Construction & Engineering Legal Update

In this month's digest we highlight the following developments of interest:

• Contract formation: "Subject to contract" and contractual intention
• Credit crunch causes loss of profits claim to fail
• Main contractor liable for sub-contractor's failure to put in place and implement safe systems
• Inadequate warning did not oust the warranty of fitness for purpose
• Quantifying whole life carbon dioxide emissions of buildings
• Severability and enforcement of adjudicators' decisions
• Arbitration: Will an application for an extension of time for service of a defence in court proceedings amount to a "step in the proceedings"?

Contract formation: "Subject to contract and contractual intention

The Court of Appeal has recently confirmed that although the use of the phrase “subject to contract” is lawyers’ shorthand intending to indicate an absence of intention to be bound until the relevant document is signed, its absence does not necessarily mean an intention to be bound once oral agreement is reached.

In Investec Bank (UK) Ltd v A Zulman and D Zulman the defendants agreed in principle to amendments to personal guarantees they had given to the claimant bank.  The original guarantee could only be called upon when the debtor company’s liability to the bank exceeded £2 million.  Following a reduction in the company’s borrowing it was agreed that that should no longer apply.

The bank sent the defendants a draft amended guarantee which did not contain a requirement for a threshold level of debt to be achieved before the guarantee could be called upon. The draft guarantee also contained the following:

"YOU SHOULD SEEK INDEPENDENT LEGAL ADVICE BEFORE ENTERING INTO THIS GUARANTEE

SOLICITOR'S CERTIFICATE

I confirm that I have explained this document to the signatory(ies)

………………………… (Signature of Solicitor)

………………………… (Name of Solicitor and Firm)

………………………… (Date)"

The defendants did not sign the guarantee, the debtor company went into administration owing approximately £1.7 million to the bank, and the bank demanded payment under the amended guarantee.  The defendant’s defence was that since the company’s debt was less than £2 million, their guarantees could not be called upon.

The Court of Appeal held that it is important not to over-emphasise the phrase “subject to contract”.  In every case where a written agreement is contemplated, the question to be addressed is whether the parties:

(a)   intend not to be bound until the relevant document is actually signed, or

(b)   intend that the relevant document will be a record of an oral agreement already made.

The Court of Appeal held that it was clear that the defendants had to sign the new guarantee before they would be bound.  The most telling indication was that it was always contemplated that the defendants would obtain legal advice before they signed the guarantee.  The court said that this would be a pointless provision if the parties intended to be bound by the terms of an earlier oral agreement, since if their solicitor advised them against signing it the defendants had to be in the position of being able to take that advice.  The bank’s claim therefore failed.

Note that this case concerned an absence of a “subject to contract” clause.  As reported in our April Update, even if an unsigned contract contains a "subject to contract" clause which expressly states that it is not to be binding unless and until signed by both parties, the terms of the unsigned contract could become binding on the parties if, by their communications and conduct, they waive the requirement for signature.  This may not be what the parties intended.

Credit crunch causes loss of profits claim to fail

In Red River UK Ltd & anr v Anal Sheikh & anr, the court found the defendants liable for damages for breach of contract  in deliberately preventing the claimants' £1.75 million refinancing of a property in October 2007.  The claimants were awarded damages in respect of interest and other charges arising from the inability to complete the refinancing, but their claim for loss of profits that would have been made on redevelopment of the property failed.

The court had to consider whether Red River would have been able to redevelop the property, and if so on what basis, had the refinancing been completed.  The judge held that enhanced planning consent would have been obtained in around April 2008 at the earliest.  However, after considering the evidence, including the financial position of Red River and the claimants' unsuccessful efforts (with the assistance of various financial advisers) to obtain development finance in the deteriorating financial climate, the judge was not satisfied that Red River would not have been able to obtain development financing if the initial £1.75 million refinancing had gone ahead.  It followed that Red River would have been able to have redeveloped the property itself, even if the defendants had not sabotaged the initial refinancing.  The claim for loss of profit that Red River would have made on such a redevelopment therefore failed in its entirety.

Main contractor liable for sub-contractor's failure to put in place and implement safe systems

In Swain v Geoffrey Osborne Ltd and P J Brown Ltd, the High Court held that a subcontractor, who had day to day responsibility for operations on a site, was liable to a lorry driver who injured himself after slipping on mud on a footway.  The judge found that the driver slipped on a surface that gave rise to an unreasonable risk of slipping, that unreasonable risk having arisen from the failure of the system in place to ensure that the footway was kept clear of mud.  The judge said this was primarily due to the failure to ensure that wheels were washed before any lorry left the site, and also because of a failure to check the situation effectively thereafter.

The subcontractor had control of the site and the main contractor had an acknowledged supervisory role.  The judge accepted that the main contractor had substantially discharged its responsibility by contracting with the subcontractor to undertake the implementation of safety measures, and the subcontractor was a reputable contractor with which the main contractor had been involved on previous occasions.  However, because of its supervisory role, the judge held that the main contractor must bear some responsibility for having failed to ensure that the subcontractor put in place and implemented a satisfactory system. 

The judge was not called upon to apportion liability between the main contractor and the subcontractor, or to consider the contractual arrangements between them, but he indicated that the subcontractor who had day to day responsibility for the works on site would be likely to have to bear the greater proportion of responsibility.

Inadequate warning did not oust the warranty of fitness for purpose

In Baylis Farms Ltd v R B Dymott Builders Ltd (2010) (unreported, Lawtel), it was held that a warning given by a builder to its client about the adequacy of proposed drainage works had been insufficiently clear to oust the implied warranty of fitness for purpose and the builder was therefore liable in damages for the defective drainage installed.

Baylis asserted that a drainage run installed by Dymott had inadequate fall which caused the drainage system to overflow and there was a pipe leakage in the lavatory. The judge accepted that a conversation took place in which Dymott informed Baylis that the proposed new drain was inadequate but it would probably work. Baylis allegedly told Dymott  to continue with the work.

The High Court held (following Independent Broadcasting Authority v EMI Electronics Ltd 14 BLR 1 HL) that there was an implied warranty that work should be reasonably fit for purpose, unless the client was warned by the contractor and the contractor was instructed to proceed. In this case, the conversation in question did not amount to a clear warning by Dymott that the drainage might fall foul of the relevant building regulations, and Baylis should have been told that the drainage would not work. Dymott was therefore bound to put the defect right. (Details from Lawtel).

The Royal Institute of Chartered Surveyors has published a research report by Sturgis Associates which examines the issues associated with quantifying the whole life carbon dioxide emissions of buildings. 

The report does this in the context of UK construction legislation and practice, which currently calls for the partial inclusion of carbon dioxide generated by buildings, specifically operational carbon use.  The significant amounts of carbon used to make and maintain a building are ignored, as is the interrelationship between embodied (that used to create a building) and operational carbon usage.

The report proposes a solution through the use of a new, simple carbon metric known as Carbon Profiling which quantifies all sources of emissions associated with buildings.  Carbon Profiling links operational and embodied carbon usage so that they can be considered together, and evaluates the impact of time and of when the emissions actually take place. The report suggests that this enables efficient resource allocation decisions to be made, and reduces the regulatory burden of cost increases to developers and UK occupiers.

Severability and enforcement of adjudicators' decisions

In Cleveland Bridge (UK) Ltd v Whessoe-Volker Stevin Joint Venture [2010] EWHC 1076 (TCC), a dispute over a final account valuation was referred to adjudication.  The final account arose from a contract which comprised some works which were "construction operations" within the meaning of s105(1) of the Housing Grants, Construction and Regeneration Act 1996 ("the Act"), and some works which were excluded from the operation of the Act by s.105(2).

The adjudicator considered that she had jurisdiction to deal with the dispute, and gave a decision in respect of the whole dispute.

In enforcement proceedings in the Technology and Construction Court, the judge found that the adjudicator had jurisdiction to deal with that part of of the dispute which related to construction operations covered by the Act, but did not have jurisdiction to deal with the whole of the dispute.  The adjudicator's decision related to a dispute part of which was within her jurisdiction and part of which was outside her jurisdiction, and consequently the decision was not valid and enforceable.

The judge confirmed that if the adjudicator had made a decision on the whole dispute but had also made a decision which dealt only with the part of the dispute which was within her jurisdiction (as she had in fact been asked to do by the referring party), the decision on the whole dispute would not have been enforceable, but there would have been a valid, severable, enforceable decision on the part of the dispute that was within her jurisdiction.

This case serves as a reminder that a party referring a dispute to adjudication where the Act applies should limit the referral to disputes in respect of "construction operations" as defined by the Act.  If there is any doubt as to whether the dispute to be referred covers both "construction operations" and works which are excluded from the statutory definition of "construction operations", the adjudicator should be asked to provide a decision which deals separately with the items which clearly fall within the definition and those about which there is some doubt. 

Arbitration: Will an application for an extension of time for service of a defence in court proceedings amount to a "step in the proceedings"?

In Bilta (UK) Ltd v Nazir and others, the High Court had to decide whether a defendant company's application for an extension of time to serve a defence in court proceedings meant that the defendant had submitted to the jurisdiction of the court, and disabled that defendant from applying for a stay of the court proceedings in favour of arbitration proceedings.

The relevant part of section 9 of the Arbitration Act 1996 provides as follows:

"9. Stay of legal proceedings

1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may ... apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.

3) An application may not be made by a person before taking the appropriate procedural step (if any) to acknowledge the legal proceedings against him or after he has taken any step in those proceedings to answer the substantive claim".

After the court proceedings had been served on and acknowledged by the defendant, the defendant wrote to the claimant, reserving its position as to the jurisdiction of the court, explaining why it did not think it was liable to the claimant and seeking information about the claimant's conduct.  After receipt of that letter, the parties agreed to a consent orde for an extension of time for the defendant to serve his defence. The defendant then made an application to the court for a consent order.  When the defendant later applied for a stay of the court proceedings, the claimant contended that the defendant's application for an order for an extension of time amounted to a "step in the proceedings", with the consequence that the defendant was not entitled to a stay.

The judge held that it was entirely legitimate for the defendant to ask for more information about the claim before deciding whether to submit to the court proceedings or to seek to rely upon the arbitration agreement it maintained was in place. It was sensible to seek an extension of time for service of the defence in order to allow time for the defendant to receive and consider such further information. The defendant's conduct could not objectively be construed as indicating an election to waive any right it might have to seek a stay for the dispute to be referred to arbitration; nor could it be construed as an unequivocal representation that the defendant did not intend to contest the jurisdiction of the court. The making of the application was equally consistent with a desire to postpone any obligation to serve a defence until after the defendant had had a reasonable opportunity to decide whether or not to waive its rights to rely upon what it maintained was a binding arbitration agreement. The claimant's objection to the stay, based on section 9(3) of the 1996 Act, was therefore dismissed.

 

If you require any further information about any of the items mentioned, or if you have been forwarded this update by a colleague and would like to receive it direct, please contact David Kirkpatrick, Associate Solicitor and Professional Support Lawyer for the Construction & Engineering Department (0370 194 1663. email david.kirkpatrick@bevanbrittan.com).