How to win in mediation Accceleration - more haste, less speed Limitation: time to revisit an old friend?

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1 Building On... KNOWLEDGE EXPERIENCE BEST PRACTICE Issue 04 - Autumn 2009 This issue How to win in mediation Accceleration - more haste, less speed Limitation: time to revisit an old friend? Possession is 9/10ths of the law As the saying goes, possession is 9/10th of the law and a contractor with exclusive possession of a site during the course of construction works needs to be careful not to lose that right as it can have unintended consequences, particularly in relation to the amount of liquidated damages that are payable in the event that completion is delayed. Equally an unwary employer may lose its right to damages for delay by entering the site too early. Welcome Welcome to the fourth edition of our construction and engineering newsletter, "Building On". There have been a number of Court decisions in the last few years which have considered this issue and provide a useful lesson in the problems that can occur. Types of possession There are essentially three types of possession over the course of a construction project: exclusive possession by the contractor during construction exclusive possession by the contractor but allowing the employer to use or occupy part or all of the site and partial possession which involves the employer taking possession of part of the works before the project has been fully completed. Construction contracts treat the latter two types of possession very differently to the first. 'Use and occupation' In Impresa Castelli SPA v Cola Holdings Ltd, Impresa agreed to build a large 4-star hotel in London for Cola under a JCT 1981 contract. Delays occurred and the date for completion passed. The parties entered into several agreements delaying the date for completion including a written agreement on 1 September 1999, in which they agreed that Impresa would allow Cola staged "access" to the site so that by 12 September 1999 it could operate as a hotel. Such access was, however, not to be regarded as amounting to practical completion. The agreement also listed a number of works, including the air conditioning system, which were not yet complete. The works remained incomplete and by 21 May 2001, Cola alleged that Impresa had abandoned site. Cola claimed liquidated damages and Impresa defended Cola's claim by arguing that the grant of "access" by the September agreement amounted to Cola taking partial possession of the greater part of the works with the resultant effect that Cola should not be able to recover the full rate of liquidated damages. In this issue, Alex Grant looks at the difference between the types of 'possession' that can occur during a construction project and resident editor, Kevin Joyce, discusses acceleration in the context of major construction or engineering projects. Neal Morris sets out his thoughts on how to get the best out of mediation and James Ladner considers the recent proposals by the Law Commission to reform the law on the limitation periods. Finally, Shy Jackson rounds off with a digest of the latest case law. We do hope you find the newsletter enjoyable and informative. Andrew Hibbert Head of UK Construction and Engineering

2 ...continued from page 1 The key clause of the contract was clause 17.1 (similar to clause 2.33 of JCT05 form). This entitled Cola, with the reasonable consent of Impresa, to take possession of part of the Works (referred to as the "relevant part"). In such circumstances, practical completion in relation to the relevant part would be deemed to have occurred with the result that a mini defects liability period would begin to run, there would be a partial payment of retention, a reduction in the liability to pay liquidated damages, and the employer would be obliged to maintain joint names insurance and reinstate the works if damaged in respect of the relevant part. In contrast, under clause of the contract (the equivalent of clause 2.6 in the JCT05 form) Cola, with the reasonable consent of Impresa, could use or occupy the whole or part of the site before practical completion, without any of the consequences of partial possession. The judge therefore had to decide whether partial possession had occurred under clause 17.1 or whether Cola's presence was merely use or occupation under clause The judge noted that if Cola had intended to take back exclusive possession, despite the fact that certain works were incomplete the September agreement could have used the words partial possession instead of referring to access. The judge found nothing to suggest that partial possession had occurred. In looking at the factual background to the problems with the air conditioning system and Cola's need to have the hotel operational by 12 September as well as the intention of the parties as evidenced through the wording of the September agreement, the judge concluded that the word "access" in the September agreement implied "use and occupation" as referred to in clause rather than "partial possession" as referred to in clause As a result, Cola s presence did not amount to partial possession, Impresa s liability for damages was not reduced and Cola s claim was enforceable. Indeed, despite the fact that Cola was able to access and make use of the works for the very purposes for which they were intended (i.e. as a hotel), Cola was able to recover the full amount of liquidated damages. 'Partial possession' Shortly after Impresa came the decision in Skanska Construction (Regions) Ltd v Anglo-Amsterdam Corporation Ltd. Skanska was employed by Anglo- Amsterdam to construct a purpose built office facility in Edinburgh. As in Impresa the contract was a JCT 1981 standard form. Anglo- Amsterdam alleged that Skanska was late in the completion of the works and applied liquidated damages. Skanska argued it had achieved practical completion on time, or alternatively that Anglo- Amsterdam had taken partial possession. The operation of clause 17.1 meant that Skanska was not liable to pay liquidated damages. Clause 16 of the contract was amended to impose a more stringent test for establishing practical completion. Under the test it appeared that in two ways the works were not complete: the air conditioning system was not functioning and Skanska had not produced operating and maintenance manuals. The arbitrator appointed by the parties to determine the dispute decided that practical completion had not occurred. Anglo-Amsterdam had written to Skanska confirming that the proposed tenant for the building, ICL, would commence fitting out works on the disputed date of practical completion. ICL was charged with responsibility for security once it entered into this non-exclusive possession and Skanska was allowed access to carry out work, subject to making the necessary security and access arrangements with ICL. Skanska argued that once ICL had started its fit-out of the building, the employer had taken partial possession of the entirety of the works and Skanska no longer had to pay damages for delay. The arbitrator disagreed and took the view that the purpose of clause 17.1 was to deal with the situation in which an employer takes partial, not complete, possession. The clause could not apply where the entirety of the works had been given over to a tenant for fit-out. Skanska was therefore liable to pay liquidated damages until practical completion was achieved under clause 16. On appeal to the Court, the judge overturned the arbitrator s decision. He found that clause 17.1 could operate when possession had been taken of all parts of the works and was not limited to possession of part. He concluded that partial possession of the entirety of the works had been taken as a result of the employer agreeing to ICL starting the fit-out. Consequently Skanska was entitled to repayment of the damages. Conclusion Often on construction projects a developer will be keen to get on site to commence fit out or start operating their business and contractors trying to be helpful will try and facilitate this. However employers and contractors need to beware of the unintended consequences of inadvertently taking possession of a site and the impact this can have on the operation of their contract. alexander.grant Key points There are three types of possession of the site: exclusive possession, exclusive possession with use/occupation by the client and partial possession. The consequences of each (under the JCT contract) are very different: partial possession relieves the contractor of part of its liquidated damages (and other) risk but granting use of part of the site does not. When giving consent for partial possession or allowing the employer use and occupation, a contractor should be clear as to exactly which consent it is granting. Clear and unambiguous written consent is vital in achieving this aim. It is possible to have partial possession of the whole of the works. 2

3 How to win in mediation Mediation is now firmly established in the UK construction and engineering sectors for the cost-effective resolution of disputes. But how do you ensure you get the best result? Mediation is concerned with achieving "win-win" solutions, where both parties consider the settlement which they arrive at to be a success. But there is a difference between a narrow win and a convincing one - winning in mediation is concerned with achieving the best winning results. This best result may be in terms of the intangible benefits which mediation brings to the resolution. It is not limited simply to how much to pay or to be paid. Given mediation's increased use in the construction industry, how do participants get the best out of it? Is mediation the right method of dispute resolution? The first consideration is to ensure that mediation is the right method of dispute resolution and that it is used at the right time in the dispute. Mediation is not the best process for all disputes. As no settlement can be guaranteed, adjudication or expert determination may be preferable if certainty and cash flow are vital. A party is also unlikely to achieve its best commercial settlement through mediation if the process takes place before it has had an opportunity to convey some of the strengths of its case to the other side, or to understand some of its weaknesses. Knowledge is power Mediation is known as an assisted negotiation. As in any negotiation, knowledge is power, so arm yourself with as much knowledge about your dispute and the other party as possible. The key to this is to understand what the issues will be: What are each parties' strengths and weaknesses on those issues? Most importantly, what will happen if the dispute is not settled? In mediation jargon, the acronyms BATNA and WATNA are used. They mean "Best" and "Worse" Alternative To a Negotiated Agreement. Make sure you collect as much advice as possible specific to likely recovery/payment levels, chances of success, timescales and budgeting. This enables you to carry out a risk assessment and to negotiate confidently at the mediation. Your mediation team The next step is to select your mediation team. Choose the members of your organisation and its advisers who can put you in the best negotiating position. This team is kept as small as possible and must include your commercial decision maker. In disputes involving large sums, it is often helpful to involve expert witnesses. With a good mediator's assistance and direction they can play a helpful part in persuading the other party of the strengths of your case and also in helping their own party understand its weaknesses. Employing experts requires judgement as to whether they will bring the parties closer together and towards your viewpoint. Bear in mind that an unfettered, adversarial approach by experts can be counterproductive, as well as a waste of time and costs. Similar considerations apply to involving Counsel in the mediation team. In some cases, where parties appear to have opposing views on points of law, a frank discussion between Counsel can crack a dispute and produce a settlement far more economically than a full trial or preliminary issue. The other side's team You then need to ensure that the other party has the right mediation team. Do they have their ultimate decision-maker involved in the preparation and present in person at the mediation? Only if the person who authorises the cheque is in the room will your persuasive arguments have their best effect and produce the best result. Similarly, there is no point preparing your experts to persuade their counterparts if the other party intends the mediation only to be a commercial discussion of settlement figures. He who prepares best usually gets the best result. The negotiation plan The next step is to prepare a negotiation plan. Think about: How will you persuade the other party of the strengths of your case in the early phases of the mediation? How will you deal with its weaknesses when the other side raise them? What negotiating tactics will work best? Do you make the first offer to control expectations, or is this a sign of weakness? At what level will you pitch your offer? What is your plan for movement from that opening gambit? In practice, a reasoned approach, which you have thought through and rehearsed in advance, is very effective and can often lead to a better settlement than bargaining. Rehearsing these arguments in advance, putting yourself in the other party's shoes, preparing for unorthodox solutions, is all time very well spent. And finally One final practical tip. All mediations reach a stage of deadlock. Be ready for this. Plan for it. Do not abandon hope. Be ready with some final arguments or unorthodox solution to break that deadlock and get what you want. Mediation works. Try it! neal.morris 3

4 Acceleration - more haste, less speed Given the vagaries of construction or engineering processes and the uncertainties into which projects often launch, progress is invariably different to planned intention. The concept of 'acceleration' is therefore relevant to all construction and engineering contracts. If progress is slow, acceleration is often considered as an option by which the project team can claw-back time that has been lost and not rely solely on the hope that things will improve later on in the project and result in completion on time. What is 'acceleration'? Acceleration is where the contractor takes steps, despite a change to the works, to achieve the original completion date or to achieve an earlier completion date than would otherwise be the case. It is an increase in the intensity of the work being carried out with the aim of bringing the job in on time and should not be confused with mitigation which is simply reallocation of existing assets in order to minimise cost and delay under the changed conditions on the site. If the contractor has accelerated, it will want to recover the costs it inevitably occurs in: Adopting increased working hours Working weekends Instigating double or triple shifts or Bringing in extra equipment or other resources to speed up the work. In circumstances where the employer expressly instructs the contractor to accelerate and where the need to accelerate does not arise from the contractor's own delay, then the right to recover the acceleration costs is often relatively straightforward. More difficult, but probably more common, is the situation where there is no clear instruction to accelerate. This sort of situation may arise where for example the contractor thinks he has a valid claim for an extension of time and notifies the employer of this; the employer (or his Project Manager or Contract Administrator) refuses or fails to grant an extension of time and the contractor, rather than risk being wrong and having to pay liquidated damages, decides to accelerate to make up the delay. On the other hand, the employer may want the contractor to accelerate, not just to achieve an earlier completion date but to make up delays so that the original completion date can be met. If the building or engineering contract is silent on this type of acceleration then the employer will have no right to issue such an instruction and will 4 have to reach a side agreement with the contractor. The contract terms The GC/Works and JCT05 contracts contain relatively structured procedures enabling the parties to accelerate to achieve completion before the completion date specified in the contract based on a quotation and acceptance procedure. By comparison, the NEC3 adopts a relatively simple procedure for acceleration (again, based on quotation and acceptance). However, these forms only provide for acceleration to achieve an earlier completion and not acceleration to make up delay and achieve the existing completion date. Constructive acceleration What happens where the employer refuses to grant an extension of time and the contractor considers it is obliged to accelerate in order to hit the original completion date? This is what is known as "constructive acceleration", a principal recognised in the United States and Australia. In these jurisdictions, if a contractor can prove that a delaying event was one for which it ought to have been awarded an extension of time and the certifier under the contract refuses to grant an extension of time either promptly or at all, a contractor may be permitted to claim acceleration costs on the basis of an implied instruction to the contractor to accelerate, overcome delays and finish the project by the contractual completion date. In the UK, however, the Courts do not as openly accept the principle of 'constructive acceleration'. The conventional position is that the parties have included provisions for extensions of time in the contract and if the employer fails to grant an appropriate extension, the dispute resolution provisions should be used to correct such failure. In reality, however, there will often be significant commercial pressures on the Contractor if it continues at its normal rate of progress and becomes liable to pay liquidated damages while the Project Manager or Engineer makes up its mind as to the contractor's entitlements and/or the parties follow the dispute resolution procedures in the contract. These commercial pressures often outweigh the risk of accelerating to bring the job to a timely conclusion in the hope that some allowance for acceleration costs will be made in the final account. In Ascon Contracting Limited v Alfred McAlpine Construction Isle of Man Limited and Motherwell Bridge v Micafil Vacuum Technik the Courts appeared to suggest that there are certain limited circumstances where the contractor may be able to recover its acceleration costs even where there has been no express instruction to accelerate and where there is no agreement as to which party is responsible for the delay which the contractor is attempting to make up. However, the position remains unclear.

5 Best practice - the contractor s perspective Given the uncertainty surrounding the authorities in English law on the circumstances in which a claim for acceleration costs will be successful, the best advice for the contractor remains to attempt to resolve extension of time claims promptly and/or obtain from the employer a written instruction to accelerate before undertaking such works. Where that is not possible but where the contractor decides that nonetheless he will take accelerative measures, he needs to set out clearly beforehand, the basis of the steps he is going to take, explaining what it is about the conduct of the Employer which leaves the Contractor to consider that he is effectively being instructed to accelerate. If it is subsequently established that the causes of delay are the responsibility of the Employer, there is a prospect that the Contractor may be able to recover its costs, either as loss and expense, damages for breach or on the basis of unjust enrichment. Once the principle of whether acceleration costs can be recovered has been established the Contractor then needs to be able to prove what these costs are. Its chances of success will be greatly enhanced the better the records it has kept. Best practice - the employer s perspective From the employer's point of view, the contractor's entitlements to an extension of time should be addressed promptly and agreement sought in relation to the value of acceleration if possible. If you do not intend to instruct acceleration then extreme care needs to be taken with written and oral communication as an inadvertent reference to it could result in arguments from the contractor that it has actually been so instructed. Once again, ensure that good records are maintained so that the additional costs can be traced back to additional resource not instructed. kevin.joyce Limitation: time to revisit an old friend? When a problem arises on an old job, everyone knows that the time limit for bringing a claim depends on whether the contract was a simple contract, where the claimant has six years from the date of breach to make a formal claim or where the contract was executed as a deed where the limit is 12 years. But is it really that straightforward? The answer is a resounding "no". The six/twelve year rule is only the position in relation to most breaches of contract; the position in tort (for example, in negligence cases) differs, here the law allows six years from the date when the damage is suffered, which may be a long time after the breach of duty occurred. This is particularly relevant in relation to claims against consultants. The six year / twelve year rule does not take into account deliberately concealed breaches (such as those sometimes alleged in relation to defects) or where the future defendant has agreed that money is due (as is often seen on final account disputes). Both extend the period in accordance with the detailed facts. As a result of these and other peculiarities, the time at which a claim becomes barred can vary by years in the sorts of disputes that we regularly come across in the construction world. In light of this complex legal framework, the Law Commission has recommended to the Ministry of Justice that the law on limitation be reformed and the Ministry has issued an 5

6 informal consultation asking for views. These will be published along with the draft bill later this year. The proposal The Commission has recommended a core limitation period applicable to the majority of cases in contract and tort (not including personal injury) of three years, with the three year period commencing from when the claimant acquired sufficient knowledge to bring the claim. The three year count down from this date of knowledge starts running when the claimant knows or ought to have known: (i) the facts that give rise to the claim; (ii) the identity of the defendant; and (iii) that the injury, loss or damage is significant. The proposal also includes a "long stop date" of ten years from when the act or omission complained of occurred (or should have occurred), after which the claim becomes barred. The Commission accepts that these time limits can be extended in cases of concealment. A three year period for claims is somewhat shorter than the 12 years that the industry is used to. The Commission implicitly recognise this and propose that both the core period and long stop period can be modified by agreement. However, such bespoke arrangements would be subject to statutory rules on fairness to militate against the risk of unreasonably long or short periods. Consequences Many have argued, in the current depressed market, that the proposed regime will result in longer limitation periods leading to increased risk for contractors and difficulties or additional expense in purchasing insurance. This may be the case but it seems that the proposal could also allow the opposite with a statutory basis for parties to agree periods less than the 12 year norm resulting from contracting by deed. This flexibility may allow reduced project insurance costs. The other major change, claims running from the date of knowledge, seems more likely to be a cause of future difficulties as claimants will often be in the best position to make out the facts which could lead to uncertainty as to the end of the limitation period to the detriment of defendants. When examined, the simplified scheme appears to have almost as many caveats as the existing position and it is therefore doubtful (flexibility aside) that the perceived benefits of the proposed legislation outweigh the new issues raised by it. james.ladner Case law update Chartbrook Limited v Persimmon Homes Limited (1 July 2009) On 30 July 2009 the House of Lords handed down its final judgment and from 1 October 2009 was replaced by the Supreme Court. This was one of the last decisions by the House of Lords and it deals with interpreting contracts. The specific issue was the extent to which a complicated payment formula could be interpreted by using pre-contractual correspondence. It was argued that the pre-contractual correspondence should be taken into account, since it was clearly identified the correct interpretation. The House of Lords held that it is necessary to take an objective approach and to construe the specific term in the context of the contract as a whole and its "business purpose". It was confirmed that pre-contractual correspondence could not be taken into account when interpreting contracts. This was because such correspondence was subjective and would result in greater uncertainty. The lesson is therefore to ensure that everything that has been 6

7 agreed is clearly set out in the contract. It will not be possible, except in rare cases, to rely on pre-contract negotiations to explain what the contract means. Siemens Building Technologies FE Ltd v Supershield Ltd (1 May 2009) Construction claims often involve more than one party and following a settlement there will sometimes be an attempt to recover the settlement sum, or part of it, from a third party. The key to such claims is proving that the settlement was reasonable and this case provides useful guidance on how such reasonableness is determined. The court made it clear that the test is whether the settlement was, in all circumstances, within the range of settlements which reasonable people in the position of the settling party might have made. The Court gave examples of such circumstances, including the strength of the claim, whether the settlement was the result of legal advice, the uncertainties and expenses of litigation and the benefits of settling the case rather than disputing it. This case demonstrates the difficulty of challenging a settlement as unreasonable. However, such challenges can be avoided by ensuring that there is a contemporaneous written record, such as an internal memo, setting out the background and the commercial and legal reasons for the settlement. Estor Ltd v Multifit (UK) Ltd (12 August 2009) In this case, the main contractor fell out with the employer and left the site. The sub-contractor, who carried out most of the works, agreed to complete the works on the basis of a quote sent and accepted by . Although the quote excluded part of the works, it appears that the sub-contractor paid the other sub-contractor who was carrying out the excluded works. A formal contract was never executed. The sub-contractor then obtained an adjudication decision in its favour. The employer resisted enforcement on the basis that it was the parent company who was named as the employer in the adjudication rather than the subsidiary company, although both were represented by the same person. The judge held that which company was the employer was a question of fact, which could not decided as part of the summary judgment application. As a result, the sub-contractor could not enforce the adjudication decision. This judgment demonstrates the importance of identifying the precise party to the contract, especially when dealing with individuals who may act for several group companies, and the scope of works. Such uncertainties can be avoided by executing a formal contract. shy.jackson Pinsent Masons LLP 2009 This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. LONDON DUBAI BEIJING SHANGHAI HONG KONG SINGAPORE OTHER UK LOCATIONS: BIRMINGHAM BRISTOL EDINBURGH GLASGOW LEEDS MANCHESTER T Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) and regulated by the Solicitors Regulation Authority. The word 'partner', used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm who is a lawyer with equivalent standing and qualifications. Singapore location in association with MPillay. A list of members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP's registered office: CityPoint, One Ropemaker Street, London, EC2Y 9AH, United Kingdom. We use Pinsent Masons to refer to Pinsent Masons LLP and affiliated entities that practise under the name Pinsent Masons or a name that incorporates those words. Reference to Pinsent Masons is to Pinsent Masons LLP and/or one or more of those affiliated entities as the context requires. For important regulatory information please visit: