Construction of Contracts, Implied Terms, Estoppel of Contracts, Implied Terms, Estoppel Construction of contracts – new law? “What’s so hard ?” “Nothing has changed” but

Ben Patten QC

Nicola Shaldon

Benjamin Fowler

Construction of Contracts, Implied Terms, Estoppel

Construction of contracts – new law?

“What’s so hard ?”

“Nothing has changed” but four substantial cases in the House of Lords and Supreme Court in the last 10 years:

Chartbrook v Persimmon [2009] 1 AC 1101

Rainy Sky SA v Kookmin Bank [2011] UKSC 50

Arnold v Britton [2015] UKSC 36

Wood v Sureteam Direct [2017] UKSC 24

Problems tend to arise where the wording of the contract doesn’t match up to the commercial sense of what was intended

Frequently precisely the same problem in construction projects

Sutton Housing – absurdity is anathema

Sutton contract with Rydon for a long term maintenance contract

Contract requires Rydon to achieve “minimum acceptable performance levels” (MAPS) for each year. Penalties if not

But the parties omit to put the actual MAPS in the Contract.

There is a table showing an example of the application of the MAPS for one year.

Sutton contend that this table should be used. Court disagrees. Sutton appeals

Court of Appeal (Jackson LJ, Beatson LJ)

No specific weight placed on any of the recent SC authorities: there is no suggestion that they say anything different.

Contractual intention is ascertained by looking at all aspects of the contract including how it was intended to work. They cant have intended absurdity.

Parts of the contract are unworkable without MAPs. They must have intended to include them.

When they say “for example” they are applying the actual MAPs

Although the examples only deal with one year the parties must have intended that there be extrapolation for all subsequent years, taking 3% below target as the benchmark.

Carillion – a little bit of absurdity is fine

Carillion engages Emcor as its sub-contractor on DOM/2

Provisions relating to EOT are different under the sub-contract, but

Emcor is meant to compensate the client for delay it causes

Issue is whether an extension of time for EMCOR is

i) Contiguous – i.e. starting immediately on the sub-contract

completion date; or

ii) Non-contiguous – i.e. corresponding to the period of actual delay

by the sub-contractor

This could be important if delay loss is not fixed, but fluctuates

Court of Appeal – LJs Jackson, Simon, Flaux

Natural meaning of words supports contiguous EOT

Need and exceptional case to overcome that

Carillion is correct that this construction leads to “oddity”, but

“the life of the law has not been logic, it has been experience”; general

construction experience was to treat all eots as being contiguous

Emcor’s construction was perfectly workable – it did not lead to the

contract breaking down

Implied Terms – TCC decisions after Marks & Spencer v BNP Paribas

When will a term be implied in a construction contract?

Construction contracts, factors limiting scope for implication:

detail, complexity, entire agreement clauses

But implication still plays a role – see the recent rejection of implication in Balfour Beatty v Grove Developments [2016] EWCA Civ 990

What is the state of the law after Marks & Spencer v BNP Paribas [2016] AC 742 ?

If the parties leave something out, will the Court fill the gap ?

Reasonableness v Necessity

“in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such provision would spell out in express words what the instrument read against the relevant background, would reasonably be understood to mean.”

AG of Belize v Belize Telecom Ltd [2009] 1 WLR 1988

Reasonableness v Necessity

Marks and Spencer v BNP Paribas:

• It must be necessary to give business efficacy – not ‘absolute necessity’ – can only be implied if contract lacks commercial or practical coherence without it;

• It must be so obvious as to go without saying

• Necessary but not sufficient for provision to be fair or that contracting parties would have agreed it if suggested to them

• Not critically dependent on proof of actual intention of the parties but by reference to notional reasonable people in the position of the parties at date contract made

• Construction and implication are different exercises

Demolition contract with a “bolt-on” milestone provision

“Payment to be made within 72 hours of receipt of invoice, issued when the milestone is achieved”

23 October – Contractor says milestone is achieved and issues invoice

28 October – pay less notice

No provision in amendment for period prior to due date for service of a pay-less notice. Contractual position was 5 days. Default position under the Act is 7 days.

But the Act also requires the pay-less notice to follow the demand ….

Manor Asset – a problem the parties created

Edwards-Stuart J – the answer is implication

Tension between AG of Belize v Belize Telecom and Marks & Spencer v BNP Parisbas to be resolved by regarding Belize as restating the traditional “necessity” test in different language

Hypothetical reasonable person would expect contract to be lawful

Only way in which scheme can be lawful is if the prescribed period for pay less notice is “nil”: it can be given at any time before the due date

Where parties fail to provide for something to happen, it generally doesn’t, but necessity can provide an exception

The proposed solution is both (1) necessary and (2) not inequitable

Walter Lilly – a problem no one foresaw

Walter Lilly’s work is halted by the planning authority who claim it is in breach of planning

Walter Lilly seek an EOT

Employer asserts that the work is not in breach of planning and the planning authority is wrong

Contract is silent as to who bears the risk

Walter Lilly contend that it is an implied term that the Employer obtains unequivocal planning permission

Edwards-Stuart J – the answer is not implication

There are commonly implied obligations on an employer to give access and provide the contractor with all necessary information in good time

Obvious to a hypothetical observer that (1) someone should obtain PP and (2) it should be the employer rather than the contractor

Obvious that the employer should carry the risk of carelessness in obtaining PP

But not obvious that employer should carry the risk of LA acting capriciously

If parties didn’t provide for something, it is not included without necessity: the loss lies where it falls

Estoppel – does it work in construction law ?

Estoppel – forget the contract, that’s not what we did

Even in construction contracts parties will conduct themselves in ignorance of the terms or disregarding the terms

This may amount to waiver, but is more likely to give rise to an estoppel

But precisely what needs to be proved and do the different kinds of estoppel matter ?

Can one party rely on the other’s acts and omissions ?

Can estoppel be used as a cause of action ? (a sword, not a shield ?)

Mears – contract or practice ?

Shoreline is a housing provider, Mears is a maintenance contractor

Shoreline and Mears negotiate for a long time before they agree a contract

In the meantime they adopt a particular practice as to the rates for work

Contract is retrospective and sets out a different (lower) set of rates (it contains an “entire agreement” clause and variations must be in writing)

Mears issues proceedings and alleges estoppel - could it do so ?

Akenhead J – practice trumps contract

Estoppel by convention depends upon a shared common assumption relied upon by the party claiming estoppel in circumstances where (invariably) it would be unconscionable for the other party to go back on the assumption. It cannot be a “sword” but it can support some other cause of action.

Estoppel by representation is where A makes a false representation of fact to B, intending / knowing B would rely, B does rely to its detriment, A seeks to deny the truth of the representation and has no defence to the estoppel.

Clear estoppel on either basis on these facts – not being used as a sword, but a defence to Shoreline’s pretended entitlement to payment

Costain – what the contract says or what we thought ?

Contract contains dual dispute resolution procedures

Under one of them there is a time limit for reference to arbitration

Costain negotiates instead of making an application, believing it could still do so. Tarmac says nothing about the right to make an application.

Tarmac raises the point after the deadline passed

Costain contend Tarmac is estopped

Coulson J – no shared assumption

Costain proceeded on a mistaken basis, but the mistake was not shared by Tarmac

Tarmac said nothing to communicate that it shared the (mistaken) assumption – silence is not enough

Tarmac had no obligation to point out the mistake (no “sharp practice”)

Anyway, no detriment: Costain still in time when it learned the true positon (although it mistakenly thought otherwise)

“Mutual trust” provision makes no difference

The References

Sutton Housing Partnership Ltd v Rydon Maintenance Ltd [2017] EWCA Civ 359

Carillion Construction Ltd v Emcor Engineering Ltd [2017] EWCA Civ 65

Manor Asset Ltd v Demolition Services Ltd [2016] EWHC 222

Walter Lilly & Co Ltd v Jean Francois Clin [2016] EWHC 357

Mears Ltd v Shoreline Housing Partnership Ltd [2015] EWHC 1396

Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319

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Limitation and Claims in Tort in Construction Projects

Mark Cannon QC

11 July 2017

Abbott v. Will Gannon & Smith Ltd

So what is the present state of the law of England? With three House of Lords' cases to guide us it ought to be possible to give a clear answer to this question, but I regret that I feel unable to do so with any confidence.

Sparham-Souter v. Town & Country Developments

when building work is badly done and covered up - the cause of action does not accrue, and time does not begin to run, until such time as the plaintiff discovers that it has done damage, or ought, with reasonable diligence, to have discovered it.

Different Defendants, Different Duties?

Local Authorities: Dutton v. Bognor Regis and Anns v. Merton


Architects and Engineers: Pirelli v. Oscar Faber

Robinson v. P E Jones (Contractors) Ltd

It is perhaps understandable that professional persons are taken to assume responsibility for economic loss to their clients. Typically, they give advice, prepare reports, draw up accounts, produce plans and so forth. They expect their clients and possibly others to act in reliance upon their work product, often with financial or economic consequences.


Building Contractors and Developers

Robinson v. P E Jones (Contractors) Ltd

The law of tort imposes a different and more limited duty upon the manufacturer or builder. That more limited duty is to take reasonable care to protect the client against suffering personal injury or damage to other property. The law of tort imposes this duty, not only towards the first person to acquire the chattel or the building, but also towards others who foreseeably own or use it.

Pirelli General Cable Works v. Oscar Faber


Three Possibilities:

1. 1969: When the chimney was built: out of time

2. 1970: When undiscoverable cracking occurred: out of time

3. 1972: When cracking was discoverable and discovered: in time


Counsel for the appellants submitted that the fault of his clients in advising on the design of the chimney was analogous to that of a solicitor who gives negligent advice on law, which results in the client suffering damage and a right of action accruing when the client acts on the advice: see Howell v. Young (1826) 5 B. & C. 259 and Forster v. Outred & Co [1982] 1 W.L.R. 86. It is not necessary for the present purpose to decide whether that submission is well founded, but as at present advised, I do not think it is. It seems to me that, except perhaps where the advice of an architect or consulting engineer leads to the erection of a building which is so defective as to be doomed from the start, the cause of action accrues only when physical damage occurs to the building.

The Emperor’s New Clothes

Murphy v. Brentwood District Council

If the Anns tort is complete, and a cause of action against the local authority accrues when, but only when, some physical damage is sustained by the building, one might have expected that the damages recoverable would equal the cost of making good that damage. But this is not so. It is established that the damages recoverable are not confined to the cost of repair of the damaged wall or gas pipe, or whatever. The damages recoverable include the cost, which frequently will be much higher, of remedying the underlying defect of which the damaged wall or gas pipe is merely the physical manifestation.


… there is no liability in tort upon a manufacturer towards the purchaser from a retailer of an article which turns out to be useless or valueless through defects due to careless manufacture. The loss is economic. It is difficult to draw a distinction in principle between an article which is useless or valueless and one which suffers from a defect which would render it dangerous in use but which is discovered by the purchaser in time to avert any possibility of injury. The purchaser may incur expense in putting right the defect, or, more probably, discard the article. In either case the loss is purely economic.


In Pirelli General Cable Works Ltd v. Oscar Faber & Partners [1983] 2 A.C. 1 it was held that the cause of action in tort against consulting engineers who had negligently approved a defective design for a chimney arose when damage to the chimney caused by the defective design first occurred, not when the damage was discovered or with reasonable diligence might have been discovered. The defendants there had in relation to the design been in contractual relations with the plaintiffs, but it was common ground that a claim in contract was time-barred.


If the plaintiffs had happened to discover the defect before any damage had occurred there would seem to be no good reason for holding that they would not have had a cause of action in tort at that stage, without having to wait until some damage had occurred. They would have suffered economic loss through having a defective chimney upon which they required to expend money for the purpose of removing the defect. It would seem that in a case such as Pirelli, where the tortious liability arose out of a contractual relationship with professional people, the duty extended to take reasonable care not to cause economic loss to the client by the advice given. The plaintiffs built the chimney as they did in reliance on that advice. The case would accordingly fall within the principle of Hedley Byrne & Co. Ltd v. Heller & Partners Ltd [1964] A.C. 465.

Principles

• What sort of damage?

• Does it fall within the scope of the defendant’s duty?

• When was it first suffered?

• Discovery or discoverability of damage is irrelevant


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Limitation and Claims in Contract in Construction Projects

Tim Chelmick

11 July 2017

Introduction

• Basic principles – a reminder

• Deeds?

• When does the claim arise?

• More than one claim?

• Reports?

• Continuing breaches?

Basics

• Majority of construction works are carried out pursuant to a contract.

• Claim arises when the breach of contract occurs.

• Limitation is 6 years UNLESS the contract is a deed under seal (section 5 of the Limitation Act 1980).

Deeds

Section 1 - Law of Property (Miscellaneous Provisions) Act 1989:

• Needs to be clear on the face of the document that it is being executed as a deed

• Signed

• Witnessed (by two witnesses)

• Delivered

How does this work in the modern world?

• R (Mercury Tax Group and another) v HMRC [2008] EWHC 2721 – signature should be part of the same physical document.

• Care required when executing in counterparty/replacing signature pages.

• Law Society Practice Note - Execution of documents by virtual means

When does the claim arise?

• Obligation to deliver the work:

1. Free from defects;

2. On time.

• Issue is whether the breach of duty occurs ONLY when the building is handed over at Practical Completion or whether the breach occurs as soon as the work is completed.

Conquer v. Boot [1928] 2 K.B. 336

Here there is but one promise, to complete the bungalow; and the question whether or not it has been performed is to be decided by the state in which the bungalow was when it was handed over by the defendant to the plaintiff as complete.”

More than one claim?

May be instructed to carry out a number of different tasks. Different contractual duties and claims? Secretary of State for Transport v. Pell Frischmann Consultants Ltd (No.2) [2006] EWHC 2909 (TCC): (i) If the claimant asserts a duty which was not previously pleaded and alleges a breach of such duty, this usually amounts to a new claim. (ii) If the claimant alleges a different breach of some previously pleaded duty, it will be a question of fact and degree whether that constitutes a new claim. (iii) In the case of a construction project, if the claimant alleges breach of a

previously pleaded duty causing damage to a different element of the building, that will generally amount to a new claim.

Co-operative Group Limited v Birse Developments Ltd [2013] EWCA Civ 474 If the breach does not arise out of the same or substantially the same facts as those already in issue on a claim previously made in an original action, it is likely to be a new cause of action.

Reports

Does it make a difference if the advice is given in a report?

• Hamlin & Anor v Edwin Evans [1996] P.N.L.R. 398

When a surveyor produces a report, if it is negligently produced, there is only one cause of action regardless of the number of defects present in the building

• Would this apply to all construction professionals who produce a report?

Structural engineer?

Architect?

Continuing duties

When will a professional be under a continuing duty to review/correct a design?

• Brickfield Properties Ltd v. Newton [1971] 1 W.L.R. 862

“The architect is under a continuing duty to check that his design will work in practice and to correct any errors which may emerge. “

• Applied to engineers as well as architects

Equitable Debenture Assets Corporation Ltd v. William Moss Group Ltd (1984) 2 Con.L.R. 1, at 24 per HH Judge Newey QC.

• Architects were under a continuing duty to review their advice and design until they were incorporated in the works

Kellie v. Wheatley & Lloyd Architects Ltd [2014] EWHC 2212 (TCC).

Continuing duties

• Need for a reason to reconsider:

New Islington and Hackney Housing Association v. Pollard Thomas & Edwards Ltd

Accepts scope of duty to review the design until included in the design.

BUT scope of the duty important – only under such a duty if something occurs that makes it necessary or prudent to do so.

• Does not change the fundamental position: a competent architect or engineer is under an obligation to review his design up until the point when it has been executed.

• Fact or legal fiction?

• Construction professionals in a different position from other professionals?


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The Liability of Joint Insureds in Construction Contracts After Gard Marine

Neil Hext QC and Alison Padfield | 11 July 2017

What is subrogation?

• Insurer’s right to take advantage of claims against third parties

• Two limbs:

• Right to step into shoes of the insured

• Right to receive from insured any benefit conferred on him by third parties with an aim of compensating for the loss

Subrogation: origins

• An equitable right? Morris v. Ford Motor Co[1973] QB 792

• An implied term in the insurance contract? Yorkshire Insurance Co v. Nisbet [1962] 2 QB 330

• Insurance a contract of indemnity: insured entitled to be fully indemnified, but not more than fully indemnified

• No express term required; but there often is one

The limits of subrogation: alternative analyses (1)

• An express or implied term in the insurance policy preventing subrogation: e.g. Rathbone Brothers v. Novae [2014] EWCA Civ 1464

• An implied exclusion in the underlying contract between the insured and the third party excluding liability where loss covered by insurance: e.g. Co-operative Retail v. Taylor Young [2002] 1 WLR 1491; Scottish & Newcastle v. GD Construction [2003] Lloyd’s Rep IR 809; Gard Marine v. China National Chartering[2017] UKSC 35

The limits of subrogation: alternative analyses (2)

• A third alternative?

• Proceeds of insurance res inter alios acta

• Exceptions for reasons of “Justice, reasonableness and public policy”

• Insurers’ payout to insured not ignored; thus insured has no loss to claim against third party

• Mark Rowlands v. Berni Inns [1986] 1 QB 211

• Rathbone Brothers v. Novae[2014] EWCA Civ 1464

• Gard Marine v. China National Chartering [2017] UKSC 35 – Lord Sumption

Co-op Retail Services v. Taylor Young [2002] 1 WLR 1419

• Fire in new building under construction

• Co-op was prospective owner of building. Co-op alleged that fire caused by negligence of two professionals

• Professionals brought contribution proceedings against contractor

• Preliminary issue on assumption that breach of contract could be proved against contractor – would contractor have been liable for the damage caused by the fire to the Works?


• Clause in main contract provided for contractor’s liability for loss or damage to property caused by negligence

• But subject to proviso that that clause did not apply to the Works

• Clause 22A.1: contractor to take out joint names policy for all risks for the Works

• Clause 22A.4: proceeds of insurance to be used to pay for reinstatement of Works carried out by contractor

• Each party to bear its own loss referable to delay


• HL held that effect of clauses: • Contractor not liable to employer for damage to

Works, even if caused by contractor’s negligence • Funds for reinstatement to be source from joint

names insurance policy • “the ordinary rules for payment of

compensation for negligence and for breach of contract [had] been eliminated”

• Obiter, effect of provision for joint names policy: • “nonsensical” that joint insured should be able

to make claims against each other – implied term to that effect

Tyco Fire v. Rolls-Royce [2008] Lloyd’s Rep IR 617

• Construction of new manufacturing plant

• Rolls-Royce was the employer; Tyco was the contractor employed to install sprinklers

• Pipe burst causing flood

• Damage caused to existing structures

• Was claim by Rolls-Royce against Tyco barred by joint insurance provisions of contract?


• Contract required Rolls-Royce to maintain “in the joint names of the Employer, the Construction Manager and others including, but not limited to, contractors, insurance of existing structures”

• Express indemnity for loss arising out of Tyco’s negligence – no carve out for damage caused by insured risks (cf. Co-op case)


• CA held (Rix LJ):

• On true construction of contract, Tyco was not one of the entities in whose name the insurance was to be taken out

• But in any event:

• Absence of express exclusion in Tyco’s indemnity meant that joint insurance only needed to cover risks non-negligently caused

• Joint names provision would not always mean that claim by one co-assured against another was excluded


“I can well see that a provision for joint names insurance may influence, perhaps even strongly, the construction of the contract in which it appears. It may lead to the carving out of an exception from the underlying regime so far as specified perils are concerned. But an implied term cannot withstand express language to the contrary. Moreover, if the underlying contract envisages that one co-assured may be liable to another for negligence even within the sphere of the cover provided by the policy, I am inclined to think that there is nothing in the doctrine of subrogation to prevent the insurer suing in the name of the employer to recover the insurance proceeds....”

Gard Marine v. China National [2017] UKSC 35

• Loss of bulk carrier ship in a storm when exiting Kashima port, Japan

• Owners alleged breach by charterers of safe port warranty

• At first instance, judge held that Kashima not safe

• That conclusion overturned in CA and Supreme Court. But Supreme Court dealt with question of whether owners would have had a valid claim in any event, given insurance provisions of charterparty


• Clause 12: vessel to be kept insured by charterers at their expense against marine risks “to protect the interest of both the owners and the charterers”

• Express term that “all insurance policies shall be in the joint names of the Owners and the Charterers as their interests may appear”

• But safe port warranty unqualified


• Supreme Court held by a majority of 3:2 that the owners would have had no claim

• Lord Toulson: “It has become a common practice in various industries for the parties to provide for specified loss or damage to be covered by insurance for their mutual benefit, whether caused by one party’s fault or not, thus avoiding potential litigation between them. The question in each case is whether the parties are to be taken to have intended to create an insurance fund which would be the sole avenue for making good the relevant loss or damage, or whether the existence of the fund co-exists with an independent right of action for breach of the term of the contract which has caused that loss.” (para 139)


• “the risk of consequential damage to the vessel [as a result of breach of the safe port warranty] was catered for by the insurance required to be maintained by the demise charterer in the joint names of itself and the owners. The commercial purpose of maintaining joint insurance in such circumstances is not only to provide a fund to make good the loss but to avoid litigation between them, or the bringing of a subrogation claim in the name of one against the other” (para 142)


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Documents

Construction of Contracts, Implied Terms, Estoppel of Contracts, Implied Terms, Estoppel Construction of contracts – new law? “What’s so hard ?” “Nothing has changed” but