Construction & Engineering London Legal Update

Transcription

1 Costructio & Egieerig Lodo Legal Update Isurace - ad risk allocatio p.1 Project isurace p.1 The scope of public liability isurace p.5 Evirometal isurace - the pollutio reisurer pays p.7 Idemities ad joit ames isurace p.8 Notificatio, otificatio, otificatio p.11 Dow with liability - ad how to fix the ceilig p.12 The meaig of cosequetial loss p.14 Liability for costs uder a collateral warraty p.16 What s bee happeig at Mayer Brow? p.17 Costructio judge rules that parties have o cotract p.19 ICC Turkey ulockig the potetial? p.20 Withholdig of liquidated damages - Reiwood v Brow p.24 Procuremet roud-up p.26 The price of ocompliace p.26 Regeeratio Complicatios at Roae p.28 Teder Cotracts - Duties of Fairess ad Good Faith p.29 Miig what goes o beeath the surface? p.30 Morals but o moral rights? Architects ad the RIBA Stadard Coditios of Appoitmet. p.32 A Guide to the Site Waste Maagemet Plas Regulatios 2008 p.34

2 Costructio & Egieerig Legal Update Isurace - ad risk allocatio Welcome to this latest editio of the Costructio & Egieerig Legal Update. The key theme for this issue is isurace. The courts have very helpfully provided a umber of recet decisios that we feature i the first part of this Update, together with a leadig article by Tom Duca o project isurace. The remaider of the costructio ladscape has ot bee eglected ad elsewhere i the Update the reports ad articles rage from a review of the ICC Model Turkey Cotract for Major Projects to a roud-up of EU (ad other) procuremet decisios, ot to metio a guide to the UK Site Waste Maagemet Plas (for those who are ot already fully up to speed with the ew regime). We hope you ejoy the cotets. Project Isurace All sorts of projects have all sorts of isurace for all sorts of participats i the works. But ca it all be made much simpler, ad cheaper, by gettig people covered by the same policy? It already happes, to some extet; costructio cotracts ofte cotai clauses requirig oe party to take out joit ames isurace for its beefit ad that of other parties o the project. The isurace is iteded to allocate risk to the policy, rather tha the parties, for the circumstaces isured agaist, but does it really work? Joit isurace the problems Eve that deceptively simple step, however, of joit isurace is a legal miefield. There is a substatial body of law o the meaig ad effect of joit isurace, which might mea that the parties itetios at the start of a project are ot ecessarily reflected i the cotractual ad isurace arragemets betwee them. The recet Court of Appeal decisio i Tyco Fire v Rolls-Royce (cosidered i detail o page 8 below) is a good example of the problem ad is also a remider of the importace of havig i place cotractual ad isurace regimes that are co-ordiated ad clear ad which achieve the stated aims of the parties. Oe of the issues cosidered i Tyco was the iter-relatioship betwee the provisios for joit isurace ad the idemities provided i the cotract ad how this affected the right of oe joit isured to sue aother i respect of damage for which they were joitly isured. It has previously bee said that there is a rule of law that prevets a actio betwee two or more persos who are isured uder the same policy agaist the same risk. Perhaps the best kow cases i this area are Petrofia (UK) Limited v Magaload ad Mark Rowlads Limited v Beri Is. The basis for this rule has bee the subject of much academic debate but the purpose of this article is ot to revisit this area, except to ote that i recet times (most otably i the House of Lords decisio of Co-operative Retail Services v Taylor Youg) the courts have suggested that the basis of the rule is to be foud i the cotract betwee the parties. I Tyco the cotract provided for the cotractor s liability to the employer for egligece but also cotaied provisios cocerig joit ames isurace. Lord Justice Rix stated 1

3 that the existece of isurace i the ames of both the cotractor ad the employer did ot, i itself, prevet a subrogated actio beig pursued by the isurer i the ame of the employer agaist the cotractor. Such a actio would oly be preveted by a express term i the policy prohibitig subrogatio. If that is correct the it must also be correct that, uless there is a express term to the cotrary, the employer may sue the cotractor uder the idemities provided i the cotract rather tha claim uder the policy (eve though the cotractor is a joit isured). The employer would certaily choose to do so if the isurace compay were to fail or if the isurace compay were to dey cover. I either case, this may leave the co-isured cotractor facig a liability for losses which it evisaged would be covered uder the joit ames policy. This sceario ca be avoided by careful cotract draftig to make the idemities provided by the cotractor subject to the joit isurace provisios. This uderlies the importace of givig the isurace regime careful thought prior to the start of a project ad esurig the cotracts reflect what is iteded. What joit isurace is available for costructio projects? The traditioal approach Most stadard form cotracts provide for joit ames isurace for the works with a requiremet for the cotractor to have i place its ow public liability ad professioal idemity isurace as appropriate. The joit isurace i questio is ormally a Cotractor s All Risks (or CAR) policy,. A CAR policy provides a idemity agaist the costs of repairig damage to the works caused by all risks. Usually the employer, cotractor ad sub-cotractors are amed as joit isureds i the policy. CAR policies differ but the trigger for cover is damage to the isured property. For the purposes of CAR isurace, it is importat to distiguish betwee what is damage ad what is a defect, damage beig covered by the policy ad defects (ad the effect of defects) beig excluded to varyig degrees. Geerally, damage will exist if there has bee a physical alteratio which impairs the usefuless of the property isured. I Pilkigto v CGU Isurace, the Court of Appeal decided that damage does ot exted to the icorporatio of a defective product i property where the defective product does ot physically harm the property ad the harmful effect of ay later defect is cotaied withi the product. If there is damage, whether the CAR policy will respod depeds upo the exclusios i the policy. The most importat exclusios relate to damage caused by defective desig or workmaship. There are five defect exclusios widely used i the Lodo isurace market, DE1 to DE5. These provide as follows: DE1 is a outright defects exclusio which excludes all loss or damage to the property isured due to a defect i desig, pla, specificatio, materials or workmaship. DE2 excludes all loss or damage to the property isured which is: (a) i a defective coditio due to a defect i desig, pla, specificatio, materials or workmaship; (b) relies for its support o (a); or (c) which is icurred i order to assess ad repair (a) or (b). 2

4 Costructio & Egieerig Legal Update However, DE2 does cover loss or damage to property isured which is ot i a defective coditio but which is damaged by isured property i a defective coditio. DE3 gives the same cover as DE2 save that (b) above is also covered provided it is ot i a defective coditio ad is ot damaged durig the repairs of (a). DE4 excludes oly loss or damage to the compoet part or item of the property isured which is defective i desig, pla, specificatio, materials ad workmaship as well as damage icurred to isured property to access ad repair the defective part. However, DE4 writes back i cover to all other parts of the isured property which is ot defective but is damaged as a cosequece of the defect. DE5 gives the widest cover because it oly excludes the cost of redesigig the defective isured property. The defective compoet part, the damage caused by that part ad the access costs are all covered. The most commoly used desig exclusio is DE3 but the parties ca choose how wide the cover should be uder the CAR policy by optig for oe of these five optios. The premium obviously icreases as the scope of cover wides. Issues to cosider whe selectig a isurace regime As highlighted i Tyco, whe choosig the scope of cover the parties should cosider how that will affect the cotractual obligatios. If the parties ited to trasfer the risk to the policy this should be made clear i the cotract. The easiest way of doig this is by expressly makig clear that the relevat cotractual obligatios are subject to the requiremet to take out the joit ames policy. Aother issue to watch for is that may stadard cotracts cotai obligatios to take out a certai level of cover, for example JCT cotracts require existig structures isurace to be take out i respect of specified perils. Wider cover is available ad if it is obtaied the cotract obligatios should be reviewed to esure they are compatible. CAR isurace plays a importat role durig the life of the costructio project but the cover it provides is oly for the costs of rectifyig damage to the works. It is therefore still ecessary for all the parties to have liability isurace i place durig the life of the works to cover claims agaist or by oe or more of the parties relatig to losses other tha damage to the works. Project isurace For may projects, particularly for more complex high value works, CAR isurace is ot sufficiet because of its limited scope. O such projects it is commo to put i place joit ames project isurace coverig damage to the works, third party liabilities ad delays. The works cover is the same as a CAR policy ad relates to damage to the works. The third party public liability cover is for damage to third party property or physical ijury to third parties arisig durig the course of the works. The trigger for cover uder this sectio is a legal liability to a third party but the scope of cover teds to be limited to damage or ijury to the public (although fiacial loss extesios are available at a icreased premium). The works ad third party sectios will have all the parties to the project amed as joit isureds. Delay i start up cover is ormally oly available for the employer ad ay fuders or future ower/operators of the works. The cover is for loss of cash flows geerated by the 3

5 completed project i the evet of delay to the completio of the works but oly where the delay is the result of damage to the works. Delay isurace is ofte required by fuders o large projects to protect the icome stream, as those cash flows are required to service (ad repay) the debt. Project isurace is ormally take out by the employer at its cost o behalf of the other joit isureds. This arragemet usually places the risk that the scope ad amout of cover is sufficiet for the eeds of the project o the employer ad gives the employer cotrol over the admiistrative tasks, particularly otificatio. If the project policy is paid for by the employer there may be a reductio i the cotractor s bid price but that is by o meas certai as a desig ad build cotractor will still have to bear the cost of its ow professioal idemity isurace. Project policies for high value works may also have large deductibles, ad cosideratio eeds to be give to how the deductible will be allocated as betwee the parties. Oe optio is to limit the parties cotractual liabilities to the level of the deductible, so that the party resposible for the damage pays the deductible ad thereafter the policy respods. The same fault-based approach ca be take to losses withi the scope of the policy but which exceed the limit of idemity. I both cases, however, disputes ca still arise as to resposibility for the damage, ad therefore the deductible ad/or the uisured losses, despite the existece of joit isurace. It has bee estimated that two-thirds of costructio professioal idemity claims are made prior to completio, which suggests that the joit ames isurace curretly used i the idustry ca, at best, have oly a limited effect i prevetig sigificat disputes arisig betwee the parties durig the life of the project. The future? Collaboratio ad parterig have log bee idetified as the way to overcome the blame culture that ca arise o costructio projects. Much has bee writte about these cocepts ad how they lack cotractual teeth whe relatioships break dow but may cotracts are cast i this mould ad cliets, particularly i the UK public sector, are ow lookig for a isurace regime to help facilitate the parterig ethos. I respose, the Strategic Forum for Costructio has proposed itegrated project isurace, which is joit ames isurace that isures agaist the fiacial effects rather tha occurreces (such as damage) or liabilities. It is implemeted uder a cotractual regime where the parties agree to waive their rights to claim agaist each other ad istead look to the policy to recover their losses, however those arise. The itetio is that itegrated project isurace would replace the parties ow policies (icludig professioal idemity ad public liability policies) ad put a ed to the ofte competig ad cotradictory isurace arragemets coverig particular projects. It is proposed that isurers would be brought ito discussios at the start to agree the target cost pla for the project. Each member of the project team is the icetivised uder its cotract to meet the target cost usig a pai/gai-share formula ad the deductible uder the policy, if applicable, would become part of the pai elemet. Over ad above this pai share isurers would bear ay fiacial losses up to the limit of idemity. 4

6 Costructio & Egieerig Legal Update At this stage the idea is i its ifacy but pilot projects are beig iitiated to test the idea i practice ad a project team comprisig isurers, brokers ad advisers will moitor the projects to develop the practicalities of the proposals. While it remais to be see whether it ca achieve its stated aim of elimiatig disputes durig the life of the project, some have estimated that itegrated project isurace could save the idustry 1% of its total costs. If this is correct (which remais to be see) it is likely that those ultimately resposible for procurig projects will be kee to do their best to make it work. Tom Duca The scope of public liability isurace What a public liability policy covers may ot be as obvious as you thik. I April this year, i Tesco Stores Limited v Costable & Others, the Court of Appeal looked at coverage uder a public liability policy ad had to decide how far that cover exteded. Did it exted to liability i cotract for pure ecoomic loss? I 2003 Tesco embarked o a project to build a supermarket over a railway cuttig ear Gerrards Cross statio. The railway lie was to be eclosed i a tuel with the supermarket beig built o the ifill site above it. Part of the tuel collapsed i 2005 while the work was beig carried out ad the railway lie was closed for 51 days. The trai operator that used the lie had etered ito a Deed of Coveat with Tesco which required Tesco to pay the trai operator:- o demad such sums as shall from time to time fairly compesate them for all ad ay costs, losses or expeses arisig out of or resultig (directly or idirectly) from the carryig out of the Works ad its existig ad/or future railway passeger busiess Tesco had to take out public liability isurace of 155,000,000:- i respect of legal liability which may be icurred by [the isured] i respect of death or bodily ijury to ay perso ad loss or damage to property arisig from the activities authorised by each licece holder. The descriptio of cover i the public liability policy take out by Tesco said that:- The isurers will idemify the Isured agaist all sums for which The Isured shall be liable at law for damages i respect of: a) death of or bodily ijury to or illess or disease of ay perso b) loss or damage to material property c) obstructio, loss of ameities, trespass, uisace or ay like cause happeig or cosequet upo a cause occurrig durig the Costructio Period or ay extesio thereof ad arisig out of ad i coectio with The Project There was a cotractual extesio to the cover which provided that: [1] Cotractual Liability 5

7 Other tha as may be stated or implied i The Cotract, liability assumed by The Isured uder cotract or agreemet ad which would ot have attached i the absece of such cotract or agreemet shall be the subject of idemity uder this sectio oly if the coduct ad cotrol of ay claim so relatig is vested i The Isurers ad subject to the Exceptios ad Extesios of this sectio. Lord Justice Tuckey said that a public liability policy provides cover agaist liability to the public at large whereas private liability arises from cotracts betwee idividuals. Public liability i this sese arises i tort ad does ot ad caot arise oly i cotract ad, as a geeral rule, a claim i tort caot be based o pure ecoomic loss. This was, he said, a strog, but ot coclusive, poiter to the meaig of the words used. Lord Justice Tuckey looked at the classes of liability set out i a) to c) of the descriptio of cover ad oted that each class of liability correspoded with a familiar class of liability arisig i the law of tort, or its effect, from physical iterferece with a third party s perso, property or property rights ad was typical of harm associated with a project of this kid. There was othig i the wordig to idicate that liability i cotract uder a cotract of idemity was iteded to be icluded. Nor did the cotractual liability extesio assist Tesco. This did ot apply, said Lord Justice Tuckey, because ay loss which the trai operator suffered was ot i respect of (meaig for) physical impact o its property or property rights. Its loss was oly the cosequece of such impact o the property ad property rights of others. The trai operator s claim uder the cotract extesio ra ito precisely the same difficulty as its claim i tort. It was ot a typical public liability claim but simply a cotractual claim for ecoomic loss. Tesco had ot damaged the trai operator s property or property iterests, ad the trai operator could ot base its liability to the trai operator o the groud that it had damaged the property or property iterests of Network Rail. Thigs might have bee differet, of course, if the trai operator had suffered the ecessary damage. However, o the facts i this case, the trai operator had ot suffered damage, because it oly had a limited iterest i the railway. Iterestigly, Lord Justice Tuckey oted that if Tesco had wished to provide isurace cover for this liability:- It would have bee a simple matter to provide a copy of the deed of coveat to isurers ad agree a simple clause to cover that liability, if isurers had bee prepared to do so at a premium acceptable to Tesco. Outside its isurace cotext, this case is a useful remider to those draftig cotracts of the limitig effect of the phrase i respect of. If less limitig laguage is required, phrases such as i coectio with or arisig from are to be preferred. Michael Rega 6

8 Costructio & Egieerig Legal Update Evirometal isurace - the pollutio reisurer pays A key evirometal theme is that the polluter pays. With a growig evirometal isurace market the obligatio to pay rests with isurers ad reisurers, if the relevat specialist policies cover the pollutio i questio. Cases o evirometal isurace are geerally few ad far betwee but a recet rulig by the Court of Appeal may prompt pause for thought by the evirometal isurace market ad isureds. I Wasa Iteratioal Isurace Compay Limited v Lexigto Isurace Compay ad Others the Court of Appeal had to cosider whether back to back reisurace covered the clea-up costs of maufacturig sites i the Uited States. I the early 1990s the US Evirometal Protectio Agecy ad various state evirometal agecies had required Alcoa (the Alumiium Compay of America) to clea up pollutio ad cotamiatio of groud water, surface water ad soil at various maufacturig sites i the US used by Alcoa. Alcoa issued proceedigs i the courts of the State of Washigto agaist various of its isurers that had provided cover over a period of approximately 30 years, seekig a declaratio of etitlemet to isurace cover i respect of the clea-up costs at 35 maufacturig sites i the USA. The courts of Washigto State applied the law of Pesylvaia ad the Supreme Court of Washigto State foud that Alcoa could recover the full costs of remediatio at ay particular site provided oly that some damage had occurred at the relevat site durig the years whe Lexigto was at risk. Lexigto were Alcoa s property damage isurers for the period betwee 1 July 1977 ad 1 July 1980 but the cosequeces of the Supreme Court s decisio were that Lexigto was the faced with a hefty claim of the order of US$ 180 millio, which they evetually settled for a figure of US$ 103 millio. Lexigto had, however, reisured their risk o the Lodo reisurace market o the same terms ad coditios as origial icludig, specifically, the isured period of 1 July 1977 to 1 July The reisurers, Wasa ad AGF, declied to pay o the basis that the reisurace policy was govered by Eglish law ad that, as a matter of Eglish law, reisurers could oly be liable for the costs of remedyig damage to property which actually occurred betwee 1 July 1977 ad 1 July They said they could ot therefore be liable for the cost of remedyig damage occurrig before or after that period. Those argumets failed. The Court of Appeal held that the reisurers were boud by the decisio of the Supreme Court of Washigto State. Lord Justice Logmore said: I the preset case oe has to determie whether as a matter of costructio of the cotract the parties iteded the period clause to have the same meaig, whatever that meaig may be. It seems to me that they did Ad Lord Justice Sedley added that: Save to the limited extet that the terms of reisurace pushed them apart, the two cotracts were back to back, because that is what reisurace prima facie is. 7

9 Lord Justice Logmore referred to the evolutio of the Bermuda Form i which the parties agree to Eglish or Bermuda arbitratio but agree also that the substative law of the isurace (or reisurace) is to be that of New York, otig that this sesible arragemet might avoid some, at least, of the problems throw up by this difficult case Cate Sharp, head of our Eviromet Group, commets: This case highlights the relevace of evirometal isurace as a optio for busiesses i their maagemet of evirometal risks. Although it has bee said may times before, the case also demostrates how importat it is for all parties to check the risks that are beig covered. Evirometal isurace premiums ca certaily be costly ad busiesses will wat to esure that their cover is activated i the iteded circumstaces ad protracted litigatio is avoided. Evirometal isurace ievitably presets its ow particular issues. A particular issue with respect to specific policies coverig cotamiatio by gradual migratio or seepage is esurig adequate disclosure to the isurer of all kow issues at the site. It is also importat to ote that a typical exclusio i evirometal isurace policies is where there is ay volutary reportig to a regulator. This ca limit coverage i circumstaces where, as a matter of iteral policy, a compay is proactive i its evirometal maagemet or where a third party (such as a ladlord or former ower) makes such a report. If you have ay questios about evirometal isurace, please cotact: Cate Sharp csharp@mayerbrow.com Eviromet Group Idemities ad joit ames isurace As the latest adveture of Idiaa Joes goes to show, some themes just keep comig back. Take joit ames isurace ad idemities. A burst pipe, a flood ad the old familiar argumet about who should pay for the damage may ot be i the same league as Harriso Ford s exploits but the twists ad turs of the Court of Appeal decisio i Tyco Fire & Itegrated Solutios Limited v Rolls-Royce Motor Cars Limited surely provided a edig to talk about ad eough ammuitio for a sequel i the House of Lords. I priciple it s all very simple. A cotractor gives a idemity to the employer agaist its egligece but elsewhere i the cotract the cotractor or the employer is required to isure the works, ad perhaps the existig structures, i their joit ames. The questio is, does the joit ames isurace arragemet cut dow the applicatio of the idemity, to the extet of the isurace obligatio? Did the parties ited a isurace fuded solutio? Sometimes the parties say so but sometimes they do ot, which is where the problem begis, as it did i Tyco. 8

10 Costructio & Egieerig Legal Update Tyco cotracted with Rolls-Royce to provide fire protectio services, icludig a sprikler system, at a ew Rolls-Royce maufacturig plat ear Goodwood i West Sussex. Oe of the mai supply pipes burst ad caused a flood, damagig ot oly the works but other parts of the plat. Tyco repaired the damage to the Works, but the Court of Appeal had to decide whether Tyco was liable to Rolls-Royce for damage to existig structures (i.e. other parts of the developmet). For the purposes of the proceedigs, Tyco accepted that the flood was caused by its egligece i failig properly to coect or faste a joit i the mai supply pipe, which had caused the burst ad cosequetly the flood. Clause 13.5 of the cotract, which was ot a idustry stadard form, bega with this critical wordig: The Employer shall maitai, i the joit ames of the Employer, the Costructio Maager ad others icludig, but ot limited to, cotractors, isurace of existig structures.. agaist the risks covered by the Employer s isurace policy referred to i Schedule 2 (ie the Specified Perils) subject to the terms, coditios, exclusios ad excesses (uisured amouts) of the said policy. Rolls-Royce had apparetly ot take out this isurace i joit ames but the parties agreed that the court should resolve the case as if it had. The first key issue was whether the first setece of clause 13.5 made Tyco a joit isured i respect of the existig structures. The first istace judge looked at the phrase.. others icludig, but ot limited to, cotractors.. ad commeted: It is difficult to thik of a wider scope of persos iteded to be covered. The Court of Appeal did ot agree. They foud a umber of thigs strikig about the isurace of the existig structures: The "Cotractor was ot amed, although the Cotractor was amed i coectio with isurace of the Works ad it would have bee so easy to iclude the cotractor i the first part of the clause. The rest of clause 13.5 was about isurace of the Works ad othig further was said about how a joit ames policy i respect of the existig structures was iteded to work. "others, icludig but ot limited to, cotractors was a odd phrase; cotractors were at least idetified by descriptio but others were wholly udefied. What was the isurable iterest i respect of which "others were to be isured? Schedule 2 (referred to i 13.5) cotaied a "Notice To Cotractors O Isurace Provisios which suggested that cover i respect of the Specified Perils was limited, where cotractors were cocered, to their Works. Lord Justice Rix also oted that there was o obligatio o Tyco to take out professioal idemity isurace (which he thought, had it bee take out, would have applied to Tyco s assumed faulty pipe tighteig) but commeted that it would be a brave cotractor who udertook work without puttig such isurace i place. The opeig part of clause 13.5, said the Court, was ot iteded to give Tyco or ay idividual cotractor separate liability isurace i respect of the existig structures outside the area of its ow Works. 9

11 All that this phrase is iteded to do is to state that the Employer s Policy isurig its ow property o the Site embraces a series of joit amed policies which protects others icludig but ot limited to cotractors. Cotractors are told this so that they may have the cofidece that, if disaster strikes the developmet, the employer will have the resources to reistate it icludig the resources to prepare ad see to completio the performace of cotractor s Works. It seems to me that others is ot a atural way to refer, eve iclusively, to the Cotractor uder a idividual package cotract, ad that the positio is ot improved by sayig that others icludes cotractors, a phrase which does ot i terms embrace the Cotractor. There was o special regime i relatio to the existig structures (or eve, it seems, i relatio to the Works) which excluded Tyco s other cotractual obligatios, i particular its idemity to Rolls Royce agaist egligece. Lord Justice Rix cosidered the challegig case law ad foud the Court of Appeal s decisio i Lodo Borough of Barkig & Dageham v Stamford Asphalt Compay Limited the closest case, i terms of the facts (although the issue i Tyco was, of course, oe of costructio of the particular cotract that Tyco made with Rolls-Royce). Barkig was apparetly ot cited (ad was therefore uaffected) by the key House of Lords decisio i Co-operative Retail Services Limited v Taylor Youg Partership Limited. The Barkig aalysis that, i this situatio, a obligatio to isure i joit ames oly exteds to specified perils so far as loss by such perils has ot bee caused by egligece, was, i Lord Justice Rix s view, bidig o the Court of Appeal i the absece of the distiguishig wordig i, for example, the Co-operative case. The Court of Appeal did ot have to decide the secod mai issue, whether, as a matter of isurace law, the provisio for joit ames isurace by itself provided a overridig reaso to costrue the cotract so as to override Tyco s cotractual liability for egligece. Lord Justice Rix did cosider the issue but cautiously, as the House of Lords had explored the issue i the Co-operative case. Differet doctries had, he oted, bee put forward to explai why a isurer caot sue by subrogatio i the ame of oe co-assured to recover, from aother co-assured, moies paid out o the basis of the latter s egligece or default. Oe doctrie is circuity of actio ad aother is a implied term i the isurace cotract, the latter ow apparetly replaced by the doctrie of the true costructio of the uderlyig cotract for the provisio of joit ames isurace. A provisio for joit ames isurace might, he said, as a matter of costructio, lead to the carvig out of a exceptio from the uderlyig regime so far as specified perils were cocered. A implied term could ot, however, withstad express laguage to the cotrary ad if the uderlyig cotract evisaged that oe co-assured might be liable to aother for egligece eve withi the sphere of the policy s cover, i the absece of ay express exclusio of subrogatio, there was othig i the doctrie of subrogatio to prevet the isurer suig i the employer s ame to recover the proceeds paid out by the isurer. The latest thikig, said Lord Justice Rix, is to the effect that it is all ultimately a matter of the parties itetios as foud i their cotracts. ad ot, therefore, a rule of law. Nothig i cosiderig the secod issue, therefore, caused him to chage his mid o the first. 10

12 Costructio & Egieerig Legal Update Oe clear message that does emerge from the judgmet is just how importat it is for parties to agree what risks are to be covered by isurace ad how far (if at all) to make express referece to the sesitive issue of egligece. Despite that clear message, however, ad despite the growig emphasis o risk allocatio, do ot bet agaist a sequel or two. Some themes just do t seem to go away. Richard Crave Notificatio, otificatio, otificatio Although ot quite as excitig as the UK TV home-hutig series Locatio, locatio, locatio, followig the otificatio provisios of your isurace policy ca be just as crucial as takig the pluge ad pluggig your life-savigs ito purchasig a swaky ew flat. The recet decisio i Kajima UK Egieerig Ltd v The Uderwriter Isurace Compay Limited serves as a key remider of the importace of sufficiet otificatio. Kajima was the mai cotractor for the costructio of a block of apartmets, which were i the form of pre-fabricated, stacked accommodatio pods. Kajima took out professioal idemity isurace with the defedat uderwriters for a two year period. The policy stated: The Isured shall give writte otice to the Uderwriters as soo as possible after becomig aware of circumstaces which might reasoably be expected to produce a claim... The effect of the policy wordig was that, if circumstaces were otified uder the policy which later led to a claim, the policy would respod as log as the circumstaces (ad ot ecessarily the claim) were otified withi the policy period. Durig the policy period, Kajima duly made a otificatio that the pods were settlig, which was causig adjoiig roofig, balcoies ad walkways to distort. The otificatio also referred to other potetial damage ad risk ad that a ivestigatio was uderway. Shortly afterwards, the policy expired ad the ivestigatios were completed. The ivestigatios revealed a umber of serious ad extesive problems, oly some of which were i the same area of the defects origially otified. Further, some of the problems ucovered were ot the same as those origially otified. The questio arose, whether the problems that occurred after the policy expired formed part of the circumstaces origially otified i the policy period, or whether the additioal problems were ew circumstaces which would ot be covered by the policy. The isured, Kajima, argued that the ivestigatio had led to further discovery of additioal defects ad so there was a cotiuum of evets which were related, begiig with the iitial ivestigatio. The court disagreed. There had to be some relatioship betwee the defects ad damage that occurred after the policy had expired ad the previously otified circumstaces. O the facts of the case there was o such relatioship ad therefore the isured had o claim eve though the ivestigatio (which was otified) ucovered the additioal defects ad problems. 11

13 Ad the message? The case is a sharp remider that if a policy is to respod, every isured must be careful to otify the specific circumstaces or claim. If there has already bee a otificatio, ew circumstaces that arise may eed to be otified, eve if the isured believes there to be some lik to the origial otificatio. Takig a precautioary approach to otificatio is the safe course. Takig a more relaxed approach might mea that isurers are etitled to reject a claim uder the policy, ad that could be seriously bad ews. Gemma Houghto Dow with liability - ad how to fix the ceilig You always eed a pla B. Especially with cotracts, ad the costructio idustry is well versed i risk allocatio betwee employers, cotractors, subcotractors ad the other idustry players. With potetial liabilities o costructio, oil ad gas projects ruig ito the millios, effectively drafted exclusios, idemities ad limitatio of liability clauses ca be vital; as ca be the choice of law which ultimately govers them. Such clauses should ideally be drafted usig clear wordig which accurately captures the itetios of the parties. What happes, however, whe a exclusio clause or idemity is silet, for example, as to damages or loss which flows from a party s ow egliget or itetioal act? What is the approach of the Eglish courts i such circumstaces? Amog the various questios of fact ad law explored i the recet decisio of Mr Justice Ramsey i Biffa Waste Services Ltd ad Biffa Leicester Ltd v Maschiefabrik Erst Hese Gmbh ad aother was the scope ad extet of limitig wordig cotaied i a clause of a agreemet betwee Biffa Waste ad MEH. Biffa Leicester ad Leicester City Coucil etered ito a PFI cotract for the collectio, recyclig ad disposal of Leicester s domestic waste. The PFI cotract required the costructio of a recyclig plat, a key part of which was a Ball Mill. Biffa Leicester the etered ito a back to back agreemet with Biffa Waste who i tur cotracted with MEH uder a Desig ad Build Deed for MEH to desig ad build the relevat plat. MEH also provided a warraty i favour of Biffa Leicester (the Direct Agreemet). MEH subcotracted the supply of the Ball Mill. While post completio modificatio works were beig carried out i the Ball Mill by a third party a fire broke out. Biffa Leicester ad Biffa Waste brought proceedigs i the Techology ad Costructio Court agaist MEH ad a subsubcotractor of MEH to recover losses resultig from the delay caused by the fire to the operatio of the recyclig plat. (Two of the parties to the proceedigs were apparetly isolvet.) I determiig whether MEH was liable to Biffa Leicester ad if so, to what extet, Mr Justice Ramsey had to cosider the effect of clause 2.2 of the Direct Agreemet ad to decide if the wordig was sufficiet to exclude or limit liability i tort. The clause read: The Cotractor shall subject to the terms of this agreemet owe o liability, duty or obligatio to Biffa Leicester which is greater tha would have existed if Biffa Leicester had bee amed Provider uder the Supply Cotract 12

14 Costructio & Egieerig Legal Update Biffa relied o the priciples of iterpretatio set out by Lord Morto, i 1952, i Caada Steamship Lies v The Kig. Those guidelies provided that, i cases where there is o express referece to egligece, the court must cosider if the words used are wide eough, i their ordiary meaig, to cover egligece ad if they are, the the court must cosider whether the head of damage may be based o some groud other tha that of egligece. If this is foud to be the case (ad that head is ot so faciful or remote) the Caada Steamship provided that liability for a party s ow egligece would ot be excluded. Mr Justice Ramsey aalysed the authorities, icludig the relatively recet case of HIH Casualty ad Geeral Isurace Ltd v. Chase Mahatta Bak, ad helpfully summarised the positio: (1) Limitatio of liability clauses are costrued with less rigour tha exclusio of liability clauses or idemity clauses. (2) The guidelies i Caada Steamship provide helpful guidace o the proper approach to iterpretatio but do ot lay dow a code which prescribes rigid rules to be applied mechaically to iterpret a particular clause. (3) The relevat clause must be costrued i the cotext of the whole istrumet ad agaist the admissible backgroud, to ascertai whether the wordig, although literally wide eough to cover egligece, did ot do so. (4) I the case of exclusio clauses or idemity clauses it is iheretly improbable that oe party iteded the clause to release the other party from liability for egligece or impose a idemity for the other party s egligece. But, i the case of a limitatio of liability clause there is o such high degree of improbability. O the basis of these priciples, Mr Justice Ramsey foud that clause 2.2 of the Direct Agreemet was sufficiet to limit MEH s liability i tort for delay caused by egligece as: clause 2.2 was a limitatio of liability clause ad as such was to be costrued less rigorously tha a exclusio clause, although there was o express referece to "egligece" i clause 2.2, the referece to "liability" ad "duty" was sufficiet to cover liability i tort for egligece, ad there was othig improbable about MEH wishig to exclude liability i tort for egligece. The judgmet i Biffa v MEH therefore idicates that the courts have distaced themselves from iflexible applicatio of the rules set out i Caada Steamship, especially i circumstaces where to do so would, as Lord Scott of Foscote said i HIH v Chase Mahatta: produce a result icosistet with the commercial purpose of the cotract i questio. As with all matters of draftig, the questio could be avoided altogether if the relevat cotract clause cotais wordig that makes clear whether or ot the particular exclusio or idemity applies to a party s ow egligece or itetioal acts. How easy or difficult it may be i practice, however, to egotiate what may be a sesitive issue, is, of course, aother matter. Moica Chapli 13

15 The meaig of cosequetial loss Just like the Eglish moarchy, Eglish cases o the iterpretatio of cosequetial losses ru i a relatively log ad established lie. Cosequetial losses, cocluded the Court of Appeal i British Sugar v NEI Power Projects, are losses that fall withi the secod limb of Hadley v Baxedale, which are losses that may reasoably be supposed to have bee i the cotemplatio of both parties, at the time they made the cotract, as the probable result of the breach of it. While clear i priciple, like so may thigs, the difficulties start to surface whe the test is applied i practice. Take, for example, the 1997 case of Deepak Fertilisers ad Petrochemical Corporatio v Davy McKee (Lodo) Ltd ad ICI Chemicals & Polymers Ltd where the Court of Appeal had to cosider the followig clause: ad i o evet shall DAVY by reaso of its performace or obligatio uder this CONTRACT be liable for loss [of] aticipated profits, catalysts, raw material ad products for idirect or cosequetial damages. Deepak had made a claim agaist Davy which icluded a claim for fixed costs ad overheads, arisig from a explosio at a methaol plat which was rebuilt, together with loss arisig due to the fact that the ew plat used more catalyst per charge tha the origial plat. I this istace, the Court came to the coclusio that the fixed costs ad overheads together with the losses relatig to the higher catalyst charges were ot idirect or cosequetial ad therefore Davy could ot rely o the exclusio clause. Some sixty years previously, i Sait Lie v Richardsos, Westgarth & Co, where marie egies to be fitted i a ship were rejected as usuitable, loss of profit claimed by the owers of the ship was also held ot to be a idirect or cosequetial loss. More recetly, i Hotel Services Ltd v Hilto Iteratioal Hotels (UK) Ltd the Court of Appeal foud the cost of removal ad storage of defective chiller uits ad loss of profits ot to be idirect or cosequetial losses. A umber of stadard form cotracts have similar exclusio clauses. For example: Clause 17.6 of the FIDIC Silver Book: "Neither Party shall be liable to the other Party for loss of use of ay Works, loss of profit, loss of ay cotract or for ay idirect or cosequetial loss or damage which may be suffered by the other Party i coectio with the Cotract Clause 44.2 of MF/1: " either the Cotractor or the Purchaser shall be liable to the other for ay loss of profit, loss of use, loss of productio, loss of cotracts or for ay fiacial or ecoomic loss or for ay idirect or cosequetial damage whatsover that may be suffered by the other. Clause 44.2 was cosidered i The Lodo Fire ad Emergecy Plaig Authority v Halcrow Gilbert Associates ad Others, where a state of the art fire-fighter traiig facility i Southwark itself caught fire ad burt dow due to a leak i the ductwork. The claimat sued its cosultig egieers ad its buildig services egieers, Lore Stewart, who had istalled the ductwork. 14

16 Costructio & Egieerig Legal Update Lore Stewart had bee appoited pursuat to a MF/1 form of cotract ad oe issue the court had to cosider was whether the cost icurred by the claimat i payig for alterative traiig facilities, while the firehouse was shut dow followig the fire, was excluded by clause 44.2 of MF/1. The claimat argued that the alterative fire traiig costs could ot be excluded by the clause as the wordig was ot sufficiet to exclude costs that fell withi the first limb of Hadley v Baxedale. The judge disagreed. He said that Clause 44.2 must be costrued disjuctively, ot cojuctively. It is ot iteded to iclude loss of profit etc as examples of idirect or cosequetial loss. It is iteded to specify categories of loss which are to be excluded. This reasoig might arguably apply to clause 17.6 of the FIDIC Silver Book as the wordig is similar. What about this clause, however? either the tugower or the hirer shall be liable to the other party for loss of profit, loss of use, loss of productio or ay other idirect or cosequetial damage for ay reaso whatsoever. Eagle eyed readers will o doubt have oticed the word other i this clause but does this make a differece? This wordig was cosidered i Ease Faith v Leoie Marie Maagemet where the court cocluded that this clause oly excluded liability for idirect loss of profit, because of the referece to or ay other. Similar wordig was cosidered i BHP Petroleum v British Steel but there Mr Justice Rix came to the view that the word other should just be disregarded, so there is o clear authority o the poit. This could be sigificat whe oe cosiders the phrase: the Cotractor s liability for loss of use, loss of profit or other cosequetial loss which appears i the JCT 2005 Desig ad Build Cotract (as it did i the equivalet 1998 stadard form) ad which also has that magic word other i it. But, just like the moarchy, glitches i the lie ca occur ad the Australia Court of Appeal of Victoria has very recetly challeged the established thikig. I Evirometal Systems Pty Ld v Peerless Holdigs Pty Ltd the Court thought that, i priciple the British Sugar test appeared to be flawed. It is ot correct, it said, to cofie cosequetial losses to the secod limb of Hadley v Baxedale. The real distictio was betwee: 1. ormal loss which is a loss that every claimat i a like situatio will suffer; ad 2. cosequetial losses which are all losses other tha ormal loss. Accordig to the Court: i my view, ordiary reasoable busiess persos would aturally coceive of cosequetial loss i cotract as everythig beyod the ormal measure of damages, such as profits lost or expeses icurred through breach. The Court agreed with the approach take by McGregor o Damages which oted that: It is illogical ad fails to make practical sese to cofie cosequetial loss i cotract to loss fallig withi the secod rule i Hadley v Baxedale, beig cotradictory for oe cotractig party to commuicate special circumstaces to the other so as to fix him with 15

17 the liability for loss to which he would ot otherwise be subject ad at the same time to accept a exclusio of liability i respect of the selfsame loss. It is a iterestig argumet, although it failed to covice the Eglish Court of Appeal i the Hotel Services case. Whether the Victoria approach revives the debate ad ultimately derails the British Sugar lie of authority remais to be see, ideally i the House of Lords. I the meatime, however, if you wat to be cotractually exclusive, say exactly what you mea ad agreed ad do t metio you kow what. Emily Moastiriotis Liability for costs uder a collateral warraty The Scottish Court of Sessio recetly cosidered the meaig of the phrase Sub Cosultat s liability for costs i a collateral warraty. The case of Glasgow City Airport Limited v Messrs Kirkma & Bradford provides us with a classic example as to why, whe attemptig to limit liability for cosequetial losses, the laguage used must be clear ad uambiguous. The claimat, Glasgow Airport Limited sought to recover 2 millio with iterest for breach of a collateral warraty provided by the defedat (Kirkma & Bradford) who had istalled a floor slab at the claimat s property. The claimat s teat brought a actio agaist the claimat seekig to recover the cost of havig the floor slab replaced ad also sought to recover their losses due to disruptio to busiess ad loss of profit. The claimat subsequetly claimed agaist the defedat. I defedig the claim, Kirkma & Bradford sought to rely o a term of the collateral warraty that stated: 1. The Sub-Cosultat warrats that it has exercised ad will cotiue to exercise all reasoable skill, care ad diligece i the performace of the services uder the appoitmet. I the evet of ay breach of this warraty: (a) The Sub-Cosultat s liability for costs uder this Agreemet shall be limited to that proportio of such costs which it would be just ad equitable to require the Sub-Cosultat to pay havig regard to the extet of the Sub-Cosultat s resposibility for the same The defedat submitted that the opeig words of the clause limited their liability. They relied o the word costs, claimig that the term was cofied to the costs of repair or reistatemet of the floor slab ad did ot exted to cosequetial losses. This would mea they were oly liable to pay 775,000, the cost of replacig the floor slab. The claimat said that the collateral warraty should ot be iterpreted so restrictively, that the first full paragraph of the warraty i clause 1 (above) was urestricted ad so, uless restricted from doig so elsewhere, they were etitled to recover all losses caused by breach of that warraty, subject to satisfyig the ordiary commo law test of remoteess. 16

18 Costructio & Egieerig Legal Update The court agreed with the claimat, holdig that the proper iterpretatio of the words liability for costs had to be cosidered i cojuctio with the geeral warraty grated at the outset. The warraty had bee give i geeral ad uqualified terms ad would, uless clearly restricted (ad subject to the remoteess rules), etitle the claimat to recover all losses directly caused by the breach. Louise Barber ad Richard Crave What s bee happeig at Mayer Brow? February 2008 Miig Idaba For the past 13 years, the world of iteratioal miig has coverged o Cape Tow, South Africa for a aual coferece, kow as Idaba, a Zulu word, referrig to a meetig or covetio of tribal leaders. Members of our Costructio & Egieerig Group have bee attedig the Miig Idaba for a umber of years as part of the Mayer Brow Miig Group (see article o page 30). At each Miig Idaba, miisterial paels provide a forum to lear about ew miig opportuities ad allow delegates to iteract with dozes of cabiet-level govermet represetatives eager to secure ew ivestmets i their coutries. This presets somethig of a dilemma, give the issue of political risk. Delegates heard about miig compaies i Zimbabwe who had had their etire assets expropriated by the govermet of Mr Mugabe. At the other ed of the spectrum the presetatio by the Fiace Miister of Botswaa demostrated that Botswaa recogises the eed to cultivate iward ivestmet to brig much eeded foreig capital ad currecy ito the coutry i order to aid its developmet. That said, political risk remais a importat issue for project sposors ad leders o iteratioal miig projects. March 2008 MIPIM I March Chris Fellowes ad Jo Olso-Welsh from our Costructio & Egieerig Group had the tough assigmet of goig to Caes to atted this year s MIPIM, billed as oe of the largest real estate cofereces i the world. The evet is atteded by ivestors, developers ad advisers ad while the atmosphere was slightly subdued because of the credit cruch, Jo reports that there appeared to be o let up i the umber of developmet opportuities beig discussed ad the orgaisers have i fact sice aouced record attedaces at this year s evet. If you are attedig MIPIM ext year be sure to let us kow as Chris ad Jo would be delighted to meet you there. 17

19 May 2008 Housto Eergy Coferece Joatha Hosie was oe of three Lodo-based parters who atteded Mayer Brow s aual Eergy Coferece i Housto. Housto is ofte referred to as the Eergy capital of the world, beig home to major eergy compaies, cotractors ad specialist service compaies. Over 100 delegates from the eergy idustry ad the specialist fiace ad corporate advisory world atteded the coferece. Joatha preseted oe of the workshops Power Plat Developmet: EPC cotractig issues The workshop examied how best to structure completio risks, both through the EPC model ad other forms of procuremet, whe developig power plats. May 2008 Costructio Law 2008 O 22 May, i Lodo, Joatha Hosie, Sally Davies ad James Fielde from the Lodo Costructio ad Egieerig Group were speakers at the Costructio Law 2008 Coferece which was billed as providig a Practical, comprehesive ad tactical aalysis of the latest developmets affectig the costructio idustry. The all day coferece was chaired by Joatha, ad Sally spoke o Isuraces to uderwrite your risks, dealig with:- commo risks for D & B cotractors; the roles ad risks assumed by desig cosultats; how to hedge the risk; ad how to avoid errors ad omissios i your isurace cover. James Fielde spoke o The Commuity Empowermet, Housig ad Ecoomic Regeeratio Act 2009, cosiderig what the recetly aouced legislatio to amed the Costructio Act might cotai. Jue ICC/FIDIC ad a master class Nick Hechie had a busy start to Jue. At the begiig of the moth Nick spoke at the ICC/FIDIC coferece i Housto Iteratioal costructio cotracts ad the resolutio of disputes ad the retured to Lodo to speak at a two day master class Delay ad Disruptio i Costructio Cotracts Welcome to Kevi Owe At the ed of Jauary 2008 we were ot oly delighted to welcome our ew colleagues from JSM (see issue 55) but, i particular, to welcome the JSM Costructio & Egieerig team. I this issue we are very pleased to itroduce Kevi Owe, a parter i our Hog Kog office. Kevi specialises i all aspects of o-cotetious costructio ad project work i Hog Kog ad South East Asia, icludig rail projects, airports, water treatmet ad power-related trasactios i Idoesia, Vietam, Thailad ad the PRC. Kevi is ivolved i advisig o:- procuremet methods for large scale ifrastructure projects ad draftig costructio, cosultacy ad equipmet supply cotracts ad project documetatio for ifrastructure ad project fiace trasactios; 18

20 Costructio & Egieerig Legal Update dispute resolutio mechaisms i costructio projects ad evirometal law aspects of projects i Hog Kog. Kevi acts for Govermet-fuded statutory corporatios, real estate developers, project sposors, cosultats, cotractors ad sub-cotractors, isurers, fiacial istitutios ad all participats i the costructio process. Notable amog the projects with which Kevi has bee ivolved are the West Rail, Tsimshatsui Extesio, Kowloo Souther Lik ad Bagkok rail projects, Hog Kog Cotaier Termial CT9, the PPP Asia World Expo project, a Bagkok waste water treatmet project, the Hog Kog Covetio ad Exhibitio Cetre Atrium Lik Extesio ad a ew cargo termial at Hog Kog Iteratioal Airport. Kevi's efforts have ot goe uoticed. Asia Pacific Legal 500 have raked Kevi as a Leadig Costructio Lawyer for a umber of years, as did Chambers Asia i 2008, ad Asia Pacific Legal 500 described Kevi i 2007/08 as very impressive o-cotetious specialist. Costructio judge rules that parties have o cotract Is there a cotract? is a regular theme i costructio cases but the judgmet i Hade Youg Limited v Laig O Rourke Midlads Limited is a powerful (ad perhaps, to some, surprisig) remider of just how far parties ca go without actually cocludig the cotract. Mr Justice Ramsey, i the Techology ad Costructio Court (TCC), ruled that the parties had o cotract some two years after their project had reached practical completio. Hade Youg Limited (HYL) carried out the desig ad istallatio of mechaical ad electrical works at the Ricoh Area i Covetry. There were legthy ad detailed discussios betwee HYL ad the mai cotractor, Laig O Rourke Midlads Limited (LOR), cocerig the terms of a sub-cotract betwee them but oe was ever siged. HYL proceeded with the work, for which LOR paid HYL i accordace with its terms. The project reached practical completio ad evetually the parties arrived at the TCC watig to kow if there was a cotract. Mr Justice Ramsey foud that the parties had ot agreed o all the essetial terms, i particular because the parties had ot agreed the limit of liability uder warraties or the sub-cotract ad had ot etered ito a siged ad executed agreemet. He ruled that the proforma warraties had bee regarded as beig vital to the parties. He also held that the test of whether a cotract had bee cocluded was a objective oe. LOR argued that HYL were estopped from cotedig that o sub-cotract had bee cocluded because applicatios for paymet ad cotractual claims had bee made by HYL without ay qualificatio or suggestio that HYL were ot etitled to the paymets i accordace with the agreed price ad terms of the sub-cotract. 19