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Liquidated Damages: enforcement

Stuart Hill and Another -v- Stewart Milne Group and Gladedale (Northern) Limited (formerly Bett Limited) [2011] CSIH 50

Where a contractor is in culpable delay, it has long been a requirement that where the contract specifies a sum in respect of Liquidated & Ascertained Damages (LADs), they must be a genuine pre-estimate of the employer's losses. The purpose of including LADs in a contract is to avoid the need for proof on quantification of the loss and whether or not the loss had in fact occurred.

In this case, Hill and Milne/Gladedale were developing adjacent sites and agreed that Hill could connect to drainage systems to be installed by Milne/Gladedale. Milne/Gladedale failed to meet the agreed completion date for the systems and Hill sought LADs of £5,000 per month until the works were completed.

Milne/Gladedale argued that the amount of LADs constituted a penalty and were therefore unenforceable. They also argued that, under their contract with Hill, Milne/Gladedale had only to use all reasonable endeavours to complete the systems by the longstop date agreed by the parties and accordingly they were not in breach of contract in failing to meet the longstop date. The Inner House of the Court of Session in Scotland did not conclude a view on the second point but held that (i) Hill did not have to prove the LADs were not a penalty; (ii) the burden was on a party alleging LADs were a penalty to prove that it was so and that it must be measured at the time of entering the contract, not at the time of breach. On that basis the £5,000 per month claim for LADs was upheld.

Click here to view the case.

Duties of Professionals in terms of Building Contract Obligations

Sweett (UK) Limited (Formerly Cyril Sweett Limited) v Michael Wight Homes Limited - Exeter County Court [2012] EW Misc 3 (CC)

This case concerns obligations placed upon professionals to procure compliance, by the building contractor, with the terms of the building contract.

Sweett (UK) Limited ("Sweett") were engaged by Michael Wight Homes Limited ("Wight") as quantity surveyors and employer's agents for a project in Somerset. The building contract provided that the contractor, Diamond Property Construction Limited ("Diamond"), would provide Wight with a performance bond. No performance bond was provided. Diamond went into liquidation in June 2009, 14 months after signing the building contract.

Wight argued that Sweett had an absolute obligation to ensure that Diamond provided a performance bond in the form agreed in the building contract. Alternatively, they argued that it was an implied term of the building contract that Sweett would use reasonable skill and care to arrange for the performance bond to be executed.

Sweett argued successfully that there was no absolute obligation upon them to ensure that Diamond signed the bond. Rather, their obligation was to put in place arrangements for the bond to be signed and that is what they did. Sweett accepted that they were under an implied duty to use reasonable skill and care in the performance of their obligations, but argued, successfully, that in light of the steps they took to have the bond executed, they had attained that standard.

This case will reassure professionals that an obligation to "arrange" for something to be done is not the same as an obligation to "ensure" that it be done. However, to the extent that steps to arrange something are within their control, professionals will be expected to take those steps and be in a position to demonstrate that they have done so.

RICS New Rules of Measurement

The Royal Institution of Chartered Surveyors (RICS) has published the second part of its New Rules of Measurement (NRM), updating the first part of the NRM published in 2009.

In 2009, the RICS envisaged the replacement of the Standard Method of Measurement, currently in its seventh edition (SMM7), by summer 2010. However, the RICS now plans to "switch off" SMM7 in July 2013.

Advice given by claims consultants does not attract legal advice privilege

Walter Lilly & Company Ltd -v- Giles Patrick Cyril Mackay & DMW Developments Ltd [2012] EWHC 649 (TCC)

A recent case from the TCC looks at whether documents generated by a claims consultant attract legal professional privilege.

During a project to construct a house in London, Mr Mackay and his wife, engaged a claims consultant. The building contractor issued an application for disclosure of all correspondence with, or documents created by, the claims consultant, relevant to the issues in the proceedings. Mr Mackay argued that many of the documents prepared by his claims consultant attracted legal advice privilege and did not require to be disclosed.

To determine whether or not legal advice privilege applied, Mr Justice Akenhead had to consider the capacity in which the claims consultant had been engaged. The written retainer issued by the claims consultant stated that it would provide "contractual and adjudication advice".  It went on to discuss a mechanism for instructing solicitors, where the claims consultant deemed it necessary.

Mr Mackay lodged a witness statement explaining that the claims consultant had, in his view, been engaged to provide legal advice. He said he understood his principal contacts there to be qualified, practising, barristers or solicitors. He considered the advice they received was both legal in nature and from people who held themselves out to be lawyers. Mr Mackay argued that a client who, in good faith, instructs an organisation or person whom he mistakenly believes is a qualified solicitor or barrister and who provides legal advice, is entitled to the protection of privilege.

The judge decided that Mr Mackay had engaged the claims consultant to provide him with claims and project handling advice. They were not engaged as barristers or solicitors. He took the view that it was immaterial that Mr Mackay honestly understood that his principal contacts with the claims consultant were qualified and practising barristers or solicitors because that was not the service he engaged them to provide. As a result, he found that the documents created by the claims consultant were not privileged. The application for disclosure was granted.

The law on privilege is rooted in policy. It is thought that proper legal advice can only be given if a client can have a full and frank discussion with his lawyer. Clients might be unwilling to do that if they thought that information disclosed might find its way to the other side. This case is a reminder, however, that to have the benefit of legal advice privilege, one must engage a qualified lawyer.

In his concluding remarks, Mr Justice Akenhead made it clear that his decision relates only to legal professional or legal advice privilege. He confirmed that his decision does not address litigation privilege. Whether or not advice or other communications with claims consultants in connection with adjudication proceedings are privileged, therefore, remains an outstanding issue.

New Scottish Procurement Regulations

On 1st May 2012 the Public Contracts (Scotland) Regulations 2012 and the Utilities Contracts (Scotland) Regulations 2012 will come into force. The biggest change will be a reduction to the time limits within which bidders can challenge procurement decisions. The limit will drop from three months to thirty days. The thirty day time limit may be extended by a court when there are good reasons to do so. Although similar provisions have been in force in England and Wales since the beginning of October 2011, there has not yet been any guidance on what the courts will consider a good reason to extend the time limit.

The new regulations have also been heralded as an addition to the toolbox in the fight against organised crime. Offences under the Bribery Act 2010 and the Criminal Justice and Licensing (Scotland) Act 2010 are now included as reasons for which offending companies must be excluded from public contracts.

Click here to read the Public Contracts (Scotland) Regulations 2012.

Click here to read the Utilities Contracts (Scotland) Regulations 2012.

Click here to view the minor amendments made by the Public Contracts and Utilities Contracts (Scotland) Amendment Regulations 2012.

Developing sites outwith the procurement rules (after Helmut Muller)

Midlands Co-operative Society Limited, R (on the application of) v Tesco Stores Limited [2012] EWHC 620 (Admin)

The extent to which the procurement rules apply to development agreements has featured in earlier editions of our construction update, when we reported on the Helmut Muller case in our Construction May 2010 Update. The recent judgement in the Midlands Co-op case from the High Court in London, sheds further light on when a development agreement will be caught by the procurement rules.

In this case, Birmingham City Council ("the Council") had earmarked a site for development. The site comprised parcels of land in multiple ownership, including a community centre owned by the Council. The Council required the relocation of the community centre as part of any development proposal. Both Tesco and the Midlands Co-Operative Society ("the Co-op") applied for and received outline planning permission for the site.

Given this interest, the Council decided to run a competitive process between the two parties to select a development partner for the site. The Council agreed in principle to sell its interest in the community facility to the successful party and the tender documents issued to Tesco and the Co-op obliged the developer to construct a replacement community centre.

Both Tesco and the Co-op submitted tenders and Tesco was selected as the preferred partner. As the negotiations with Tesco progressed, the Co-op raised objections and alleged that the Council had not conducted the tender in accordance with the procurement rules. The Council subsequently abandoned the tender process.

The Council launched a second tender process, this time inviting Tesco and the Co-op to bid for the Council's interests in the community centre as a pure land sale with no development obligations. However, as part of the tender submissions, the developers were required to submit a development appraisal. The Co-op again argued that the Council had not conducted the tender in accordance with the procurement rules and refused to submit a bid. The Council subsequently abandoned the tender process on the ground that it had not received a bid that was capable of approval.

The Council launched a third new tender process. This time the Council advertised the sale of the site of the community centre by informal tender. The Co-op again argued that the contract was not a straight-forward land deal and alleged that the tender was a sham. Tesco submitted the only bid and was successful. The Council granted Tesco planning permission for the site, which included obligations relating to the redevelopment of the community centre. The Council and Tesco exchanged contracts in relation to the sale of the site.

The Co-op subsequently sought judicial review of the Council's decision to sell the site to Tesco. One ground of challenge was that the Council had breached the procurement rules as the sale of the site to Tesco formed part of a 'public works contract' that had not been tendered in accordance with the Public Contracts Regulations 2006.

The High Court considered the guidance provided by the European Court of Justice in the Helmut Muller case and found that for there to be a public works contract, there must be a commitment by the developer that is legally enforceable by the contracting authority, to perform the relevant works. The Court ruled in the circumstances of the present case, the Council did not hold a legally enforceable obligation over Tesco to construct the replacement community centre.

While the planning conditions imposed obligations on Tesco to be responsible for all works of fitting out and relocation costs of the replacement community centre if it developed the site, there was no obligation on Tesco to develop. Looking at the arrangements as a whole, there was no obligation on Tesco to perform works and therefore no public works contract. Accordingly, the procurement rules did not apply.

While the case does not alter the legal position, it is important because it shows how the domestic courts are likely to apply the Helmut Muller judgment going forward. An important issue which the judge flagged is that contracting authorities cannot get round the rules by hiving off the obligation to perform works into a separate agreement - the arrangement will be looked at in the round. Nevertheless, the judgment illustrates that there is scope to formulate strategies to develop sites outwith the scope of the procurement rules.

Click here to read the Midlands case.

Environmental taxes - Scotland

The Scotland Act 2012 received Royal Assent on 1 May 2012. Section 30 of the Act gives the Scottish Parliament the power to introduce a Scottish landfill tax. Section 31 disapplies the existing landfill tax in Scotland. These provisions are expected to take effect from April 2015, and will fully devolve landfill tax to Scotland.

Contact us

If you think your business may be affected by any of the above, or if you have any other questions, please contact:

Mark Macaulay
Partner
0141 271 5691
mark.macaulay@mms.co.uk

Kirsti Olson
Partner
0131 228 7211
kirsti.olson@mms.co.uk

David Scott
Partner
0131 228 7203
david.scott@mms.co.uk

This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.