02/11/2022
Whilst it has been known for several years that a number of buildings constructed under PFIs have faced issues with fire and other safety defects, a recent judgment is helpful both in addressing defences from contractors around fire strategy, and in reviewing the appropriate method of assessing damages – particularly where remedial works have not yet been carried out.
Background
The case concerned a PFI agreement entered into between St James’s Oncology SPC Limited (“Project Co”) and Leeds Teaching Hospitals NHS Trust (“Trust”) for the design, construction, operation and maintenance of the Oncology Centre as an extension to the Hospital (the “PFI Project”).
Project Co appointed Lendlease Construction (Europe) Limited (“Lendlease”) to design and build the Oncology Centre for a contract sum of over £173 million. Lendlease’s parent Lendlease Construction Holdings (Europe) Limited also provided a guarantee (the “PCG”) to Project Co. Practical completion was certified on 14 December 2007.
Both the PFI Agreement and the D & B Contract required compliance with various safety obligations, including compliance with Health Technical Memorandum 81 (“HTM81”), which sets out guidance on the design of fire precautions in new hospitals and/ or extensions to existing hospitals. However, shortly before practical completion, Revision 19 of the Fire Strategy (“Rev 19”) was issued. This changed earlier fire strategies by removing fire compartmentation.
Rev 19 was a critical part of Lendlease’s defence: Lendlease argued that the Trust had agreed Rev 19 and that this meant that not only was the construction was not defective, but that, to the extent that there was any departure from the technical specification in the D&B Contract, such derogation was approved. Lendlease also relied on the fact that a Building Regulations Completion certificate had been issued.
Deficiencies relating to fire stopping were identified in the Oncology Centre in 2014 following risk assessments and other works. Project Co obtained a fire compartment survey report in 2014, following which remedial works were commenced; however, during those works, further defects were identified. The defects included defective installation of transformers/generators, inadequate protection to power supplies, inadequate fire stopping and lack of fire protection in service risers. The defects were such that a single fire or failure could take out both the primary and secondary power supplies in the oncology centre.
On 11 December 2019 Project Co commenced proceedings against Lendlease for the recovery of the cost of the carrying out of remedial works. An outline remedial scheme was produced in 2021, but had not yet been carried out.
Decision
The Court dismissed Lendlease’s argument that Rev 19 was an agreed and justified fire engineering solution. The Court noted that Rev 19 Fire Strategy did not adopt a fire engineering approach, nor provide a standard of fire safety equal to or better than that provided for in HTM 81.
The Court further noted that there was nothing in the Review Procedure that could relieve Lendlease of its contractual design obligations, regardless of whether Rev 19 was agreed by the Trust. Further, the Trust had not approved Rev 19 in any meaningful sense: the lack of compartmentation had not been drawn to the Trust’s attention. The fact that Rev 19 had been complied with was therefore of no assistance to Lendlease.
The Court was also satisfied that the fact that a Building Regulations Completion certificate had been issued did not provide a defence: Regulation 17(4) of the Building Regulations 2000 makes clear that a certificate is not conclusive evidence of compliance. The Court therefore found that Lendlease was liable for the defects (and its parent company under the PCG).
In assessing quantum, the Court noted that the general rule is that the measure of damages to be awarded will be the cost of making the defects good, unless that cost is disproportionate. It is not an answer to a claimed remedial scheme that the defects could have been rectified through an alternative scheme at a lower cost; Lendlease was required to show that the costs of the scheme were unreasonable. The Court was satisfied from the expert evidence adduced by Project Co that the costs were reasonable.
Lendlease also sought to argue that the Trust and Project Co did not intend to carry out the works in accordance with the remedial scheme put before the Court, but that Project Co would, in fact, wait to see what quantum was awarded, and then decide what work to carry out.
Again, it was not a defence for Lendlease to say that the works could have been carried out more cheaply had remedial works been undertaken as soon as the defects were identified. The Court referred to an earlier case of Dodd Properties v Canterbury City Council:
“. . . where there is a material difference between the cost of repair at the date of the wrongful act and the cost of repair when the repairs can, having regard to all the relevant circumstances, first reasonably be undertaken, it is the latter time by reference to which the cost of repair is to be taken in assessing damages . . .".
In this case, the Court was satisfied that there was ample evidence that delays in carrying out remedial works were not due to Project Co not intending to carry out such works, but because of the very real need to discuss those works with the Trust.
Discussion
The judgment demonstrates the difficulty for Defendants trying to rely on waiver or estoppel arguments to circumvent clear contractual obligations in relation to fire safety and other compliance issues. Defendants seeking to rely on such arguments will need to show categorically not only that documents were approved by the Claimant and/ or affected party, but that the Claimant/ affected party was fully aware of the contents of such documents. Defendants are also likely to have to overcome contractual hurdles such as no oral variation clauses, or in this case the clear requirements of the Review Procedure.
The judgment also shows the importance for Claimants of planning a remedial scheme which maximises the possibility of recovering costs in litigation. The scheme does not have to be the cheapest scheme available; it does, however, have to be reasonable. In this case, expert evidence was adduced. The use of experts is vital. Privilege can be maintained over draft reports where experts are instructed by solicitors.
Discussions around remedial schemes can also cause issues around legal privilege: advice should be sought as to how to ensure that this is maintained.
Public authorities and Project Cos who become aware of defects should also seek prompt advice on limitation, to ensure any claim is not time-barred. Whilst the judgment shows that remedial works do not have to be undertaken straight away (a helpful message for cash-strapped public bodies), it is critical to understand the time limits for bringing a claim, and to design strategy accordingly.
