred on the wording in Condition 6 and Condition 1. Condition 6 provided that the contractor must supply sufficient labour to maintain the rate of progress and all necessary tools and equipment for such labour. The Condition also required the contractor to maintain a competent foreman or chargehand on site. Redrow argued that the requirements of Condition 6 were inconsistent with a personal obligation.

However, all of the conditions were stated to be subject to Condition 1: the contractor agrees to be bound by the conditions "insofar as they are applicable to his sub-contract". It was held that the effect of Condition 1 was to make the remaining conditions on the printed form a "menu" so that it was necessary to determine which particular conditions were applicable to any particular contract. The issue for the court therefore, was to determine the clauses the parties intended to select as applying to their contract. The 'matrix of fact' was essential.

In the circumstances it was held that Condition 6 was not intended to be included so as to permit others to do the work. This made sense of Redrow's decision to contract with bricklayers individually, and the nature of the scheme for payment which was said to point strongly in the direction of contracts with individual bricklayers to do the work personally. The court agreed with the employment tribunal that on the evidence it was the intention of the parties that personal services were to be provided, and the appeal was dismissed. The bricklayers were therefore entitled to their holiday pay!

Hurst Stores and Interiors Limited v ML Europe Property Limited [2004] EWCA Civ 490

This appeal concerned Merill Lynch's toilet block. Or rather, a unilateral mistake in drawing up the final account for payment for the toilet block.

ML Europe Property Ltd (ML) entered into a trade contract with Hurst Stores and Interiors Ltd (Hurst) to complete fit out works of the toilet block. Under the contract the fixed trade price could be adjusted by measured variations or extensions of time in respect of delays that properly affected the progress of the works. ML issued many variations (called CMIs), some of which were routine; whilst others provided for substantial additional works. There was also a system in place for issuing interim statements of account listing the CMIs and costing them for labour and materials but not disruption costs.

The trade contract envisaged that the works on the toilet block would be commissioned on 5 February 2001. In fact the works were not completed until the end of October 2001. Hurst submitted a 'final account' to ML, which included some £2.5 million for disruption. ML refused to accept this 'final account' stating that, by a document signed on 27 April 2001, Hurst had agreed to a final settlement of all claims up to that date and could therefore now only assert additional costs arising since that date.

It is this document, dated 27 April 2001, which is at the centre of this dispute. The origins of the document are that ML's Contract Manager asked Hurst's Project Manager to prepare a draft final account. This was used by ML as the basis to prepare 'the final account' in April 2001. Unlike the draft, the 'final account' included a clause that the amount quoted was in full and final settlement of all claims arising under the contract. Hurst's Project Manager did not read the document before signing it.

At first instance Hurst applied for and was granted (i) rectification to remove from the 27 April 2001 document, the words on which ML relied (i.e. 'in full and final settlement of all our claims'), and (ii) a declaration that in any event the Project Manager did not have authority to enter into the agreement. These points were the main subject of the appeal.

The Court of Appeal held that the Trial Judge was entitled to make both of these decisions. On the first issue, the Court of Appeal stated that the test to establish whether a contract should be rectified in circumstances where one party was mistaken as to its meaning, was set out in Commission for New Towns v Cooper. The Court of Appeal agreed with the Trial Judge that the elements had been set out on the facts, in that (i) the Project Manager was mistaken as to the content of the documents; (ii) the Contract Manager had at least "shut eye" knowledge of the mistake; and (iii) that even though the trial judge did not separately address the issue of unconscionability he plainly had it in mind and was well within his proper area of judgment in finding that ML's conduct fell within the description set out in the Commission for New Towns.

As to the second issue the Court of Appeal also affirmed the first instance decision, stating that "the judge was fully entitled to find that no one contemplated Mr Mell [the Project Manager] as having authority to agree to so radical a departure from the process of valuation contemplated by the contract". For the reasoning above ML's Appeal was dismissed.

Yorkshire Water Services Limited v Taylor Woodrow Construction Northern Limited [2004] All ER (D) 111

This was a decision on a preliminary issue involving Taylor Woodrow and its sub-contractor, Biwater. Yorkshire Water played no part in these particular proceedings. The issue between Taylor Woodrow and Biwater concerned whether a contact had come into existence between them, and if so, its relevant express terms.

Taylor Woodrow argued that a "Yellow Book" sub-contract had been agreed between itself and Biwater. For the avoidance of doubt this expression actually refers to the 'Biwater Model Form of Conditions of Sub-Contract for Process Plants, December 1997, Rev.0'. Biwater argued that no contract was ever agreed between the parties.

The facts of the case are as follows: Taylor Woodrow submitted a tender for the works in August 1997. The tender was regarded by Taylor Woodrow and Biwater as a joint tender, although it was submitted in Taylor Woodrow's name only. Yorkshire Water accepted this tender in November 1997, and Taylor Woodrow subsequently instructed Biwater to proceed with the works in accordance with their joint tender, stating that a formal agreement was being prepared.

The judgment contains a lengthy examination of numerous exchanges of correspondence between Taylor Woodrow and Biwater which demonstrate the attempts made by the parties to conclude the sub-contract. In April 1999 the parties' management board had become concerned that the sub-contract had not been completed and it was decided the "sticking points" should be considered by the Management Board. The first "sticking point" concerned the limit of liability for delay damages; and this was resolved at a meeting in July 1999. However the second "sticking point" point concerning the liability for the performance guarantee proved more difficult to resolve. At a meeting in October 1999 Biwater submitted a revised proposal which Taylor Woodrow stated it would review.

Mr Justice Forbes held that this subsequent proposal meant that the earlier offer without the amendments was no longer open to Taylor Woodrow to accept because it had been rejected at a meeting in July 1999, and had not been renewed.

Furthermore it was held that even though Taylor Woodrow did not expressly accept Biwater's proposal either orally or in writing, the court was satisfied that the offer had been accepted by conduct. The judgment states that in the period following the October 1999 board meeting, Taylor Woodrow had consistently acted in its dealings with Biwater with the intention of accepting Biwater's performance guarantee proposal and that, by its conduct in so acting, Taylor Woodrow had accepted Biwater's offer. Both parties were said to be 'clearly and consistently dealing with each other on the basis that the sub-contract had finally come into existence'. The following examples are noted: Biwater's application for a takeover certificate pursuant to clause 34 of the General Conditions of Contract, followed by a significant number of communications from both Biwater and Taylor Woodrow in which the "Yellow Book" form of sub-contract was asserted and/or accepted to exist. The result was that the sub-contract was concluded between the parties in the "Yellow Book" form in accordance with Taylor Woodrow's primary argument.

Reed Executives Plc v Reed Business Information Limited [2004] EWCA Civ 887

This Court of Appeal decision enforces the view that parties who have negotiated on a wholly "without prejudice" basis have always done so in the faith and expectation that what they say cannot be used against them, even on the question of costs.

This was the main issue in the case; however the second issue concerned whether or not the court's order as to costs should reflect the fact that the Defendant, Reed Business Information Ltd (RBI) was not willing to take part in an alternative dispute resolution (ADR) process after it was proposed by the Claimant, Reed Executives Plc (RE).

The main issue concerned disclosure for the purposes of costs only. Negotiations on a "without prejudice save as to costs" basis were obviously inadmissible; but negotiations in the instant case were on a completely "without prejudice" basis. Although there are some exceptions to this rule, costs is not one of them.

The Court of Appeal stated that the recent decision of Halsey v Milton Keynes General NHS Trust (see Construction law Bulletin, May 2004: 'Mediation – encouragement or compulsion?') did not affect the principle that negotiations on a "without prejudice" basis cannot be used against them. Accordingly the Court of Appeal could not order disclosure of "without prejudice" negotiations against the wishes of RBI. In addition no adverse inferences were to be drawn against RBI for its reluctance at the costs hearing. To do so would impose indirect pressure to permit disclosure, which was contrary to the basis of completely "without prejudice" negotiations.

On the second issue it was held that RBI could not be said to be unreasonable in refusing ADR. The following reasoning was given: both parties indicated that they did not wish to use ADR in their allocation questionnaires; RE was negotiating from a position of strength; RE was claiming considerable damages; RBI had reasonable belief in its prospects on appeal and had ongoing disputes with the RE in other jurisdictions to consider. Therefore RBI's refusal to participate in ADR was not relevant in assessing costs.

For further information contact Billie Bingham on +44(0)20 7367 2766 or at [email protected]