Non-contractual claims can in certain circumstances provide additional rights of action which are not otherwise available under a construction contract. The ability to choose the law governing such rights therefore provides an opportunity to employers and contractors to influence the extent to which such claims can be brought. A growing number of countries now permit parties such a choice, either through their domestic conflict of laws rules or as part of their arbitration law. In this Law-Now, we provide a summary of the relevance of non-contractual claims to construction disputes and some recommendations for how best to negotiate a choice of law clause in relation to non-contractual obligations.
Non-contractual obligations: what are they and how are they relevant to construction contracts?
Aside from specific statutory duties, certain non-contractual obligations apply to regulate the legal relationship between private entities in addition to contractual obligations. These non-contractual obligations are referred to as “torts” in English law. They concern such matters as trespass, assault, fraud, and confidentiality, as well as a general right of action for “negligence” in respect of certain types of damage. Other jurisdictions refer to these obligations as “delict” or “civil wrongs”.
Actions for the tort of negligence frequently appear in claims for defective work in England. These claims are often brought alongside claims that the work fails to comply with a contractual standard. In such cases, a claimant may allege that the works fail to achieve a certain contractual specification and/or that the work has been performed negligently.
There are a number of reasons why tort claims are made alongside contractual claims under English law. Claims in tort may allow the employer to take advantage of a longer limitation period (sometimes referred to as “prescription” in other jurisdictions) than is applicable to claims under contract. Claims in tort may also permit the employer to recover a greater amount of damages depending on the circumstances. Tort claims therefore remain an important part of the law applicable to construction contracts in England.
The same is also true in other jurisdictions. For example, many civil law countries impose decennial liability on builders and/or consultants in relation to structural or safety related defects which emerge within 10 years from completion and which applies irrespective of the contractual arrangements agreed between the parties.
Choice of law for non-contractual obligations
In most jurisdictions there has traditionally been no ability for the parties to choose the system of law which will govern their non-contractual obligations in the same way as the law governing their contract is specified. Under English law, it was not thought possible for parties to nominate the applicability of English tort law regardless of the nature and location of the contract to which they had agreed (see Morin v Bonhams & Brooks). Applicability would depend instead on a comparison of the place in which the tort was committed with any other factors connecting the tort to England. An express choice of English tort law would only be one factor connecting the tort to England and could be outweighed by others.
This position was changed for EU countries by the Rome II Regulation, which took effect in 2009. The Regulation permits parties to expressly nominate the legal system which is to govern their non-contractual obligations. Such a nomination is permitted if the parties are pursuing a commercial objective and the nomination is expressed or demonstrated with “reasonable certainty”. The Rome II position has been retained by the UK after its departure from the EU and is sometimes referred to as “Rome II UK”.
Outside Europe, the position is much less uniform but a number of major jurisdictions have already adopted something close to the Rome II position or appear likely to do so in the future. For example, section 5-1401(1) of the New York General Obligations Law allows the parties to commercial contracts involving a value of US$250,000 or more to choose New York law as the governing law of both the contract and their non-contractual obligations, regardless of where the parties or the subject matter of the contract is located. The position in Singapore is “still an open one” but academic opinion appears to favour the Rome II approach given Singapore’s aim to establish itself as a centre for cross-border litigation (see Ong Ghee Soon Kevin v Ho Yong Chong and Professor Yeo Tiong Min, “The Effective Reach of Choice of Law Agreements”). By contrast, some countries, such as China, only permit a choice of law for non-contractual obligations ex post facto after a tort has been committed. Still other countries, such as Saudia Arabia, do not permit even this exception.
One question which is yet to be fully explored under Rome II UK is the extent to which existing contractual choice of law clauses will lead to the applicability of English tort law. For example, the clause in Morin v Bonhams & Brooks was thought to be sufficiently broad to express a contractual choice for – in that case – Monegasque tort law. It stated that “all transactions to which these Conditions apply and all matters connected therewith shall be governed by Monegasque law”. One might however contrast the standard FIDIC choice of law clauses which state simply that “the Contract shall be governed by the law of [relevant country]” (1st Edition) and “the Contract shall be governed by the law of the country (or other jurisdiction) stated in the Contract Data” (2nd Edition). It may be open to question whether such a narrowly drafted provision would be capable of demonstrating with “reasonable certainty” that the parties intended to apply English tort law. Under New York law it is clear that such narrowly drafted clauses which refer only to the law governing the contract will not be sufficient to include non-contractual obligations: Krock v. Lipsay.
What about arbitration?
Where the parties have agreed to submit their disputes to arbitration, the position is much more uniform. The arbitration legislation applicable to 126 jurisdictions across the world is based on or influenced by the Model Law on International Commercial Arbitration adopted by UNCITRAL in 1985. Article 28(1) of the Model Law provides that the “arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute.”
The English Arbitration Act 1996 has adopted this wording in almost identical form at section 46(1). However, many countries which do not recognise choices of law in relation to non-contractual obligations also adopt the Model Law approach, in whole or in part. For example, whilst Saudia Arabia is among the strictest of jurisdictions in refusing to recognise such choices of law, article 38(1)(a) of its Law of Arbitration (Royal Decree No. M/46) provides that:
“Subject to provisions of Sharia and public policy in the Kingdom, the arbitration tribunal shall, when deciding a dispute … [a]pply to the subject matter of the dispute rules agreed upon by the arbitration parties. If they agree on applying the law of a given country, then the substantive rules of that country shall apply, excluding rules relating to conflict of laws, unless agreed otherwise.”
A choice of law for non-contractual obligations could therefore be made and would be binding on an arbitral tribunal subject to Sharia principles and public policy. The enforcement of awards in Saudi Arabia is similarly subject to compliance with Sharia principles and public policy. For example, awards for interest (whether arising on a contractual or non-contractual basis, such as pre-award interest) will not be enforced as this is contrary to the Sharia principle of “riba”.
Accordingly, even where the jurisdiction in which the project is situated does not permit a choice of law as to non-contractual obligations, parties may nevertheless be able to exercise such a choice if they are prepared to submit their disputes to arbitration.
Risks and opportunities under English tort law
There are both procedural and substantive risk-based reasons why parties may wish to choose English tort law. Procedurally, if the contract is to be governed by English law, it is simpler if English tort law is to apply also. Any arbitral tribunal will then only be required to apply a single system of law, rather than applying a mixture of English contract law and local tort laws.
Substantively, the primary relevance of English tort law to a construction project arises through the tort of negligence when considering liability for defective works.
Tortious liability can sometimes provide an advantage over contractual liability in the following ways:
- Under English law, the limitation period for contractual claims varies depending on whether the contract is executed as a deed (where the applicable period is 12 years) or under hand (where the period is 6 years). Whilst the basic limitation period for claims in tort is 6 years, this is able to be extended in latent damage cases to 3 years from the date on which claimant knew or ought to have known the facts necessary to bring a claim (up to a maximum of 15 years).
- The commencement of the limitation period for tortious claims may be later than for contractual claims, due to the rule that contractual claims accrue on breach whereas tortious claims accrue when damage occurs. For example, tortious claims for defects against subcontractors will accrue on practical completion of the main contract works (or possibly when a claim is made by the employer), whereas contractual claims will ordinarily accrue on the, usually earlier, completion of the subcontract works.
- Tortious claims may not be caught by contractual prohibitions against assignment.
- The rules on remoteness of damage are more generous in tort than in contract, however recent caselaw has held that these more generous tortious rules do not apply where tortious liability is concurrent with liability in contract, which is usually the case for claims in the tort of negligence (Wellesley Partners Ltd v Withers LLP).
These attributes of English tort law may provide advantages for employers in particular. However, opportunities also exist for contractors. A Court of Appeal decision in 2011 (Robinson v PE Jones) concluded that concurrent duties in tort in relation to pure economic loss arising from defective work or materials would not ordinarily arise in a construction contract. English law continues to develop the extent of this finding in relation to construction contracts involving design or professional aspects (for a recent Law-Now of ours on this topic please click here). However, contractors may find comfort in the fact that – for pure construction obligations at least – English tort law is unlikely to provide an employer with any significant rights in relation to defective work, not causing property damage or bodily harm, beyond that provided by the contract itself.
Whether or not these aspects of English tort law provide a reason for its selection, or its relegation, will depend on an comparative analysis of non-contractual rights offered by other legal systems, such as decennial liability offered by many civil law systems.
How to make an effective choice of law for non-contractual obligations
The growing willingness of a number of jurisdictions to allow parties to make a binding choice of law in relation to non-contractual obligations represents an opportunity for both employers and contractors to negotiate choice of law provisions which will best suit their own interests. As the previous section shows, such a choice throws up a number of complex questions, both in accurately understanding the law in any given jurisdiction and comparing it to other jurisdictions to enable an informed choice to be made. We set out below something of a roadmap to allow parties to make the best choice for any given project:
- The starting point for consideration should be the proposed lex fori which, for those contracts with arbitration clauses, will usually be determined by the seat of arbitration, but will otherwise be the jurisdiction local to the project. This is the legal system which will govern conflict of laws debates and, therefore, the extent to which a choice of law as to non-contractual obligations will be upheld. If the project were situated in England and subject to the jurisdiction of the English courts, Rome II UK will apply and the parties will have a free hand in deciding on the applicable law for non-contractual obligations. Similarly, if a London seated arbitration clause had been agreed, section 46(1) of the Arbitration Act 1996 would require the arbitral tribunal to apply the law agreed by the parties in relation to both their contractual and non-contractual obligations. If the lex fori is more restrictive, and disputes are to be submitted to arbitration, this may be a reason to consider specifying a different seat.
- Once the ability to choose has been confirmed, an analysis should be undertaken as to those legal systems whose law of non-contractual obligations is likely to be most favourable to a party’s interests. This is likely to require collaborative advice from an international law firm, such as CMS, who can readily identify the likely issues which will arise on a given project and identify the varying approaches taken to those issues in different jurisdictions across the globe.
- The approach of the lex fori to limitation issues should be considered as part of this analysis. As noted above, one reason for including tortious claims in construction disputes is to take advantage of the extended limitation periods which can sometimes apply. However, the conflict of laws rules of the lex fori may mean that the limitation rules of the jurisdiction chosen by the parties to govern their agreement or non-contractual obligations do not apply and the limitation rules of the lex fori apply instead. Arguments often arise in this context as to whether the limitation rules of the chosen jurisdiction are part of the “substantive” law of the jurisdiction (in which case they will apply) or are merely “procedural” (in which case the limitation rules of the lex fori are said to apply). An analysis of the approach taken to this issue by the lex fori may, therefore, impact an assessment of what might otherwise have been thought to be a favourable jurisdiction for non-contractual obligations.
- Local tort law should also be considered to identify any local requirements which cannot be contracted out of. Any choice of law for non-contractual obligations will be subject to these mandatory local law requirements and this may, therefore, affect the analysis as to which jurisdictions present the most favourable position for non-contractual obligations.
- Once a short-list of favoured jurisdictions has been arrived at, consideration should be given to the proposed law governing the contract. A choice of law clause which specifies one system of law to apply to the contract and another to apply to non-contractual obligations is rare and is likely to make for a more difficult negotiation. Employers in particular may already have fixed positions on the law that is to apply to the contract and a view should therefore be taken as to how that jurisdiction compares against a party’s favoured list of jurisdictions for non-contractual obligations. A decision can then be made as to whether to accept the proposed law of the contract as governing non-contractual obligations also, to negotiate separate systems of law for each, or to press for a change to the proposed law of the contract to align it with a party’s favoured jurisdiction for non-contractual obligations.
- Finally, care is needed to make sure that any choice of law for non-contractual obligations is expressed in sufficiently clear language. As noted above, Rome II countries (including the UK) require such a choice to be expressed with "reasonable certainty” and clauses which merely refer to the law governing the contract may not be sufficient for this purpose.
* This is an abridged version of an article originally featured in the 2024 CMS Annual Review of English Construction Law Developments. To download a copy of the Annual Review, please click here.
References:
Krock v. Lipsay, 97 F.3d 640
Morin v Bonhams & Brooks [2003] EWHC 467 (Comm)
Professor Yeo Tiong Min, “The Effective Reach of Choice of Law Agreements” (2008) 20 SAcLJ 723
Robinson v PE Jones (Contractors) Ltd [2011] EWCA Civ 9
Wellesley Partners Ltd v Withers LLP [2015] EWCA Civ 1146
Ong Ghee Soon Kevin v Ho Yong Chong [2016] SGHC 277
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