Editorial. Contents. September edition 4. Keith Lonsdale

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1 Building brief September edition 4 Contents Editorial Adjudication and professional negligence claims: a case to answer p2 A leap of faith? Good faith in UK & UAE construction contracts p3 Agency: when is there a binding contract between parties p4 Pirelli - still good construction law p5 Contractual limitation periods p5 Building a swimming pool in Spain does not necessarily mean a headache p7 Welcome to the latest edition of Building brief. This edition has a distinctly international flavour with articles from our Dubai office and Spanish associates (for those still dreaming of their summer holidays). Suzanne Weight's article on Abbott and Another v Will Gannon & Smith Ltd is a wonderful example of the law biting back just when you thought the position was clear (to the extent that it will forever be the case when the words 'tort' and 'limitation' appear in the same sentence). Just to re-cap on history, in Pirelli General Cable Works Ltd v Oscar Faber and Partners the House of Lords decided that a building owner's cause of action against a consulting engineer for negligent design accrued, for limitation purposes, when physical damage to the building first occurred. The situation where latent damage had occurred was 'repaired' by virtue of Section 14A of the Limitation Act (three years from 'date of knowledge') so, presumably, that was the end of Pirelli? As Suzanne explains Pirelli lives on. On the subject of confusion, the eagle eyed will have noticed an article from Paul Taylor in our Dubai office. The author is Paul D Taylor and not Paul J Taylor, our former national senior partner and new consultant. I can assure you that this has been the cause of confusion on a Pirelli type scale! Building Brief is published by the marketing department of Berrymans Lace Mawer (Castle Chambers, 43 Castle Street, Liverpool L2 9SU) on behalf of the partnership. Printed in England by Patersons Printing Ltd. Berrymans Lace Mawer 2006 Keith Lonsdale Partner, BLM London

2 Adjudication and professional negligence claims: a case to answer It is an often made observation that adjudication has become used for disputes for which it was never contemplated by Sir Michael Latham when he drafted his final report in 1994, noting: There should be no restrictions on the issues capable of being referred to the adjudicator, conciliator or mediator. The drafters of the legislation took him at his word and duly translated the recommendation into the Housing Grants, Construction and Regeneration Act (the Act). This has resulted in adjudications of considerable complexity, including claims of professional negligence which have lasted many months at considerable and irrecoverable costs to both parties. When Sir Michael Latham originally made his recommendations he envisaged that arbitrators would be acting as adjudicators: If the proposed system of adjudication works properly many current arbitrators will be making decisions during the course of the project but in the role of adjudicators. The problem is that arbitrators have had little exposure or training in professional negligence claims, which almost invariably (except in international contracts) are heard by the courts. In London & Amsterdam Properties v Waterman Judge Wilcox remarked: On this issue (that of an expert report concluding that the defendants were not negligent) it is strongly arguably that the adjudicator failed to properly address the issue of professional negligence, he did not do so in his reasons. Other common law jurisdictions, notably New Zealand and certain Australian States, as well as Singapore, have implemented in one form or another many of Sir Michael's recommendations, especially those on payment and pay when paid clauses. Interestingly New South Wales has chosen to limit adjudication to disputes about payment of either fees or stage payments, relegating allegations of defects in workmanship or design to a defence rather than them being claims in their own right. The DTI in its review initiated in 2004 Improving Payment Practises in the Construction Industry has not sought as part of its remit to restrict the scope or use of adjudication, rather the contrary. A consultation at the DTI on 1 June 2006 was principally concerned to diminish the potential challenges to an enforceable adjudication decision and to streamline the payment provisions. Professional negligence claims can and will continue to be pursued in adjudication, despite some very trenchant criticism from the judiciary. Lady Paton in Gillies Ramsey Diamond v PJW Enterprises Limited said: Whilst therefore it may on one view seem startling that a professional person acting as an adjudicator should be invited to rule within 28 days on the important and often difficult and often delicate question as to whether a fellow professional has failed in his or her duty to such an extent that there has been professional negligence, the exceptional and summary adjudication procedure permits this very result. There are two fundamental objections to the use of adjudication for claims of professional negligence:! That the brevity of the procedure (which of course is its principal attraction) is insufficient for a proper examination of such issues.! That the majority of adjudicators are unversed in professional negligence claims and what is required to prove them. There is some anecdotal evidence to suggest that those making claims of professional negligence are coming to realise that the adjudication timetable and procedure, and the nil cost recovery under it, make it an unattractive option. As to the second concern, BLM has sought to address this. Advanced training for adjudicators is now being run on behalf of the four principal appointing bodies (RICS, RIBA, ICE and the Chartered Institute of Arbitrators). BLM has contributed a module on professional negligence and the proof the evidence required to make a finding of negligence at the first of such courses run in autumn It apparently provoked food for thought. Robert Stevenson Partner, BLM London page 2 Berrymans Lace Mawer

3 A leap of faith? Good faith in UK & UAE construction contracts In Dubai, United Arab Emirates (UAE), some things never change: it will be hot again tomorrow, sand will always somehow get into the car again, and contractors will use the traditional enquiry/tender procurement route for all construction work. Or so we all thought. The heat and sand remain. However, a change may be in the air. Phrases such as 'partnering', 'co-operation' and 'alliancing' are being whispered in the boardrooms of Dubai's construction industry. So is this simply the UAE following English legal concepts, or could the UK learn something from the UAE? Other than the weather, the fundamental difference between the UAE and the UK (and a point all those seeking to do business in this part of the Middle East need to be aware of) is the nature of their respective legal systems. English law is based on 'common law' and relies on case law created by the courts to set its rights, rules and precedents. Dubai's law is based on 'civil law', a written code which sets out the overriding rules of the game from the outset. Both countries have a history of competitive tendering and traditional procurement procedures for construction work. However, the UAE Civil Law at Article 246(1) states that: The contract must be performed in accordance with its contents and in a manner consistent with the requirements of good faith. At the other end of the scale, for years English Law has debated the 'good faith' issue and never formally recognised the concept (save in insurance contracts where the relationship is based on an absolute duty of good faith/full disclosure). In the UK, some standard form construction contracts have even sought to encapsulate the concept of good faith or something akin to it:! The ECC/NEC New Engineering Contract requires a ' spirit of mutual trust and co-operation' and proffers its own bespoke Partnering Option X12 arrangements.! The PPC2000 Partnering Contract requires a ' spirit of trust fairness and mutual co-operation.! The Be Collaborative Contract requires a ' co-operative manner in good faith and in a spirit of mutual trust and respect'. The English courts even came close to recognising the rather nebulous concept of good faith in the well-known case of Birse Construction Ltd v St David Limited (1999) BLR4 when HHJ Humphrey Lloyd QC took into consideration conduct and attitudes to be a non-binding partnering charter between two parties. All very laudible yet still the concept of good faith is not an enshrined rule or doctrine of English law. Some may say that this is hardly surprising in an industry in which the chief protagonists have for many years been at loggerheads in countless construction claims, arbitrations and adjudications against each other. The fact that the concept and duty of good faith is already enshrined in its Civil Code, might just give the UAE a distinct advantage if partnering agreements become prevalent in Dubai. UAE law might in fact be able to lead the way for others in recognising, embracing and enforcing the meaning and effect of good faith in construction contracts and providing guidance to others on how it should be approached. Until then, certainly in the UK, concluding that any conduct or action of one party to a construction contract amounts to an enforceable breach of good faith, will still very much mean taking a leap of faith. Paul D Taylor Senior construction solicitor, BLM Dubai Berrymans Lace Mawer page 3

4 terms of the contract, the quantity surveyor had reverted to the employer for confirmation and this evidenced their authority). It was also argued that the contract sent to the contractor was not sent as a 'draft' or 'subject to contract' and the quantity surveyor did not say that the contract would be referred to the employer for approval. What defeated the claim was that it was not the conduct of the employer which had led to the contractor's belief that the quantity surveyor had authority to enter into the contract, but the conduct of the quantity surveyor. Judge Kirkham decided that: 1 There is a significant difference between negotiating the terms of a contract and actually entering into one. 2 The employer's silence, in not saying that the quantity surveyor's authority was limited, did not amount to a representation of authority. Agency: when is there a binding contract between parties? In the case of GPN Limited (in receivership) v O2 (UK) Limited [2004] the court had to decide whether an employer's (O2's) quantity surveyors (McCreadies) had ostensible or apparent authority to bind the employer to a contract with the contractor (GPN Limited). The works were the construction of approximately 1900 sites to allow for 3G technology. The employer sent the contractor a letter of intent. Terms of the contract were subsequently negotiated by the quantity surveyor and the contractor. The quantity surveyor agreed terms without always referring back to the employer, and finally sent the contractor the 15 th version of the contract, requesting that it be signed. The following month the contractor went into administrative receivership. In a subsequent adjudication the adjudicator decided that there was a contract between the parties and made an award for the contractor. In the enforcement proceedings the employer maintained that there was no contract because the quantity surveyor only had authority to discuss schedules of rates, to draft contract documents and to negotiate terms. 3 That the quantity surveyor had to refer back to the employer on some negotiated elements was evidence that there was a limit on the quantity surveyor's authority. 4 The contractor's evidence that agents are commonly used to negotiate and enter into contracts was unconvincing. 5 The signed letter of intent referred to the parties agreeing terms and to formal execution of the contract so did not aid the contractor. 6 Although the contract itself referred to the quantity surveyor as the employer's agent, this was a mere 'bootstrap argument' (self-supporting) and in itself, not sufficient. Comment There were 14 previous drafts of the contract, some of which presumably contained the agency clause and some presumably read by the employer. The terms of the contract were correctly agreed by someone with authority to agree them. The contractor may feel hard-done-by. Parties to a contract clearly need to be extremely careful that the other party gives the final approval of the contract, or they may find themselves protected only by the emperor's new bootstraps. The contractor argued that agents are often used to negotiate and enter into contracts and they had not been informed that the quantity surveyor's authority was restricted to negotiation. Charles Ingmire Solicitor, BLM London The contractor claimed that employees of the employer had led them to believe by their conduct that the quantity surveyor had ostensible authority to act on their behalf (although, for some page 4 Berrymans Lace Mawer

5 Pirelli - still good construction law In Pirelli General Cable Works Ltd v Oscar Faber and Partners (1983), the House of Lords decided that a building owner's cause of action against a consulting engineer for negligent design accrues, for limitation purposes, when physical damage to the building first occurs. The 2005 case of Abbott and Another v Will Gannon & Smith Ltd asked the Court of Appeal (CA) to decide whether Pirelli is still good law. At first instance, the district judge had heard limitation as a preliminary issue, and held that Pirelli applied. The defendant appealed this decision. In May 1995, Mr Abbott, the owner of a hotel in Torquay, retained the defendant consulting engineer to design work to remedy structural defects in a large bay window of the hotel. Remedial work was carried out according to the engineer's design and completed by a local builder in March In late 1999, the claimant first noticed that the lintel over the bay window had moved and cracked the surrounding structure. The claimant arranged for further remedial work to be carried out which cost approximately 20,000. Proceedings were not issued in both contract and tort until September made the following interesting points: 1 He made the distinction that, if the claimant discovers the defect before the damage occurs he has a claim for economic loss (as long as there is a special relationship ie between the builder or designer and the claimant) (Murphy)). However, if the claimant does not discover the defect before damage occurs, the cause of action will accrue at the date the physical damage first occurs (Pirelli). 2 He held that even if Pirelli is not good law and if the claimant's cause of action accrued at the time it suffered economic loss, in Abbott such loss would only occur when it manifested itself in some way which would affect the value of the building, measured either by cost of repairs or by depreciation in the market value. The CA therefore rejected the defendant's arguments and, even if based on the decision in Murphy, the claimant in Abbott would have made the claim in time, as the loss which affected the value of the building occurred in late 1999 when the cracks first appeared. Although Pirelli is still good law, I suspect that there will be further cases as LJ Tuckey raised the possibility of there being more than one cause of action for limitation purposes. Guidance from the House of Lords will be required. The parties agreed that the contract claim was time barred, as more than six years had elapsed since the contract was entered into in The claim in tort was time barred if the cause of action accrued more than six years before the issue of the claim, and the cause of action would not accrue until damage had occurred. In Abbott, the Latent Damages Act did not help the claimant, as this only extends the limitation period for a further three years from the claimant's date of knowledge, and the claimant discovered the damage in late The claimant relied on the decision in Pirelli. Damage first occurred in late 1999, so the claimant would have six years from 1999 to issue a claim. The defendant relied on the decision in Murphy v Brentwood DC (1991). This was a later decision by the House of Lords, which is inconsistent with Pirelli, in that Murphy decided that the cause of action accrues when the building owner suffers economic loss, and this occurs when work carried out according to the negligent design has been completed, leaving the owner with a defective building in need of remedial work. The CA judge, in Abbott, decided that Murphy had not expressly or impliedly overruled the decision in Pirelli. Therefore, the cause of action accrued at the date of physical damage, which was late 1999, and therefore the limitation period extended until late Lord Justice Tuckey, who gave the main CA judgment in Abbott, Suzanne Weight Solicitor, BLM London Contractual limitation periods Periods of limitation have been the subject of English Statues for at least 500 years. The concept is often the subject of criticism. Only recently a rape victim's case against her assailant, lottery winner Lorworth Hoare, was struck out for being brought more than six years after the event. Why have limitation periods? The combined judicial pronouncements have been distilled to:! Long dormant claims have more cruelty than justice in them.! A defendant might have lost the evidence to disprove a stale claim.! Persons with good causes of action should pursue them with reasonable diligence. None of these would appear to apply to the example above, but as the Law Commission has commented 'It will never be possible to achieve complete fairness between the parties'. Berrymans Lace Mawer page 5

6 The Limitation Act 1980 is the principal but not the only statute on limitations. It provides a basic six year period for claims in contract, from the date of breach; and in tort from the date injury is suffered or reasonably discoverable. The most recent Law Commission Report (No 270) on limitation considers these periods to be too long and recommends shortening them to three years (the same period as for personal injury claims). The report also recommends parties agreeing their own limitation periods, leading to the prospect of even longer periods of liability than the current 12 years for contracts executed as deeds. Arguments about limitation provide much grist to the legal mill. Two recent Court of Appeal (CA) cases, Henry Boot Construction Limited v Alstrom Combined Cycles and Birse Construction Limited v McCormick (UK) Limited illustrate this well. The Henry Boot contract incorporated the ICE Standard Form, 6 th Edition. Alstrom argued (successfully before the arbitrator judge) that on a true interpretation of the contract, sums included in the final certificate by the engineer were in fact statute barred, as the relevant causes of action had arisen when the work itself had been done (or at least when an interim certificate in respect of that work had or should have been issued) and these were more than six years before the commencement of the arbitration. After a lengthy analysis of the contract their Lordships concluded that interim valuations, or their non-payment, are not the breach from which the limitation period was to run, rather it is the revision of those interim sums as part of the final certificate which constitutes the starting point. contractor to make a claim which was to be either accepted or rejected in fairly short order by the employer. The judge at first instance and the CA took the accrual of any cause of action to be the date of submission of the claim, plus three to four weeks. As with many of these contractual claims, the calculation of when the limitation period starts to run will be a question of construing the contract. The answer for other forms of contract, for example the JCT Standard Form will be different as there is a contractual machinery for the positive ascertainment by the architect/ supervising officer, in accordance with a post completion timetable, of sums due to the contractor, the contractor nominally providing information for this ascertainment to be undertaken. All this can lead to considerable uncertainty as to just when a contractor's claim becomes statute barred. This is to be contrasted with the position in certain standard professional appointments such as those published by the ACE and RIBA, where there is a provision limiting the bringing of any action, in contract or in tort, to six/twelve years following practical completion. This type of provision was first included in collateral warranties, and interestingly a similar provision does not appear in the new BPF Consultancy Form, except in the appendices which are the equivalent of collateral warranties. A similar provision in building contracts would serve to concentrate both parties' minds on an end date. It would also avoid the possibility of a tort claim being pursued just because the contractual limitation period has expired. Henry Boot did not succeed on every count. The CA ruled that claims for interest on claims that sums should have been included in interim certificates, became statute barred six years after that right accrued. This ruling may have an important impact on financing charges which can form a significant part of a contractor's claim (in this particular case Henry Boot was claiming in excess of 13 million in compound interest). Much of a claim for financing charges is based on unpaid loss and expense, which should have been certified and paid during the course of the works, the delay in payment extends the contractor's borrowing, hence the financing charges. If the eventual arbitration/limitation is commenced more than six/twelve years after the date when the loss and expense should have been certified, then at least part of the financing charges may be statute barred. Drafters of all construction contracts are going to have to turn their minds to limitation periods if the Law Commission proposals are enacted, three years will be too short but for the simplest contracts. There is however, a simple step that can be taken now, to make the position of limitation a little clearer. Robert Stevenson Partner, BLM London In Birse Construction v McCormack the issue of limitation concerned the date of the accrual of the cause of action. Birse's claim was for additional site establishment costs and was initially made on 14 November Proceedings were on 23 May The contract was not in the standard form and provided for the page 6 Berrymans Lace Mawer

7 Building a swimming pool in Spain does not necessarily mean a headache Many Europeans enjoy the long, sunny days of the Eastern Spanish coast and have decided to own apartments and bungalows, with enough room for a swimming pool to make their holiday extra special. However, few owners of these mini-paradises are aware of the actions, rights and resources that the EU and Spanish law offers them when the construction or maintenance of a swimming pool could cause serious headaches and considerable expenses. A swimming pool, as with any other building work in Spain, must be built by a properly authorised builder, who must offer the customer not only the guarantee for the building work for defects, where this guarantee is extended to 10 years (article 1591 of the Civil Code) but also a guarantee over the products used to build the swimming pool such as insulating panels, spotlights, ladders, water purifiers and even the rolls of interior covering material of the swimming pool. This guarantee must last for no less than two years (Law 23/2003 implements EC Directive. 44/1999 of the Plmt And Cncl). upon in the contract other conditions that may be demanded in good faith and for the building practices and uses must also be fulfilled (article 1258 Spanish Civil Code). Nowadays, many builders offer their customers 'key in hand' contracts, under which the builder is obliged, on the customer's behalf to obtain all the authorisations and licences, be they regional, municipal or from other organisations as might be the supplying companies (water, electricity, etc) as well as the necessary permits for the sewerage and water treatment if required. When the builder offers the customer this type of contract, he usually demands an advance amount varying between 30% and 50% of the total cost of the work. On this point, the customer may always request the builder to accredit the amounts received as insurance in case the job is unfinished for any reason attributable to the builder (ie builder's insolvency, demise of the work's foreman, etc). Before signing the job's approval certificate the customer must demand (and of course the builder must offer) the details of the builder's civil liability insurance with coverage over the damages that faulty installation or construction could cause to the property (the customer), or to the construction and finally the damages that could be caused to third parties and their properties. This must last for a time period of no less than the guarantee period (two years) and even in the case of the action deadline for damages caused by a faulty product incorporated (three years for the action and in all cases, 10 years) Law 22/1994 implements EEC Directive 85/374 of the Cncl. There is nothing new about the fact that in most cases the builders operating along the coast practice 'blanket' agreements, therefore there will be no important differences in their prices and competition is severely restricted, if it exists at all. However, it is undeniable that the quality of the finished work forms the final true point of competition between the different builders operating in the same geographical area. Theoretically, the quality of the work is standardised in accordance with the Building Regulations issued by the competent Autonomous Region (local governments) in terms of the location of the work. Under this heading the details about the excavation of the land, building of the walls or swimming pool basin along with the details about the concrete and its components and additives intervene, and are established in detail by the Autonomous Region's regulations. However, there is no regulation about the perfection of the finished work and the detail of its components. The customer will always be protected by the Civil Code that states that, as well as the points agreed In the case of house building, the Law 57/1968 obliges the builders to guarantee or insure the amounts handed over on account by the future owners. In Spain there is no specific regulation that applies a similar requirement to builders of edifices not to be used as dwellings. (For example: silos, tanks, stables, etc). When ordering the building of a swimming pool, the guarantees that the builder must accredit to the customer about the amounts handed over on account must be negotiated in the contract. Finally, when the day arrives for the handing over of the completed work with all its details - lighting, water filtering, water maintenance, substance tipping vessels, pumps, electrical boards, etc the customer must personally check the operation of each piece of equipment and product used in the work and obtain copies or originals of the invoices issued by the manufacturers to the builder for the products used in the work, Berrymans Lace Mawer page 7

8 in order to be able to bring the relevant actions before the courts in the case of malfunction or damages derived from malfunction. 'Inspectorate' inspection companies are not frequently used in Spain. These companies in turn certify that the jobs and works have been completed in accordance with the contract and their termination is acceptable in accordance with the acceptance standards. However, in those cases where knowledge of the language is insufficient or the chance of inspecting the development of the work is not possible as the customer lives in another place, it is advisable to seek out the collaboration of a works inspection company which in turn will offer an additional guarantee with the corresponding civil liability insurance. The Spanish courts are slowly extending the idea that the construction of swimming pools, despite being a job perceived by some as of minor importance, is subject to Construction Law, resulting in each person being responsible for the faults or damages in or caused by the work being bound by law jointly and severally before the owner (Articles 9, 10, 11 and successive ones. Construction Arrangement Act Law 38/1999). Likewise, the owners who privately order the building of a swimming pool using a 'key in hand' contract are legally consumers and therefore they are protected by the Consumer and User Defence Act (Law 26/1984) that they can invoke before the courts as well as the Guarantees in the Sale of Consumer Goods Act (Law 23/ implementing EEC Directive 1999/94 of the Plmt & Cncl ) for the products incorporated in the work. If, in the end, the work has been correctly performed and the customer accepts it, there is nothing more for us to do, except wish him a happy holidays. Fernando Beteta Estudio Internacional Abogados, Madrid Events calendar 2006/07 BLM has a very comprehensive programme of events each year offering in depth coverage of key specialist areas. This year highlights include: BLM Claims Review and 11 October Manchester (5 October at New Century House) and London (11 October at One Great George Street) Each full day will feature BLM specialists and expert external speakers covering topics such as EL, PL, costs, quantum, motor, policy development, claims trends, fraud, ADR/mediation and health and safety. Construction Law Seminar Bristol (2 November at IoD Hub) Southampton (January 2007 date and venue tbc) Other events BLM is involved in and is sponsoring a number of seminars run by Post Magazine over the next few months including Management briefing 'Fraud' - 27 September, Claims Club Annual Conference - 11 October, and Management Briefing 'Environmental Claims' 7 December. For full details of our full and half-day seminar programme, please contact: Linda Coppell, Berrymans Lace Mawer, Castle Chambers, 43 Castle Street, Liverpool L2 9SU. T e linda.coppell@blm-law.com DX LIVERPOOL 1 or visit All details are correct at the time of printing and can be subject to change. If you have any questions about the services that BLM can provide, please contact one of the following: Birmingham Leeds Liverpool London Manchester Southampton Stockton-on-Tees Dubai 63 Temple Row Park Row House Castle Chambers Salisbury House King s House Carlton House Innovation House Suite 701 Birmingham Park Row 43 Castle Street London Wall 42 King Street West Carlton Place Yarm Road Al Khaleej Centre B2 5LS Leeds Liverpool London Manchester Southampton Stockton-on-Tees PO Box LS1 5JF L2 9SU EC2M 5QN M3 2NU SO15 2DZ TS18 3TN Dubai, UAE T T T T T T T T +971(0) F F F F F F F F +971(0) DX BIRMINGHAM 1 DX LEEDS 1 DX LIVERPOOL 1 DX FINSBURY SQ DX MANCHESTER 1 DX SOUTHAMPTON DX STOCKTON 8 Disclaimer This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of Berrymans Lace Mawer. Specialist legal advice should always be sought in any particular case. 0906_608 page 8 Berrymans Lace Mawer