Construction Claims: Current Practice and Case Management

Jeremy Hackett

• Publisher: Informa Law from Routledge
• Year: 2021
• ISBN:
  9781000341560
• Edition: 1
• Topic: Law
• Subtopic: Construction Law
• Index: Law

This book discusses practices in preparing and defending claims, bringing in funding, insurance and design team issues. It brings together the basic knowledge from the principal post-1996 legislation required by practitioners, together with an outline of the options and risks.

CHAPTER 1

INTRODUCTION

1.1 AN ENGLISHMAN’S WORD

The world that we now live in, and in particular the construction world, has become a very fractious place, where the written word and proof of posting, or even time of transmission, can be everything when it comes to a contract dispute. With the inevitable progress to the exchange of information by electronic transfer the day of the paperless office, and even the paperless project, is promised by the disciples of Mr Bill Gates—but can that really happen I ask as I start writing this book “homeworking” on a laptop from the middle of peaceful nowhere in South West France?

One can always remember the hot summers of one’s youth but my abiding memory of my father was his disillusionment with the rapid decline in business ethics when he returned to trying to run his own company after the Second World War in 1945: “… but in the thirties an Englishman’s word was his bond. It was respected throughout the business world,” he would say. For my father, written contracts, before putting the order in hand, were only for matters of real necessity, like buying or selling a house—and so he learnt the hard way with two bad debts in quick succession.

In the late 1950s my father used to sail at Shepperton with an architect who at one time lived on an old Thames barge and one day my future career was decided: “If your lad is good at maths and Latin, why not put him into quantity surveying—that is where the money is now, not in Architecture.” A few years later I might have gone to Oxford or Dublin to study law, but funds did not permit and I enrolled at The College of Estate Management, then part of London University and located in Kensington, to study quantity surveying.

Having now visited various places in the world in the course of business I can look back on a colourful career, and have always had a keen interest in the legal aspects of construction contracts.

However, like the late Lord Denning, I have never accepted that lawyers necessarily know all the answers, or at least provide answers that acknowledge the requirements of justice in the real world. So with due deference to my various legal friends I apologise in advance if some of my opinions in later Chapters are strong meat, but there has to be a dialogue between those of us practitioners, who have to operate major contracts, and those who advise how such contracts should be set up—or, when things go wrong, should have been set up!

1.2 THE COLLAPSE OF TRUST

When I started out as a quantity surveyor the JCT Standard Form of Contract 1963 was the “norm” in the building industry—with any specialist trade usually being the subject of a prime cost (PC) sum entered in the Bills of Quantities sent out to tender to secure the selection of the main contractor. The specialist work, when designed, would then be separately billed and tendered, and then the successful bidder would be appointed as a nominated sub-contractor—simple really, except they now call it “Management Contracting”.

As work progressed all such nominated sub-contractors’ work would be valued each month and the value declared on the back of the standard RIBA Interim Valuation Certificate, and this would be copied to the firms in question, i.e. they knew what had been certified each month, and when. Accordingly, if they were then not paid by the main contractor they could demand to know why not, and, in extremis, get paid direct by the employer.

This system worked very well for many years until in the early 1970s there was a minor recession and there were various nominated sub-contractor insolvencies. As such, employers and their Architects had to renominate, which not only went totally against the grain, but horror of horrors, more often than not Architects also had to grant Extensions of Time under the contract to cover the lost time whilst a replacement sub-contractor was appointed—usually at a premium cost. Usually, there would then be a claim for Loss and/or Expense.

The JCT in their infinite wisdom then tried to dump the sub-contractor insolvency risk on the main contractors and invented the obviously artificial dodge of the employer and the design team selecting a preferred specialist—with the main contractor then having a notional right of rejection before taking on the chosen specialist as their own domestic sub-contractor.

Thus specialist sub-contractors, typically cladding or finishing trades, were appointed as domestic sub-contractors, with no declared monthly work values on the back of the Architect’s Interim Payment Certificate—so they had no better contractual status or better certainty of payment than the main contractor’s own appointed domestic sub-contractors, e.g. groundworkers.

Having been appointed on a domestic sub-contractor basis, specialist firms often found themselves in what has been crudely described as a “mushroom farm” scenario, i.e. kept in the dark as to what had been certified for them and paid in good faith by the employer to the main contractor. All too often the sub-contractors were not paid until much later, and then only part paid without good reason, yet they were expected to perform as and when it suited the main contractor.

A simplistic statement no doubt, but one that increasingly came to reflect the frustrations of many genuine specialists. Such firms would often be kept at arm’s length by main contractors as regards payment—when main contractors needed to protect their own overdraft position, particularly when the money supply became very tight in the major recession of the late 1980s and early 90s.

In short, for many an unscrupulous main contractor the temptation was too great, and with specialists’ payments no longer declared on the back of the Architect’s monthly Interim Payment Certificate, the specialist simply had no knowledge of what had been certified in his favour, or when. Accordingly, cash flow down the supply chain broke down on many projects. As projects increasingly overran on both time and cost, the employers, and in particular developers and funders, were the real losers and disputes proliferated—all because main contractors were quite improperly using sub-contractors as free banks and the previous basis of trust had broken down.

1.3 THE PROLIFERATION OF MULTI-PARTY DISPUTES

In the meantime the law had got itself into difficulties over who could recover what loss. This situation arose out of a series of cases concerning the duty of Local Authorities to properly consider the known history of sites when granting planning consent, and then when approving the design and installation of foundations under the Building Regulations to have properly inspected the work in progress.

In Dutton v. Bognor Regis UDC (1972) a second owner recovered the costs of major repairs when it was found that her house had been built on the site of an old rubbish tip, and in consequence the standard shallow strip foundations were inadequate. However, one of the Lords Justices in his speech volunteered the opinion—not directly relevant to the facts of the case—that had the Plaintiff claimed on the basis of diminution in market value, then he and his colleagues would have been in some difficulty, so setting the hare running concerning the principle of economic loss.

Then came Anns v. Merton LBC (1978) where a second lessee proceeded against the Local Authority, despite the fact that the builder retained the freehold, when major cracks appeared in his flat. Tried as a preliminary issue, the key question was: on the assumed basis that the Local Authority Building Inspector had been negligent in approving the foundation design, could he have reasonably foreseen that a second lessee might suffer injury or loss? Answer: Yes. The court followed Dutton v. Bognor and awarded full repairing costs to the Plaintiff against the Local Authority.

Presumably in total ignorance of the above cases, which took some time to reach judgment and publication, another houseowner, this time a first owner, on realising his property was affected by subsidence, obtained an estimate of £45,000 for the repairs. He then did the sensible thing: not wanting to live with all the uncertainty and mess he sold on, selling for £35,000 less than market value, and mitigated his loss by £10,000. Presumably the builder was not in business any more, so the owner then proceeded against the Local Authority for the lost £35,000.

So Murphy v. Brentwood Council (1991) came to court, the High Court finding for the Plaintiff following both Dutton and Anns, £38,777 being awarded—but the Local Authority appealed on the basis of the gratuitous opinion in Dutton concerning diminution in market value, and therefore the concept of economic loss. Unfortunately for Mr Murphy, or his insurers, the Court of Appeal and subsequently the House of Lords found for the Local Authority on the basis that:

1. Mr Murphy had only suffered “economic loss”, as opposed to physical damage or injury.

2. Because the defects had become apparent before physical injury or loss to property had occurred, then no negligence had occurred sufficient to bind the LA under the previously established principle of foreseeable damage given a lack of duty of care.

3. To allow such a claim would create far too wide a class of action.

So the principle of economic loss was established and, importantly, the rule established that economic loss can only be recovered under the law of contract, and not in the tort of negligence. Thus if parties C or D (first and second lessees) in the development chain suffer economic loss due to the default of party B (the contractor), who was only in contract with party A (the employer), then there can be no right of recovery for C or D against B, either in contract or tort.

The consequences of this decision for the commercial property world have been profound. What if significant defects are found after completion, or after the development had been sold on, or after one of the links in the development chain had gone out of business?

So the Collateral Warranties industry was born, legally linking third parties to first parties, who otherwise were not in contract with one another, just in case an issue of economic loss should arise at some future date—but more about Collateral Warranties and third party rights later in the book.

As a direct result of the concept of economic loss being unrecoverable under the law of tort, but recoverable under the law of contract, the practice of alternative pleadings became the “norm”, particularly in cases where the guilty party had yet to be identified.

1.4 ARBITRATION V. LITIGATION

Given that for every head contract between an employer and a main contractor there are probably 12 or more major sub-contracts—and that each of these is sourced by various labour or material purchase orders, even a relatively modest project has an extended supply chain. It follows that a dispute—usually about payment—can occur at any of the various links in the supply chain.

The main contract and the next level down of major sub-contracts will usually be secured with formally completed contracts, with back-to-back provisions concerning monthly payments. Usually these will also dictate whether any dispute is to be resolved by arbitration or litigation. However, at the next level down in the supply chain the placement of sub-sub-contracts is often relatively informal, i.e. no formal offer and acceptance in place, so when a dispute arises the first question is: arbitration or litigation?

In Northern Regional Health Authority v. Derek Crouch Construction Ltd (1984) the courts had come down firmly in favour of arbitration provided there was written agreement to an arbitration clause, so the existence of a completed contract incorporating such a clause was inevitably the starting point in any dispute. As such the existence of a written contract, and whether this incorporated an effective arbitration clause, often had to be resolved at considerable expense before even the forum for the main dispute could be determined.

Most disputes originate over claims for additional money or additional time, and the party trying to defend a position will naturally look to the next party up the supply chain, i.e. rarely will a dispute involve just two parties. Accordingly, there were often real problems of agreeing whether arbitration or litigation should apply if the middle party had an arbitration clause up the line, but no arbitration clause down the line.

Inevitably legal points on the existence or otherwise of a properly completed contract would be taken by the party wishing not to be parted from their money, and until the Arbitration Act 1996 there were few free-thinking and robust arbitrators who could handle a multi-party arbitration.

As most standard forms of contract, prior to the wholesale updates of 1998 prompted by the introduction by statute of Adjudication, provided only for arbitration, the perceived wisdom was that it must necessarily be the preferred option. Consequently, rarely were such standard arbitration clauses deleted in head contracts, and when a dispute arose litigation was often not an option—until Crouch was overturned in the courts in 1998.

In considering the relative merits of the two processes, prior to the late 1990s, one might have listed the following aspects:

• – In favour of arbitration
  • A private procedure.
  • Parties had the opportunity to choose own “judge”.
  • Parties could choose own venue.
  • Parties could in theory agree own timetable.
  • Technical matters would be more familiar to a technical “judge”.
  • Arguably a simpler, quicker and therefore more cost effective process.
• – In favour of litigation
  • A public procedure—sometimes a tactical advantage to the party claiming money etc.
  • A free court and a free judge—paid for by the taxpayer.
  • More certain quality of decision.
  • Defendants less likely to abuse timetable.
  • Ability to handle multi-party disputes.
  • Less likelihood of appeal or non-compliance with judgment.

However, there was one major disadvantage to litigation—the problem of getting a trial date allocated in the old Official Referee’s Court on a first fixture basis, and then Counsel on both sides actually being available when eventually required. Usually one’s case would get a provisional date allocated, on a double or treble booking system, given that other cases might settle in the meantime—so with a trial date often two years away one would get on with other business, leaving the dispute unresolved. Not only would the removal of pressure greatly lessen the incentive to settle, but one could never be sure that one’s key witnesses of fact would still be available, w...