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Construction case update: February 2016

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Burgess & Anor v Lejonvarn [2016] EWHC 40 (TCC)

The recent case of Burgess & Anor v Lejonvarn [2016] EWHC 40 (TCC) highlights that even where a professional consultant renders their services gratuitously, a tortious duty of care will still arise and continue to be owed to recipients of their advice or services.

The key facts

The claimants, Mr and Mrs Burgess (the “Claimants”) purchased a property in March 2010. The Claimants were good friends with their former neighbour Mrs. Basia Lejonvarn (the “Defendant”), an architect with numerous years of experience working in the industry.

In 2012, the Claimants decided to extensively landscape the garden of their new home (the “Project”). Without concluding a formal contract, the Defendant assisted by providing project management services with a view to providing subsequent design input as and when the Project reached a more advanced stage. The Claimants became concerned about the escalating costs and the quality of the services being provided. The Defendant’s involvement in the Project was subsequently brought to an end and an alternative landscape designer sought to complete the Project.

The Claimants alleged that much of the works performed during the Defendant’s involvement were defective, which the Defendant argued she was not responsible for. The Claimants therefore decided to sue the Defendant in contract and in tort. A claim was brought for the additional costs incurred by the Claimants for completion of the Project, valued at a maximum of £265,000.

The court examined various key issues in order to establish the extent of any duties owed by the Defendant, including:

(i) whether a contract was concluded between the Claimants and the Defendant and if so, on what terms?;

(ii) whether the Defendant owed the Claimants a duty of care in tort and if so, what the nature and extent of that duty actually was?

The decision

The court held:

- in response to point (i) above, that no contract had been agreed between the parties and thus there were no terms governing the parties’ relationship. This was because the essential requirements for the formation of a legally binding contract (notably the existence of an offer, acceptance and consideration) were not present; and

- in response to point (ii) above, the Defendant, in assuming certain responsibilities over the Project, whereby a special skill was being exercised by her as a professional upon which the Claimants had placed reliance, did indeed owe a duty of care in tort which extended to protecting the Claimants against economic loss in relation to both the advice and services that she had rendered.

Practical implications/comment

Although it was recognised by the court that the provision of brief ad hoc advice or services on an occasional basis by a professional in an informal context, will be unlikely to attract the same determination, this decision nevertheless highlights the potential risks associated with a professional consultant providing informal advice without entering into a formal, legally binding written contract. It also underlines the importance of exercising care in order to distinguish between social and professional relationships, where no formal contract has been entered into.

This decision will likely result in professionals adopting a more cautious approach when rendering what may be construed as professional assistance, in an informal context. This issue will be particularly pertinent on relatively small scale, domestic (as opposed to commercial) projects, where this scenario is arguably more likely to arise. 

Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWHC 168 (TCC)

A contractor will have no contractual right to make an interim payment application, or to be paid for such, where a schedule of interim payments has been agreed. Therefore any project overruns resulting in the expiry of an agreed payment schedule will potentially render a contractor unable to request further interim payments until practical completion has been achieved, at which point only the final payment mechanism may be utilised, in order for the contractor to obtain payment.

The key facts

Grove Developments Ltd (the “Employer”) and Balfour Beatty Regional Construction Ltd (the “Contractor”) entered into a JCT Design and Build Contract, 2011 Edition with bespoke amendments, with a value of approximately £121 million (the “Contract”). The Contract included amendments which had been made to the standard form payment provisions which resulted in the parties opting for staged payments which resulted in agreement of a payment schedule comprising 23 interim payment applications, to be made between September 2013 and July 2015.

The works undertaken by the Contractor did not reach practical completion on the date set out in the Contract. The parties had therefore in advance of the expiry of the payment schedule, sought to reach agreement on a revised schedule, but were unable to do so in time. In August 2015 the Contractor issued interim payment application 24 for the sum of approximately £23.16 million, despite no agreement having been made as to the mechanism for making future payments beyond the 23 interim payment applications provided for under the Contract.

The Employer argued that the Contractor was not entitled to issue any interim applications beyond the 23rd provided for under the payment schedule. The Contractor, assumed the validity of their 24th payment application and thus contended that the Employer had not served a payment notice or a payless notice within the required time frames and that as a result, it was owed the amount referred to under interim payment application 24.

The decision

In Part 8 declaratory relief proceedings, the court held that the Contractor had no contractual right to make or be paid for any interim payment application beyond the 23rd application provided for under the Contract. Significantly, he concluded that:

- such a future payment provision could not be implied into the Contract, because the possibility of providing for further interim payments as a consequence of a delay in reaching practical completion, was something which the parties could have negotiated prior to agreeing to the original payment schedule; and

- the payment procedures as set out in the Scheme for Construction Contracts 1998 could not apply to future payments due to the parties having already agreed a schedule pursuant to which payments would be made. Further interim payments to the Contractor was subject to the parties agreeing the terms upon which they would be made, which they had already been unable to do.

Practical implications/comment

The decision rendered by the court may raise concerns for some contractors who have already agreed to a set of payment terms, including the provision of a fixed payment schedule, that does not adequately foresee the possibility of project overruns or delays. It emphasises the importance contractors should place on ensuring they agree a payment schedule that adequately considers all scenarios, including those that are both within and beyond their control, and furthermore the impact that a deviation from this may have upon their cash flow.

As a result, a contractor’s potential financial exposure to sub-contractors and third parties further down a project supply chain will increase if there is a deviation beyond a pre-agreed staged payment schedule, meaning that should they fail to agree a revised payment schedule prior to the final interim payment application date, they will have to wait until the project has achieved practical completion, before they can be paid which could expose them to liability vis-à-vis third parties.

Where a contractor believes that this situation may arise and that delays are foreseen, they should consider renegotiating their payment terms and seek to agree a revised payment schedule with their employer which properly aligns with the revised project programme. This should be undertaken as early as possible prior to the expiry of their current payment schedule.

Lukoil Mid-East Ltd v Barclays Bank Plc [2016] EWHC 166 (TCC)

The case of Lukoil Mid-East Ltd v Barclays Bank Plc [2016] EWHC 166 (TCC) raised a short point of construction in relation to a contractor’s on demand guarantee and the circumstances in which an employer in a construction and engineering project may be entitled to make a demand against this.

The key facts

An on demand bank guarantee (the “Guarantee”) was issued by Barclays Bank Plc (the “Defendant”) pursuant to an oil drilling contract valued at USD 142.3 million (the “Contract”) entered into by its client, Baker Hughes Asia Pacific Ltd (the “Contractor”) and Lukoil Mid-East Ltd (the “Claimant”). The Guarantee was worth 5% of the Contract value which equated to a value of approximately USD 7.1 million (the “Guarantee Amount”). A number of amendments had been subsequently agreed in particular in relation to the date of expiry of the Guarantee.

In October 2015 the Claimant made a written demand for the Guarantee Amount, for breach by the Contractor of their obligations under the Contract. This arose as a result of the Contractor’s failure to achieve any of the key milestone dates which had been agreed. Accordingly the Claimant demanded liquidated damages of approximately USD 14.2 million, a portion of which could have been paid by calling upon the Guarantee Amount.

The key provisions of the Guarantee required:

(i) the Defendant to pay upon receipt of a demand by the Employer “[…] without any disputes or objections, any amount or amounts within the limit of USD 7,115,034.00  […] not requiring from you [the Claimant] to provide any proof or justification of your request for the amount defined in this document”;

(ii) payment of the Guarantee Amount to be made in full at the Claimant’s first written request if the Contractor fails to fulfil the Contract “[…] on condition that no amendment has been made to the Contract […] impacting the timely performance of the Works under the Contract”; and

(iii) (in apparent contradiction to point (ii) above) that “[…] no amendments nor addenda to the Contract, nor any contractual documents made by you and [the Contractor] shall relieve us [the Defendant] from our responsibilities under this Guarantee, and we hereby waive the right to be notified of such amendments or addenda”.

The Defendant rejected the validity of the Claimant’s on demand request, arguing that the terms of the Guarantee, required the Defendant to pay the Claimant upon their first written request provided that no amendment had been made to the Contract which impacted the timely performance of the Contract, and furthermore that these words needed to have been expressly stated within their written request.

The decision

The court held that the Claimant’s demand to call on the guarantee was valid, concluding that:

(i) the Guarantee must be interpreted as a whole with individual words or clauses interpreted with an appreciation for the broader context in which it had been drafted. The requirement for no amendment to have been made to the Contract impacting its timely performance, was considered irrelevant to the Defendant’s obligation under the guarantee and lacked “commercial or principled legal justification”;

(ii) given that the Contract actually provided for a mechanism for varying the scope of works under the Contract, which would naturally have had an impact upon the timely performance of the works “it would be almost inconceivable that in the course of a huge construction contract such as the Contract, there would be no changes to the scope of the Works that would impact on timely performance”. Thus the Defendant’s interpretation would, if deemed valid, have rendered the Guarantee “virtually useless” as the Employer would have essentially never been able to make the written statement that was required to constitute a valid demand, pushing the Guarantee’s interpretation into what the court described as “[…] the realms of commercial absurdity”.

Practical implications/comment

In a global climate of increasing financial pressures and uncertainty, performance bonds are a key component of construction and engineering projects. A disagreement over the validity of a payment demand can be a costly and time consuming issue to resolve. This case therefore reiterates the importance of ensuring that performance bonds are carefully negotiated and clearly and comprehensively drafted.

Where there is scope for interpretation, the courts have illustrated that they will generally adopt a pragmatic and ‘common sense’ approach, one which seeks to uphold the broader commercial context within which the security has been provided.