In Site UK Construction and Engineering Newsletter

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1 UK Construction and Engineering Newsletter Winter 2010/2011 Authors: Suzannah E. Boyd +44.(0) Kevin Greene +44.(0) Inga K. Hall +44.(0) Daniel T. Lopez +44.(0) K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit Welcome to the Winter 2010/2011 edition of. This edition covers the following topics: Recoverability of pure financial loss : Linklaters Business Services v Sir Robert McAlpine Limited; RIBA Agreements 2010; Settlement agreements and the decision in Silver Queen Maritime Ltd v Persia Petroleum Services plc; Recent adjudication cases; and Changes to the Construction Act expected to take effect this Spring. For more information on any of these articles, or on any other issue relating to construction and engineering law, please contact any of the authors or your usual K&L Gates contact. Pure financial loss Widespread corrosion of insulated water pipes installed in their leasehold office premises resulted in Linklaters taking the main contractor, sub-contractor and subsub-contractor to court in Linklaters Business Services v Sir Robert McAlpine Limited and others [2010] EWHC 2931 (TCC). The decision is of interest as it confirms that a sub-sub-contractor may owe tenants or other end-users of buildings a duty of care in tort and also that the nature and extent of the work performed will be relevant to whether or not any loss will be characterised as pure financial loss and therefore irrecoverable in tort. During the redevelopment of the premises in 1995, the main contractor (McAlpine) appointed a sub-contractor (How Engineering Group Limited ( How )) to install the pipework and How appointed a sub-sub-contractor (Southern Installation (Medway) Ltd ( Southern )) to install the insulation. After an initial leak appeared in 2006, investigations showed extensive corrosion throughout the pipework which led Linklaters, on advice, to replace rather than repair - the corroded pipework throughout the building with new pipework at a cost of 2.5 million. McAlpine and How had each provided Linklaters with collateral warranties warranting that they would carry out the duties and obligations under their contracts properly. Linklaters were therefore able to pursue claims for breach of contract against these two parties, but as Linklaters did not have a contractual relationship with Southern (there was no collateral warranty), it pursued its claims against the sub-sub-contractor on the basis of a breach of a duty of care in tort On the facts, the court found that both McAlpine and How were in breach of their obligations under the building contract and sub-contract and, therefore, their collateral warranties to Linklaters. The court held that the breaches under those contracts were the cause of the excessive corrosion of the pipework. How was held to be responsible for the design and management of the insulation work, with Southern simply responsible for installing it in accordance with How s directions.

2 The court also established that Linklaters had a sufficient interest in the property (as leaseholder with maintenance obligations) for Southern to owe it a duty of care in respect of the insulation installation and that a claim for damages would not be time-barred by limitation periods (the relevant loss arising when Linklaters made the claim against McAlpine and How in 2007). Nevertheless, the court held that, on the balance of probabilities, Southern was not in breach of that duty. As a consequence, How was left with responsibility for Linklaters replacement costs (which the court assessed as being reasonably incurred) as How had provided McAlpine with an indemnity for breach of contract and the resulting damages under the terms of its DOM/1 subcontract. Obiter comments made by the Judge, and which are therefore non-binding in future cases, were interesting. The established position in a claim in tort is that damage to the thing itself is not the basis of a claim. However, what happens if damage is caused by a carelessly installed component, such as a valve within a boiler, which causes damage only to the boiler? In this case, the Judge thought that the pipework and the insulation should be considered as being the one thing as it would not be possible to have chilled water pipework without the insulation because the chilled water would not remain chilled and [the pipework] would corrode. The Judge concluded that even if Southern had breached its duty of care to Linklaters not to cause damage to the building, no cause of action would arise in tort because the loss caused by the damage was not damage to other property but rather to the thing itself and as such was irrecoverable as pure financial loss. RIBA Agreements On 1 December 2010, the RIBA Agreements 2007 were withdrawn from sale, having been superseded by the RIBA Agreements The new suite of contract documents - for the appointment of architects and other consultants - followed a two-year review process and has been endorsed by numerous industry bodies. The RIBA Agreements 2010 comprise professional appointments for an architect or a consultant in three forms - Standard, Concise and Domestic Project - plus a form of sub-consultant agreement. In addition to the main appointment forms, the RIBA Agreements 2010 include a Guide to RIBA Agreements 2010 and a number of electronic-only components, comprising a number of services schedules, a draft third party rights schedule, a draft sub-consultant warranty and a public authority supplement. All of the RIBA Agreements 2010 and their components are available as electronic files but, as indicated above, only a limited number of the conditions and core components are being published in print. Indeed, the Standard Agreement is the only form that has a hard-copy consultant form - the Concise and Domestic Project forms for consultants are only being published electronically. The electronic and hard-copy formats can be used in combination, the idea being that the electronic versions are cheaper, more convenient and more easily tailored to a given project than the printed versions. The new suite is not radically different from the 2007 editions. A table setting out the "principal changes" between the 2007 and 2010 editions is included on the cover page in each form of appointment, with key changes including the following: Legislative changes: The new suite takes account of recent legislative developments, such as the Cancellation of Contracts made in a Consumer's Home or Place of Work Regulations 2008 and the Provision of Services Regulations 2009; Termination: The new provisions for termination now give the architect/consultant rights "equal" to those offered to the client; Cap on liability: The architect's/consultant's liability under the new suite is limited to the amount of its professional indemnity insurance, so long as it has notified its insurers of the relevant claim(s) as required under the terms of its insurance cover; Increased interest charges: Under the RIBA Agreements 2010, parties can claim interest for the late payment of fees at 8% above the Bank of England's base rate. This is in contrast to the previous rate of 5% above base under the 2007 edition; and Suspension of copyright licence: The right of the architect/consultant to suspend the copyright licence in the event of nonpayment of any amounts properly due has Winter 2010/2011 2

3 been clarified in the 2010 suite of documents. It is hard to say what effect the introduction of the RIBA Agreements 2010 will have on the use of RIBA forms of appointment over other industry-produced forms. The new forms are intended to be more user-friendly than the 2007 editions, although potential users will probably still be swayed one way or another on the basis of the balance of risk within the appointments. Rightly or wrongly, the new forms are still perceived by some to be more pro-consultant than some of the alternatives in the market. As always, which form of contract to use will come down to a variety of factors, including the size, nature and complexity of the particular project. Settlement agreements: when do they become binding and irrevocable? In Silver Queen Maritime Ltd v Persia Petroleum Services plc [2010] EWHC 2867 (QB), the court considered (as a preliminary issue) whether or not a dispute between Silver Queen Maritime Ltd ( Silver Queen ) and Persia Petroleum Services plc ( Persia ) had been conclusively settled. The dispute related to payment for an oil exploration survey Silver Queen had carried out under its sub-contract with Persia. After Silver Queen had issued a claim for unpaid monies due, negotiations commenced and in July 2009 the terms of the settlement reached were recorded in a settlement deed. Persia executed the deed and sent it, via its solicitors, to Silver Queen for execution. Persia then however purported to withdraw from the exchange of the settlement agreement, saying that Silver Queen had failed to disclose negotiations with Persia s employer on the project for direct (discounted) payment of the unpaid invoices. Silver Queen went ahead and executed the settlement deed. During August 2009, Silver Queen nevertheless indicated that it would be willing to settle for a lower amount, provided payment was made by a certain date. When Persia did not take this offer up, Silver Queen sought to enforce the July settlement deed. The first issues which therefore arose were whether a concluded settlement had been reached in July 2009 and, if so, whether Persia could rescind the agreement for non-disclosure. Was there a concluded settlement? A deed differs from a simple agreement in that it requires both execution and delivery to be enforceable. Deeds can be delivered unconditionally (in which case they are irrevocable and take immediate effect), but it is often the case that they are instead delivered in one of the two following ways: as an escrow, meaning they are irrevocable from the time of delivery, but not taking effect unless and until the conditions of the escrow are fulfilled; or by being handed to an agent to be dealt with in a certain way, being revocable and of no effect until dealt with in that way, such as by meeting to exchange counterparts. The court held that the deed had been delivered by Persia as an escrow and the condition of the escrow (signing and returning by Silver Queen) had been fulfilled. Rejecting Persia s arguments that the deed fell into the second category, the court found no evidence that this was how Persia intended to proceed when it sent the executed deed to its solicitors, as it reflected the outcome of the settlement negotiations, and there were no outstanding issues to be resolved. It was clearly intended to be a deed binding on Persia. The court said there was no evidence of Persia wanting to reserve the right to revoke the deed once it had gone to Silver Queen and consequently Persia s purported withdrawal was not an effective revocation. If Persia had wished to reserve the right to revoke the deed before Silver Queen signed it, an express right to do so should have been included in the deed. Non-disclosure and/or unconscionable conduct? The court held that the July agreement could not be rescinded for non-disclosure and the Judge commented that, unlike in the context of insurance contracts or where a fiduciary relationship exists, the idea that the negotiation of agreements to settle hostile litigation generally gives rise to a duty of disclosure is misconceived. Persia s only ground for alleging unconscionable conduct was the non-disclosure and the court did not consider that the circumstances came anywhere near justifying the court to interfere with unconscionable bargains. A further settlement? On the last issue, the court held that Silver Queen s August 2009 indication that it would accept a lower amount did not amount to a legally binding agreement which would prevent it enforcing the terms of the July agreement. Winter 2010/2011 3

4 Adjudication Update Pay now, argue later The case of Volker Stevin Limited v Holystone Contracts Limited [2010] EWHC 2344 (TCC) is another example of the "pay now, argue later" principle of adjudication. The courts will only interfere with the decision of an adjudicator in circumstances where there are legitimate points as to jurisdiction and/or natural justice. Volker (as main contractor) terminated a subcontract with Holystone (as sub-contractor) and adjudicated over the financial consequences of that termination. The adjudicator decided that Holystone owed Volker money but Holystone failed to pay the sum awarded. When Volker commenced enforcement proceedings, Holystone challenged the adjudicator s decision on a number of grounds (discussed briefly below) but Coulson J held there were no jurisdictional or natural justice grounds as to why the adjudicator's decision should not be enforced, and Holystone's arguments were dismissed. Requesting and receiving new material - Volker served a spreadsheet of actual and forecast costs with its referral and the adjudicator sent a number of requests to Volker on quantum issues. Volker provided responses. Holystone did not respond until it eventually said it had insufficient time to deal with the new figures. Coulson J held the adjudicator had not exceeded his jurisdiction in asking for further information. The court said the adjudicator was "entitled, indeed obliged, to ask for it" and went further by saying the adjudicator must take the initiative and ask for information he wants. The amendment of the claim - The new material led Volker to reduce its claim by 66,000. It was held the adjudicator had jurisdiction to deal with the reduced claim as he was not limited by the notice of intention to a particular sum. Knowledge of a without prejudice offer - The issue of whether the sub-contract had been validly terminated had been the subject of an earlier adjudication. Between the two adjudications, the parties had met on a without prejudice basis. Holystone referred to this meeting in its response and in a letter to the adjudicator but then objected when Volker referred to the offer in a letter to the adjudicator. Coulson J was satisfied that a fair-minded observer would not conclude that the adjudicator was biased because the bulk of the adjudicator's decision had been produced before he became aware of the offer and the second adjudicator was bound by the first adjudicator's decision on liability. An adjudicator will not be biased simply because he knows one party has made an offer to settle a dispute. Alleged insolvency of Holystone - Holystone said that if the decision was enforced, this would push it into insolvency. Coulson J said that if a party alleges that it is in financial difficulties it must present evidence of that fact and even then it would only be relevant to an application for a stay of execution. It would be irrelevant as to whether the adjudicator's decision was enforceable. Construction Act alert Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (the LDEDC Act ) will introduce changes to the payment and adjudication provisions of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act ). It is currently anticipated that the LDEDC Act may take effect from as early as Spring The changes will apply to all construction contracts entered into on or after the effective date. We will report on the changes fully when the LDEDC Act takes effect but, briefly, the key changes are to include: removal of the requirement for construction contracts to be in writing (although adjudication provisions still must be); introduction of a statutory slip rule for adjudicators to correct mistakes; restricting parties ability to pre-agree who pays the costs of the adjudication; Winter 2010/2011 4

5 removal of pay-when-certified clauses which link to other contracts; overhaul of sections 110 and 111 with the introduction of new payment notices which either party may issue and the replacement of withholding notices with pay less notices; and improvements in the statutory right to suspend to allow suspension of some, rather than just all, services. Anchorage Austin Beijing Berlin Boston Charlotte Chicago Dallas Dubai Fort Worth Frankfurt Harrisburg Hong Kong London Los Angeles Miami Moscow Newark New York Orange County Palo Alto Paris Pittsburgh Portland Raleigh Research Triangle Park San Diego San Francisco Seattle Shanghai Singapore Spokane/Coeur d Alene Taipei Tokyo Warsaw Washington, D.C. K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit K&L Gates is comprised of multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in Taipei; a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong; a Polish limited partnership (K&L Gates Jamka sp. k.) maintaining an office in Warsaw; and a Delaware limited liability company (K&L Gates Holdings, LLC) maintaining an office in Moscow. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners or members in each entity is available for inspection at any K&L Gates office. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer K&L Gates LLP. All Rights Reserved. Winter 2010/2011 5