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Asia Pacific – 2013’s Top 10 Construction Cases.

13 January, 2014

 

Legal News & Analysis – Asia Pacific 

 

As 2014 begins, we present a Top 10 of the past year’s other construction-related cases that you should be aware of as you negotiate contracts and manage disputes.


10. When Does A New Cause Of Action Arise Out Of Facts Already In Issue?

 

Ensuring claims are brought within the applicable limitation period is often a challenge, but s35 of the Limitation Act 1980 (or similar provisions) can help parties where a new cause of action arises out of the same or substantially the same facts as are already in issue. The section deems such new claims to have commenced on the same day as the existing action. However, Co-operative Group Ltd v Birse Developments Ltd [2013] EWCA Civ 474 showed that certain sets of facts might make it harder to fall within s35. Birse was contracted by Co-operative to design and build two warehouses. Co-operative issued a claim form in respect of various defects in the concrete floors in the warehouses. The form was issued within the applicable 12-year limitation period. Co-operative subsequently sought leave to amend the particulars of claim as further defects became apparent. It came to light that the steel fibre content of the floors was inadequate and that the concrete floors would need to be replaced entirely. Birse argued that the amendment introduced a new cause of action, which was out of time. Co-operative argued that even if it amounted to a new cause of action, it was one which arose out of the same or substantially the same facts as were already in issue. The Court of Appeal held that the proposed amendment was not permissible. While the original allegation was for a group of relatively disparate defects in the floor, capable of disparate replacement and repair, the new allegation was in relation to a systemic defect, which would result in complete condemnation and replacement. The proposed amendment involved separate and distinct allegations of breach and separate and distinct allegations of loss, which in turn constituted an entirely new and different cause of action. If concerns over the steel fibre content of the floors were added to the claim, it would require a major investigation into the original design and structural adequacy of the floor.


9. The Perils Of Applying For Insurance Cover

 

Insurance is a topic close to the hearts of all those engaged in construction disputes, but Genesis Housing Association Ltd v Liberty Syndicate Management for and on behalf of Syndicate 4472 at Lloyd’s [2012] EWHC 3105 (TCC), a decision that was recently upheld by the Court of Appeal, is a reminder that even at the outset the utmost care is needed when completing insurance proposal forms. Paddington Churches Housing Association, which was amalgamated into Genesis in 2011, had in 2007 entered into an agreement with Time and Tide (Bedford) Ltd for the letting and refurbishment of a building as affordable housing. In 2007, Paddington also entered into a building contract with Time and Tide (Bedford) Ltd (wrongly named as Time and Tide Ltd). As part of these arrangements, Time and Tide (Bedford) Ltd were to approach MD Insurance Services, who administered policies underwritten by Liberty, for insurance of the building and against Time and Tide (Bedford) Ltd’s insolvency. An insurance proposal form was filled out by MD during a meeting with Time and Tide (Bedford) Ltd (acting as agent for Genesis). That form, signed by both parties, contained a basis of the contract clause, commonly found in proposals for contracts of insurance, declaring that the information provided by Genesis in the form, to the best of its knowledge and belief, was correct and complete in every detail and formed the basis of the insurance contract. The form wrongly identified the builder as Time and Tide Construction Ltd. Following the insolvencies of Tide (Bedford) Ltd and Time and Tide Construction Ltd, Genesis sought an indemnity under the insurance contract. Mr Justice Akenhead affirmed the established position that if an insured signs a proposal form, as the basis of the insurance contract, confirming, to the best of its knowledge or belief (or absolutely) that the contents of the document are true, the insurance contract will be void if the contents are untrue.


8. Good Faith Interpretation

 

The impact of express good faith provisions on contractual interpretation has been a subject of extensive comment.  In Mid Essex Hospital Services NHS Trust v Compass Group UK the English Court of Appeal considered how a good faith provision impacted on express provisions of a contract dealing with the imposition of deductions under a long term service contract.  The Court overturned the decision at First Instance.  It considered that the specific mechanism provided in the contract did not involve an element of discretion.  In these circumstances no term could be implied to restrain the employer from operating the provision in an arbitrary, irrational or capricious manner.  The good faith obligation provided in the contract was read narrowly based upon its specific purpose.  The contractor’s claim that the employer had repudiated the contract through its operation of the provisions was rejected.


7. Assistance On Criteria For Assessing NEC3 Compensation Events


As more and more projects adopt the NEC3, this standard form has increasingly begun to appear before the courts. Atkins Ltd v Secretary of State for Transport [2013] EWHC 139 (TCC) helped us understand that where similar defects are encountered in a long term maintenance contract containing NEC3 compensation event wording, each defect and its underlying cause must be examined individually to satisfy the test of the defect being one which an experienced contractor would have judged it unreasonable to allow for in its pricing. Atkins had been engaged to maintain UK roads, which included repairing potholes. Before an adjudicator and then an arbitrator, Atkins argued it was entitled to extra payment for every pothole over the number that an experienced contractor should reasonably have allowed for in its pricing, pursuant to the compensation event provisions, meaning that all additional defects were compensation events. The court observed that this would tip the contract heavily in Atkins’s favour. The judge found that the wording in the compensation event clause had to be applied to each pothole individually, given that the clause in no way suggested that the number of defects was an important element in the compensation event equation. Whether the test set out in the clause was passed or not would depend on the foreseeability of the underlying cause of the defect. In lump sum contracts, the parties collectively take the risk that defects will be more or less in number and expense than the lump sums may allow for.


6. Stick To Agreed Forms Of Demand When Calling Bonds


Bonds and guarantees generate a steady stream of litigation every year. Sea-Cargo Skips AS v State Bank of India [2013] EWHC 177 (Comm) reminded us that a demand made under a guarantee should follow closely the demand wording set out in the guarantee, particularly so that a guarantor to whom an existing guarantee is assigned can easily verify whether all the elements required in the demand are present. Sea-Cargo claimed against SBI under a refund guarantee provided by SBI in connection with significant delay to completion of a contract for the building of a ship to be purchased by Sea-Cargo. In order to receive payment under the guarantee, Sea-Cargo was required to confirm that the construction of the vessel has been delayed by more than 270 days, since this entitled it to cancel the purchase under a specific article of the contract. Subsequently, Sea-Cargo assigned its rights under the guarantee to an entity which had financed the purchase, cancelled the purchase and made a demand under the guarantee. When making the demand, Sea-Cargo stated that there had been a delay of 270 days in the delivery of the vessel, but referred neither to the stage at which the delay occurred nor to the specific article in the contract which allowed it to cancel the purchase. Mr Justice Teare in the Commercial Court held that the demand was ambiguous and thus invalid on the ground that it failed to track the demand wording set out in the guarantee and refer to the specific article in the contract, even though it was common ground that the demand did not have to repeat the precise words of the refund guarantee.


5. Priority Of Documents Clauses May Take A Back Seat

 

Standard forms keep on evolving, but old chestnut issues don’t stop arising. An innocuous priority of documents clause came under the TCC’s scrutiny in RWE Npower Renewables Ltd v JN Bentley Ltd[2013] EWHC 978 (TCC). As the priority of documents clause in this case began by stating that all the documents were “deemed to form and be read and construed as part of this Agreement”, the contract should be construed by reference to all the documents forming part of the contract. Only if there was an ambiguity or discrepancy between two or more contract documents once the court had construed the contract in the usual way would the court need to consider the order of precedence. The court was clear that a contractual construction exercise should not be carried out on each material contract document, with the results of that exercise then being compared to see if there is an ambiguity. Where it is possible to identify a clear and sensible commercial interpretation from reviewing all the contract documents, which does not produce an ambiguity, a priority of documents clause may not be needed to interpret a contract.


4. Protection By Exclusion Clause Lost


Judicial consideration of exclusion clauses sometimes means that parties find, as in Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd [2013] EWCA Civ 38, that they have lost the protection they thought the clause gave them. Kudos entered into a five-year catering services agreement with MCCC, a clause of which provided that “Kudos hereby acknowledges and agrees that MCCC shall have no liability whatsoever in contract, tort (including negligence) or otherwise for any loss of goodwill, business, revenue or profits, anticipated savings or wasted expenditure (whether reasonably foreseeable or not) or indirect or consequential loss suffered by Kudos or any third party in relation to this Agreement and the limitations set out in this condition shall be read and construed and shall have effect subject to any limitation imposed by any applicable law, including without limitation that this Condition shall not apply to personal injury or death due to the negligence of MCCC”. The agreement ended after three years, with both sides alleging repudiatory breach. Kudos sued to recover its resulting loss of profit. The judge gave a preliminary ruling on the interpretation of the clause, ruling that it excluded all liability for loss of profit. Kudos’s appeal to the Court of Appeal was successful. The Court criticised the width of the exclusion. If the contract were performed, Kudos would earn a share of any profits. If MCCC were not liable for loss of profit, there was no sanction for non-performance. Taken literally, the clause could deprive Kudos of any sanction for MCCC’s breach of contract. MCCC had not put forward a commercial justification for such a wide exclusion of liability and such a literal interpretation of the clause would be contrary to business common sense and therefore cannot have been what the parties intended. The clause applied only to MCCC’s liability for defective performance, not for its refusal to perform.


3. English Courts Can Grant Anti-Suit Injunctions To Restrain Non-EU Proceedings


Those who recall the European Court of Justice’s decision in West Tankers Inc v Allianz SpA (C-185/07) which held that the courts cannot give injunctive relief in relation to foreign proceedings within the Brussels/Lugano regime, breathed a sigh of relief in June when the Supreme Court in Ust-Kamenogorsk Hydropower Plant JSC v AES Ust-Kamenogorsk Hydropower Plant LLP [2013] UKSC 35 made it clear that in foreign court proceedings outside the EU, the English courts have jurisdiction to grant anti-suit injunctions to restrain such proceedings in breach of an arbitration agreement, including when no arbitration has been commenced or is in prospect in the jurisdiction of arbitration seat.


2. Changes To The Test For Repudiatory Breach?


The Court of Appeal in Ampurius Nu Homes Holdings Ltd v Telford Homes (Creekside) Ltd [2013] EWCA Civ 577 in May indicated a shift in the way the judiciary assess whether a breach is sufficiently serious to amount to repudiation. Judges are looking to the overall purpose of contracts to reach their decision. Ampurius entered into an agreement for lease for four mixed-used blocks with Telford, a property and construction company. Blocks C and D were due to be completed in July 2010 and blocks A and B in February 2011. The work on blocks C and D fell behind schedule but was completed in April 2011. Telford halted work on blocks A and B in March 2009 due to funding difficulties. Unknown to Ampurius, the suspended work was resumed on 4 October 2010. On 22 October 2010, Ampurius notified Telford of its intention to terminate the contract for repudiatory breach. The judge held that Ampurius was entitled to terminate because Ampurius would receive only two of the blocks and continued building work on blocks A and B could interfere with Ampurius’s efforts to market units in blocks C and D. He found that repudiation had occurred by July 2010, as it would then have been clear that completion could not have taken place close to the target date. Telford’s appeal was allowed. The judge had not given adequate weight to the ultimate aim of the contract, namely 999-year leases. He had concentrated on the expected effects of the marketing period. The judge had also been impressed by the four blocks being envisaged as a single project and by the potential that subletting might be interfered with if Ampurius was compelled to take two blocks while building work continued on the remaining blocks. However, the contract had envisaged a staged handover and seven months’ worth of such interference, so it overstated the case to say that the consequences of any gap between handover dates would be so serious as to amount to repudiatory breach. As Ampurius also accepted that the delay had not caused any actual loss, the future loss of £100,000 that Ampurius was seeking to avoid had to be considered. Set against a purchase price exceeding £8,000,000, and overall development costs exceeding £100,000,000, this was insufficient to characterise the delay as repudiatory.


1. Not So In Demand Bonds

 

In Doosan Babcock Ltd v Comercializadora de Equipos y Materiales Mabe Limitada [2013] EWHC 3010 (TCC), Mr Justice Edwards-Stuart followed and developed the reasoning inSimon Carves Ltd v Ensus UK Ltd [2011] EWHC 657 (TCC) a 2011 case which indicated a more nuanced and pragmatic approach to the willingness of courts to injunct the making of calls on construction bonds.

 

Doosan had agreed in a FIDIC-based contract to supply two boilers for a power plant in Brazil owned by Comercializadora. Performance guarantees provided in respect of each of the boilers expired on the earlier of the grant of the Taking Over Certificates under the FIDIC contracts or 31 December 2013. Doosan applied to the court for an injunction to prevent a call on the performance guarantees. It was accepted that the performance guarantees took the form of unconditional or demand bonds.

 

Mr Justice Edwards-Stuart considered that the courts will restrain a bank from paying on a bond, not only in the event of fraud, but also in other circumstances, where the procurer of a bond had a strong case that the beneficiary is in breach of the underlying contract. He noted that there was no authority to support the proposition that a beneficiary could make a call on a bond when it was expressly disentitled to do so. For example, where an underlying contract provides that a bond may be called only in certain circumstances, no previous cases had allowed such a bond to be called in other circumstances. Therefore, in principle, if the underlying contract in relation to which a bond or guarantee has been provided clearly and expressly sets out circumstances after which or failing which a call should not be made or would be improper, then an injunction might be granted to prevent a call. The judge observed that this was consistent with the general principal that a party should not be permitted to benefit from its own breach of contract. Applying this principle to the present case, the judge was satisfied that it was an appropriate case in which an injunction could be granted.

 

He accepted that Doosan would suffer loss that could not be compensated in damages if a call was made. This loss took the form of damage to its commercial or financial reputation. He considered that such loss was not illusory and that it would be difficult to quantify. He also noted that Comercializadora would suffer no prejudice if the issue was resolved before the guarantees expired or if the validity of the guarantees were extended to avoid the potential expiration.  As a result, he considered the balance of convenience favoured the grant of the injunction.

 

Hogan Lovells

 

For further information, please contact:

 

Mark Crossley, Hogan Lovells

mark.crossley@hoganlovells.com

 

Timothy Hill, Partner, Hogan Lovells

timothy.hill@hoganlovells.com

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