Recent construction cases round-up - Spring 2005

Our regular review of recent cases covers legal professional privilege, computer based delay analysis, variations and liquidated damages, letters of intent, the jurisdiction of an arbitrator and quantum meruit.

Three Rivers District Council & Others v Governor and Company of the Bank of England [2004] UKHL 48

In our last cases round-up, we noted that the House of Lords' decision had been handed down, with reasons to follow. In November 2004 the Lords handed down their Opinions and these are summarised below.

You will recall that the issue was whether communications between the Bank of England and its lawyers (relating to the Bingham inquiry into the collapse of BCCI) were protected by legal advice privilege. The Court of Appeal had previously ruled that communications that did not relate to the Bank's legal rights and obligations were not privileged.

The House of Lords overturned this decision. The following key points can be drawn from the Lords' unanimous decision:

• the correct test for legal advice privilege is set out in Balabel v Air India [1998]: "...legal advice is not confined to telling the client the law: it must include advice as to what should prudently and sensibly be done in the relevant legal context".
• In determining whether advice is 'legal advice' the court will consider whether or not a lawyer is providing advice in his or her capacity as a lawyer, in other words using his or her legal skills.

The Lords are generally in favour of the protection of legal professional privilege; however this case has still left some areas of uncertainty. Therefore privilege should never be assumed. We set out below some points to bear in mind:

• establish and observe recognised lawyer / client relationships;
• keep circulation of legal advice to a bare minimum so that you did not risk waiving privilege;
• mark documents that are intended to be privileged "private and confidential – privileged legal communication". This label will not be conclusive, but may be persuasive if there is ambiguity.

Skanska Construction UK Limited (Formerly Kvaerner Construction Limited) v Egger (Barony) Limited [2004] EWHC 1748 (TCC)

This case gives an insight into the court's view on the use of expert delay analysis in complex construction disputes; an area in which, until now, there has been little guidance.

Egger entered into a contract with Skanska for the design and construction of a chip board factory. A dispute occurred between the parties as to liability for additional works arising out of design and development. This was considered by the Court of Appeal, and a judgment was handed down on 1st May 2002 in which it was held that Skanska was entitled to full extensions of time.

This more recent decision concerned the numerous quantum issues that were left in dispute. His Honour Judge Wilcox considered the evidence of two of the experts to determine the sub-contractors' loss and expense claims which Skanska sought to pass on to Egger.

It is clear that Judge Wilcox preferred the evidence of Skanska's expert, a planning consultant, whose report was "accessibly depicted in a series of charts accompanying his evidence". The expert was described as "someone who was objective, meticulous as to detail, and not hide bound by theory as when demonstrable fact collided with computer programme logic".

This was in contrast to Egger's expert who Judge Wilcox pointed out had produced a report of hundreds of pages supported by 240 charts which was largely based upon factual matters digested by the expert's team of assistants. The Judge suggested that the expert had created the impression that he was not entirely familiar with the details of the report, and that there was a reliance upon the judgment of others in selecting the data for input into the computer programme. In a further attack Judge Wilcox stated that the reliability of the expert's sophisticated impact analysis was only as good as the data put in, which affected the court's confidence in "this complex and rushed computer project".

It is clear from the comments of the Judge that the court does not take kindly to the use of complicated computer programmes as a substitute for an expert applying objective judgments to specific facts.

North Sea Ventilation Limited v Consafe Engineering (UK) Limited (unreported, 20 July 2004, Technology and Construction Court)

This case concerned two preliminary issues. First, the court was asked to consider a variations clause in the sub-contract, and whether the clause had itself been varied. Second, it considered whether a provision for liquidated damages was a penalty clause.

The background to these issues was as follows: North Sea entered into a contract with Consafe to supply equipment for the heating, ventilation and air conditioning of a waste retrieval system. Disputes arose concerning the extent of additional works that North Sea claimed it had carried out.

Consafe denied liability to North Sea for the additional variations arguing that the work was contained within the scope of the sub-contract. Consafe also relied in part on a term in the original contract (GC35), which set out the protocol that should be followed in the event of any claim for additional payment. North Sea argued GC35 had not been incorporated into the sub-contract, or alternatively the parties had varied the agreement such that the protocol no longer needed to be followed.

It was held that the onus was on North Sea to prove there had been a variation of the contract so as to exclude GC35. North Sea had failed to do this. It was noted that the contract terms included an entire agreement clause and a non waiver clause, and that mere conduct on the part of the parties was incapable of amounting to variation of a contract containing such terms. Furthermore the contract and sub-contract were on back to back terms which made it unlikely that Consafe would agree to a variation. A variation could not be spelt out of Consafe's silence.

The second issue regarding liquidated damages arose out of Consafe's counter-claim. The sub-contract provided for graduated sums increasing in proportion to the seriousness of the breach. Judge Cockcroft noted that a penalty clause is extravagant and unconscionable in comparison with the greatest loss that could result from a breach, whereas a liquidated damages clause was a genuine pre-estimate of loss (Dunlop Pneumatic Tyre Co v New Garage Motor Co [1915]). It was also noted that striking down a clause as a penalty is a blatant interference with freedom of contract, which can only be justified where there is oppression (Philips Hong Kong v The Attorney General of Hong Kong [1993]). Judge Cockcroft held that looking at the clause in the sub contract there was no oppression. The provision of graduated sums increasing in proportion to the seriousness of the breach is characteristic of a liquidated damages clause.

Mowlem PLC (t/a Mowlem Marine) v Stena Line Ports Limited [2004] EWHC 2206 (TCC)

Stena, the owner of a new ferry terminal in the port of Holyhead, employed Mowlem to carry out marine and onshore works. It was common ground that the Works were undertaken by Mowlem pursuant to a series of letters of intent. Each of the letters of intent took effect as an offer capable of acceptance by Mowlem's performance, which would bring into existence a contract that superseded the contract under the previous letter.

The final letter of intent was dated 4 July 2003 and it included a paragraph that confirmed Stena's commitment to expenditure up to a maximum of £10 million to enable Mowlem to proceed with the Works in accordance with the programme until 18 July 2003.

In the event, Mowlem carried out works beyond the £10 million limit. Mowlem claimed that it was entitled to be paid a reasonable sum for the execution of the Works carried out by way of an implied term. Stena submitted that the last letter of intent clearly imposed a £10 million limit and that Stena had not instructed continuation or completion of the Works after 18 July 2003.

His Honour Judge Seymour QC held that the relationship between the parties was governed by the letter of intent dated 4 July and that this letter did not have effect only until 18 July, or only in relation to work done or instructed before that date. He stated: "it would make no commercial sense to have a financial limit on Stena's obligations to make payment which could be avoided by the simple expedient of continuing to carry out work after 18 July 2003".

It was also held that there was no implied term that Stena would pay a reasonable sum for the works carried out after 18 July or exceeding the limit; nor had Stena conducted itself in such a way as to lead Mowlem to believe that it would not seek to rely upon the terms of the letter dated 4 July 2003. Accordingly Mowlem's claim failed and Stena's counterclaim succeeded.

Amec Civil Engineering Limited v The Secretary of State for Transport [2004] EWHC 2339 (TCC)

This judgment by the Honourable Mr. Justice Jackson (the new head of the Technology and Construction Court) concerned a challenge to the jurisdiction of an arbitrator. It gives particular guidance as to the meaning of a 'dispute'.

The background to the dispute was as follows: The Secretary of State engaged Amec to carry out renovation works at Thelwall Viaduct. The contract incorporated the ICE conditions and contained a clause that permitted disputes to be referred to the engineer (clause 66). Defects arose in the works so the Highways Authority ("HA") (who was acting as agent of the Secretary of State) sent Amec a letter of claim. Amec denied liability and HA referred the dispute to the engineer; although it did not notify Amec that it had done so. Amec disputed the engineer's decision and the dispute was referred to arbitration.

At an early stage in the arbitration Amec challenged the jurisdiction of the arbitrator on three grounds: (1) no dispute existed which was capable of being referred to the engineer; (2) alternatively, the engineer's decision was invalid due to procedural irregularities; (3) alternatively, the arbitrator's jurisdiction was limited to the claims identified in the engineer's decision, not other matters. The Arbitrator ruled he had jurisdiction, so Amec commenced these proceedings arguing the arbitrator had erred in rejecting each of its contentions.

Mr Justice Jackson dealt with the first issue in some depth by reviewing the judicial authorities on whether a 'dispute' had arisen. He considered both arbitration and adjudication case law and then gave seven points of guidance. Importantly he stated that the litigation had not generated any hard edged legal rules as to what is, or is not, a dispute; but as a general principle a dispute does not arise until it emerges that a claim is not admitted. Examples of these circumstances include an express rejection of the claim; discussions from which it can be inferred a claim is not admitted; prevarication by the respondent; or silence for a period of time. In relation to Amec's contentions, he pointed to the relevant documents which highlighted a dispute existed between the parties.

The second and third issues were dealt with more briefly. Mr Justice Jackson considered that clause 66 of the ICE conditions did not imply any rules of natural justice into an engineer's decision; sufficient protection is afforded by the fact that the engineer's decision can be challenged before an arbitrator. The engineer is solely under a duty to act independently and honestly. Finally, on the third issue, Mr Justice Jackson confirmed the jurisdiction of the arbitrator is not limited to the claims as identified in the engineer's decision; it extends to all matters that were initially referred to the engineer.

For the reasons above, Mr Justice Jackson rejected Amec's challenges to the jurisdiction of the arbitrator.

Mowlem PLC v PHI Group Limited [2004] BLR 421

This was an appeal against an award in an arbitration between the contractor, Mowlem, and its sub-contractor PHI Group. One of the main issues that arose was whether the court should order a reasonable remuneration to be paid for goods supplied i.e. the issue of quantum meruit.

The sub-contract involved the construction of terracing to form level areas that would be surfaced for use as car parking. Mowlem had undertaken to supply free-issue fill material that was to be incorporated by PHI into the earthworks. While the free-issue material met the grading requirements of the sub-contract it was found to be unsuitable because it could not be compacted properly. Mowlem supplied additional free draining material and then sought payment for the cost of the new material and the cost of removing the surplus material that was not used in the earthworks.

The dispute was referred to an arbitrator who rejected Mowlem's claims. He decided that the sub-contractor had not agreed to pay Mowlem for the material. Furthermore no such agreement could be implied as a matter of law on a quantum meruit basis.

On appeal, Judge Gilliland QC agreed that the circumstances of this case did not entitle Mowlem to quantum meruit. He stated that for a quantum meruit claim to succeed circumstances must exist which affirmatively establish that the parties contemplated that the claimant would be paid for its services. He also took a strict view of the rule that findings of fact in an arbitral award cannot be challenged in an appeal.

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