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In this issue:
1 Welcome 1 Concurrent Delay: Which Way Now? 4 The Application of Liquidated & Ascertained Damages 6 6 8 ADR Analysis: Sanctioned Offers & Payments ADR News ADR Diary
Welcome
In this edition of the new look ADR Digest, Patrick ONeill revisits the question of concurrent delays and the Scottish case of City Inn Limited v Shepherd Construction Limited (2010) which has been included in no less than three previous issues of the ADR Digest. Patrick reviews two recent UK cases which only add to the uncertainty of this vexed issue. As our guest writer we are very pleased to have Peter Brennan, Senior Contracts Manager of Gamuda Engineering Sdn Bhd in Malaysia. Peter provides a comprehensive review of the common law position on liquidated damages, together with some commonly encountered problems in their use. Finally, our ADR Analysis series considers the making of sanctioned offers and payments in litigation proceedings following the new Hong Kong High Court and District Court Rules which came into effect on 2 April 2009.
Introduction
The Scottish decision decided on appeal in City Inn Limited v Shepherd Construction Limited (2010) (CSIH 68 CA101/00) revisited the question of how to approach concurrent delay in extension of time claims and has been included in no less than three previous issues of the ADR Digest; (Spring 2008, Summer 2010 and Winter 2010/2011). The case continues to generate both interest and debate concerning delay analysis, and the recent Commercial Court Decision of Adyard Abu Dhabi v SD Marine Services [2011] EWHC 848 (Comm) continues the debate further by considering the extent to which fact, not theory, is relevant when analysing delay to progress of the Works.
James B Longbottom
Managing Director
The Background
Prior to considering the decision in Adyard Abu Dhabi v SD Marine Services, it is worthwhile, briefly, summarising the position as regards causation, concurrency and delay following the City Inn case. The first instance decision of the lower court in Scotland (City Inn Limited v Shepherd Construction Limited [2007] CSOH 190) focused on two key areas, namely: - What are the principles that apply in determining an extension of time where there is concurrent delay by the Employer and the Contractor ?; and - What is the position where the Contractor is delayed by the Employer but no extension of time is available because the ADR Digest 1
giving of a notice within a specified time is a condition precedent to an extension of time and the Contractor has failed to give notice? Concerning the principles to be adopted in determining an extension of time where there is concurrent delay by the Employer and the Contractor, the court decided that such decisions are to be based on a common sense approach and with the Architect or Engineer exercising their judgement to determine, on a fair and reasonable basis, the extent to which completion has been delayed by relevant events and Contractor default. The apportionment of responsibility for delay between numerous causes was considered to be for the Contract Administrators discretion. However, that discretion must be exercised reasonably, taking into account all the relevant circumstances giving rise to the delays, and including, crucially, the degree of culpability involved in each of the causes of delay and the significance of each of the factors in having caused delay. City Inns subsequent appeal was rejected by all three appeal Judges, albeit in specific relation to the matter of concurrency, one of the Judges, Lord Carloway, in a dissenting judgement rejected the concept of apportionment in favour of the prevention principle; i.e. that the Contractor must have the time allotted to it within which to perform the Works, and any delay caused by the Employer would entitle the Contractor to an extension of time regardless of any concurrent delays. Lord Carloway stated as follows: delay caused by the Contractor is irrelevant so far as the contractual exercise is concerned. That exercise does not involve an analysis of competing causes, it involves a prediction of a completion date, taking into account that stated in the contract and adding the extra time which a relevant event would have instructed, all things being equal. All three Judges, however, agreed that a critical path analysis was not essential in order to carry out the exercise, although it may be relevant. The leading authorities continue to diverge on this most important and relevant area of law.
The leading authorities continue to diverge on this most important and relevant area of law.
The Courts decision in this instance to place reliance on the prevention principle accorded with the minority view expressed by Lord Carloway in the City Inn case. However, it should be noted that the judgement neither referred to City Inn or to any other English authorities on concurrent delay. The decision added to a growing weight of opinion at the time that the majority view in City Inn did not represent the law of England concerning concurrent delays in construction contracts.
Apportionment Rejected
The majority decision in City Inn was first given the cold shoulder in De Beers UK Limited v Atos Origin I.T. Services UK Ltd [2010] EWHC 3276. The project was in respect of a large software development aimed at upgrading the I.T.S diamond handling business. The project fell behind schedule both as a result of additional works ordered by De Beers and in part due to matters that Atos was responsible for. The Court found that both the De Beers delays and the Atos delays were critical and operated concurrently. The Court upheld the prevention principle as providing an answer to the question of concurrency; i.e. either delay was sufficient on its own to delay completion. The Court found that since both the De Beers and Atos delays were critical and ran concurrently, then the prevention principle applied in that: where there is concurrent delay to completion caused by matters for which both Employer and Contractor are responsible, the Contractor is entitled to an extension of time but he cannot recover in respect of the loss caused by the delay. 2 Autumn 2011
default. The Employer decides a week before the (original unextended) contract completion date that he wishes a wall to be painted blue instead of the contractually specified red. At the time of the instruction, because of the Contractors delays, the wall is not even built yet. The paint will take 5 weeks to procure, but will still arrive before the completion of the wall and the date upon which the Contractor would require the paint in line with his delayed progress. Mr Swans analysis would appear to entitle the Contractor to 4 weeks extension of time (by adding 5 weeks to the date of impact, and comparing with the original contract completion date). However, I would suggest that common sense tells the observer that such an extension was neither fair nor reasonable, where the employers actions have not actually delayed the progress of the Contractor by a single day. Hamblen J went on to record that: in my judgement, Adyards approach is wrong as a matter of both principle and authority. It is also contrary to common sense, as the above example illustrates. The Judge considered that under English law, it is essential to prove that an Employer risk event or a relevant event had caused actual delay to the progress of the Works. Notional or theoretical delay would not suffice. The Court noted that in relation to both its extension of time claim and its claim in reliance on the prevention principle, Adyard had to establish causation in fact, which meant showing that the variations were likely to or (as the case may be) did cause actual delay to the progress of the Works. In essence, the Judge rejected the Claimants entitlement to an extension of time, because, as pleaded, there was no proof of causation. The case was unique in that the Contract required the parties to agree the extent of the extension of time. Adyards argument was therefore simply that if no agreement was reached on the time entitlement then the contract effectively had no extension of time mechanism and the prevention principle would apply. Any Employer delay, no matter how small, would then relieve the Claimant of the obligation to complete the works by the completion date by virtue of the prevention principle. The approach was wholly rejected by the Court. Hamblen Js decision effectively rejects Lord Carloways prevention principle in City Inn (but which had been applied in De Beers), and, instead, requires that an assessment be made of the delay actually caused by the relevant event. Failure to prove any actual delay caused by the relevant event meant that the causation claim effectively failed. Hamblen J found no support for Adyards case on causation either in the City Inn case or in the Society of Construction Laws Delay & Disruption Protocol, which was considered and expressly referred to in the judgement. Rather, the Judge held that in relation to both its extension of time claim and its claim for reliance on the prevention principle, Adyard had to establish causation in fact, which meant showing that the variations were likely to cause, or did actually cause, delay to progress of the Works. Thus, in the Adyard case, had the builder been able to establish that a variation had been instructed and that there was no mechanism in the contract to allow extensions of time to be granted, the builder would still have been required to establish that the variation caused actual delay to progress and not by exercising judgement as in City Inn. The case re-emphasises the importance of establishing causation in fact in respect of either contractual extension of time provisions or indeed in respect of claims that seek to rely
on the principle of prevention. The need to demonstrate proof of actual delay is somewhat at odds with the minority view of Lord Carloway in City Inn which had found favour in the De Beers decision summarised above, and the Court found no support for the ability to be able to apportion delay as had been advocated so strongly in City Inn. Whereas immediately following City Inn there had appeared to be a clear difference of opinion between England and Scottish law on what was the correct approach to be adopted in determining extensions of time entitlement where a delay to a project was caused by concurrent Employer and Contractor events, the recent cases of both De Beers and particularly Adyard leave the position somewhat uncertain as to how concurrent delay is to be dealt with. City Inn held that whilst it would be useful but not essential for to have the benefit of a critical path analysis to assist in determining the matter, and that the apportionment principles could apply, Adyard on the other hand now appears to advocate a stronger reliance on fact based analysis in order to demonstrate actual delay to progress and Hamblem J was quick to make clear in his judgement that the Lord Carloway suggestion that it was not necessary to show causation in fact had no place in English Law.
Conclusion
The decision in Adyard is very likely to cause further uncertainty as regards the correct position to be adopted in determining concurrent delay issues not least by virtue of the fact that apportionment principles that were so strongly advocated in City Inn have failed to make any appearance or even any mention in the more recent judgements. Therefore, as a result of Adyard, the leading authorities continue to diverge on this most important and relevant area of law and they illustrate the difficulties associated with resolving what continues to be a vexed issue.
patrick.oneill@adrpartnership.com
ADR Digest 3
completion, the drafter had been allowed the opportunity to insert a sum (in this case, nil) and no alternative remedy was permitted in general damages. Although this still remains the position in UK law, in the Australian case of J-Corp Pty Ltd v Mladenis 3 the courts held that nil liquidated damages meant exactly that and held that a remedy should still exist in general damages. Interestingly, the courts have previously been asked to consider a situation where the parties agreed to set the level of damages at less than the pre-estimate of damages in the Australian case of Multiplex v Abgarus 4. It was found that if the parties agree to a level that is less than the damage suffered no attack can be made on the grounds that the level of damages is extravagant or unconscionable. As is the case with the imposition of caps on limits of liquidated damages, it is a commercial decision that forms part of the parties bargain.
The courts held the set-off clause to be unenforceable and stated that to allow it to stand would be metaphorically described as a double deduction. The liquidated damages provision was a remedy for all costs arising from the delay to completion and any single breach may only be addressed by one remedy. As a means of addressing this situation consideration may be given to the imposition of a higher level of liquidated damages in a sub-contract. However, any pre-estimate of the total costs arising from a breach of a sub-contractors completion obligations would be very difficult to accurately predicate and calculate. The insertion of a general damages provision may offer more protection and attention should be drawn to the main contract level of damages, to ensure that they may be recovered as special damages. This represents an onerous contractual arrangement that may deter sub-contractors from pricing or may lead to the inclusion of a higher contingency for risk in the sub-contractors bid. There is no ideal solution; however the back to back arrangement so commonly adopted in subcontracts is not advisable and likely to result in an under-recovery.
In Murray v Leisureplay 6 the expression in terrorem was considered and it was concluded that it was outdated and needed recasting in modern terms. This recasting was to be found in Lordsvale Finance v Bank of Zambia 7: Whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for the breach. That the contractual function is deterrent rather than compensatory, can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if the breach occurred. The relationship between a deterrent and compensation may still be too distinct and does not recognise that the liquidated damage provision may serve to be both an incentive for the contractor to complete on time and a reasonable remedy in compensation for the client. The Dunlop case dealt with market control and a fixed level of pricing for tyres. The construction industry has different demands and in order to ensure the delivery of a stadium for the 2012 Olympics or the opening of a lucrative casino in Macau, an employer may well want a liquidated damages provision to be considered in terrorem.
However, in the Court of Appeal Lord Justice Burton considered Dunedins test of extravagance and conscionable and stated: ... the tradition leaning as to penalty clauses is very unlikely to fit into the dynamics of an employment contract at least when the penalty is said to be imposed by the employer. The Court of Appeal overturned the Court of the First Instance and appears to take Philips v Attorney General a stage further. However, Dunlop was again considered, in the case of Jeancharm v Barnet Football Club 10 when a clause for late payment of football shirts allowed interest to be charged at a rate of 260% per annum. This provision was struck out as it was considered extravagant and unconscionable. In this case the courts also considered the Philips judgement and remarked that it had not radically altered the guidelines established in Dunlop v New Garage and Motor almost 100 years ago. It can be seen that the courts have expressed significantly different views on the significance of Philips v Attorney General and almost certainly Dunlop v New Garage and Motor will be subject to further consideration.
Conclusions
In construction contracts liquidated damages are a provision that the parties do seriously consider at tender stage. A contractor is perfectly within their rights to decline the invitation to treat and return the tender or to, include an allowance for risk in their bid or to try to negotiate a lower level of damages. However, as regards whether this actually occurs is another issue. It is however fair to state that both parties would normally have equal bargaining power. Numerous disputes have, and continue to arise in construction with respect to the application of and the use of liquidated damages provisions. The courts power to intervene includes that where unequal bargaining power is evident and one party insists that its standard terms are accepted. If a liquidated damages provision is then found to be penal, it should be voided. This situation may, for example, be encountered in specialist supply contracts in construction. Notwithstanding the above, challenges to liquidated damages provisions in construction contracts are not generally entertained by the courts.
For further information contact:
peterbrennan@gamuda.com.my
Footnotes: 1. MJ Gleeson plc v Taylor Woodrow Construction Ltd (1989) 49 BLR 95 2. Temloc Ltd v Errill Properties Ltd (1987) 39 BLR 30 3. J-Corp Pty Ltd v Mladenis (2009) WASCA 157 4. Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) NSWLS 504 5. Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd 1915 (AC79) 6. Murray v Leisureplay plc (2005) IRLR 946A 7. Lordsvale Finance plc v Bank of Zambia (1996) QB752 8. Philips v Attorney General of Hong Kong (1993) 61 BLR 41 9. Elsley v JG Collins Insurance Agencies (1978) 83 DLR at 15 10. Jeancharm Ltd v Barnet Football Club Ltd (2003) A11ER D69
ADR Digest 5
ADR Analysis
Sanctioned Offers & Payments
Background
Confidentiality
As regards confidentiality, normally, when a sanctioned offer or sanctioned payment is made this cannot be brought to the attention of the court until the end of the trial and is therefore confidential. Furthermore, a defendant may make a sanctioned payment without admitting any liability. Therefore, the concessions made by the plaintiff or defendant in the sanctioned offer or sanctioned payment would not be construed as a sign of weakness before the court.
In the Spring 2011 issue of ADR Analysis, the recent case of Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd HCA 2032/2007 and the term sanctioned offer were referred to. Under the new High Court and District Court Rules (new Order 22 of the Rules of High Court, or the Rules of the District Court) which came into effect on 2 April 2009, sanctioned offers and sanctioned payments replace the existing payments into court system. This change, along with other elements of the Civil Justice Reforms, is aimed to encourage parties to settle a dispute and therefore avoid the time and cost implications associated with litigation.
Definitions
A sanctioned offer is an offer made by either a plaintiff or a defendant, after the commencement of the court action, to settle by means other than by way of a payment into court. Therefore, a plaintiff can make a sanctioned offer in respect of their own monetary and non-monetary claims. A sanctioned payment is an offer made by a defendant (the plaintiff cannot make such an offer), after the proceedings have commenced, by way of a payment into court.
ADR News
We are pleased to announce that David Robson has joined the ADR team. David is a Chartered Quantity Surveyor with extensive experience in the commercial management of construction projects. He has experience in the preparation, assessment and defence of contractual claims for extensions of time, prolongation and variations. David has also assisted in the preparation of documents for an adjudication working closely with legal professionals. 6 Autumn 2011
ADR Digest 7
ADR News
ADR and their guest celebrities from all genres of rock music gathered at The Grand Hyatt Hotel in Hong Kong on Friday 24th June 2011 to attend the British Chamber of Commerce & Standard Chartered Bank Annual Ball. The We Will Rock You themed ball was in support of the KELY Support Group, a bilingual local charity that offers non-judgemental, empathetic and confidential support to young people between the ages of 14 to 24 in Hong Kong. It provides a comprehensive range of harm reduction services that aim to inform, empower, and build peer support among todays young people. Further information on the support groups activities can be found at: http://www.kely.org/en/index.html
ADR Diary
Forthcoming Events 2011
ADR Asia Conference 2011: Hong Kong International Arbitration Centre - Four Seasons Hotel British Chamber of Commerce Breakfast Briefing: The New Horizon for Construction - Risks and Opportunities, Thomas Ho - Hong Kong Club Lighthouse Club: October Get Together Delaneys 1st Floor, Wanchai British Chamber of Commerce: Breakthrough Boxing - Hong Kong Football Club Society of Construction Law: Talk by Charles Manzoni QC - Hong Kong Club 28 Sep 29 Sep
4 Nov
Lighthouse Club: November Get Together Delaneys 1st Floor, Wanchai HKIS Annual Dinner 2011 - Grand Hyatt Hotel Lighthouse Club: Annual Dinner 2011- HK Branch Chancellor Room, Hong Kong Convention & Exhibition Centre Society of Construction Law: One Day Conference Renaissance Harbour View Hotel
14 Nov
19-20 Nov 58th Macau Grand Prix 2011 2 Dec Lighthouse Club: December / Christmas Get Together - Delaneys 1st Floor, Wanchai Lighthouse Club: Annual Golf Day HK Branch Kau Sai Chau Golf Course
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Based in Hong Kong, ADR Partnership Limited is a dynamic practice of construction professionals providing specialist commercial and contractual services to the construction industry. If you would like to discuss any of the articles published in this Digest or your project requirements, please contact James Longbottom, Patrick ONeill or David Longbottom at ADR Partnership Limited on (852) 2234 5228 or e-mail us at info@adrpartnership.com
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8 Autumn 2011