"Back to back" but what are the basic lessons?

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1 "Back to back" but what are the basic lessons? Talk given at a meeting of the Society of Construction Law in Bristol on Thursday 24 th October The purpose of this paper is to discuss and analyse the relationship between sub-contracts and main contracts, and most particularly how the benefits and liabilities of each may apply to the other. The importance of this topic may be witnessed by the recurrence of disputes between main contractors and sub-contractors. This often follows a settlement of the main contractor's account with his employer. The sub-contractor may allege that he has a beneficial right to receive specific payments. This may also involve the main contractor seeking to attach blame upon the sub-contractor for a portion of the main contractor's liabilities. Often, a further complication is the disclosability of specific documents where one of the parties may allege privilege thus preventing their disclosure. Background Prior to the introduction of the Housing Grants Construction and Regeneration ("HGCR") Act 1996 on 1 May 1998, litigation or arbitration were the preferred methods of resolving disputes between main contractors and sub-contractors. The introduction of adjudication has meant that sub-contractors and main contractors are able to progress their disputes to a conclusion in a fraction of the time and the costs which it would formerly have taken. Whereas adjudication, ordinarily, does not have the status of being final and binding, it has proved effective nonetheless and is widely used. "Pay when paid" clauses were frequently inserted by main contractors into their contracts with their sub-contractors. The intention was to seek to prevent a sub- contractor from pursuing an independent claim against the contractor, the contractor arguing that the sub-contractor's entitlement was conditional upon the main contractor being paid in the first instance. This linked the sub-contractor's rights directly to recovery under the main contract There was much debate as to how these clauses should be interpreted. Was it on the one hand an attempt to exclude an entitlement, or was it but a mechanism and timescale for payment? If it was an exclusion, could it be said that it was subject to the Unfair Contract Terms Act 1977? Whatever these arguments, such clauses have now been affected by operation of Section 113 of the HGCR Act Furthermore, Section 110 of the Local Democracy, Economic Development and Construction ("LDEDC") Act 2009 limits the right of a payer to provide that payment is dependent upon acts by a third party. This is targeted to prohibit "pay when certified", or "pay when entitled" clauses. The combined effect of these changes is to allow contracts between main contractors and subcontractors to possess a greater degree of independence, the parties' respective rights and liabilities being subject to the parameters of the relevant contract terms alone. Sub-contractors are now no longer compelled to join forces with the main contractor in the hope of securing a payment. Thus the practice of nominated sub-contractors stepping into the shoes of the main contractor in dispute of claims against the employer, thus invoking the "name borrowing" provisions, are perceived to be somewhat archaic and quaint. This practice was followed, for example, in the decision of Lorne Stewart Limited -v- William Sindall Plc and NW Thames Regional Health Authority (1986) 35BLR v3 22/10/ :50:26 1 Veale Wasbrough Vizards

2 It will be noted however that Section 110 of the 2009 Act does not apply to PFI or PPP projects. Also, main contractors will always seek to step down obligations into their sub-contracts thus ensuring that, wherever possible, the liabilities are "back to back". An example of an attempt to render the sub-contract "back to back" with the main contract may be found in Brightside Kilpatrick Engineering Services -v- Mitchell Construction (1973) Limited [1975] 1 BLR 62. In this instance, the Court of Appeal had to try and interpret the effect of the words "the conditions applicable to the sub-contract with you shall be those embodied in the RIBA as above agreement". It remains important to sub-contractors to identify payments made and in particular, settlements concluded under the main contract between the employer and the main contractor. Main contractors may wish to prevent a sub-contractor from knowing the composition and breakdown of any settlement concluded. Similarly, main contractors may be compelled to try and identify the precise elements which make up a global settlement figure as a prerequisite and precursor for the recovery of the element from a culpable sub-contractor. When performing this analysis they may be compelled to identify sums for which they or their consultants are culpable. Sub-contractors' claims for work undertaken (a) Unjust enrichment. There is often argument whether or not a sub-contract exists and, if so, what are its terms. This can be a costly prerequisite to determining the parties' respective rights and liabilities. Finalising the terms of any sub-contract can take time Sub-contractors will monitor progress and potential risks if they have commenced performance of their work are yet to execute the sub-contract documents. They can thereby evaluate the potential benefits or disadvantages of being paid a fair and reasonable sum for their work as opposed to those entitlements under the proposed sub-contract. Sub-contractors furthermore know that once the performance of their work has commenced, it is more difficult for a main contractor to find a replacement. Furthermore the absence of a subcontract means that there cannot be a breach of contract. The sub-contractor thus escapes liability for any of the main contractor's failures or difficulties even though they may have been caused by the sub-contractor. The downside is that there will not be a contractual benefit to direct loss and/ or expense. The circumstances in which the sub-contractor performs the work will be relevant but only in respect of the value or the benefit of the work conferred as opposed to an entitlement based on cost An example of where such issues arose is Hall & Tawse South Limited -v- Ivory Gate Limited (1997) 62 Con.L.R 117, a decision of Judge Anthony Thornton Q.C. The Court concluded that a provisional agreement had been reached between the parties but that this did not contain many of the terms which Hall & Tawse contended. Critically, the Court found that the sub-contractor's entitlement was to be paid a reasonable sum for the work carried out. Costain Civil Engineering Limited -v Tarmac Construction Limited and Zanen Dredging and Contracting Company Limited (1996 ) 85 BLR 77 provides a good example of the different entitlements of a sub-contractor where his rights were based on the principle of unjust enrichment. This case involved civil engineering work. Zanen was the sub-contractor responsible for various dredging operations. Part of the works comprised a tunnel under the River Conwy through which the A55 Conwy bypass was to go. The casting of the pre-fabricated tunnel elements was to take place in a dry basin known as the cast basin excavated for that purpose adjacent to the river. Following the completion of the operations, the joint venture was obliged to backfill and reinstate the basin to its condition prior to commencement of the work. This would be cheaper than

3 removing the material that had been excavated. However, the Crown Estate, who was not a party to the main contract, decided to build a marina using the flooded casting basin. Thus the joint venture was relieved of its obligation under the main contract to backfill and reinstate. Thus, there was a significant saving and profit. Some additional works were instructed in order to modify the casting basin and Zanen were instructed to do these works. Initially the arbitrator, and subsequently the court, concluded that this was work which Zanen had performed outside of the contract. Thus it was entitled to a sum by way of quantum meruit in respect of this work. Furthermore, it was entitled to a share of the profit arising from the works to the marina. The court concluded that this was a sum to which Zanen was entitled by application of the law of unjust enrichment. The Court also made clear that the sub-contractor would not have been entitled to seek this payment by invoking the terms of its sub-contract. This sub-contract incorporated the standard FCEC Conditions of Contract ("the Blue Form"). (b) Entitlements under the sub-contract Ordinarily, questions of the measurement and valuation of the sub-contractor's work are governed by the sub-contract documents which will include the sub-contractor's prices. The rates paid to the main contractor and the measurement of the main contract works should not affect or override that which is contained within the sub-contract documents. Thus, if there were an error of measurement and the main contractor is overpaid it would not be under a duty, ordinarily, to pass on this benefit to the sub-contractor. The sub-contractor's entitlement would be to the work, as correctly measured, and in such a situation the windfall would be retained by the main contractor. Similarly, if the sub-contractor had included an enhanced rate or has an entitlement to additional benefits,which have been omitted from the main contract, the sub-contractor will still receive this benefit, such entitlements being governed by the provisions of the sub-contract. A sub-contractor may make clear that specific work is excluded from its price for which it claims additional payment. Its entitlement is not dependent upon the main contractor having adopted the same pricing mechanism. Payment for variations or changes will be governed by the terms of the sub-contract. These may impose strict time limits and procedural requirements. The entitlement may be stated as being conditional upon compliance with the contract mechanism. The logic being that this is included for the avoidance of disputes and the early identification of potential claims. The courts have interpreted these strictly and have rejected sub-contractors' claims, belatedly made, where there has been a failure to comply with the contractual requirements and timescales. The court's role is always to interpret the terms of the contract which have been negotiated and not to try to rewrite the bargain by ignoring that which may be regarded as unfair. Examples where the courts have rejected sub-contractors' entitlements where they failed to comply with the contract requirements are Amec Process and Energy Limited -v- Stork Engineers & Contractors BV (1999) 2 Con.L.R. 17 and the unreported Scottish case of Amec Mining Limited -v- The Scottish Coal Company Limited ( 6 August 2003). Sub-Contractors' Benefits under the Main Contract The amended Section 110(1A) of the LDEDC Act prohibits reliance in a construction contract where payment is stated to be conditional upon either the performance of obligations under another contract or a decision by any person as to whether or not the obligations have been performed. This will prevent the main contractor from relying upon a "pay when certified" defence. However, some

4 sub-contracts are phrased so as to allow a sub-contractor to share in recovery under a main contract of any benefits the main contractor may receive whilst not creating an entitlement to these same benefits under the sub-contract. Thus there is no benefit which arises under the sub-contract, per se, but there is a right on the part of the sub-contractor to share in any contractual benefits as may be due under the main contract. Such wording if correctly drafted would survive the operation of Section 110 (1A) of the LDEDC Act notwithstanding that there is clearly a correlation and a connection between the entitlement under a sub-contract and the main contract. The Court of Appeal had to consider how such a clause would operate in Mooney -v- Henry Boot Construction Limited and Balfour Beatty Construction Limited -v- Kelston Sparkes Contractors Limited (1996) 80 BLR 66. This decision, again, related to the operation of the FCEC "Blue Form" of sub-contract and in particular clause 10(2) which gave rise to an obligation on the part of the Main Contractor to secure contractual benefits under the main contract on account of any adverse physical conditions or artificial obstructions. This then continued by stating: "(2) On receiving any such contractual benefits from the Employer (including any extension of time) the Contractor shall in turn pass on to the Sub-Contractor such proportion, if any, thereof as may in all the circumstances be fair and reasonable". The Court, allowing the appeal, stated that the works "such contractual benefits. as may be claimable" in clause 10(2) of the sub-contract meant such contractual benefits as may be claimable by the main contractor and not such benefits as were due under the main contract. Furthermore, in this event, the main contractor was responsible to pass on any such portion as in all the circumstances were fair and reasonable. In such a situation, the sub-contractor clearly has a right to know what, if any, had been the recovery and furthermore what steps had been taken by the main contractor to secure recovery. It would be difficult to identify what may be a fair and reasonable portion where the main contractor has lodged a number of claims with his employer on a global basis. However, the interrelationship between the sub-contract and the main contract in such a situation is clear. This decision does not create an entitlement to receive a fair and reasonable portion of all of those sums recovered by the main contractor A further decision of the Court of Appeal illustrates the inter-relationship. In Birse Construction Limited -v- Cooperative Wholesale Society Limited (trading as CWS Engineering Group) (1997) 84 BLR 63) the Court considered the meaning of clause 12 of the "Green Form" where a sub-contractor was nominated by the Architect under the JCT 1963 Form. This provided that "12. The Contractor will so far as he lawfully can at the request and cost of the Sub-Contractor obtain for him any rights or benefits of the Main Contract so far as the same are applicable to the Sub-Contract Works but not further or otherwise". A similar provision is now to be found in clause 3.24 of the CBCSub/C standard form of sub-contract. The appeal raised the question whether, and in what circumstances, an award in an arbitration between the employer and the main contractor under the main contract could render the main contractor liable to make a payment to the sub-contractor. A dispute arose in circumstances where an arbitrator had awarded the main contractor a total of 4.7 million from the employer. Of this the sums of 325,842 and 779,625 were monies due and payable to the sub-contractor. In the arbitration, the sub-contractor and the main contractor were separately represented, the subcontractor having invoked the name borrowing procedures. The main contractor did not challenge

5 the sub-contractor's entitlement. The employer, however, went into liquidation without paying the amount of the award. The sub-contractor claimed payment of these sums from the main contractor. The Court concluded that there was such a liability to make payment where the main contractor had expressly assumed the risk of the employer's insolvency. In Birse there was obviously a close link between the main contract and the sub-contract. In a situation where there is not such a close connection, benefits accruing to a main contractor can still apply to the sub-contractor. Sub-contractors are frequently obliged to indemnify any losses which the main contractor assumes due to the sub-contractor's breaches or failures. If the main contractor assumes the benefit of full extensions of time, so that no LADs are imposed, the sub-contractor also benefits irrespective of whether he in fact caused any critical delay. A less clear example would occur if a domestic sub-contractor whose works specification was the same as that included within the main contract, claimed that additional work assumed the status of variations. If the main contractor was successful in persuading the main contractor that they were variations and thus secured additional payment, could he continue to deny payment to the sub-contractor alleging that they weren't? Ultimately a judge, arbitrator or adjudicator would form his own view. It is likely, however, that he would be influenced by what the main contractor had argued and the recovery that had been secured. The disclosure of such information may at least give rise to an estoppel argument. A sub-contractor's rights to share in the main contractor's benefits will be enhanced by the inclusion of such wording as is to be found within clause 3.24 of the SBCSub /C 2011 set out below, which is similar to that referred to in the Birse decision: "At the request of the Sub-Contractor, the Contractor shall, so far as he lawfully may, obtain for him any rights or benefits of the provisions of the Main Contract to the extent that they are applicable to the Sub-Contract Works and not inconsistent with the express terms of the Sub-Contract, but not further or otherwise. Any action taken by the Contractor in compliance with any such request shall be at the cost of the Sub-Contractor and shall be subject to the Sub-Contractor providing such indemnity and security as the Contractor may reasonably require". Most construction contracts expressly exclude the operation of the Contracts (Rights of Third Parties) Act 1999.This is legislation, as its title suggests, which confers on third parties who are either named in the primary contract or fall within an identified named class, the rights to pursue the benefits to which they are entitled. They can do so notwithstanding that they are not parties to that same primary contract. The SBCSub/C 2011 form excludes this Act. Without this exclusion, subcontractors could arguably pursue these remedies directly against the employer. Disclosability of documents In any dispute resolution process, the sub-contractor will wish to know what payments have been made to the main contractor for the sub-contractor's work and as well as the written exchanges that have taken place between the main contractor and the employer and its consultants. This may arise where there are claims for extensions of time and for additional sums due to prolongation and disruption. The sub-contractor may rely upon an express contractual entitlement and, or alternatively, where he alleges a breach by the main contractor of either an express or an implied contract term. The sub-contractor will be faced by the usual challenges of the need for the provenance of the loss and establishing the necessary element of causation. It will be important for the sub-contractor to have knowledge of the pursuit of such similar allegations by the main contractor against its employer and what, if anything, has been recovered. The disclosure of such

6 documents will usually be considered to be relevant. Thus, ordinarily, a sub-contractor should be able to convince a court of the need for disclosure of such correspondence. This should also include its consultants. This may assist in exposing inconsistency with the main contractor's argument.. He may, for example, be vehemently denying the entitlement to the sub-contractor, whilst pursuing the same claims against the employer. Different considerations may apply, however, if the main contractor settles its claims with its employer. If the exchanges have been conducted on a "withoutprejudice" basis, both the terms of the settlement as well as the negotiations leading up to the settlement may be the subject of privilege and will not be disclosable. This subject was debated by the House of Lords in Rush & Tompkins Limited -v- Greater London Council and Others(1988) 43 BLR1. The main contractor, Rush & Tompkins, compromised its claims against its employer, the Greater London Council. The payment made in settlement was 1.2 million which included all claims under the main contract of its sub-contractor, Carey. The action against the GLC was then discontinued. The terms of the settlement were disclosed to Carey but it did not show how much of the 1.2million (if anything) was included for Carey's claim. The application was made by Carey, who had added a counterclaim for 150,582.86, for specific disclosure of the "without prejudice" correspondence between Rush & Tompkins and the GLC leading to the settlement. This correspondence might show how the figure of 1.2 million had been arrived at and how they and the GLC had evaluated Carey's claim. Rush & Tompkins, however, claimed the correspondence was privileged from disclosure because it was conducted on a "without prejudice" basis. Its purpose was for the settlement of the claim with the GLC. The Court concluded that, as a general rule, correspondence conducted on a "without prejudice" basis was inadmissible in litigation. This included subsequent litigation connected with the same subject matter. Lord Griffiths stated at page 16 of his judgment that: "I have come to the conclusion that the wiser course is to protect "without prejudice" communications between parties to litigation from production to other parties in the same litigation. In multi party litigation, it is not an infrequent experience that one party takes up a reasonably intransigent attitude that makes it extremely difficult to settle the claim. In such circumstances it would, I think, place a serious fetter on negotiations between the parties if they knew that everything that passed between them would ultimately have to be revealed to the one obdurate litigant." The obvious purpose of maintaining "without prejudice" privilege is to enable parties to make a genuine attempt to negotiate without risk of their proposals being used against them if their negotiations fail. This decision was subsequently cited in Galliford Try Construction Limited -v- Mott MacDonald Limited [2008] TCLR 6. A similar issue was referred to Jackson J. in Honeywell Control Systems Limited -v- Multiplex Constructions (UK) Limited [2007] EWHC 390. This related to a dispute between Honeywell and its main contractor, Multiplex. Honeywell sought a declaration that it was entitled to inspect certain documents. A dispute had arisen between Honeywell and Multiplex, the main contractor responsible for building the new National Stadium at Wembley. The dispute related to responsibility for delays in the construction of the Stadium. Honeywell was the sub-contractor responsible for the installation of the electronic systems in the Stadium under the terms of a sub-contract agreed between them. An appendix to the sub-contract contained an inspection clause giving Honeywell the right to view the main contract. Honeywell sought sight of the Settlement Agreement concluded between Multiplex and its employer believing it included an extension of time for completion of the Stadium that superseded the obligations as to time in the main contract. Multiplex accepted that

7 the Settlement Agreement, in part, varied the terms of the main contract between itself and its employer and Honeywell submitted that it had a continuing contractual right to inspect the main contract after execution of the sub-contract. Further, as matter of commercial sense, that right extended to variations of the main contract. The Judge in approaching the issue indicated that there was a very clear distinction between variations under the contract and variations to a contract. Whereas on the one hand Honeywell had a right to know the extent of the variation to the main contract, it did not have an entitlement to inspect the terms of the Settlement Agreement. Thus, those portions of the Settlement Agreement only which varied the terms of the main contract were the subject of the Order for disclosure. Furthermore, the Court of Appeal concluded in the decision of Somatra Limited v- Sinclair Roche & Temperley [2002] Lloyd's Rep.673 that privilege could not be waived unilaterally by any one party. Waiver had to be bilateral as opposed to unilateral. If, however, the sub-contractor had an express right to claim benefits under the main contract and documents disclosed did not identify what this was there may be stronger grounds for the lifting of privilege or at least affording the Court to inspect these documents itself. There may be situations, however, as in Honeywell where the sub-contractor is compelled to pursue these claims without the assistance of the documents which he seeks. Claims and Counterclaims Where a sub-contractor pursues its claims for further monies against a contractor it often provokes a counterclaim. This may allege that the sub-contractor has delayed performance of the works as a whole or has in some other way been responsible for some, if not all, of the main contractor's losses. It is common to include clauses in main contracts which provide that the sub-contractor is deemed to have notice of the provisions of the main contract. JCT Contracts, for example, usually include the particulars of the main contract including such key information such as periods for completion and LADs. This would be to prevent a sub-contractor, subsequently, from arguing that any losses claimed by the main contractor are too remote and do not fall within the reasonable contemplation of the parties. Furthermore, some main contracts impose upon the sub-contractor, an obligation to indemnify the main contractor against any losses which are alleged to have been caused by the sub-contractor. Clause 2.5.1of the SBCSub/C 2011 form identifies by reference to the Schedule of Information which of the contractor's obligations relate to the sub-contractor's works. It thus imposes an obligation on the sub-contractor to indemnify against any losses of the contractor due to any breach or non observance or non performance thereof by the sub-contractor. The main contractor in such situations will need to demonstrate what are its losses and how and why it is that the sub-contractor has caused them. There will have to be a process of analysis, demonstrating compliance with the various tests of causation. This process involving the forensic skills of programming and quantum experts is well known to construction lawyers. This process is often difficult and time consuming. The process receives added complication if the contractor has negotiated and concluded a settlement of its own claims with its employer which has also taken into account the employer's own complaints against the contractor alleging examples of failures and non performance. It will not be sufficient, for example, if the contractor merely seeks to apportion the totality of its losses by any given number of sub-contractors without undertaking this analysis looking at cause and effect. It is noted that the " but for" test is the one that was preferred and was included within the Society of Construction Law's Delay and Disruption Protocol when published in However judges, arbitrators and mediators

8 may prefer a more direct and fundamentalist approach by simply asking "What caused the loss?". This is a far easier question to answer once the analysis is complete. The first and inevitable consequence of such an action will be that the contractor will be compelled to disclose the terms of the settlement negotiated with its employer. It will not be able to argue that it has incurred losses for which it seeks recovery from the sub-contractor without identifying these losses and the manner in which it is alleged that they came about and what they relate to. It may furthermore encounter difficulties due to the judgment in Rush and Tompkins v Greater London Council and Others, as discussed earlier. If there have been negotiations conducted on a "without prejudice" basis between the contractor and the employer, it will not be possible for one party to unilaterally waive the mantle of privilege applying the findings in the Somatra case. Thus the other party would need to consent to these documents entering the public domain. Ultimately, the Court may conclude that if the subject matter of the dispute is the settlement of the main contract dispute and how much of this is due to the failures of the sub-contractor, it will have to compel the disclosure of the settlement documents. Secondly, it will be necessary for the contractor to show that the settlement is a reasonable one. Following Biggin and Co Ltd v Permanite Ltd and Others [1951] 2 K.B.314, it has long since been settled law that a claimant is not compelled to litigate the third party claim, and a settlement of that claim may form the basis of that recovery so long as it may be shown to be reasonable. It will be a matter for the claimant to demonstrate the reasonableness of the settlement. In Wessex Regional Health Authority v HLM Design Limited (1995) 71 BLR 38, a decision of His Honour Judge James Fox- Andrews Q.C., the claimants sought recovery from its designers sums which it alleged had been overpaid to its contractor. In what the judge referred to as a "remarkable document", the claimant adduced particulars stating that far from being a settlement at a reasonable sum, it was a settlement at a most unreasonable sum but nevertheless was one reasonable to make in all the stated circumstances. Biggin v Permanite was the subject of comment in John F Hunt v ASME [2008] BLR 115, a decision of His Honour Judge Peter Coulson Q.C., as he then was, and by the Court of Appeal in Supershield Limited v Siemens Building Technologies FE Limited [2010] BLR 145. John F Hunt, John F Hunt Demolition Limited ("Hunt") was engaged as a sub-contractor to Keir Build Limited. Hunt performed the demolition work as part of a project to construct commercial office premises at 3-8A Whitehall Place, London SW1. During its work on site, arc welding equipment was used and sparks from that set light to bitumen felt weather proofing on the facades which caught fire. A claim was presented to Hunt for 248, Hunt, following advice from independent quantity surveyors that the claim was worth 151,545 plus interest, settled with Kier Build for 152,000. The Court's findings were that in seeking to claim a settlement figure from a defendant, it was not essential that the claimant should prove that it was liable to the party to whom the settlement was reached. The principle in Biggin v Permanite could be utilised where the requirements of a reasonable settlement could be satisfied in all the circumstances, regardless of the ultimate liability. However, the Court had to consider whether the breach of contract complained of caused the loss incurred in satisfying the settlement. His Honour Judge Coulson decided that on the facts of this case the settlement was unreasonable and that the lesser maximum sum of 43, (out of the total settlement sum of 152,500) could only be recoverable from ASME, John F Hunt's sub-contractor. It was necessary, however, to establish an effective causal link between the breaches of duty of the defendant and the need for the claimant to enter into the settlement with a third party. If there was no such causal link there would be no liability to pay the settlement sum irrespective of whether the settlement was reasonable.

9 The Supershield decision related to damage to a new office building in the City of London due to the activation of a sprinkler pump. As the level of the water in the tank dropped one of the float valves was operated but a nut and bolt connection failed and the bolt fell out so that the valve was in the open position letting water into the tank without shutting off the flow of the water. The judge at first instance, Mr Justice Ramsey, found that the probable cause of failure of the nut and bolt connection was a lack of sufficient tightening when the ball valve was installed. As Supershield had in fact installed the ball valve, it was liable. He found that the settlement between Siemens and the other party was reasonable and gave judgment against Supershield for the full amount of the settlement together with interest. The reasonableness of the settlement as made by Siemens was attacked but the Court of Appeal concluded that it was within the range of what may be considered reasonable. It may well be that the reasonableness of any settlement may be justified by legal advice the party may have received. This obviously may be a relevant consideration and factor, but if a party pleads its case in this way it runs the risk that it will have to disclose some if not all of that legal advice, such being the finding of His Honour Judge Havery QC in The Society of Lloyd's v Kitsons Environmental Services Limited and Others [1994] 67 BLR 105. The Judge commented at page 113 (paragraph H) that " it is plain from the reasoning of the Court of Appeal in Jones v Searle that a plaintiff whose claim for damages involves proof of the existence and nature of legal or, I would add, technical advice he has received loses his privilege in relation to the relevant documents" One can easily see the added status of any settlement if it has been reached following the provision of legal advice, as in the Kitsons decision. Thus where it can be shown that it is supported by such legal advice, it is more difficult to allege that it lacks the requirement of reasonableness in accordance with the Biggin v Permanite principle. This does, however, come at a price and it may be that any Order for the disclosure of documents which the opposing party may subsequently obtain may be wider than contemplated. The third consequence, and it is submitted potentially the most difficult, is the attempt to apportion that liability, or share thereof, to the appropriate sub-contractor or sub-contractors. This will be compounded, potentially by allegations of the failures of the various consultants as well. It will be necessary to show that, the loss the subject of the settlement, may be properly attributed to the sub-contractor. This is a potentially difficult, time consuming and expensive task to undertake. There are a number of cases where the Courts have had to deal with this dilemma. In The Royal Brompton Hospital NHS Trust v Hammond and Others [1999] BLR 162. a contractor made claims against the plaintiff hospital trust claiming extra payments and loss and expense, variations, delay, disruption and other matters. The claim totalled 22M and the plaintiff paid the sum of 5.2M against this amount. Ultimately, following the commencement of arbitration proceedings a settlement was reached and the contractor was paid 6.2M which took into account the plaintiff's counterclaim for 6.6M. The plaintiff also had to bear its own costs and paid the arbitrator's fees. Subsequent to the commencement of the arbitration, but prior to the settlement, the plaintiff issued proceedings against the 16 defendants who were all members of the professional team who had acted for the hospital during the project. The plaintiff sought recovery from the defendants of those additional sums paid to the contractor. The judgment, which dealt with matters of principle only, omitted to deal with the practicalities of the provenance of the claims which continued. In this case, however, the plaintiff accepted that it needed to prove the liability of each defendant independently

10 and that the settlement was relevant only to the issue of damages and became relevant only if liability was first established. The evidential difficulties which were encountered by the plaintiff were clear to see. A number of judgments, with appeals, were delivered by the Courts in which they determined what they considered to be the parties liabilities. Whereas this dispute concerned the liabilities of the professional team as opposed to sub-contractors, the practical difficulties of seeking to analyse and apportion a global settlement are one and the same. There clearly must have been a very significant costs liability. P &O Developments v The Guy's and St. Thomas NHS Trust [1999] BLR 1 provides a similar example relating to works contractors' entitlements under a management contract. In this instance there had been a commercial settlement with a payment of 83.9M to the management contractors Higgs and Hill Management Contracting Limited but without any breakdown of how it was made up or what, if any, sums were to be paid to the individual works contractors. In Cleveland Bridge and another v Multiplex Constructions (UK) Limited [2010] EWCA Civ. 135 the Court of Appeal in March 2010 dealt with the overall entitlements of the parties with a payment being made in Multiplex's favour of 5,525,769. The Court of Appeal also dealt with the complicated issue of costs. This, however, still left in abeyance Multiplex's claims against its engineers Mott Macdonald. In November 2008, the main contractor issued its claim against the engineer. The value of the claim against the engineer exceeded 250 million and included a variety of issues, including inadequate design information, delay and disruption, and the cost of settlement agreements reached with sub-contractors (including Cleveland Bridge). Ultimately this litigation settled but not without some very clear words of caution from the presiding judge, Coulson J. relating to costs. In Brookfield Construction (UK) Ltd v Mott Macdonald Ltd [2010] EWHC 659 (TCC), he gave a combined judgment from four case management conferences and one hearing. This was where the main contractor's costs were stated to be in excess of 28.5M as at December 2009 with a further 17M costs which were estimated be incurred to the end of the sub trial. The main contractor had spent 8.48 million on the pre-action protocol process (including 5 million on its experts). Coulson J. said that he was "confident that is the biggest sum ever expended on the pre- action protocol process in the TCC". Again, he thought this was potentially disproportionate and unreasonable (paragraph 41 of the judgment). " He commented further in paragraph 53 by stating: " I am required to provide the parties with robust encouragement to explore all ways of resolving their differences without a trial. It seems to me that the size of this case (both financially and in terms of documents) makes it ideally suitable to all the many forms of ADR. In particular, I would have thought that a mediation, conducted by one of the many experienced construction practitioners who offer a mediation service, would be a sensible next step, to be taken sooner rather than later." Thus one sees the enormity of the costs that may be expended in performing this detailed analysis whereby cause and effect are looked at. Judges at the present time cannot order the parties to mediate but they do have the sanction of disallowing recovery of costs. Conclusion The HGCR and LDEDC Acts have benefited sub contractors and made them less dependable upon main contractors' goodwill in being able to secure financial payments.

11 There will, however, inevitably be a reluctance on the part of main contractors to allow their subcontractors to assume a lesser degree of risk, wherever possible, than they themselves have assumed. Inevitably, this will lead to continued claims and counterclaims. In determining a subcontractor's rights and liabilities it will be necessary to consider the contents of the main contract as well as the sub-contract. Real Estate - Construction Jeffery Brown - Partner [email protected] [email protected] Veale Wasbrough Vizards LLP