Jurisdiction - Hong Kong
Reports and Analysis
Asia Pacific – Highlights Of 2014 English Law Cases For The Construction Industry: Part One.

7 January, 2015

 

Legal News & Analysis – Asia Pacific

 

In this first part of a two part review (to be concluded in next month) we will look at a dozen decisions from the English courts from 2014 which the construction industry should be aware of when negotiating contracts and managing disputes.

 

1. Clearly Drafted Net Contribution Clauses Are Effective

 

In West v Ian Finlay & Associates [2014] EWCA Civ 316, West purchased a house for extension and refurbishment, appointed IFA as its architect and engaged other consultants, contractors and specialists for certain discrete works. The appointment contained a form of net contribution clause providing that IFA’s liability for loss or damage was “limited to the amount that it is reasonable for [IFA] to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by [West]”. West engaged a main contractor to carry out the works, but these were defective. The main contractor became insolvent and West brought a negligence claim against IFA for failing to notice and remedy the defects. IFA relied on the net contribution clause. IFA was found liable at trial and the judge held that the net contribution clause was enforceable. However, the reference to “contractors” in the phrase “other consultants, contractors and specialists” was held to include only the specialist contractors and suppliers engaged directly by West, not the main contractor. Therefore, IFA’s liability for defects for which the main contractor shared responsibility was not limited. IFA’s appeal was allowed. The normal meaning of the words in the clause was clear and unambiguous. There was no limitation on the words “other consultants, contractors and specialists”, which should be taken to mean any such persons, including the main contractor. The clause also satisfied the UCTA reasonableness test and was therefore a valid and effective limitation on IFA’s liability.

 

2. Injunctions Available Where Exclusion Clauses Limit Recovery

 

The case of AB v CD [2014] EWCA Civ 229 resolved conflicting authorities on whether an injunction can be granted in cases of an alleged breach of contract where the contract contains a provision limiting the recoverable damages for that breach to less than what might otherwise have been awarded as a matter of general law. CD owned the intellectual property rights in an internet platform. CD entered into a licence allowing AB to market the platform in the Middle East. The licence excluded liability for loss of profits and limited the total amount of damages recoverable by either party under any head of claim. CD purported to terminate the licence. AB began arbitration proceedings under the arbitration clause in the agreement and then brought proceedings in the English High Court for an interim injunction requiring CD to continue to perform its obligations under the agreement and restraining CD from terminating the agreement, pending the arbitral award. At first instance, the judge denied the injunction on the basis that AB had an adequate remedy in damages but granted AB leave to appeal as there were conflicting authorities on the point. The Court of Appeal unanimously overturned the judge’s decision. It held that an exclusion clause was conclusive in a claim to recover damages, but not when seeking an injunction which is designed to avoid any cause for a claim to such damages. This is because the primary duty of a party is to perform its obligations. As a result, the Court rejected CD’s argument that the parties’ commercial expectations (namely, that because the parties had agreed to restrict the damages recoverable, those damages must constitute an adequate remedy) would be undermined. An agreement to pay damages in the event of breach is a secondary obligation which cannot excuse a party from its primary obligation to perform a contract. The key question is whether it is just in all the circumstances that the claimant be confined to its remedy in damages. In this case, the Court held that it could not be just that, where the only losses suffered as a consequence of the breach were of the kind that would be excluded by the contract, no injunction would lie and the contract-breaker would be able to walk away from his obligations with impunity.

 

3. Are Partnering Clauses Expressions Of Good Faith?

 

Exclusions of liability and good faith duties are regularly explored by the courts and 2014 was no exception. In Fujitsu Services Ltd v IBM United Kingdom Ltd [2014] EWHC 752 (TCC), IBM contracted to provide IT services. IBM retained some responsibility but subcontracted the management and maintenance of the IT infrastructure to Fujitsu. Fujitsu sought damages, claiming IBM had breached the terms of the subcontract by failing to subcontract services, as well as failing to implement the contractual change of control procedures. The court had to determine whether IBM’s liability to Fujitsu was excluded by an exclusion clause and whether IBM’s failures amounted to a breach of fiduciary duty and a breach of duty to act in good faith arising from a partnering clause. The court found in favour of IBM. A clause stating that “neither party shall be liable to the other…for loss of profits, revenue, business, goodwill, indirect or consequential loss or damage” was held to be effective, as a matter of interpretation, to exclude any liability on the part of IBM for damages or equitable compensation on the work share, change control and money value claims. The inclusion of “indirect or consequential loss” later in the clause neither qualified the words “loss of profits” at the beginning nor cut down the scope of these words, although wording such as “other indirect or consequential loss”, may have suggested a narrower meaning. The relationship between the parties did not fall within any of the settled categories of fiduciary duties and IBM had “gone out of their way” to prevent such a fiduciary relationship from arising. As there was no clear wording stating otherwise, the partnering clause was insufficient to create an express duty of good faith.

 

4. The Hurdles For Successfully Establishing Nuisance Claims

 

McAlpine was contracted to carry out redevelopment work in Newcastle, the area where Northumbrian Water provides sewerage services. One of Northumbrian’s sewers ran under the site where McAlpine was working. As part of the redevelopment, concrete was poured down a shaft to form a concrete pile but escaped from the shaft and blocked the sewer. Northumbrian incurred extensive costs in clearing the blockage and sought to recover damages in negligence and nuisance. In Northumbrian Water Ltd v McAlpine Ltd [2014] EWCA Civ 685, the Court of Appeal reaffirmed the judge’s decision that McAlpine had neither breached its duty of care nor was negligent. Northumbrian’s own plans did not show the sewer, the existence of which was only discoverable by searching a local museum’s archives. Therefore, by carrying out extensive searches, McAlpine had discharged its duty. The court’s rejection of Northumbrian’s nuisance claim had also been correct. The judge had rightly concluded that if the use of land is reasonable, the harm is unforeseeable and the case falls outside of the rule in Rylands v Fletcher (which imposes strict liability for foreseeable damage caused by a failure to control the risks associated with the non-natural use of land), then no liability in nuisance exists, even though nuisance is traditionally regarded as a strict liability tort. There was no evidence to suggest that the method deployed by McAlpine to create piles was unreasonable and no foreseeability of harm as McAlpine was not aware of the existence of a sewer following its searches.

 

5. Extravagant Liquidated Damages May Not Be Penalties

 

The important case of Makdessi v Cavendish Holdings BV [2013] EWCA Civ 1539 brought the courts’ increasing use of commercial justification as a tool for interpreting contracts to the realm of liquidated damages clauses. A company was formed to sell Mr Makdessi’s company. The shareholders agreed to sell 47.4% of the company’s shares to a minority shareholder in the company. The minority shareholder transferred its shares to Cavendish, who became the majority shareholder and then replaced the minority shareholder in the share purchase agreement by means of a novation. Clause 5.5 of the agreement provided that if the seller defaulted, it would not be entitled to receive certain payments. Clause 5.6 provided that Cavendish could exercise an option over the shares retained by the defaulting seller to purchase at net asset value only, excluding any goodwill (which was less advantageous than the price that would apply on a sale of the shares where there had been no breach). These provisions would have meant that, in case of a default, Mr Makdessi could lose around USD 44m. Cavendish subsequently found that Mr Makdessi had breached the agreement and his duties as company director and gave notice to exercise its option under clause 5.6. Reversing the first instance decision, the Court of Appeal unanimously held that clauses 5.5 and 5.6 constituted penalties and were therefore unenforceable. In doing so, the Court set down a “more modern approach” to penalties. Such clauses will not be struck down as penalties, even if they are extravagant and unconscionable and increase payable amounts upon default, if they are commercially justifiable, which may be indicated where their dominant purpose is not to deter the other party from breaching. On the facts, the Court found that if the amount recoverable were zero, the sums that could be withheld from Mr Makdessi ranged from nothing to USD 44m, depending on the valuation of operating profit after tax. There was also no proportionality between the number, materiality and consequences of breaches. The amounts in clause 5.6 were held not to be genuine pre-estimates of loss, but extravagant and unconscionable and without sufficient commercial justification. The offending clauses were struck down. This case is currently on appeal to the Supreme Court.

 

6. How The Courts Address Failures To Comply With Procedural Rules

 

Following its decision in Mitchell v News Group Newspapers Ltd [2013] EWCA Civ 1537, which seemed to penalise parties for minor breaches of procedural rules, the Court of Appeal in July heard three appeals together (Denton v TH White Ltd, Decadent Vapours Ltd v Bevan andUtilise TDS Ltd v Davies [2014] EWCA Civ 906) to clarify the courts’ approach. Denton served expert witness statements late, one month before the date set for a ten-day trial, leading to an adjournment. Denton’s application for relief from sanctions was granted. Decadent did not pay court fees on time as the cheque, which would have arrived one day late regardless, was lost either by the court or in the document exchange system used by Decadent’s solicitor. Relief from sanctions was not granted. In Utilise, the appellant filed its costs budget 45 minutes late. This breach was held to have been rendered non-trivial by Utilise’s later failure to comply with an order requiring Utilise to inform the court of the outcome of negotiations, which Utilise did 13 days late. The Court held that an application for relief from sanctions should be dealt with using a three-stage test. Firstly, the court should identify and assess the seriousness or significance of the failure to comply. If the breach is not serious or significant, the court should grant relief from sanctions. Secondly, the court should consider why the default occurred. There is no defined list of good reasons, but the examples provided in Mitchell remain helpful. Thirdly, the court should consider all the circumstances of the case, paying particular, but not overriding, importance to the requirement that litigation be efficient and at proportionate cost and that rules, practice directions and court orders be complied with. In relation to these three appeals, Denton’s failure to serve the witness statements was a serious breach, as it led to a lengthy trial being adjourned at short notice. Conversely, the failure to pay the court fees on time by Decadent’s solicitors was not a serious breach. Though there was no good reason for the breach, the third stage of analysis was in favour of relief from sanctions. The breach did not prevent litigation from being conducted efficiently and at proportionate cost and steps to remedy the breach were taken promptly. In Utilise, the Court stated that Utilise’s failure to file the costs budget on time was neither serious nor significant as it did not disrupt the litigation.


Related: 


Important 2014 English Law Cases For The Construction Industry: Part Two.

 

Hogan Lovells

 

For further information, please contact:

 

Timothy Hill, Partner, Hogan Lovells

timothy.hill@hoganlovells.com

 

Damon So, Partner, Hogan Lovells

damon.so@hoganlovells.com

 

Terence Wong, Partner, Hogan  Lovells

terence.wong@hoganlovells.com

 

Alex Wong, Partner, Hogan Lovells

alex.wong@hoganlovells.com

 

Paul Teo, Partner, Hogan Lovells

paul.teo@hoganlovells.com

 

Joseph Kim, Partner, Hogan Lovells

joseph.kim@hoganlovells.com

 

Patric McGonigal, Partner, Hogan Lovells

patric.mcgonigal@hoganlovells.com

 

Mark Crossley, Hogan Lovells

mark.crossley@hoganlovells.com

Comments are closed.