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

12 February, 2015

 

Legal News & Analysis – Asia Pacific

 

In this edition we conclude our review of 12 decisions from the English courts from 2014 which the construction industry should be aware of when negotiating contracts and managing disputes.

 

7. A Reasonable Endeavours Obligation To Agree With A Third Party May Not Be Enforceable

 

As usual, the year saw a fair number of cases dealing with the interpretation of commonly used contractual words and phrases. The parties in Dany Lions Ltd v Bristol Cars Ltd [2014] EWHC 817 (QB)entered into a settlement agreement which was subject to a condition precedent that Lions use reasonable endeavours to enter into an agreement with a third party to restore a classic car. The judge held that this obligation was not enforceable as it was an agreement to agree and no different from a situation where contracting parties agree to use reasonable endeavours to agree the terms of a new contract. The object of the endeavours was the future agreement itself, which was not sufficiently certain to be enforced. Only where the essential terms of the prospective agreement with the third party are identified in advance might there be certainty of object and sufficient criteria to judge the endeavours. In this case, whilst the third party and the scope of its work had been identified, no agreement had been reached on the price, payment method and other key terms. However, an obligation to use reasonable or best endeavours to achieve a particular object will not be too uncertain to be enforceable if the object of the endeavours can be ascertained with sufficient certainty and there are enough objective criteria by which the performance of the obligation can be ascertained, for example, permission to import goods requiring the consent of a third party.

 

8. Practical Completion May Occur Where Contractual Completion Criteria Are Not Satisfied

 

In Laing O’Rourke Construction Ltd v Healthcare Support (Newcastle) Ltd [2014] EWHC 2595 (TCC), a healthcare trust engaged HSN under a project agreement to design, build, finance and operate two hospitals. Laing contracted with HSN for the construction of facilities, in connection with which an independent certifier was appointed. One phase was not built in accordance with the trust’s contractual requirements and so it argued the certifier should withhold the sectional completion certificate. The court held that the certifier should conclude that the completion criteria in the contract were satisfied where it reasonably considered that any difference between the works and the trust’s requirements in those criteria did not have a material adverse impact on the ability of the trust to use the buildings for the purposes anticipated by the contract. As a sectional completion certificate is not conclusive evidence of the quality of the work and can be opened up, it would not help business efficacy or common sense to say that any breach of the requirement to comply with the completion criteria, even if minor, could prevent the certificate from being issued.

 

9. Bending Time Bars In NEC3

 

2014 provided further evidence that the days are gone when those in the construction industry could boast of the supposed superiority of the NEC forms because they did not attract litigation. Northern Ireland Housing Executive v Healthy Buildings (Ireland) Ltd [2014] NICA 27 found that the time bar limiting compensation event applications in the NEC3 suite is suspended where the employer should have notified the contractor of a compensation trigger. NIHE engaged Healthy to undertake asbestos surveys under the NEC3 Professional Services Contract. It became apparent during discussions that NIHE expected more rigorous inspections than Healthy envisaged. Over three months after these discussions, Healthy notified NIHE that these more rigorous inspections would constitute a compensation event. NIHE contended that the rigorous standard had been contacted for and that no further compensation was required. The dispute was adjudicated and Healthy’s claim for compensation was successful. NIHE appealed, arguing that it had not varied the scope of services and that Healthy’s notification and application were excluded by a time bar provision. Basing its analysis on meeting minutes, the Court of Appeal found that NIHE had varied the contract’s provisions. The contract’s standard of work was specified to be in accordance with the Health and Safety Executive’s guidance, which the new instructions exceeded. Having found a compensation event, the Court went on to consider whether or not the claim was time barred, as the time limit for Healthy to apply for compensation had passed. The contractual time bar was qualified by a provision which suspended a claim’s exclusion if the NIHE should have given notice of a compensation trigger. The Court found this created an objective test. Consequently, the NIHE’s mistaken belief that it had not triggered a notification event was immaterial. NIHE had failed to notify which rendered the time bar invalid and therefore the appeal was dismissed.

 

10. How To Value Omitted Works

 

In 2015, our construction team aims to consolidate its position as a market-leading legal adviser in the world’s growing offshore wind sector. Our August 2014 Talking Point reported the decision in MT Hojgaard a/s v E.On Climate and Renewables UK Robin Rigg East Ltd [2014] EWHC 1088 (TCC) which found that a reasonable skill and care obligation can coexist with, but not necessarily override, a fitness for purpose obligation. A Court of Appeal decision involving the same offshore wind farm, MT Hojgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd [2014] EWCA Civ 710, addressed the valuation of omissions. MTH was engaged by E.On to design, manufacture, install and commission wind turbine foundations and to charter its own barge for their installation. When it was discovered that MTH’s barge was technically inadequate and would take longer than anticipated to install the foundations, E.On issued variations whereby E.On would, at its own cost, charter a replacement vessel. The contract provided, and the parties agreed, that, in the event of disagreement as to a valuation of a variation, if the schedule of rates contained in the contract was not directly applicable, suitable rates would be established by the engineer, reflecting the pricing in the schedule. If there was no schedule, the amount was to be in all the circumstances reasonable. A dispute arose as to how much should be deducted from the contract price to reflect the fact that MTH’s barge was not used to carry out the works. MTH argued that since the breakdown of the contract price reflected the cost of installation using MTH’s barge, the deduction should be based on such amount. E.On contended the deduction should be calculated by reference to the time MTH’s barge would have taken to carry out the works and multiplying that by an applicable rate. The appropriate reduction in price should be the difference between the notional price if carried out by MTH’s barge and the actual price of the work as carried out by E.On’s barge. The TCC judge at first instance agreed with MTH’s interpretation. The inclusion of the breakdown meant that the contract recognised that the contract price represented the sum of the costs of the various elements of the works. Accordingly, if MTH carried out part of the works, it would be entitled to that element of the contract price, but if not, the amount accorded to those works should be deducted. E.On’s appeal was dismissed. The Court held that MTH had agreed to carry out the work for a fixed price and had therefore assumed the risk that the price would not cover the work. Additionally, it was not appropriate to calculate the notional price of MTH’s barge carrying out the work as this would be contrary to the principle that parts of the works had a price to which MTH was entitled if they were carried out, but not if they were not. The Court also held that if it was difficult to determine the precise contribution of the omitted work to the contract price, the engineer might need to look at relevant material such as how the contract price was built up. As the contract did not deal with valuing omissions, it was necessary to consider the contract as a whole, the price risk to MTH of taking on a fixed value contract and the fact that the parties must have intended that some sort of price reduction would be necessary.

 

11. Meaning Of An “Appropriate Deduction” For Defects In JCT Forms

 

It is interesting to compare the TCC’s reasoning in the E.On case with its decision in Mul v Hutton Construction Ltd [2014] EWHC 1797 (TCC), as it also addressed deductions, but on this occasion for defects under a JCT form. Mul engaged Hutton under the JCT Intermediate Form to carry out extension and refurbishment works. A list of incomplete and defective works was attached to the practical completion certificate. Mul paid Hutton the final sum certified by the contract administrator. A dispute then arose in relation to the defects and Mul issued proceedings against Hutton. The contract provided that any defects notified to Hutton by the contract administrator no later than 14 days after the expiry of the defects rectification period should be made good by Hutton at no cost, unless the contract administrator instructed otherwise. If the contract administrator did so instruct, an “appropriate deduction” would be made from the contract sum for any defects not made good. The preliminary issue was how the appropriate deduction should be valued. Hutton argued that it had at all times remained ready, willing and able to repair the defects, even after the rectification period, and therefore that the valuation of the appropriate deduction should refer to the contract rates and pricing schedule. Mul argued that the appropriate deduction should not be limited to the contract rates or pricing schedule but be what is appropriate in all the circumstances. The court agreed with Mul, meaning it could be calculated by reference to one or more of the following, amongst possibly other, factors: the contract rates or priced schedule of works; the cost to the contractor of remedying the defects (including sums to be paid to third party subcontractors engaged by the contractor); the reasonable cost to the employer of engaging another contractor to remedy the defects (albeit that in most cases the employer’s duty to mitigate would normally involve inviting the original contractor to remedy the defects); and the particular circumstances and/or expert evidence relating to each defect and/or the proposed remedial works.

 

12. A Requirement To Resolve Disputes Through Discussions In A Limited Time Is Enforceable

 

Of course, parties ultimately prefer to avoid expensive dispute resolution procedures in the first place and so often include in their contracts provisions for more cost effective means of resolving disputes (although such provisions cannot displace the statutory right parties have in certain jurisdictions, including England and Wales, to refer disputes to an adjudicator at any time). The decision in Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm) helps those drafting dispute resolution provisions aimed at dissuading parties from arbitrating or litigating at the first sign of disagreement. In connection with an iron ore supply contract, ETA was alleged to have failed to take up iron ore in sufficient quantities. PME served notice to terminate the contract and recover liquidated damages. The resulting dispute was referred to arbitration. ETA argued the arbitrator lacked jurisdiction as the contract contained a condition precedent that the parties should first seek to resolve the dispute by friendly discussions over a four-week period, failing which the dispute could be referred to arbitration, a condition which had not been satisfied. PME argued that the condition precedent was not enforceable as it amounted to an agreement to negotiate, which English law has traditionally been unwilling to enforce (although clauses requiring parties to settle disputes in good faith through ADR have been held to be both enforceable and not). The judge accepted the English law position but followed Commonwealth authorities and ICSID decisions instead to find that the clause was neither incomplete nor uncertain and therefore enforceable. The judge distinguished a conflicting previous House of Lords decision on the grounds that it was not concerned with a dispute resolution clause in a binding contract obliging the parties to seek to resolve a dispute in a limited time period. He said there was clear public policy favouring the enforcement of dispute resolution clauses designed to avoid expensive litigation or arbitration. Further, none of the appellate decisions on the enforcement of obligations to mediate obliged him to hold that the agreement in the present case was unenforceable. The judge said that a clause is likely to be uncertain if, for example, a mediator or process for appointing a mediator is not identified, or if there is no express time limit in the negotiations. A friendly discussion is also likely to be interpreted to require the parties to negotiate in good faith and take an “honest and genuine approach”. The judge held on the facts that the condition precedent had been satisfied as the parties had engaged in a two-day discussion. It was common ground that these discussions had been friendly, even though they did not resolve PME’s claim. As PME referred the dispute to arbitration six months later, after the expiry of the four-week period in the condition precedent, the condition had been satisfied and the arbitrator had jurisdiction.

 

Related:

 

Highlights Of 2014 English Law Cases For The Construction Industry: Part One.

 

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

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