Winter 2011
Construction and
Engineering
Winter 2011 In Site
By Kevin Greene, Inga Hall, Daniel Lopez and Lee Forsyth
Welcome to the Winter 2011 edition of In Site. This edition covers the following topics:
 the prevention principle, concurrent delay and the decision in Jerram Falkus Construction
Limited v Fenice Investments Inc;
 direct and indirect losses and the decision in McCain Foods GB Ltd v Eco-Tec (Europe) Ltd;
 the relationship between adjudication and pre-action disclosure applications under CPR Rule
31.16;
 the Scottish courts support collateral warranty claims in Scottish Widows Services Ltd v
Building Design Partnership; and
 factors to consider in deciding whether a dispute is the same or substantially the same as a
dispute previously referred to adjudication.
For more information on any of these articles, or on any other issue relating to construction and
engineering law, please contact any of the authors or your usual K&L Gates’ contact.
Concurrent delay and the prevention principle
A key issue in the recent case of Jerram Falkus Construction Limited v Fenice Investments Inc
[2011] EWHC 1935 (TCC) was whether or not, where concurrent delays have occurred, the
employer’s conduct could be relied on by the contractor to prevent the employer recovering
liquidated damages for delay.
Jerram Falkus Construction Limited ("JFC") had been engaged by Fenice Investments Limited
("Fenice") to carry out the development of a site in London. Completion of the works was delayed
by several months and the employer, Fenice, claimed liquidated damages. JFC disputed this
entitlement. It argued that Fenice had prevented completion, and as there was no mechanism in the
contract for extending time in this event (the JCT clause 2.26 Relevant Event dealing with
prevention events having been deleted from the contract), time was at large and Fenice could not
levy liquidated damages.
The prevention arguments raised by JFC were based on Fenice having responsibility for works
undertaken by British Gas and EDF which allegedly delayed JFC in carrying out its own works.
JFC did however acknowledge that it was already in delay and that the utilities’ delays were
concurrent with its own delay. One of the key issues for the court (Coulson J) was therefore
whether, if Fenice did prevent JFC from completing the contract works, but the delay was
concurrent with delays that were JFC's fault, time would be set at large and Fenice would be
unable to claim liquidated damages.
Coulson J examined the leading authorities in the area of prevention which establish (i) that the
employer cannot hold the contractor to a specified completion date if the employer has by his own
act or omission, prevented the contractor from completing by that date (Peak Construction
(Liverpool) Limited v McKinney Foundations Limited (1970) 1 BLR 111) and (ii) that acts of
prevention by an employer do not set time at large if the contract provides for extension of time in
respect of those events (Multiplex v Honeywell [2007] EWHC 447 (TCC)).
Winter 2011 In Site
In assessing the impact of the prevention principle where there is concurrent delay the court gave
weight to the recent High Court decision in Adyard Abu Dhabi v SD Marine Services [2011]
EWHC 848 (Comm). In that case Hamblen J considered the interplay between the prevention
principle and causation:
"The conduct…[of the employer] has to render it “impossible or impracticable for the other party
to do the work within the stipulated time”. The act relied on must actually prevent the contractor
from carrying out the works within the contract period or, in other words, must cause some actual
delay".
The court saw a distinction between a situation where the contractor would not have completed by
the due date because of his own delay (where the prevention principle would apply in respect of a
distinct non-concurrent period of employer-caused delay) and the situation described in the
Adyard case which indicated that if there were two concurrent causes of delay, only one of which
could be described as employer prevention and the other was the responsibility of the contractor,
the prevention principle could not be relied on.
Coulson J considered that the contractor must prove that the alleged act of prevention caused
delay to the actual progress of work and held that:
"the contractor must be able to demonstrate that the employer's acts or omissions have prevented
the contractor from achieving an earlier completion date and that, if that earlier completion date
would not have been achieved anyway, because of concurrent delays caused by the contractor's
own default, the prevention principle will not apply."
He found that JFC were responsible for delay throughout the project and that there was no critical
delay caused by British Gas or EDF and so there was no liability for delay on the part of Fenice.
The prevention principle was therefore not in play. However, the court went further and stated that
if there had been delay to the works as a result of British Gas or EDF and Fenice had been
responsible for those delays the prevention principle would still not have been triggered. This is
because the delays would have been concurrent with the delays caused by JFC and therefore the
completion date would not have been earlier if the alleged default by Fenice had not occurred.
The prevention principle was therefore no bar to the employer claiming liquidated damages for
delay in this particular case. The case is also of interest as a reminder of the important links
between the prevention principle, extensions of time and the right to claim liquidated damages.
Severing the link between the first two (as in this case) can (and on different facts in this case,
may well have) render time at large and result in an employer losing its right to claim liquidated
damages.
Classification of losses: McCain Foods GB Ltd v Eco-Tec
(Europe) Ltd
Contracting parties typically include limitation clauses in their contracts excluding liability for
indirect or consequential losses. The implication is of course that they remain liable for the direct
losses stemming from a breach. Commercial parties commonly understand that direct losses are
losses recoverable under the first limb of Hadley v Baxendale (1854) 9 Ex 341 as losses arising
naturally in the ordinary course of things, whilst indirect and consequential losses are only
recoverable under the second limb of the test in Hadley v Baxendale i.e a party can cover damages
for "special circumstances" where those circumstances were in contemplation of the parties at the
time the contract was entered into.
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Despite this, parties often make assumptions about the classification of losses (for example, that
loss of profit or other financial losses are normally indirect losses) which may not, on the facts of
the case and/or the construction of the limitation clause, turn out to be correct.
This was the issue in McCain Foods GB Ltd v Eco-Tec (Europe) Ltd [2011] EWHC 66 (TCC).
McCain were the purchasers of a system from Eco-Tec which was intended to remove hydrogen
sulphide from biogas produced in McCain's waste water treatment processes. The clean biogas
was then to be used in power generation for the plant as well as allowing McCain to obtain
renewable energy certificates based on the energy value produced. McCain said the system could
not be commissioned and it was entitled to damages for (i) the cost of electricity which McCain
had to purchase elsewhere during the time the system was out of commission ("Utility Losses")
and (ii) the loss of profit which would have been generated by the sale of Certificates of
Renewable Energy Production ("ROC Losses") to third parties.
The court found that the system could not be commissioned and as such Eco-Tec were in breach
of the fitness for purpose obligation in the contract. Although Eco-Tec accepted that this meant it
was liable to pay the cost of replacing the system, it said the Utility Losses and ROC Losses were
indirect losses and excluded under the limitation clause in the contract, which stated: "... in no
event…will Seller be responsible for indirect, special, incidental and consequential
damages…arising out of any breach by Seller of any…obligation contained in this Agreement".
McCain's position was that both categories of loss were direct losses and therefore recoverable,
and it relied on the decisions in Hotel Services Limited v Hilton International Ltd [2000] BLR 235
and Deepak v ICI [1999] 1 Lloyd’s Rep 387. In the Hotel Services case, mini-bars rented by
Hilton Hotels leaked ammonia and could not be used. Hilton claimed, for loss of profits arising
from the use of the mini bars and the defendant relied on a clause in the rental agreement which
excluded consequential loss. The loss of profits from hiring out the mini-bars themselves was held
to be a recoverable direct loss, with the judge in that case making a distinction between that loss
and loss of profitability of the hotel itself (which would be a consequential loss and therefore not
recoverable). In Deepak v ICI the claimant's methanol plant was destroyed and they lost money
while the plant was being reconstructed. The Court of Appeal in that case considered that the loss
of profits during the period of reconstruction were direct losses.
Applying those cases, the court in McCain considered that the costs of repair, replacement,
mitigation and associated losses are direct losses, and that the Utility Losses clearly came within
that category as "additional utility costs arise because they are the cost of electricity which
McCain had to purchase elsewhere…which ought to have been generated by the System".
In relation to ROC Losses the court considered that if the system had been commissioned McCain
would have obtained the Renewable Energy Production Certificates which had market value and
this resulted in loss of revenue. The inability to commission the system resulted in loss of revenue
from selling the certificates and this loss flowed from the system itself, similar to the loss of
revenue from the mini-bars in Hotel Services. The losses were therefore direct and recoverable.
The court also held that McCain could recover for other losses associated with the failure of the
system which were considered to be direct losses, including, the costs of contractors, site
managers, attempted mitigation, employee time and the purchase of auxiliary equipment from
Eco-Tec. To have excluded liability for potentially direct losses such as loss of profits or other
types of financial loss, Eco-Tec should have explicitly excluded such losses in the limitation
clause, rather than assuming they would be ‘wrapped up’ in the general consequential loss
exclusion.
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Winter 2011 In Site
Pre-action disclosure and adjudication
Applications for pre-action disclosure under Rule 31.16 of the Civil Procedure Rules are not
intended to be 'fishing expeditions' and, as the parties in the case of PHD Modular Services
Limited v Seele GmBH [2011] EWHC 2210 (TCC) recently found, engagement in a series of
adjudications (which are successful in resolving disputes) may make the court less – rather than
more - inclined to grant an application under CPR 31.16.
The relationship between PHD, a scaffolding sub-contractor, and its employer, Seele, was a rocky
one and over time, PHD had launched 7 adjudications. Following the commencement of the sixth
adjudication, Seele purported to terminate PHD's employment and PHD ceased work.
Adjudication No. 7 was effectively an attempt by PHD to obtain a declaration that the termination
was wrongful, unlawful or otherwise unjustified.
PHD then issued an application for pre-action disclosure under CPR 31.16, which sought to obtain
categories of documents in very wide classes.
It is a pre-requisite to any order made under CPR 31.16 that the applicant and respondent are both
"likely to be a party" to subsequent proceedings. Assuming that hurdle can be overcome, the
applicant must also demonstrate that pre-action disclosure is desirable in order to:
 dispose fairly of the anticipated proceedings;
 assist the dispute to be resolved without proceedings; or
 save costs.
The judge looked first at the extent to which it is necessary to show that proceedings are actually
contemplated by the parties. This is not specifically addressed in CPR 31.16, but Akenhead J took
the view that it is "important for there to be more than the faint possibility that proceedings will
happen". It could not be the case, he said, that CPR 31.16 is engaged "simply because there are
issues between commercial parties, and there is a possibility that at some time in the future there
might be litigation between the parties". It was not the Court's job to interfere with the parties'
commercial arrangements to give one party a possible commercial advantage in the form of access
to commercially sensitive documentation which they would not otherwise have had under the
contract. Rather, there "must be a real prospect, if not a certainty or likelihood, that there will be
proceedings between the parties".
In this case, PHD had been successful in the adjudications to date and there was no evidence that
Seele was threatening or wanting to take the matter further. In the judge's view, PHD had not
shown that there was a realistic prospect that proceedings would be instituted. "At best, PHD
think that given the deteriorated relationship between it and Seele, exacerbated possibly by PHD
having pursued no less than 7 adjudications against it, there might at some stage be court
proceedings between the parties." This, in Akenhead J's view, was not enough to satisfy the right
to secure disclosure.
Similarly, Akenhead J rejected as a matter of logic PHD's suggestion that simply because there are
disputes between the parties court proceedings will be contemplated. If anything, he said, the
opposite is true, "particularly in circumstances where parties go down an alternative dispute
resolution route". The judge had earlier noted that it was clear that the impact of adjudication has
been to encourage final resolution of disputes and, as a result of all these considerations,
Akenhead J dismissed PHD's application.
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This case clearly demonstrates that proceedings must be genuinely anticipated by the parties to a
dispute. That the parties may be pursuing alternative dispute resolution procedures does not
automatically mean that they are contemplating proceedings - in fact, it may well serve to show
the opposite intention.
The judge stressed that CPR 31.16 should not be seen as "some sort of procedural support and a
tactical weapon for the purposes of adjudication". This touches on the point that it is only
available when court proceedings are anticipated; and also the idea that the Court should not
interfere with the parties' contractual relationship where the contract itself does not as such give
either party a right to documentation. In any event, where CPR 31.16 is used, parties should
ensure that the scope of their request for disclosure is suitably limited to the particular
circumstances rather than being an excuse for some sort of hopeful fishing exercise.
Collateral warranties – support from the Scottish courts
confirmed
The decision from the Scottish equivalent of the Court of Appeal (the Inner House of the Court of
Session) in Scottish Widows Services Ltd v Building Design Partnership [2011] ScotCS CSIH 35
shows that the courts will strive to enforce collateral warranties wherever possible, and whether or
not they have been assigned. This decision follows the earlier Outer House decision in Scottish
Widows Services Ltd v Harmon/CRM Facades Ltd [2010] ScotCS CSOH 42 and supports the
decision reached in that case that a key purpose of collateral warranties from members of the
professional team is to address, and avoid "…the problem of the legal "black hole", whereby loss
is sustained by a party who has no right of action and the party with the right of action suffers no
loss.... Such warranties are an important feature of modern practice in the construction industry.
In my opinion they must be construed in such a way as to further their essential purpose, namely
to ensure that the party who suffers loss has a right of action against any contractor or member of
the professional team who has provided defective work."
The key question was whether a tenant could recover under a collateral warranty even though it
did not have a relevant repairing obligation under its lease i.e there was no contractual duty to
remedy the defects in question.
Scottish Widows Services Ltd ("SWSL") had become the beneficiary of a collateral warranty from
the architect ("BDP") after numerous assignments from the original beneficiary (another member
of the Scottish Widows group). The collateral warranty permitted assignment to group companies
without BDP’s consent being needed. SWSL occupied the building in question as tenant under a
sublease (which had been assigned from the original sublessee along with the collateral warranty).
The roof of the building suffered damage, which SWSL spent money on fixing in order to make it
wind and water-tight. BDP was found liable for the defects but sought to argue that SWSL did not
have an obligation to fix the defects, and as such the loss suffered was not recoverable under the
collateral warranty. The Inner House supported the opinion of the Outer House in this respect,
namely that the absence of a contractual obligation to fix the defect did not matter in this case
because the landlord (under the headlease) had excluded the normal landlord’s liability to repair
such defects with the result that the subtenants were left with a building in a manifestly
unacceptable condition with no right of recourse against their landlords. "In such a situation the
only remedy available to the subtenants was to perform the necessary remedial works
themselves…and it is the expense of making them good that gives rise to a claim under each of
the…collateral warranties. Ultimately the repairing obligations in the lease and sublease are of
negative significance: if there is no obligation to carry out repairs, the subtenant or tenant is
compelled to do so simply to have a building fit for occupation. It is the fact that necessary repairs
have been carried out at the expense of the grantees of the collateral warranties or their assignee
that gives rise to a claim."
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Winter 2011 In Site
Accordingly, the Inner House concluded that there is nothing inherently difficult in an architect or
other member of the professional team indemnifying a named prospective occupier, or that
occupier’s assignees, for the cost of rectifying defects which impinge on that occupier’s
enjoyment, and that "[a]s the Lord Ordinary puts it [in the Outer House opinion], while the
primary physical loss may be sustained by the owner or tenant of the building at the time when the
defective work was performed, that physical loss has economic consequences, and any party who
suffers those economic consequences, such as a subsequent owner or tenant, may sue for that loss
provided that a contractual relationship exists between the party responsible for the defective
condition of the building and the person who suffers the economic consequences. In the present
case, such a contractual relationship is not disputed and it is plainly averred that [SWSL],
whether directly or as assignees, have incurred the costs for which recovery is sought."
Is it the same dispute?
The recent decision in Carillion Construction Limited v Stephen Andrew Smith [2011] EWHC
2910 (TCC) provides useful guidance for determining whether or not a dispute is the same, or
substantially the same, as a dispute that had previously been referred to adjudication under a
contractual adjudication clause (and therefore whether or not there could be a successful challenge
to the second adjudicator’s jurisdiction on that ground).
The sub-contractor in this case had not completed the work on time but claimed that the contractor
was responsible for the delay. The subcontractor referred its claim for losses arising from the
contractor’s failure to award an extension of time to adjudication. The adjudicator rejected the
claim for loss and expense, partly on the grounds that the claim lacked particularisation, and that a
causal link had not been established. The subcontractor subsequently set out greater details of its
alleged losses, reformulated its arguments regarding causation and started a new adjudication. The
contractor said the subcontractor could not do this, as it was the same, or substantially the same
dispute as previously referred, and the subcontractor was bound by the first adjudicator’s decision.
After considering the authorities, the judge in this case, Akenhead J held that, in his judgment, the
following factors (amongst others) can be deployed in considering whether the same or
substantially the same dispute has been referred to or resolved in an earlier adjudication:
 the comparative scope and ambit of the two disputed claims (with a reasonably "broad brush
approach" to be taken in determining the scope of the references). Notices of adjudication and
referral notices are a useful starting point in comparing disputes, but it must be borne in mind
that these documents do not need to be in a specific form, and may be drafted by people
without legal expertise. One "strong pointer" however as to whether disputes are substantially
the same is whether essentially the same causes of action are relied upon in the earlier and later
Notices of Adjudication and Referral Notices. As Akenhead J commented, "[o]ne must bear in
mind that one dispute (like one claim in Court proceedings) may encompass more than one
cause of action".
 the fact that different or additional evidence is presented and/or arguments used in the later
dispute will not usually alter what the essential dispute is or has been, as evidence or
arguments alone do not necessarily alter the essential dispute. It is important to differentiate
between the essential dispute and the arguments and evidence required to support or
undermine each party’s case;
 the fact that the quantum is different or is claimed on a different quantification basis in the
later reference to adjudication from that claimed in the earlier adjudication is not necessarily a
pointer to the referred disputes being in substance different; and
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 shock and awe tactics – with Akenhead J commenting that "one should be particularly
cautious about being over-awed in the exercise of comparison of two sets of documents
purporting to set out the disputed claims for two adjudications by the amount or bulk of the
detail, evidence, analysis, submissions or annexures attached to either".
Applying these principles to the facts of this case, he held that the two disputes were the same or
substantially the same – each involved a claim for delay and disruption based loss and expense
relating to the same alleged delays, the financial heads of claim were the same (although the
figures were different), the period of delay was the same, and although the latter adjudication
involved substantially more documents which had not been used in the first adjudication (but had
been in existence), this did not convert the dispute into a different dispute.
Authors:
Kevin Greene
kevin.greene@klgates.com
+44.(0)20.7360.8188
Inga Hall
inga.hall@klgates.com
+44.(0)20.7360.8137
Daniel Lopez
daniel.lopez@klgates.com
+44.(0)20.7360.8152
Lee Forsyth
lee.forsyth@klgates.com
+44.(0)20.7360.8190
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