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Construction Matters – October 2014

Construction Matters – October 2014

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24/10/2014

Net contribution clauses – “by no means unusual”?

In the recent case of West v Ian Finlay & Associates [1], the Court of […]

In the recent case of West v Ian Finlay & Associates [1], the Court of Appeal found that net contribution clauses “are by no means unusual, and…we doubt whether any lawyer advising a commercial party to a building contract would be likely to object to such a term or ‘press for its deletion’.”

As the main contractor engaged by Mr and Mrs West was insolvent, they sued the architect for the costs of repairing the defective renovation and improvement work which had been carried out on their home. The architect’s appointment contained the following net contribution clause:

“Our liability for loss and damage will be limited to the amount that is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists employed by you“.

At first instance, the judge found that the clause was ambiguous and this meant that it had to be given the meaning most favourable to the Wests under regulation 7(2) Unfair Terms in Consumer Contracts Regulations 1999 (UTCC). The clause was therefore ineffective and he did not reduce the amount of damages awarded to the Wests to take into account the main contractor’s responsibility for some of the losses.

The Court of Appeal held that the clause was not ambiguous and that “the normal meaning of the words is crystal clear“. It also found that the clause was neither unfair under the UTCC nor unreasonable under the Unfair Contract Terms Act 1977. The clause was therefore effective and reduced the architect’s liability to the Wests.

Whilst the Court of Appeal suggested that lawyers would likely accept a net contribution clause, we believe these will continue to be hotly contested, as they significantly alter risk allocation between the parties.

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[1] [2014] EWCA Civ 316

Will a refusal to mediate mean a reduction in the amount of costs you can recover?

The answer was “no” in Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al […]

The answer was “no” in Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Limited [2]. However, parties should not take this decision as a green light to refuse to mediate without expecting costs consequences, as this decision is likely to be the exception rather than the rule.

The question at the centre of the dispute was whether the defendant was entitled to terminate a licence agreement for convenience under the terms of the enabling agreement which governed the licence agreement. The court found that the defendant was indeed entitled to terminate the agreement. The court was then asked to rule on the appropriate costs award.

The claimant accepted the principle that the defendant was entitled to its costs to be assessed on a standard basis, if not agreed. However, it argued that the defendant’s costs should be reduced by 50% as the defendant had unreasonably refused to mediate. The defendant argued that it should be awarded the full amount of its costs as it had made an admissible offer to settle which the claimant had not accepted and the claimant had not beaten the terms of that offer.

The court found that, although the defendant reasonably believed that it had a strong case, the dispute was one which was suitable for mediation, and the defendant’s decision to refuse to mediate was unreasonable. However, the refusal to mediate was not the only factor which should be taken into account in deciding what costs order should be made. Under CPR 44.2(4)(c), any admissible offer to settle which is brought to the court’s attention and which is not a Part 36 offer should also be taken into account. The claimant’s refusal to accept the defendant’s offer therefore also had to be considered.

The court held that, on balance, the “fair and just outcome should be that neither party’s conduct should be taken into account to modify what would otherwise be the general rule on costs“.

The case is yet another example of the courts’ strong endorsement of the benefits of mediation. Even where there is a dispute on an “all or nothing” legal interpretation, a skilled mediator can often assist the parties to find a solution.

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[2] [2014] All ER (D) 66

Are you irreplaceable?

It is fairly common for parties to agree liquidated damages (LDs) to be used for […]

It is fairly common for parties to agree liquidated damages (LDs) to be used for breach of contract in failing to complete on time, or breach of contract in failing to pass specified performance tests.

However in Bluewater Energy Services BV v Mercon Steel Structures BV and others [3] the parties to a subcontract agreed LDs in connection with a key personnel clause.

The works related to the design, construction and installation of a tower based soft yoke mooring system as part of the development of an oil field in the Caspian Sea.

Under the sub-contract, the main contractor (Bluewater) was entitled to apply liquidated damages if the subcontractor (Mercon) replaced key personnel without obtaining the prior approval of the main contractor. The rate of LDs ranged from €20,000 for the HSE engineer to €50,000 for the project manager. The subcontractor replaced personnel without approval and then argued that the LDs were a penalty and so unenforceable.

The court upheld the validity of the clause – it was not a penalty. The judge considered that the key personnel were central to the successful performance of the contract and Bluewater’s ability to approve or disapprove of their replacement was an important safeguard for the proper performance of the contract.

In addition the judge did not consider the value of LDs to be unconscionable in terms of being extravagant or exorbitant. A key factor in this case was timing. Whether a contractual provision is a penalty or not must be judged at the date of the contract in question. At the time of entering into the contract the evidence showed that the parties had negotiated the LD rates and had considered the possible loss caused by disruption to the works by replacing key personnel.

LDs provide certainty to both parties in commercial relationships, and the courts continue to be reluctant to interfere with freedom of contract. It is therefore worth considering agreeing LDs for other types of breach under a contract, particularly if quantifying/proving the loss would be difficult after the breach. In adopting this approach, it is important to keep safe the contemporaneous evidence of discussions and calculations on how the LDs were settled upon, in case these need to be disclosed in the future to justify the amount.

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[3] [2014] EWHC 2132 (TCC)

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Jules Harbage, Partner, Construction & Engineering

Jules Harbage
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