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English construction
law developments 2012
An international perspective

June 2013
 Contents
Introduction 3
On-demand guarantees: developments in form and substance 4
Reasonable endeavours and financial expense in construction contracts 8
Good faith and co-operation 10
Implied terms as to progress and quality 14
Global claims 18
Indirect and consequential loss exclusions 20
Contractual damages: expected losses, unexpected liability? 22
Settlement agreements 24
Commercial pressure and economic duress 26
Time bars and documentary requirements in construction contracts 28
Document harvesting and disclosure in international construction disputes 32
Maintaining privilege in international construction disputes 34

What CMS offers 36

Why we are market leaders 37
Where to find us 38

2 | CMS London - English construction law developments 2012: An international perspective

Introduction

Welcome to the Spring 2013 edition of our international update on English construction law developments.
As with our previous bulletins, the aim is to highlight legal developments over the past year that are relevant
to those organisations involved in English law construction projects outside the United Kingdom. Last year
provided a bumper crop of cases concerning issues which challenge those operating in this arena - both
familiar topics which we have touched on before and some new ones too.

We hope you find this edition informative and thought provoking. As always we would welcome your
feedback - and look forward to working with you over the coming year.

Victoria Peckett
Partner
T +44 (0)20 7367 2544
E victoria.peckett@cms-cmck.com

After much internal consideration and debate, the key English cases in 2012 are dissected and analysed
below. Three common threads link them.

First, English law has traditionally upheld contractual provisions, whatever the consequences, in the
name of certainty. This approach was reinforced in 2012 by a case in which an entire claim failed due
to non-compliance with a time bar provision. There also, in 2012, remained a reluctance to imply terms
into contracts and, in this regard, we saw a move towards a general duty of good faith halted by the
Court of Appeal.

Second, as the answer to many English law disputes often begins and ends with what the contract
says, the rules of interpretation are important. 2012 saw challenges to these rules only for traditional
positions to be reasserted upon appeal. Wuhan v Emporiki was an example of this in an all too
common dispute about whether a bond was on-demand or conditional. While the parties were not
from the UK (like two-thirds of those in the English Commercial Court) they were expected to know
the niceties of English law’s rules of interpretation when choosing it. For these rules, sometimes one
word can make all the difference, like the word “other” in clauses excluding liability for “consequential
loss” – a very English law concept.

Third, 2012 saw plenty of cases that provide salutary guidance on avoiding, managing and resolving
claims. The most important was Walter Lilly v Mackay and what it had to say about global claims.
For many it represents a diluting of the previously understood position, in favour of contractors when
pursuing their employers and also subcontractors when pursuing contractors. Much still turns on
what the contract says, but this case was notable in 2012 for developing, if not moving away from,
a tradition.

Rupert Choat
Partner and Solicitor Advocate
T +44 (0)20 7367 3573
E rupert.choat@cms-cmck.com

3
On-demand guarantees: developments in
form and substance

In keeping with the last two years, 2012 has provided some interesting developments concerning
the interpretation and enforceability of on-demand securities. The prevalence of such securities
on international construction projects, and the relative frequency with which they are disputed,
underscores the importance of these developments. This year’s developments concern the proper
interpretation of such instruments and the execution formalities needed to make them effective
under English law.

Interpretation: on-demand vs conditional

Undoubtedly the most important aspect of drafting an To this list one might add where payment is to be made
effective on-demand guarantee or performance bond is to based upon a certificate or other documents rather than
make sure that the instrument is truly on-demand, rather facts (I.E. Contractors v Lloyds Bank).
than merely conditional upon proof of some underlying
liability (i.e. a guarantee in the traditional sense). Sadly, all The formulation from Paget’s has received judicial
too often, there is some difficulty working out under approval on a number of occasions, although it now
English law whether a bond is on-demand or conditional. appears to be accepted that item (iv) is not conclusive.
To say that this can be the result of bonds employing As noted by the Court of Appeal in Gold Coast Ltd v Caja
archaic wording begs the question why they do so. Often De Ahorros, there are:
in the construction context there is ambiguity because:
‘reasons for including [clauses excluding or limiting the
(a) the procuring party (usually the contractor) expects
defences available to a guarantor] in an instrument which is
that clarity would only result in a clearly on-demand
intended to be autonomous. It might, for example, have
bond (with the beneficiary (employer) likely to resist
been included to avoid any argument that variation of the
anything less)
[underlying] contract … would imperil recovery under the
(b) the beneficiary (employer), who may already suffer … guarantees. It could have been inserted simply to ensure
from lender-fatigue, accepts what it is given by the that the rule applicable to true guarantees did not apply to
bank or other institution, feeling that it has no this instrument.’
bargaining power and
This also accords with our experience of truly on-demand
(c) the issuer has little, if any, interest in clarity – expecting
bonds being drafted with very detailed clauses excluding
to be paid for its services and, in the event of a call, to
or limiting the defences available to the issuing bank.
recover on whatever security it holds.
Nonetheless, such clauses will weigh against the finding
of a truly ‘on demand’ obligation where the operative
Historically, English law has used a complex set of rules
parts of the bond are not drafted with clarity (see for
drawn from banking law to decide whether or not a bond
example Trafalgar House Construction v General Surety
is on-demand (with terms such as ‘guarantee’ not being
and Guarantee).
determinative). Many of these rules are aimed at
determining whether the bond provider’s liability is
Item (ii) from Paget’s formulation has recently been subject
intended to be secondary in relation to the underlying
to debate with certain authorities suggesting that the
contract (and thereby conditional) or primary. In relation to
status of the issuer is of less importance than previously
international transactions, Paget’s Law of Banking, 13th
thought. The Court of Appeal has very recently sought to
edition, states:
restore favour to Paget’s formulation, but the debate has
nonetheless proved useful in clarifying the correct
‘Where an instrument i) relates to an underlying transaction
approach to be taken to interpreting ‘on-demand’ bonds
between parties in different jurisdictions, ii) is issued by a
given by banks or other financial institutions.
bank, iii) contains an undertaking to pay ‘on demand’ (with
or without the words ‘first’ and/or ‘written’) and iv) does
By way of background, the relatively early decision in Esal
not contain clauses excluding or limiting the defences
Commodities v. Oriental Credit CA provides a good
available to a guarantor, it will almost always be construed
example of the issuer’s status as a bank being used for the
as a demand guarantee’.
purpose of interpretation. The document in that case was

4 | CMS London - English construction law developments 2012: An international perspective

described as a ‘performance bond’ for 10% of the contract
price and was held to be payable on-demand despite
express words which suggested conditionality. The bond
was payable ‘on your written demand in the event that the
supplier fails to execute the contract in perfect
performance…’ The surrounding circumstances, including
the fact that the document was issued by a bank, made it
sufficiently clear that the instrument was intended to
provide prompt and certain payment in the manner of an
on-demand bond.
The reason why such a generous interpretative approach is
taken to bonds issued by banks as opposed to other
entities was explained by Hirst J in Siporex Trade SA v.
Banque Indosuez:
‘There is in my judgment no real hardship on the bank in
imposing this strict liability to pay. A performance bond is a
commercial instrument. No bank is obliged to enter into it
unless they wish to and no doubt when they do so, they
properly exact commercial terms and protect themselves by
suitable cross-indemnities …’
Very different considerations apply to the interpretation
of bonds issued between parties or their related entities.
In Marubeni Hong Kong v Government of Mongolia the
Court of Appeal noted that the cases involving banks,
‘provide no useful analogy for interpreting a document
which was not issued by a bank and which contains no
overt indication of an intention to create a performance
bond or anything analogous to it.’ In that case, the
Mongolian Ministry of Finance (for commercial trading
reasons it would appear) had ‘unconditionally pledge[d]
to pay to you upon your simple demand all amounts
payable under the Agreement if not paid when the same
becomes due…’ Despite the similarity of this wording to
the performance bond in Esal, the Court of Appeal
declined to find an on-demand obligation, finding
instead that the promise was in the nature of a
guarantee and conditional upon proof of default. The
court held that for bonds issued outside of a banking
context, there was a strong presumption against their
being on-demand as opposed to conditional.
A similar result was achieved in Vossloh AG v Alpha Trains
(UK) Ltd. The claimant provided a parent company
guarantee in favour of the defendant, which guaranteed
the performance of the contracted works. The defendant
subsequently alleged defective work and made a call on
the guarantee. Despite the fact that amounts were said to
be payable ‘on demand’, the court applied the
presumption from Marubeni to interpret the instrument as
a conditional bond requiring proof of default.
The strength of the presumption in the opposite
direction for guarantees issued by banks was recently
tested in Wuhan Guoyo Logistics Group Co Ltd v
Emporiki Bank of Greece SA. Although expressed to be
‘on demand’ the wording of the guarantee in that case
gave a number of indications which supported a
conditional interpretation requiring proof of default. The
issuing bank also had a direct connection with the
underlying transaction, being the lender to the buyer.
These factors won the day at first instance, with Clarke J
finding that proof of default was required. His decision
was, however, overturned on appeal for failing to have
sufficient regard for Paget’s formulation. In preference
to a detailed textual analysis of the wording used in the
guarantee, the Court of Appeal found it ‘much better
(and indeed simpler) to be guided by the general tenor
of previous authority enunciated by past judges of great
distinction.’ The judge at first instance ought to have had
‘much more regard’ to the formulation from Paget’s
than he did.
In summary, therefore, the passage from Paget’s Law of
Banking quoted above remains good law and there would
appear to be an equally strong presumption in favour of
bonds expressed to be payable ‘on demand’ being truly
on-demand when given by banks in a cross-border context,
as there will be against such bonds being on-demand when
given by non-commercial entities.
5
Execution formalities
Deeds play a central role in construction and engineering
projects. Many construction and engineering contracts,
and similar contracts such as collateral warranties, are
entered into as deeds. The primary advantage of doing so
is to secure the benefit of a longer limitation period
(sometimes referred to as ‘prescription’ in other
jurisdictions) than if the contract were not a deed (12 years
instead of 6). Rights under deeds therefore last longer.
Deeds also perform a special role when it comes to
on-demand performance bonds. Such bonds are usually
issued unilaterally by a bank or financial institution in
favour of parties with whom it will have no direct
commercial relationship and from whom it will receive
nothing in return. There will therefore usually be
insufficient ‘consideration’ to form a binding contract at
common law. In such circumstances, the bond will need
to be executed as a deed if it is to be enforceable by the
beneficiary. If, however, there is an irregularity concerning
the bond so that it does not constitute a deed, the bond
will not be enforceable.
It is surprising in this context that one often finds
performance bonds which are expressed to be subject to
English law and yet are not properly executed as a deed.
The requirements for execution under English law are not
particularly complex and all that is usually needed is for the
document to state that it is ‘executed as a deed’ and to be
signed and /or witnessed by the appropriate persons
depending on the nature of the company executing the
deed. Non-compliance with such formalities can, however,
have far reaching implications.
It is sometimes said that the formalities of execution are
less important when dealing with large well-known
financial institutions, as they are less likely to rely on legal
technicalities to avoid their obligations. Such comments
overlook the fact that an institution’s willingness to pay out
on a bond is usually tied to the confidence it has in being
able to recover the sums paid from its client and/or under
the applicable cross-indemnities. No bank will willingly pay
out on a performance bond if it will be left out of pocket.
In such circumstances, any defect in the formalities of
execution may enable the procuring party (i.e. the bank’s
client and usually, but not always, the provider of the
counter-indemnities) to place pressure on the bank to
refuse payment of the bond. The procuring party may, for
example, threaten to rely upon the invalidity of the bond as
precluding any recovery under its cross-indemnity to the
bank. If the bond is invalid, then payment could potentially
be viewed as voluntary and outside the scope of the
cross-indemnity.
6 | CMS London - English construction law developments 2012: An international perspective
An example last year from Australia illustrates well this risk
(which applies where English law governs the relevant
bond). In Segboer v AJ Richardson Properties a contractor
arranged for a bank to issue an on-demand performance
bond in favour of a developer as security for the
contractor’s obligations under its building contract with the
developer. The performance bond was issued by the bank
as a deed, however, following a call on the bond by the
developer, the contractor contended that the bond had not
been properly ‘delivered’ as a deed and was therefore
invalid. The ‘delivery’ of a deed is a formal requirement of
English law and will ordinarily take place upon execution
unless circumstances suggest that some later time for
delivery was intended (which was the argument made by
the contractor in Segboer).
The contractor’s argument did not succeed and the
performance bond was ultimately held to be enforceable.
It is notable, however, that once the contractor had made
its objection the bank refused to pay under the bond. This
necessitated court proceedings by the developer, in which
the bank claimed against the contractor under its cross-
indemnity (that being the only route by which the bank
could be assured of recovering against the contractor if it
paid out under the bond). Accordingly, even though the
contractor’s argument was unsuccessful, it still resulted in
considerable delay and expense in enforcing what was
intended to be a cash-equivalent security.
The proceedings in Segboer provide a helpful warning for
employers and owners to scrutinise the execution
formalities of English law performance bonds delivered by
contractors. If the formal requirements for the execution of
deeds have not been met, the contractor may be able to
successfully challenge payment by the bank.
References: Esal Commodities v. Oriental Credit CA [1985] 2
Lloyd’s Rep. 546; Siporex Trade SA v. Banque Indosuez
[1986] 2 Lloyd’s Rep. 146; I.E. Contractors v Lloyds Bank
[1990] 2 Lloyds Rep 496; Trafalgar House Construction v
General Surety and Guarantee [1996] 1 AC 199; Gold Coast
Ltd v Caja De Ahorros [2001] EWCA Civ 1806; Paget’s Law
of Banking (13th ed, 2007); Marubeni Hong Kong v
Government of Mongolia [2005] EWCA Civ 395; Vossloh
AG v Alpha Trains (UK) Ltd [2010] EWHC 2443; Segboer v
A J Richardson Properties Pty Ltd [2012] NSWCA 253;
Wuhan Guoyo Logistics Group Co Ltd v Emporiki Bank of
Greece SA [2012] EWHC 1715 (and on appeal at [2012]
EWCA Civ 1629).
For me CMS leads the field for construction law.
The CMS lawyers I have worked with across Europe
and beyond, over the last seven years, have combined
industry knowledge, legal expertise and can-do spirit
the like of which I haven’t seen in other firms.
Global Legal Counsel
European multinational investor and developer
Reasonable endeavours and financial expense
in construction contracts

A recent High Court decision has considered the meaning of ‘reasonable endeavours’ in the
context of an obligation to complete construction works. The financial impact to the
contractor of its obligation to complete was held by the court to be irrelevant in
considering whether ‘reasonable endeavours’ had been exercised. The contractor’s ability
to fund the works was to be presumed. The judgment suggests that an obligation to use
‘reasonable endeavours’ (widely found in FIDIC-based and other international construction
contracts), usually considered to be the weakest of endeavours clauses, may require a party
to sacrifice its own commercial interests despite the economic downturn.

Telford Homes (Creekside) Ltd (Telford) was the developer of
a mixed-use development known as ‘Creekside Village West’
in Greenwich, London. Telford agreed to provide a long
lease of the commercial parts of the development to
Ampurius Nu Homes Holdings Ltd (Ampurius). Telford and
Ampurius entered into an Agreement for Lease on
7 October 2008 where, in return for Ampurius’ agreement to
take up the lease, Telford agreed to ‘use its reasonable
endeavours to procure completion of the Landlord’s Works by
the Target Date or as soon as reasonably possible thereafter.’
limiting the scope of matters to be taken into account in
considering ‘reasonable endeavours’. As the construction
works themselves had not been affected, Telford was unable
to find any support for its position in the reasonable
endeavours clause. The court’s ruling leaves unclear, however,
how such a clause would apply in circumstances where the
cost of the works had risen due to unforeseen circumstances.
A lack of funding in respect of the additional costs in such
circumstances may not be as easily characterised as
antecedent or extraneous to the carrying out of the works.

Telford had already commenced work on the development
at the time the Agreement for Lease was signed. Work
continued until March 2009 when, with the onset of the
credit-crunch, demand for residential units began to dry up
and Telford was unable to meet the level of pre-sales
required by its development financing. As a result, Telford
was unable to access additional funds and decided to
suspend part of the commercial works which Ampurius
was to lease. Ampurius subsequently sought to terminate
for repudiation and one issue between the parties was
whether the ‘reasonable endeavours’ clause justified
Telford’s suspension. Telford argued that the expression
‘reasonable endeavours’ encompassed financial resources,
so that a failure to complete due to funding problems
would not amount to a breach provided reasonable
endeavours had been made to procure finance.
The court accepted that Telford had made reasonable
endeavours to procure finance, but rejected Telford’s
submission that funding came within the scope of the
clause. According to Mr Justice Roth, the reasonable
endeavours obligation was:
‘…designed to cover matters that directly relate to the physical
conduct of the works, thereby providing an excuse for delay in
such circumstances as inclement weather or a shortage of
materials for which the Defendant was not responsible. The
clause does not, in my view, extend to matters antecedent or
extraneous to the carrying out of the work, such as having the
financial resources to do the work at all.’
The court appears to have reached its decision by confining
the clause strictly to the construction works and thereby
Two previous Court of Appeal decisions provide a useful
comparison with the decision in Ampurius:
—— In Phillips Petroleum Company United Kingdom v Enron
Europe, a contract for the supply of North Sea gas
contained a number of duties requiring the parties to
use ‘reasonable endeavours’. One was a duty to use
reasonable endeavours to co-ordinate the construction
of certain facilities. Another duty required the parties to
use reasonable endeavours to agree the date on which
deliveries of gas were to begin (a long-stop date was
also specified in the absence of agreement). Because of
a fall in the price of gas Phillips refused to agree a date
earlier than the specified long-stop date. Enron argued
that each party was under a duty to use reasonable
endeavours having regard only to criteria of technical
and operational practicability and without regard to
selfish or commercial motives. The Court of Appeal
disagreed, with Kennedy LJ finding it ‘impossible to say
that [the contract terms] impose on the buyer a
contractual obligation to disregard the financial effect on
him, and indeed everything else other than technical or
operational practicality, when deciding how to discharge
his obligation to use reasonable endeavours to agree to
a commissioning date prior to 25 September 1996.’
—— In Jet2.com Ltd v Blackpool Airport Ltd (which we
reported on in last year’s publication), a contract
between budget airline Jet2.com and Blackpool Airport
(BAL) contained an agreement that both parties would
‘…co-operate together and use their best endeavours
to promote Jet2.com’s low cost services…and BAL will

8 | CMS London - English construction law developments 2012: An international perspective

 use all reasonable endeavours to provide a cost base
that will facilitate Jet2.com’s low cost pricing...’. This
clause was held by the Court of Appeal to require BAL
to allow Jet2 to operate outside of normal hours even if
this required BAL to incur a loss as a result. However,
the court suggested that if it became clear that Jet2
could never expect to operate low cost services
profitably, BAL would ‘not be obliged to incur further
losses in seeking to promote a failing business.’
Neither of these authorities were cited in Ampurius,
however, both are of some relevance in considering the
approach to be taken to matters which may be said to be
‘antecedent or extraneous’ to an endeavours clause. For
example, one might question whether the Court of
Appeal’s reference to Jet2’s profitability was not something
extraneous to the clause considered in that case. Similarly,
one might ask whether Phillips’ own financial interest in
postponing the delivery of gas was not antecedent or
extraneous to the clause considered in that case.
In a construction context, the implications of the court’s
finding in Ampurius may extend beyond similar wording in
other development agreements or agreements for lease.
Construction contracts frequently make provision for
parties to make their best or reasonable endeavours to
mitigate delay or to overcome obstacles to the progress of
the works. The logic of the decision in Ampurius may allow
parties to argue that financial constraints should not be
taken into account in deciding whether best or reasonable
endeavours have been exercised in such cases.
A good example is provided by the force majeure clause in
the FIDIC 1999 suite. For example, clause 19.3 of the Red
Book 1999 provides that ‘Each Party shall at all times use
all reasonable endeavours to minimise any delay in the
performance of the Contract as a result of Force Majeure.’
If a Force Majeure event occurs which is not one of those
listed in sub-clauses (ii) to (v) of clause 19.1 then the
contractor is not entitled to the recovery of any Cost in
relation to the Force Majeure event. Yet clause 19.3 still
requires that he use all reasonable endeavours to
minimise, not the impact of the event itself, but any delay
caused as a result of the event.
In such circumstances, a question arises about the extent to
which the contractor is required to expend cost in making such
endeavours when such costs will not be recoverable from the
employer. There are a number of ways in which that question
might be considered, including by reference to the level of any
delay damages agreed by the parties, but one might expect an
employer to argue that the contractor is required to supplement
its labour force, add extra shifts or to work out of hours. Say
the line is drawn at supplementing its labour force, but due to
the contractor’s existing delay, use had already been made of all
locally available labour to supplement the original resource plan.
Would the contractor be justified in refusing to further
supplement its labour force with more expensive labour
needing to be sourced elsewhere? The finding in Ampurius
could be argued to suggest that the contractor’s existing delay
should be treated as antecedent or extraneous and should be
ignored. Therefore, if without the contractor’s own delays,
supplementing the labour force would have been a reasonable
course to adopt to minimise delay caused by the Force Majeure
event, that is likely to remain the case (so it might be argued
following Ampurius) even if that course has been made much
more expensive by the contractor’s pre-existing delays.
Endeavours clauses will always be heavily dependent on their
context and the circumstances of each individual case for
their precise meaning and application. As was observed in
the recent decision of the Singapore High Court on the
meaning of ‘all reasonable endeavours’ in BR Energy (M) Sdn
Bhd v KS Energy Services Ltd, previous decisions on the
effect of the same words used in a different context must be
viewed with caution. However, the decision in Ampurius
potentially gives scope for argument over more general
points of distinction, such as whether the incurring of
financial expense is something ‘antecedent or extraneous’ to
any given clause. For now, it is clear that parties should not
assume that a ‘reasonable endeavours’ clause (as opposed to
‘all reasonable’ or ‘best’ endeavours clauses) will protect
them from being required to incur such expense.
References: Phillips Petroleum Company United Kingdom v
Enron Europe [1997] CLC 329; Jet2.com Ltd v Blackpool Airport
Ltd [2012] EWCA Civ 417; Ampurius NU Homes Holdings Ltd v
Telford Homes (Creekside) Ltd [2012] EWHC 1820 BR Energy
(M) Sdn Bhd v KS Energy Services Ltd [2013] SGHC 64.
9
Good faith and co-operation

English law is well known for having no general duty of good faith (unlike many other
legal systems). However, in 2012 a number of cases considered wide duties of good faith
and this trend appears to be continuing in 2013. The cases concern both implied duties,
where strong debate persists over whether such duties exist at all, and express contractual
duties, where equally strong debate is to be found over their interpretation. We discuss
both areas below and as the cases in this area continue to develop, readers can expect to
see more on this topic in next year’s publication.

Implied duties of good faith
In SNCB Holding v UBS AG the English Commercial Court
was asked to consider the implication of a duty of good
faith arising under complicated banking arrangements.
Put simply, the agreement conferred a power on UBS to
manage a certain part of the arrangements and it had
sought to do so for its own financial benefit and against
the interests of SNCB, but still within the confines of the
parties’ express contractual terms. SNCB argued that UBS
was required, by an implied term, to exercise its discretion
in good faith and in accordance with the aims of the
parties’ agreement.
The court first reiterated the traditional position under
English law, that:
‘Unlike some bodies of foreign law, commercial contracts
are not subject to general duties of good faith and fair
dealing and it is trite law that a party does not have to
exercise his contractual rights, once properly ascertained,
reasonably. If he has rights, the law will not concern
itself with the motivation or rationale lying behind his
exercise of them …’
The court accepted, however, that this principle was subject
to the usual rules as to the implication of terms, such that a
term, including one as to good faith, could only be implied
if it were necessary to make the contract work and not
otherwise inconsistent with any express terms. No such
implied terms were found to apply to UBS and, aside from
a requirement to act honestly, UBS was entitled to act in its
own interests to the exclusion of SNCB’s.
or more contracts for the provision of not less than 33500
hours of construction, design and engineering services’. In
the absence of such additional work, Skidmore was to pay
a further amount to Jacobs.
Skidmore argued that literal effect should not be given to
the word ‘award’, in the sense of contracts actually
entered into, as that would allow Jacobs to refuse to
accept contracts which Skidmore offered it and thereby
trigger the additional payment. Skidmore therefore
argued for an obligation requiring it merely to offer
contracts to Jacobs. The court disagreed, and found that
word ‘award’ could be given literal effect, if buttressed by
an implied term of good faith:
‘I consider that there were general obligations of good faith
on both sides in order to make this agreement work. …
[Skidmore] had to consider awarding contracts and Jacobs
had to consider accepting such awards, both in good faith.
Only when an agreement was reached in good faith could
there be an award of a contract. Beyond that, on this
interpretation, I can see no need for implied terms to
achieve mutuality.’
This decision stops a long way short of finding for a
generally implied duty of good faith. Good faith was only
implied because without it the parties’ agreement as to the
‘award’ of contracts would have been unworkable. This
very much accords with the traditional English law
approach to implied duties of good faith, which views
them as a measure of last resort. A much more liberal
approach was, however, suggested in February 2013 in
Yam Seng PTE Ltd v International Trade Corporation Ltd:

This position may be contrasted with Jacobs UK Ltd v
Skidmore Owings & Merrill LLP where a duty of good faith
was found to satisfy the test for implication of terms.
Jacobs had sued Skidmore for the recovery of unpaid fees.
The parties agreed to settle the proceedings for the
payment of a certain amount together with a promise by
Skidmore, over the next two years, to ‘award Jacobs ... one
‘Under English law a duty of good faith is implied by law as
an incident of certain categories of contract, for example
contracts of employment and contracts between partners
or others whose relationship is characterised as a fiduciary
one. I doubt that English law has reached the stage,
however, where it is ready to recognise a requirement of
good faith as a duty implied by law, even as a default rule,

10 | CMS London - English construction law developments 2012: An international perspective

into all commercial contracts. Nevertheless, there seems to
me to be no difficulty, following the established
methodology of English law for the implication of terms in
fact, in implying such a duty in any ordinary commercial
contract based on the presumed intention of the parties. …
I respectfully suggest that the traditional English hostility
towards a doctrine of good faith in the performance of
contracts, to the extent that it still persists, is misplaced.’
The judge’s point in Yam Seng appears to be that, while
English law does not imply a duty of good faith as a
default rule in all contracts, the approach taken in each
individual case should be more liberal and that such an
implication should, generally speaking, be made ‘in any
ordinary commercial contract’. Essentially, a default rule
by the back door.
However, the English Court of Appeal wasted no time (in
March 2013) in seeking to restore the traditional approach;
in Mid Essex Hospital Services NHS Trust v Compass Group
UK and Ireland Ltd. Commenting generally, the court
reminded itself that:
‘…there is no general doctrine of ‘good faith’ in English
contract law, although a duty of good faith is implied by
law as an incident of certain categories of contract [i.e.
such as in employment contracts and partnership deeds]
… If the parties wish to impose such a duty they must do
so expressly.’
Mid Essex concerned a long term catering contract for a
hospital. The contract provided for service failings to be
recorded and for certain deductions to be made from
payments due to the contractor based upon these failings.
The contract gave the hospital a discretion as to whether
to make these deductions i.e. they were not automatic.
The hospital’s position was therefore similar to that of an
employer under a construction contract enabling the
deduction of liquidated damages for delay. The contractor
contended that the hospital’s right to make these
deductions was subject to an implied term that
deductions would not be made in an arbitrary, capricious
or irrational manner.
The Court of Appeal rejected the proposed implied
term, finding that it was not necessary to make the
contract workable. Once service failings had been duly
recorded, the hospital was entitled to make the
deductions provided for by the contract for whatever
reasons it wished. The hospital’s discretion was merely
one as to the exercise of its own contractual rights
and there was no need for any implied term in favour
of the contractor.
Express duties of good faith
The Court of Appeal’s decision in Mid Essex also provided
useful guidance as to the interpretation of express terms
requiring good faith. Such terms are becoming
increasingly common in English contracts (or terms that
are considered to be similar such as the duty under the
NEC/ECC forms to ‘act in a spirit of mutual trust and
cooperation’) and a body of law is beginning to emerge as
to how they ought to be interpreted under English law.
Key cases include:
—— Berkeley Community Villages Ltd v Pullen: a clause
requiring the parties to ‘act with the utmost good faith
towards one another’ in the context of a contract for
land development was found to impose a duty
requiring the observance of reasonable commercial
standards of fair dealing, faithfulness to the agreed
common purpose and consistency with the justified
expectations of the other party.
—— Gold Group Properties Ltd v BDW Trading Ltd: a clause
requiring each party to ‘at all times act in good faith
toward the other’ in the context of a development
agreement was found to impose a requirement that the
parties act in a way that allowed both of them to enjoy
the anticipated benefits of the contract but did not
require either to give up a freely negotiated financial
advantage clearly embedded in the contract.
11
—— CPC Group Ltd v Qatari Diar Real Estate Investment
Company: a clause requiring the parties to act ‘in the
utmost good faith towards each other’ in the context
of a proposed development project was found to
impose a requirement that the parties adhere to the
spirit of their contract, which was held to include the
seeking of planning consent for the maximum
developable area in the shortest possible time, the
observance of reasonable commercial standards of fair
dealing, faithfulness to the common purpose and
consistency with the other’s justified expectations.
References: Berkeley Community Villages v Pullen [2007]
EWHC 1330 (Ch); Gold Group Properties Ltd v BDW
Trading Ltd [2010] EWHC 1632 (TCC); CPC Group Ltd v
Qatari Diar Real Estate Investment Company [2010] EWHC
1535 (Ch); SNCB Holding v UBS AG [2012] EWHC 2044;
Jacobs UK Ltd v Skidmore Owings & Merrill LLP [2012]
EWHC 3293; Yam Seng PTE Ltd v International Trade
Corporation Ltd [2013] EWHC 111; Compass Group UK
and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services
NHS Trust [2012] EWHC 781 (QB) and on appeal [2013]
EWCA Civ 200.

The clause in Mid Essex required the parties to ‘co-operate

with each other in good faith and … take all reasonable
action as is necessary for the efficient transmission of
information and instructions and to enable the [hospital] to
derive the full benefit of the Contract.’ The question before
the court was whether the clause should be interpreted
broadly so that the requirement to co-operate in good faith
applied to the whole of the contract, or narrowly, confining
it only to the transmission of information and matters
required for the hospital’s benefit.

The judge at first instance gave the clause a broad

interpretation, emphasising the long term nature of the
contract and the importance of co-operation between the
parties. The Court of Appeal reversed this decision,
however, finding that the judge had not given proper
consideration to the other more detailed provisions of the
contract. In the Court of Appeal’s opinion, express good
faith provisions in large commercial contracts should be
read subject to the more detailed provisions of the
contract. Lord Justice Beatson noted that:

‘The contract in the present case is a detailed one which

makes specific provision for a number of particular
eventualities. … In a situation where a contract makes such
specific provision, in my judgment care must be taken not
to construe a general and potentially open-ended
obligation such as an obligation to ‘co-operate’ or ‘to act in
good faith’ as covering the same ground as other, more
specific, provisions, lest it cut across those more specific
provisions and any limitations in them.’

Conclusion
Duties of good faith seem likely to remain a focal point for
English law for sometime to come, as more liberal efforts to
widen the traditional approach continue to be pressed in
individual cases. For the time being, however, the Court of
Appeal’s decision in Mid Essex would appear to have
affirmed the traditional approach, restricting implied terms
to those which are necessary to make a contract workable
and reading express obligations of good faith subject to
other more specific contract provisions.

12 | CMS London - English construction law developments 2012: An international perspective

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Implied terms as to progress and quality

In addition to the ongoing debate over implied duties of good faith, discussed in the preceding
article, a number of recent cases deal with the extent to which terms may be implied into
construction contracts. Three cases in particular have shown the potentially surprising results
which can sometimes depend upon the implication of terms. Insofar as they involve issues of
quality and design such terms will often flow from the specific terms of UK legislation, but will
apply internationally where English law is chosen by the parties.

Leander Construction Limited v Mulalley Dalmare SpA v Union Maritime Limited

and Company Limited
Leander related to a groundworks sub-contract. The main
contractor, Leander, initially claimed that the subcontractor,
Mulalley, was obliged to perform its works in accordance
with an Activity Schedule which set out the dates by which
certain activities were required to be completed. It was
claimed that Mulalley was late in performing the sub-
contract works, as against the Activity Schedule, and that
Leander consequently suffered loss due to the delay.
Later, it was accepted by Leander that the Activity Schedule
was not binding on Mulalley but Leander claimed that, in
any event, there was an implied duty on the subcontractor
to proceed ‘regularly and diligently’. Leander alleged that
Mulalley had failed to proceed in a regular and diligent
fashion, as it did not follow the Activity Schedule. Leander
sought to draw support for its argument from the fact that
the sub-contract gave Leander an entitlement to terminate
if Mulalley failed to proceed regularly and diligently (subject
to certain notice requirements).
and Valor Shipping Limited
Dalmare concerned the purchase of a ship. The dispute
arose due to the ship breaking down thirty hours into a
voyage and about a month after delivery due to an engine
problem. Although the seller was Norwegian and the ship
was inspected and delivered in Greece and Turkey
respectively, the sale agreement contained an express
choice of English law and the buyers therefore argued that
the seller was in breach of the implied term of satisfactory
quality provided by the Sale of Goods Act 1979 (UK).
The seller argued that the implied term under the Sale of
Goods Act was inconsistent with the express terms of the
sale agreement, which provided that the ship would, ‘be
delivered and taken over as she was at the time of
inspection, fair wear and tear excepted.’ The seller argued
that the ship had been delivered in the same condition as
at the time of inspection and that this express clause of the
sale agreement left no room for the implied term provided
for by the Sale of Goods Act.

The court dismissed Leander’s claim and held that it was
not necessary to imply a term to proceed regularly and
diligently to make the contract workable. Mulalley was
already required to complete the sub-contract works by a
specified completion date. Mulalley therefore had a
discretion as to how fast or slow it would proceed during
certain periods of the works, subject to its ultimate duty to
complete the works by the date specified. The express
power to terminate for a failure to proceed regularly and
diligently was, perhaps surprisingly, found by the court to
work against the implication of a term. That was because
the right of termination showed that the parties had
expressly considered the issue, but yet had not provided for
any express duty to proceed regularly and diligently (as
opposed to a right of termination). As the court noted, ‘it is
impossible to argue that the alleged term is necessary, in
circumstances where the parties must be taken to have
considered this eventuality and instead decided to deal
with the potential problem in an entirely different way.’
The court found that these words were insufficient to
exclude the obligation of satisfactory quality implied by the
Sale of Goods Act and in doing so, upheld the traditionally
strict approach to ousting the Act’s applicability. Although
section 55(1) of the Act allows the parties to exclude its
implied obligations ‘by express agreement’, section 55(2)
states that, ‘An express term does not negative a term
implied by this Act unless inconsistent with it.’ This
provision has been interpreted strictly in the past, to the
extent that even a clause excluding all ‘guarantees,
warranties or misrepresentations, express or implied [of]
merchantability, fitness or suitability’ has been held to be
insufficient because the terms implied by the Act are legally
categorised as ‘conditions’ rather than ‘warranties’: see
most recently, Bominflot v Petroplus Marketing (‘The
Mercini Lady’). Although this rule has been criticised as not
representing the true intention of the parties with regard to
such clauses, the approach of the courts has been to
‘consider that the parties to this English law contract,

14 | CMS London - English construction law developments 2012: An international perspective

foreign as both of them are and quite possibly ignorant of
the consequences of their choice of language, intended to
contract by reference to what English law had to say about
the language which they have adopted.’
Adopting this strict approach, the sale agreement entered
into by Dalmare was insufficient to negative the statutory
implied term of satisfactory quality. While on one
interpretation the agreement could mean that the ship was
to be delivered in an entirely ‘as is’ condition, an alternative
interpretation was that the seller was simply to make no
alteration to the condition of the ship between inspection
and delivery (and thereby saying nothing about standard of
quality warranted by the seller). Accordingly, the clause was
not sufficiently clear and could not be said to be sufficiently
‘inconsistent’ to displace the term implied by the Sale of
Goods Act:
‘Given the strict approach to construction of terms
alleged to exclude the statutory implied terms consistently
adopted by the courts … the fact that even on the sellers’
best case the words must have more than one meaning is
fatal to the sellers’ case that these words exclude the
statutory implied terms. Furthermore, given that an
obvious sensible meaning of the words is as part of the
temporal obligation [i.e. that the vessel be delivered in the
same condition as it was when inspected], section 55(2)
defeats the sellers’ argument, since it cannot be said that
the first sentence of clause 11 is inconsistent with the
implied term in section 14(2).’
Trebor Bassett Holdings Ltd v ADT Fire
and Security Plc
Statutory implied terms were again before the court in
Trebor. That case concerned a fire suppression system
designed by ADT. The system failed and as a result the
claimant’s factory burnt down. Part of the case concerned
the extent of ADT’s liability for the design of the system.
The claimant argued that the system amounted to the
supply of goods under the Supply of Goods and Services
Act 1982 and that accordingly the system was required to
be fit for purpose. ADT argued that, while each component
of the system was to be fit for purpose, it was only required
to exercise due care, skill and diligence in the overall design
of the system.
The court’s analysis of this issue centred on the proper
characterisation of the system designed by ADT. Section 4
of the Supply of Goods and Services Act provides for an
implied term of fitness for purpose in respect of any ‘goods
supplied under the Contract’. The question was therefore
whether the system as a whole, as opposed to its individual
components, could be properly characterised as ‘goods’.
Lord Justice Tomlinson, in delivering the judgment of the
Court of Appeal, did not think so:
‘… I do not regard it as either natural or accurate to regard
Cadbury as having bought from ADT a system which can
be equated with goods which are either of good quality or
not as the case may be. I can understand that that
description might possibly be apt if Cadbury had contracted
to purchase, or ADT had contracted to supply, a standard
kit or assembly. In such circumstances there would,
ordinarily, be no element of design in order to meet specific
requirements. …The present is, as it seems to me, a very
different situation. … what was offered was not a standard
product to be taken off the shelf and chosen by reference
to its description. If what was offered could properly be
described as a product at all, which I doubt, it was at best a
bespoke product in respect of which what was of
importance was not so much the inherent quality of the
constituent parts (which was of course required to be
good) but rather their selection as being suitable for the
task and the manner in which they were to be combined,
located and installed in such manner as ‘to suit the specific
requirements of the risks to be protected’. In these
circumstances it is I think wholly artificial to regard ADT as
having contracted to supply a system which can be equated
with ‘goods’ and of which it can simply be asked in the
abstract, was it or was it not of good quality.’
15
Two interesting observations can be made about this decision:
—— This decision would appear to be at odds with a
previous decision in which a ‘system’ had been held
to be ‘goods supplied’ under the Supply of Goods
and Services Act. In John Lelliott v Byrne Bros
(Formwork) Ltd an agreement to provide a
‘temporary support system’ (comprising steel tubes
and woodwork, similar to scaffolding) was found to
be subject to an implied duty (under the Act and at
common law) of fitness for purpose. That obligation
was breached because the system, as opposed to
individual items of which it was made up, did not
provide sufficient support. As the Court of Appeal
noted in Trebor, the question in any given case as to
whether a ‘system’ amounts to goods or not is
largely a matter of impression, however, it remains to
be seen how far the court’s distinction between
bespoke and ‘off the shelf’ products will be applied.
—— Quite aside from the Act, it is well established at
common law that a contractor who agrees to design
and construct works impliedly agrees that the works
will be fit for purpose (IBA v EMI Electronics Ltd). The
Court of Appeal’s decision in Trebor would appear to
leave this rule untouched as it does not depend on any
requirement for the works to be characterised as
‘goods’ (it is unclear why the common law point was
not pursued in Trebor itself). At common law, the
courts have specifically resisted attempts to divide up
the works, as was done in Trebor, ‘into so many pieces
with differing criteria of liability’ when ‘the … implied
term of fitness for purpose … prescribes a relatively
simple and certain standard of liability based on the
reasonable fitness of the finished product irrespective
of considerations of fault and of whether its unfitness
derives from the quality of work or materials or design’
(Viking Grain Storage Ltd v TH White Installations Ltd).
Conclusions
These decisions all have the potential to affect international
construction contracts and show the difficult and surprising
issues which can be posed by the implication of terms
under English law.
The relevance of Leander will be minimised for contracts
with express provisions as to progress, such as that in
clause 8.1 of the FIDIC Red, Yellow and Silver Books 1999
(‘… shall then proceed with the Works with due expedition
and without delay’). However, parties should not expect
any further or additional duties in this regard to be implied.
Trebor and Dalmare are likely to be relevant in most cases
where English law is specified as the governing law. Under
the FIDIC Red Book 1999, for example, the contractor is
expressed to be responsible for ‘such design of each item
of Plant and Materials as is required for the item to be in
accordance with the Contract’ but is not ‘otherwise …
16 | CMS London - English construction law developments 2012: An international perspective
responsible for the design or specification of the Permanent
Works’ (expect where specific parts of the Works are stated
to be the contractor’s design). This therefore forms the
minimum express design obligation within the FIDIC 1999
suite i.e. ensuring the suitability of Plant and Materials. To
this, however, must be added – where English law applies
– the more general implied obligations arising under the
Supply of Goods and Services Act of satisfactory quality
and, in certain circumstances, fitness for purpose for any
materials in which ownership is to pass to the employer.
These implied obligations may also apply to distinct parts of
the works if that part of the works can be distinctly
characterised as ‘goods’ in its own right. Specific words
must be used to exclude these terms, as Dalmare shows,
and they are unlikely to be entirely excluded by the
standard wording quoted above.
Although all of the FIDIC 1999 suite expressly impose on
the contractor a ‘fitness for purpose’ duty where it is
required to design all or part of the Works, the duty is
limited to those purposes ‘specified in the Contract’ (Red
Book 1999 and MDB) or ‘as defined in the Contract’
(Silver and Yellow Books 1999 and Gold Book 1999 and
2008). The duty implied by English law operates more
broadly by reference to any purpose ‘made known’ to the
contractor by the employer, whether expressly or by
implication. As this implied duty falls within a special
category of implied terms under English law (known as an
‘implication by law’), it must be expressly excluded. To the
extent that any express term covers part (but not all) of
the ground covered by such an implied term (as is the case
in the FIDIC 1999 suite), the implied term will continue to
apply to ‘fill the gaps’: Davy Offshore Ltd v Emerald Field
Contracting Ltd. Accordingly, under the FIDIC 1999 suite,
the narrower express terms as to fitness for purpose
restricted to the purpose specified or defined in the
contract could be supplemented by a wider duty based
upon any additional purposes made known to the
contractor when the contract was concluded. In some
instances this may impose an unexpected (and
unwelcome) extra burden on the contractor.
References: IBA v EMI Electronics Ltd (1978) 11 BLR 29
(Court of Appeal); (1980) 14 BLR 1 (House of Lords); Viking
Grain Storage Ltd v TH White Installations Ltd (1985) 3 Con
LR 52; Davy Offshore Ltd v Emerald Field Contracting Ltd
(1991) 55 BLR 1; John Lelliott v Byrne Bros (Formwork) Ltd
(1992) 31 Con LR 89; Bominflot v Petroplus Marketing (‘The
Mercini Lady’) [2010] EWCA Civ 1145; Leander
Construction Limited v Mulalley and Company Limited
[2011] EWHC 3449; Dalmare SpA v Union Maritime Limited
and Valor Shipping Limited [2012] EWHC 3537; Trebor
Bassett Holdings Ltd & Anor v ADT Fire and Security Plc
[2012] EWCA Civ 1158.
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Global claims
The judgment in Walter Lilly v Mackay was one of the most talked about in English legal
circles last year. It was notable for its restatement of the rules governing the making of
‘global’ and ‘total cost’ claims in construction disputes.
In 2004 Walter Lilly & Company (WLC) entered into a contract
with an employer (DWM) for the construction of three large
houses on the site of what was previously the Earls Court
Telephone Exchange. One of the three plots of land was
owned by Mr Mackay, who was a part-owner of DWM.
The contract price for Mr Mackay’s property was c. £5 million
and the date for completion was 23 January 2006.
Unfortunately, things did not progress according to plan and by
the time that Practical Completion was achieved in July 2008,
the relationship between WLC and Mr Mackay was
acrimonious in the extreme. Mr Mackay blamed WLC for the
delays and also for what he felt were defects in the works.
In the words of Mr Justice Akenhead, he was ‘and [had] been
for a long time angry’. WLC on the other hand, did not accept
that it was responsible for the delays to the works and believed
that it was entitled to an extension of time, along with relief
from liquidated damages, up to Practical Completion.
Among other defences raised by DWM, it was argued that
WLC’s claim should fail on the grounds that it was a ‘global’
claim. A global claim is one whereby an aggregated loss or
period of time is based on a group of individual breaches or
events without attempting to prove the individual impact of
each breach or event. Where the claim is one for money
rather than time, such claims are often referred to as ‘total
cost claims’ reflecting the fact that they often proceed simply
from the contractor’s total cost for the project, less the
amount paid to date by the employer. As Mr Justice
Akenhead (the head of the Technology and Construction
Court) noted, such claims are usually formulated on the basis
of ‘numerous potential or actual causes of delay and/or
disruption, a total cost on the job, a net payment from the
employer and a claim for the balance between costs and
payment, which is attributed without more and by inference
to the causes of delay and disruption relied on.’
Disentanglement
Before Walter Lilly, certain cases suggested that a ‘global
claim’ would only be permitted where a contractor could
show that it was impossible to disentangle or separate out
those individual losses caused by individual breaches or
events. In other words, a contractor could not simply be lazy
in presenting its claim, but would need to show that it was
18 | CMS London - English construction law developments 2012: An international perspective
impossible to present the claim in a more conventional
fashion. Moreover, it was thought by some that the contractor
should also show that he was not responsible for whatever
impossibility was present. For example, in London Borough of
Merton v Leach the approach was described as follows:
‘If … at the time when the loss or expense comes to be
ascertained it is impracticable to disentangle or disintegrate
the part directly attributable to each head of claim, then,
provided of course that the contractor has not unreasonably
delayed in making the claim and so has himself created the
difficulty the architect must ascertain the global loss directly
attributable to the two causes …’ [emphasis added]
This line of authority provided an opportunity for
defendants to bring an early attack on global claims
through attacks on the claimant’s submissions. If a global
claim had been pleaded, defendants could justifiably call
for the claimant to assert and/or provide details of why it
was said to be impracticable or impossible to disentangle
the various breaches or events relied upon.
Mr Justice Akenhead’s judgment in Walter Lilly means that
this approach is now no longer good law. Having considered
the cases usually relied upon in support of such an approach
(such as Merton), the judge concluded as follows:
‘Obviously, there is no need for the Court to go down the
global or total cost route if the actual cost attributable to
individual loss causing events can be readily or practicably
determined. I do not consider that Vinelott J was saying in the
Merton case (at page 102 last paragraph) that a contractor
should be debarred from pursuing what he called a ‘rolled up
award’ if it could otherwise seek to prove its loss in another
way. It may be that the tribunal will be more sceptical about
the global cost claim if the direct linkage approach is readily
available but is not deployed. That does not mean that the
global cost claim should be rejected out of hand.
[The] argument that a global award should not be allowed
where the contractor has himself created the impossibility
of disentanglement (relying on Merton per Vinelott J at
102, penultimate paragraph and John Holland per Byrne J
at page 85) is not on analysis supported by those
authorities and is wrong. Vinelott J was referring to
unreasonable delay by the contractor in making its loss
and/or expense claim; that delay would have led to there
being non-compliance with the condition precedent but
all that he was saying otherwise was that, if such delay
created difficulty, the claim may not be allowed. He
certainly was not saying that a global cost claim would be
barred necessarily or at all if there was such delay. … In
principle, unless the contract dictates that a global cost
claim is not permissible if certain hurdles are not
overcome, such a claim may be permissible on the facts
and subject to proof.’
Counter-examples
One of the most forceful ways in which a global claim can be
undermined is to show that there are other causes for the loss
claimed by the contractor for which there is no entitlement to
recover under the contract. Prior to Walter Lilly, it was
sometimes argued that such ‘counter-examples’ would
undermine the claim entirely and that no apportionment of
the global loss could be made to save the claim. Either the
global claim wholly succeeded or it wholly failed.
Whatever the basis for this line of argument, it has now
been considerably weakened by the decision in Walter Lilly.
The approach preferred by Mr Justice Akenhead was for
any established counter-examples to be deducted from the
global loss, insofar as they can be quantified, ‘either
precisely or at least by way of assessment’. Such an
approach was thought by the judge to be:
‘not inconsistent with the judge’s reasoning in the Merton
case that ‘a rolled up award can only be made in the case
where the loss or expense attributable to each head of
claim cannot in reality be separated’, because, where the
tribunal can take out of the ‘rolled up award’ or ‘total’ or
‘global’ loss elements for which the contractor cannot
recover loss in the proceedings, it will generally be left with
the loss attributable to the events which [sic] the contractor
is entitled to recover loss.’
This passage potentially suggests that greater flexibility and
pragmatism will be accorded to claimants in bringing global
claims. Whereas formerly, a defendant might rely on a number
of counter-examples to attempt to show the claim was
fundamentally unsound, a claimant might now respond simply
that whatever counter-examples are proved can be deducted
from the global loss and the remainder will ‘generally be …
attributable to … events [for] which the contractor is entitled to
recover loss.’ If pressed too far, this approach has the potential
in practical terms to shift part of the burden of proof to the
defendant. A defendant should now ensure that its list of
counter-examples is as complete as possible and will be less
able to rely upon arguments that the mere existence of counter-
examples fundamentally undermines the claim.
Conclusion
In January 2013 the Court of Appeal refused leave to appeal
from the decision in Walter Lilly. In doing so it remarked that
it was ‘not reasonably arguable that the judge erred in his
analysis of the law as to what is required in respect of a
global claim.’ It appears therefore that Mr Justice Akenhead’s
findings are here to stay and must now be applied.
Whilst the requirements for proof of a global claim remain
onerous, they are now less so than was previously thought.
They remain, however, subject to the express terms of the
parties’ contract. It remains notable how little standard
forms say about the issues commonly encountered in
construction disputes (like the admissibility of global claims).
One might expect Walter Lilly to prompt some employers to
write into their contracts terms prescribing when (if at all)
global claims can be made. Absent such express terms,
employers would be well advised to take global claims
seriously and to consider them on their merits.
References: London Borough of Merton v Stanley Hugh
Leach (1985) 32 BLR 68; Walter Lilly & Company Ltd v
Mackay [2012] EWHC 1773 and on application for leave to
appeal [2013] EWCA Civ 142.
19
Indirect and consequential loss exclusions

Construction and engineering contracts often contain provisions excluding or limiting liability
for ‘consequential loss’ with or without the addition of the phrase ‘loss of profit’. These two
concepts are often used interchangeably by commercial parties, however, English law has long
held that they are distinct. Loss of profit is a broader category than consequential loss and an
exclusion clause which is limited to ‘consequential loss’ will not usually exclude all claims for
‘loss of profit’. A decision of the English Technology and Construction Court last year provides
a further example of this distinction applied in practice.

ADS Aerospace v EMS Global Tracking
Aerospace and Global joined forces to develop and sell a
new satellite tracking device for use in the high-end
aeronautical market. The parties entered into an exclusive
worldwide distribution agreement, under which Global
agreed to produce and supply the device to Aerospace until
Global gave Aerospace 12 months’ notice of its intention to
cease production.
The venture was a failure and only 17 devices were sold.
Following unsuccessful discussions about a new product,
Global gave notice that it would cease production of the
devices in 12 months. Aerospace complained that Global
had, in breach of contract, ceased production of the
devices earlier than the end of the 12 month notice period
and claimed damages as a result.
The contract between the parties provided that Global
would not be liable ‘for any consequential loss or damage,
whether for loss of profit or otherwise and whether
occasioned by the negligence of [Global] or his employees
or agents or otherwise, arising out of or in connection with
any act or omission of [Global]…’.
Several decisions of the English Court of Appeal have
ruled that contractual exclusions such as this referring to
‘consequential and indirect losses’ will usually be limited to
losses which fall within what is known as the ‘second limb’
of Hadley v Baxendale. Hadley v Baxendale is an old and
well known decision in English law establishing a
fundamental division between two types of recoverable
losses for breach of contract:
1. Damages that may fairly and reasonably be considered
as arising naturally, i.e. according to the usual course
of things, from a breach of contract. For example,
if the breach involved the destruction of a factory,
both the cost of rebuilding and losses from the lack of
production during rebuilding would fall within this first
category. Such damages are said to be ‘direct losses’.
2. Any other damages which may reasonably be supposed
to have been in the contemplation of both parties at
the time they made the contract. This category depends
upon additional facts being known to both parties.
In the above example of the factory it may be that lost
production included the loss of a particularly profitable
contract. The loss of such a production contract would
not be recoverable unless the parties knew, at the time
the construction contract was entered into, that the
production contract might be lost as a result of a
breach of the construction contract. These are
‘consequential’ or ‘indirect’ losses.
In deciding against Global, the court adopted this line of
authority, noting that, ‘parties who draft contracts which
are subject to English law can be taken to appreciate
the difference between the two limbs [from Hadley v
Baxendale].’ The court found no reason to distinguish the
specific circumstances applying to the contract between
Aerospace and Global and found that the reference to
‘consequential’ loss was a reference to losses falling
within the second limb of Hadley v Baxendale.
In this context the court viewed the subsequent reference
to ‘loss of profit’ as merely a subcategory of ‘consequential
loss’. The court ruled that: ‘What is excluded … is liability
‘for any consequential loss or damage’ and an example of
this is given as ‘loss of profit’. However, loss of profit does
not define ‘consequential loss or damage’ it is simply a type
of consequential loss or damage.’
Pushed firmly therefore into the second category of Hadley v
Baxendale, Global attempted to argue that the loss of profit
claimed by Aerospace was not, in any event, direct loss of
profit within the contemplation of the parties. Once again
the court reaffirmed the usual position that such losses are
direct losses and not ‘consequential’. As the court noted:
‘the whole purpose of the exclusive distribution agreement
was distribution and onward sale by ADS to customers and it
must have been within the reasonable contemplation of the
parties that a wholesale refusal to supply the goods would

20 | CMS London - English construction law developments 2012: An international perspective

result in the inevitable loss of profit on those onward sales.
Such loss therefore is not ‘consequential’; it is direct and
firmly within the first limb of Hadley v Baxendale.’
The same finding has been made in a number of other
cases. In Corfield v Grant, the owner of a hotel that was
closed for longer than anticipated due to works being
carried out was found to be entitled to recover profit that he
could reasonably have expected to earn had the hotel been
finished on time as a direct loss. Similarly, in Robertson
Group (Construction) Limited v Amey-Miller (Edinburgh) JV a
‘stop gap’ contract allowed the recovery of ‘all direct costs
and directly incurred losses’. The contractor claimed that it
was entitled to recover damages for loss of profit as a direct
loss where it had been prevented from carrying out work it
was entitled to perform under its contract. Both the appeal
court and the court at first instance held that the loss of
profit could be recovered as a direct loss, accepting that ‘[t]
he intention to make a profit lies at the heart of all, or nearly
all, commercial activity’.
These cases may be contrasted with those where the
parties have successfully excluded direct losses. A good
example is BHP Petroleum Ltd v British Steel plc where the
relevant clause excluded ‘loss of production, loss of profits,
loss of business or any other indirect losses or
consequential damages’. With the reference to ‘loss of
profit’ now preceding ‘consequential damages’ the court in
that case held that the claim was not confined to indirect
Contract Wording
FIDIC ‘…loss of use of any Works, loss of profit, loss of
any contract or for any indirect or consequential
loss or damage …’
Orgalime ‘… loss of production, loss of profit and other
indirect loss …’
JCT (D&B) ‘… loss of use, loss of profit or other
consequential loss…’
NEC ‘… indirect or consequential loss …’
and consequential losses. Accordingly, ordinary loss of
profit/production falling within the first category of Hadley
v Baxendale had been successfully excluded.
Conclusion
Loss of profit can be either a direct loss or an indirect loss.
Parties to construction contracts will be taken to be aware
of the difference between both categories and should
therefore be clear when drafting exclusion clauses as to
whether one or both are to be excluded.
Set out below are a selection of exclusion clauses found in
common standard forms, together with an indication of
their likely effect based on the above cases. However, it
should be borne in mind that insofar as any breach occurs
before completion and causes delay-based losses (e.g. due
to loss of production), English law assumes they will be
compensated by any liquidated damages for delay (unless
any words to the contrary appear; which they do not in any
of the standard forms dealt with below).
References: Hadley v Baxendale (1854) 9 Exch 341; Corfield
v Grant (1992) 59 BLR 102; BHP Petroleum Ltd v British
Steel plc [1999] 2 All ER (Comm) 544; Robertson Group
(Construction) Limited v Amey-Miller (Edinburgh) JV [2005]
CSOH 60 and [2005] CSIH 89; ADS Aerospace Limited v
EMS Global Tracking Limited [2012] EWHC 1012 (Ch).
Effect
Loss of profit/production not recoverable, whether
direct or indirect.
Loss of profit/production not recoverable, whether
direct or indirect (applying BHP v British Steel).
Loss of profit/production not recoverable, whether
direct or indirect (applying BHP v British Steel).
Direct loss of profit/production still recoverable.
21
Contractual damages: expected losses,
unexpected liability?
As noted in the preceding article, parties often overestimate the protection given by contractual
exclusions for ‘consequential’ or ‘indirect’ loss. As with ‘loss of profit’, losses which are contingent on
matters outside the control of the parties are sometimes referred to as being ‘consequential’ or
‘indirect’ but may in fact be ‘direct’ losses when properly categorised under English law. For example,
claims for loss of production are often subject to market forces such that an employer may claim to
have missed out on higher profits. Conversely, an employer’s claim may be reduced by poorer market
conditions. Such claims are therefore contingent on matters outside the control of the parties, but
may still be ‘direct’ losses within the categorisation referred to in the preceding article.

English law adopts a reasonably liberal approach to such contingent losses. Provided the type of loss is recoverable either as
‘direct’ or ‘indirect’ loss and was therefore reasonably foreseeable (as discussed in the previous article), there is limited scope for
defendants to argue that the outcome in any given case is harsh or disproportionate i.e. because the actual size of the loss was
particularly unexpected or abnormal. As a case last year shows, this can lead to surprising results.

—— the engineer knew that its road and drainage design was
John Grimes Partnership Ltd v Gubbins needed for planning approval, and therefore that the
late provision of the design would mean a delay in the
The facts of the case were as follows:
employer obtaining planning approval and
—— An owner of land engaged a consulting engineer to
—— the engineer, being experienced in property development
prepare a road and drainage design for a parcel of land
work, understood that a delay in obtaining planning
that the owner wished to develop.
approval could mean that the employer would suffer
—— The engineer’s design was (as the engineer knew) to be the very type of loss it did, namely a loss of property value
submitted to the local council as part of the planning due to a downturn in the property market.
approvals process. The design was required to be The type of loss was ‘reasonably foreseeable’, and therefore
provided to the employer by March 2007. recoverable (there being no term in the engineer’s
appointment that would exclude or limit its liability, in this
—— However, the completed design was in fact only provided
respect). In these circumstances, it was
a year or so later, in May 2008. The council approved the
not necessary for the court to determine whether the loss
design two days after it was submitted.
was ‘direct’ or ‘indirect’ (i.e. even if the loss was ‘indirect’,
—— The engineer invoiced the employer for an additional the engineer had sufficient notice as to its likelihood and
£3,000, on top of what it had invoiced and been paid there was no contractual exclusion of liability).
previously. The employer refused to pay the £3,000
(citing the engineer’s delays), and the engineer sued for
that amount. Comment
—— The employer counterclaimed against the engineer for
On one view, the facts of the case were straightforward,
around £400,000. This was on the basis that the value of
and should have led to the result that the Court of Appeal
the property had fallen by that sum during the period of
reached. It was known to all parties that if the engineer was late
delay by the engineer in preparing its design (from March
in providing its design, the property market could go down
2007 to May / June 2008). The employer contended that
during the delay, and the employer would therefore suffer a
if the engineer had prepared its design on time, and
financial loss due to the engineer’s breach of contract. The type
planning approval had been obtained (in around April
of loss may have been contingent in the sense that it was a
2007), the employer would have been able to realise a
knock-on result of the engineer being late, but it was certainly a
£400,000 greater return on its development. The
reasonably foreseeable type of loss – one that was not too
employer’s case was that the engineer should be legally
‘remote’ from the breach. On this view, the employer’s loss was
responsible for the employer’s loss suffered during the
rightly held recoverable.
downturn of the property market.
There is, however, another way of looking at the case which
The court at first instance and on appeal upheld the
leads to the opposite conclusion. The employer’s loss may indeed
employer’s argument, finding the engineer liable for the
have been ‘reasonably foreseeable’, but it was not one which
£400,000 loss. The logic of the court’s reasoning was that:
directly flowed from the breach, in the sense that it was by no
means an inevitable result of the engineer being late in providing

22 | CMS London - English construction law developments 2012: An international perspective

its design. The property market could have gone up, down or
stayed at the same level. Although as a matter of strict logic the
engineer’s breach of contract may have pushed the project into a
period that was adverse to the employer’s financial interests, the
engineer’s breach of contract did not cause the property market
to go down. So why should the engineer be liable because a
matter outside of its or the employer’s control occurred, i.e. the
property downturn?
Conversely, if instead of going down, the property market had in
fact gone up during the period of delay, the employer would
have reaped the benefit of the delay, but the engineer would
have no entitlement to share in that benefit. Does English law
allow an employer to take the upside of a delay, but not the
downside? Minds may differ on whether such a position is justified.
The competing view takes its support from the judgment
of Lord Hoffmann in Transfield Shipping Inc v Mercator Shipping
Inc (also known as ‘The Achilleas’), which accepts that in some
circumstances it is not correct to hold a contract breaker liable
for all of the direct losses which flow from its breach:
‘It seems to me logical to found liability for damages upon the
intention of the parties (objectively ascertained) because all
contractual liability is voluntarily undertaken. It must be in
principle wrong to hold someone liable for risks for which the
people entering into such a contract in their particular market,
would not reasonably be considered to have undertaken. … In
other words, one must first decide whether the loss for which
compensation is sought is of a ‘kind’ or ‘type’ for which the
contract-breaker ought fairly to be taken to have accepted
responsibility.’
The Court of Appeal in Grimes referred to this passage,
but emphasised the fact that no evidence had been presented by
the engineer to the effect that there was any general
understanding or expectation in the property world that a party
in the engineer’s position would not be taken to have assumed
responsibility for losses arising from movement in the property
market where there had been culpable delay. In the absence of
such evidence, the Court of Appeal considered itself bound to
apply the traditional rule from Hadley v Baxendale (referred to in
the preceding article) that a party is entitled to recover all losses
of a type which were reasonably foreseeable (either because
they ordinarily occur and are ‘direct’ losses or if they are
‘indirect’ losses not ordinarily occurring, because the defendant
was specifically made aware of their likelihood).
Commercial implications for international
projects
If one extrapolates the reasoning used in the Grimes case, all
sorts of consequences can be envisaged for parties working on
international projects. Negative fluctuations in the value of the
output of the asset that a contractor or designer has promised
to build or design – whether it be a hotel, an office building, a
power plant or a factory – may all be legally attributed to the
contractor or designer in the event of the contractor or designer
being late, provided that those losses are reasonably foreseeable
(which often they are).
To best manage the risks associated with market fluctuations,
contractual provisions should be used to control liability.
Some ways in which this is commonly done are:
—— Limiting liability for delay to a contractually-defined amount.
Liquidated damages clauses are the prime way of effecting
such a limitation of liability for delay to the works. However,
they do not usually cover delays after completion from, say,
carrying out remedial works.
—— Excluding or limiting liability for ‘indirect’ or ‘consequential’
losses. As noted in the preceding article, these types of
exclusion clauses are relatively common, however they will
not serve to exclude the impact of those contingencies,
including market fluctuations, which may increase the usual
amount of ‘direct losses’. They are therefore likely, at best,
to provide an incomplete protection.
—— More specific exclusions for ‘loss of profit’, ‘loss of production’,
‘loss of use’, ‘loss of capital’, ‘loss of goodwill’ etc are usually
more effective (see for example, clause 17.6 of the FIDIC Red
Book 1999). Parties might also seek to eliminate the effect of
contingent losses altogether by stating that the measure of
damage for any breach of contract shall be limited to losses
which would ordinarily be incurred and not extend to any
unusual or extraordinary losses (although care would need
to be taken in the drafting of such a clause).
References: Hadley v Baxendale (1854) 9 Exch 341; Transfield
Shipping Inc v Mercator Shipping Inc (‘The Achilleas’) [2008]
UKHL 48; John Grimes Partnership Ltd v Gubbins [2012]
8PL03589 (TCC) and on appeal [2013] EWCA Civ 37.
23
Settlement agreements

Settlement agreements, whether formal or informal, are commonplace in international

construction projects. Whenever claims arise for additional time or extra cost, the parties
will often agree certain entitlements in ‘full and final settlement’ of the contractor’s claims
or in respect of a certain part or phase of the Works. Similarly where deductions are made
from payments on account of defective work, the parties may seek to reach agreement and
fix the proper amount ‘due’ to the contractor taking into account the defective work and
‘any other outstanding matters’. The effect of such agreements and such familiar forms of
words are sometimes misunderstood and may lead to parties giving away more (or less)
than they had expected. A decision of the Technology and Construction Court last year
provides a useful example.

Point West was the developer of a large residential
complex constructed on the site of an old West London
airport terminal. Mivan was engaged as the contractor for
the fourth phase of the development which consisted of
the design and construction of a marketing suite, sky
lobby and 48 apartments. Mivan’s final account was
agreed in 2002 but not paid. Between 2002 and 2007,
various remedial works were carried out and finally, in
October 2007, the parties agreed a settlement to ‘enable
Mivan to walk away’.
The settlement was stated to be ‘regarding Mivan’s Final
Account in respect of all Works carried out, and any
corresponding outstanding matters. The agreement
comprises a further payment of £50,000 (including VAT),
representing the final assessment of monies due or to
become due thus achieving full and final settlement in
respect of the above works, together with any and all
outstanding matters. We would confirm that this final
agreement concludes Mivan’s responsibilities and
obligations in respect of their works at the above project.’
At the time of the agreement, both parties were aware that
there was a potential issue with the curtain walling and the
heating and cooling system (although the scope of the
defects was uncertain). The owner of Flat 1601 had made a
number of complaints over the years in respect of both
issues but Point West viewed the complaints as unjustified
and minor in nature. As part of the settlement agreement,
Mivan had agreed to assist Point West in the event of a
dispute with the owner of Flat 1601, though it was
expressly stated that Point West would not look to Mivan
to carry out any remedial works.
The owner of Flat 1601 subsequently obtained a substantial
award of damages against Point West in respect of the
curtain walling and the heating and cooling system. Point
West sought to recover those damages from Mivan
claiming that Mivan’s liability in respect of those issues was
not released by the settlement agreed between them. Point
West argued that, at the date of the settlement, there was
no reason for either party to suppose that Point West was
considering making a claim against Mivan for those issues.
There was no actual dispute between Point West and
Mivan in relation to those issues and neither had Point
West intimated a claim or even the possibility of a claim in
respect of them. Point West therefore argued that the
terms of the settlement should be read down to apply only
to claims which were specifically contemplated at the time
the settlement was agreed.
The court disagreed with Point West and considered that
the wording of the agreement made it clear that it was
intended to achieve ‘full and final settlement in respect of
the above works’, being all of the contracted works,
together with ‘any and all outstanding matters’. The
defects in Flat 1601 were deemed to be ‘outstanding
matters’, despite not being the subject of a dispute
between the parties, and were therefore included in the
settlement. The judgment confirms that the courts are
reluctant to find that parties have surrendered unknown
claims (as already stated by the House of Lords in Bank of
Credit and Commerce International (SA) v Ali), but at the
same time recognised that the intention of parties using
clauses referring to ‘full and final settlement of all matters’
often was to resolve all possible matters, including those
that might be advanced in the future in respect of the same
set of circumstances.
The court’s ultimate finding as to the terms of the
settlement was that it released the issues raised by Flat
1601 together with any ‘other defects in the Point West
Development which were patent’ as at the date of the
settlement. Patent defects are those which are either
known about or which should have been known about
(e.g. upon a reasonable inspection). This naturally raises a

24 | CMS London - English construction law developments 2012: An international perspective

question about latent defects (i.e. those which might only
come to light after the settlement). Whilst the court made
no express finding as to latent defects, its finding suggests
that latent defects might not have fallen within the
wording agreed. This might potentially be justified by
confining the reference to a ‘full and final settlement’ to
Mivan’s right to payment for the works, with the words
‘any and all outstanding matters’ being intended to dispose
of other contractual claims. Those other claims would then
only be released to the extent they were ‘outstanding’
which could not apply to latent defects.
Nevertheless, parties should be wary of unintentionally
releasing claims for latent defects. While English law is slow
to find that parties have surrendered rights to unknown
claims, claims for latent defects are sufficiently common
that it can be assumed that parties take them into account
when agreeing settlements. For example, in Mostcash Plc v
Fluor Limited, the English Court of Appeal commented (in
another dispute over the scope of a settlement agreement):
‘…the claims in the present proceedings are just the sort of
claims that may be expected to be within the
contemplation of parties to a construction contract, or to a
contract for the provision of design, procurement and
construction management services. It must be a matter of
common experience amongst those who commission,
design and manage the construction of commercial
buildings that defects come to light after – perhaps years
after – the contract has been performed and the building
handed over. The books are full of such cases; and the
difficulties to which latent defects give rise in the context of
limitation.’ (Lord Justice Chadwick, paragraph 53)
These comments were echoed more recently by the
Court of Appeal in Priory Caring Services Limited v
Capita Property Services Ltd. In that case, the owner of
a development had become aware of overcharging and
the deliberate backdating of documents by its surveyor.
However, in exchange for the surveyor agreeing to
provide evidence in an arbitration against the owner’s
insurers, the owner agreed not to issue proceedings
against the surveyor, ‘in relation to matters arising from
[its] appointment as surveyors to Priory Caring Services
in relation to the Priory Hotel’. Subsequently, the owner
discovered widespread damp penetration in the
building resulting directly from the surveyor’s
negligence, but was unable to claim against the
surveyor due to the prior release:
‘… as Chadwick LJ said in Mostcash v. Fluor , in this context
there is or must be regarded as being complete familiarity
with the possibility of the emergence, sometimes years
later, of damage caused by previously latent defects in
works, due to negligence in the design, specification, or
other professional services provided by those involved in
construction. Where Mr Owen’s negligence was expressly
and specifically in contemplation [i.e. the overcharging and
backdating known by the owner], the fact that the damp
penetration did not emerge for another two years can by
no means take Priory’s resulting claim from having been
within the contemplation of the parties on 10 March 2003,
and within the express language of the letter of that date.’
The lesson to be taken from the above cases is clear.
The words used by the parties in recording any agreement
to settle claims are likely to be given priority over any
general presumption that only claims then under
discussion or within the contemplation of the parties are
intended to be settled. Particularly in construction
contracts, where the nature of the claims which can arise
are well known, general words of release, such as ‘full
and final settlement’ and ‘all outstanding matters’, may
be read literally to include claims for latent defects. Parties
should therefore give careful thought to how settlement
agreements are expressed.
References: Point West London Limited v Mivan Limited
[2012] EWHC 1223; Bank of Credit and Commerce
International (SA) v Ali [2002] 1 AC 251; Mostcash PLC &
Ors v Fluor Limited [2002] EWCA Civ 975; Priory Caring
Services Limited v Capita Property Services Ltd [2010]
EWCA Civ 226.
25
Commercial pressure and economic duress

A recent English High Court decision has clarified the circumstances in which a commercial
party’s actions may constitute economic duress and so cause any resultant agreement to be
voidable (i.e. not binding on the ‘victim’ of the duress). The decision confirms that, though it
would be unusual in commercial circumstances, the exertion of pressure by lawful means may
still constitute economic duress. The decision therefore gives parties cause for care when
entering agreements, where the balance between driving a hard bargain and exerting
illegitimate pressure may need to be considered.

Progress Bulk Carriers Ltd v Tube City IMS LLC concerned an
appeal from an arbitral award striking down a settlement
agreement between the owners of a sea vessel and a
commercial shipping firm (the ‘charterers’) for duress. The
owners argued that their behaviour had been lawful and so
was not ‘illegitimate pressure’ (that being a precondition
for economic duress under English law).
The owners had chartered their vessel to the charterers to
carry a cargo of shredded scrap from the Mississippi River
to China. The agreed charter did not provide the owners
with any right to substitute the vessel and had an agreed
laycan of 15-21 April 2009. (Laycan means the ‘lay days
and cancelling date’ or the earliest and latest dates on
which the vessel must be ready to load at the port or be
delivered to the time charterers.)
Immediately after the charter was agreed, the owners
indicated they would like to substitute the vessel for a
different one with a later laycan. They then agreed to charter
the original vessel to a different charterer without informing
the original charterers, only later telling them that they
intended to perform the voyage with a possible vessel
substitution and a laycan of 15-24 April. The charterers
meanwhile continued to press for the contracted vessel, with
the original laycan, stating that they had barges waiting with
the cargo to be loaded. Any substitution, the charterers
maintained, was strictly subject to their own and their
receiving customer’s approval. On 18 April, the owners
admitted to the charterers that they had made a mistake and
said that they would find an alternative vessel to load
between 27 and 30 April. They also assured the charterers
that they would compensate them for all damages resulting
from their failure to supply the contracted vessel.
In substituting the vessel without the charterers’ consent the
owners were in repudiatory breach of the charter contract.
However, at the time the charterers did not accept that
breach as terminating the contract. The contract therefore
remained alive, although there was no practical chance of
fulfilment by the named vessel which was by then engaged
elsewhere, nor of achieving the agreed laycan.
The parties then discussed a replacement vessel and an
extension of time to 7th/8th May. The charterers’ customer
in China agreed to extend the shipment date on condition
that there be a corresponding reduction in the purchase
price. The charterers informed the owners that they would
accept the replacement vessel, with a discount for the
cargo, but reserved their rights in respect of all claims for
damages arising out of the breach of the charter.
The owners then made a ‘take it or leave it’ offer requiring the
charterers to waive all claims for loss and damage arising out of
the nomination of a substitute vessel with a different laycan and
a late arrival. The charterers said that by that stage they were
forced to accept the owners’ terms. They responded saying:
‘… given the exigencies of the circumstances and our
urgent need to mitigate our losses and accommodate our
customer in China, we are forced to accept the Owners [sic]
terms under protest.’
In arbitration, the majority of the arbitrators held that the
charterers’ agreement, under protest, to waive all their
claims for damages in respect of the repudiatory breach, was
obtained by economic duress and was therefore voidable.
The owners appealed this decision, arguing that economic
duress only applied where the victim was subjected to
pressure by unlawful action on the part of the other party.
In the alternative, they argued that if lawful conduct could
amount to ‘illegitimate pressure’, the bar had to be set very
high and pressure should only be defined as ‘illegitimate’
where it could be considered on a par with conduct
expressly recognised at law as illegal or criminal.
The High Court dismissed the owners’ appeal, agreeing with
the arbitrators and finding that the exertion of pressure by
lawful means did not prevent the operation of the doctrine of
economic duress. Cooke J said that ‘illegitimate pressure’
could be constituted by conduct which was not in itself
unlawful (although he added that it would be an unusual case
where that were so, particularly in a commercial context).

26 | CMS London - English construction law developments 2012: An international perspective

Each case would be context-dependent, but economic
pressure could amount to duress provided that the
economic pressure was illegitimate, and was a significant
cause inducing the claimant to enter the relevant contract.
Here the owners’ repudiatory breach of contract was an
unlawful act which they subsequently sought to take
advantage of. A past unlawful act, as well as a threat of a
future unlawful act, could amount to ‘illegitimate pressure’.
The refusal to comply with assurances previously given
about providing a substitute vessel to load between 27 and
30 April and insistence that the charterers waive any claim
to damages, in spite of previous assurances that they would
be fully compensated, also amounted to ‘illegitimate’
behaviour which compelled the charterers to enter the
contract. The combination clearly amounted to illegitimate
behaviour and so to economic duress. Therefore the
contract was voidable.
Over the last decade the courts have looked to distinguish
illegitimate pressure from ‘the rough and tumble of the
pressures of normal commercial bargaining’, by examining:
— — whether an actual or threatened breach of
contract occurred
Even so, each case will depend on its facts. Had the owners
not breached the contract and so acted unlawfully initially,
the outcome here may have been different – their later
unscrupulous behaviour may or may not have been
sufficient on its own.
However, there is clear warning to contracting parties in a
dominant position that unethical conduct and extreme
demands may not be upheld. Furthermore, where an
innocent party’s predicament is caused by the other party’s
breach of contract, and where the perpetrator then seeks
to take advantage of those circumstances for commercial
gain, that is likely to meet the requirements of illegitimate
conduct and so constitute duress.
The lesson for parties in a subservient position is that they
should only accept terms like these under protest, reserving
their rights where they can, and seeking to avoid the
agreement as soon as possible afterwards.
References: Progress Bulk Carriers Ltd v Tube City IMS LLC
[2012] EWHC 273 (Comm).

—— whether the party alleging illegitimacy had a

reasonable practical alternative at the time of
submission to the pressure

—— whether the party alleging illegitimacy protested at the

time of submission

—— whether the party alleging illegitimacy sought to rely

on the contract and

—— whether the party accused of illegitimate conduct

acted in bad faith.

The High Court’s decision in Progress Bulk has confirmed

that unlawful behaviour is not necessarily a pre-requisite to
an allegation of illegitimacy. The court followed the view
espoused in the major text books and case law, that lawful
but unethical conduct can constitute illegitimate pressure.

27
Time bars and documentary requirements in
construction contracts

International construction contracts frequently contain clauses requiring claims to be submitted

within specific time periods and/or accompanied by certain supporting documentation. Sometimes
compliance with these requirements is expressed to be a condition precedent to entitlement, such
that the claim will be lost if the requirements are not complied with. In previous editions of this
publication, we have noted that the English courts support such clauses in so far as they concern
time limitations. A further decision in 2012 backs this general trend while a second suggests a
somewhat looser approach to requirements for documentation.

Inframatrix Investments Limited v Dean Informal discussions on a ‘without prejudice basis’ were
then held. In February 2010, DCL’s solicitors formally
Construction Limited responded to Inframatrix’s claim by way of a letter marked
‘without prejudice’, stating that DCL was willing to attend
Inframatrix Investments Limited (‘Inframatrix’)
site on a ‘without prejudice’ basis to carry out an inspection
appointed Dean Construction Ltd (‘DCL’) to carry out
of any works Inframatrix identified. Inframatrix agreed to
roofing and cladding works at a proposed camera
the proposed site meeting and inspection, which occurred
factory and a formal contract was entered into in July
in March 2010, following which DCL prepared a ‘without
2008. The construction of the factory was to be carried
prejudice’ report. DCL subsequently offered to carry out
out by seven contractors, of which DCL was one, each
further investigative work and any remedial works thereby
of whom was to have exclusive access to the site while
found to be necessary but stated that the offer would lapse
carrying out their works. To this end, the contract
if proceedings were initiated. Inframatrix did not accept the
distinguished the ‘Project’ (the construction of the
offer and proceedings were issued in December 2010. DCL
entire building) and the ‘Services’ (the construction of
subsequently argued that the claim was barred by the
the roof by DCL).
limitation clause.

The contract contained a limitation clause precluding the

As Practical Completion for the Services had never been
commencement of any action or proceedings against
certified, DCL’s contractual limitation defence turned on
DCL after the expiry of one year from the date of
whether DCL had provided any ‘Services’ within one year
‘Practical Completion of the Services’ or where Practical
of the claim being brought as required by the second limb
Completion ‘does not occur, the expiry of one year from
of the clause quoted above. DCL asserted that they had last
the date the Contractor last performed Services in
performed the Services in January-February 2009, which
relation to the Project’.
would mean the claim was more than ten months out of
time when proceedings were commenced. Inframatrix
DCL carried out the works on the site between
contended that the inspection in March 2010 and the
November and December 2008. Inframatrix’s
report prepared were part of DCL’s Services and therefore
representative inspected the works in January 2009 and
the claim was not time-barred. However, the court held
expressed concern over the quality of the works. DCL
that as the March 2010 meeting and inspection were held
asserted that all their works (including remedied defects)
(and the subsequent report was prepared) on a ‘without
were complete, but this was rejected by Inframatrix’s
prejudice’ basis as an attempt to avoid litigation, they did
solicitor in July 2009, who alleged poor workmanship,
not form part of DCL’s Services under their contract. The
and said that Inframatrix had appointed a consultant
‘without prejudice’ privilege had been waived for the
who advised that around £105,000 of further remedial
purposes of the trial, but this did not change the
works would be required. Inframatrix initially offered to
fundamental characterisation of the work carried out.
allow DCL to remedy the defects. However, DCL replied
Inframatrix’s claim was therefore made outside the agreed
stating that the final inspection had taken place in
contractual limitation period and was time-barred. There
December 2008 and all defects had been remedied in
was no consideration as to whether DCL would be
January 2009. In October 2009, Inframatrix’s solicitors
prejudiced by a late claim. This is very much consistent with
issued a formal letter of claim seeking the cost of further
English law’s strict approach to time bar provisions.
remedial works and loss of profits.

28 | CMS London - English construction law developments 2012: An international perspective

Walter Lilly: documentary evidence such as was necessary to prove its claim beyond
reasonable doubt. In Mr Justice Akenhead’s opinion, the
requirements contrasted clause imposed a much lower standard of information:

The strict approach to time limitations in Inframatrix can be

‘… it is necessary to construe the words in a sensible and
contrasted with the interpretation of documentary claim
commercial way that would resonate with commercial
requirements in the Walter Lilly case. As mentioned earlier
parties in the real world. The Architect or the Quantity
in this publication, the Walter Lilly decision has raised a
Surveyor must be put in the position in which they can be
number of interesting legal issues including the proper
satisfied that all or some of the loss and expense claimed is
approach to be taken to global claims. As part of its
likely to be or has been incurred. They do not have to be
defence to the claim, the defendant, DWM, alleged that
‘certain’. One has to bear in mind that the ultimate dispute
Walter Lilly (WLM) had failed to comply with the
resolution tribunal will decide any litigation or arbitration
contractual requirements as to documentation. The
on a balance of probabilities and at that stage that tribunal
contract in question was in the standard JCT form of
will (only) have to be satisfied that the Contractor probably
contract commonly used in England. Clause 26.1.3 required
incurred loss or expense as a result of one or more of the
the contractor to:
events listed in Clause 26.2. …’

‘submit to the Architect or to the Quantity Surveyor such

The judge also noted the difficulties which would arise on a
details of … loss and/or expense as are reasonably necessary
strict interpretation if only a small part of the claim were
for … ascertainment [of the amount of loss and/or expense
inadequately substantiated. That could result in an absurd
which has been or is being incurred by the Contractor]’.
situation where a claim for £1 million might be invalidated
because there was insufficient substantiation for a minor
Both parties agreed that this requirement was a condition
item worth £10.
precedent to WLM’s entitlement to claim and DWM sought
to argue that the clause required the contractor to provide
The judge also considered that it would be sufficient
extensive details and back up documentation to prove its
compliance for the contractor to merely offer for the
loss and/or expense entitlement. DWM emphasised the
Architect or Quantity Surveyor to inspect records at the
word ‘ascertain’ and argued that this meant that the
contractor’s premises. Such an interpretation will make
Architect or Quantity Surveyor was required to be given
it very difficult indeed for an employer to prove a
sufficient information to enable the amount of the claim to
breach of contract if the contractor offers an inspection
be calculated with certainty (which reflects the general
of its documents.
dictionary definition of the word ‘ascertain’).

As mentioned earlier in this publication, the Court of

However, in Mr Justice Akenhead’s view:
Appeal has this year refused leave to appeal from the
‘There is no need to construe Clause 26.1.3 in a peculiarly
decision in Walter Lilly. In doing so it remarked specifically
strict way or in a way which is in some way penal as against
that, although no appeal would be allowed on the
the Contractor, particularly bearing in mind that all the
documentary requirements issue for factual reasons, it
Clause 26.2 grounds which give rise to the loss and expense
nonetheless had ‘very serious doubts’ about whether there
entitlements are the fault and risk of the Employer.’
was any room for argument over Mr Justice Akenhead’s
interpretation. Once again, therefore, the judge’s views
DWM’s argument was almost akin to saying that a
would appear to be here to stay.
contractor was required to produce all conceivable

29
Conclusion References: Attorney General of the Falkland Islands v
Gordon Forbes Construction (Falklands) Ltd [2003] BLR 280;
This difference in approach between time limitation Inframatrix Investments Limited v Dean Construction
requirements and documentary requirements is even more Limited [2011] EWHC 1947 (TCC) and on appeal [2012]
pronounced under the standard FIDIC claims procedure. EWCA Civ 64; Walter Lilly & Company Ltd v Mackay [2012]
Clause 20.1 of the Red, Yellow and Silver Books 1999 EWHC 1773 (TCC) and on application for leave to appeal
requires a notice of claim to be given within 28 days of the [2013] EWCA Civ 142.
contractor becoming aware of an event (or within 28 days
of when the contractor should have become aware).
The second paragraph of clause 20.1 makes clear that this
requirement is a condition precedent and that failure to
comply will result in the loss of any entitlement.

The fourth paragraph of the clause also provides that the

contractor ‘shall keep such contemporary records as may
be necessary to substantiate any claim’. This requirement is,
however, not expressed as a condition precedent and
failure to comply means only that the assessment of any
entitlement must ‘take account of the extent (if any) to
which the failure has prevented or prejudiced proper
investigation of the claim’.

The 28 day notice requirement will receive a strict

interpretation under English law and contractors can expect
any entitlements to be lost if the clause is not complied
with (unless escape routes are available, e.g. that the
employer waived the requirements). The judgment in
Walter Lilly shows however that a more liberal approach
will be adopted in assessing compliance with documentary
requirements. Indeed, even if the documentary
requirements in clause 20.1 were to be made a condition
precedent to entitlement, Walter Lilly would still give
contractors considerable comfort that claims are not likely
to be lost through documentary failings.

This position may be contrasted with that previously

adopted in the FIDIC Red Book 4th Edition (which is still
regularly used in some places). Clause 53 of the Red Book
4th Edition has the same requirement to keep such
contemporary records as may be necessary to substantiate
any claim. In addition, however, the clause provided that
in the absence of such records the contractor’s
entitlement was not to exceed ‘such amount as the
Engineer or any arbitrator or arbitrators … assessing the
claim considers to be verified by contemporary records’.
This provision was given a strict interpretation in Attorney
General of the Falkland Islands v Gordon Forbes
Construction (Falklands) Ltd, such that any claims which
were not supported by contemporary records were held
to be invalidated. A partial absence of records was held to
partially invalidate a claim and the gaps were not
permitted to be filled by retrospective analysis or witness
evidence. This case is perhaps the exception which proves
the rule, by showing that very specific clauses are required
to give ‘teeth’ to documentary requirements. A general
requirement for supporting documentation, even if made
a condition precedent to entitlement, is unlikely to
meaningfully affect a contractor’s entitlement, save only
in the clearest of cases.

30 | CMS London - English construction law developments 2012: An international perspective

With numerous offices spread throughout the world,
this firm has impressive global coverage and acts on
construction projects in Asia, Latin America, Africa
and the Middle East.
Chambers & Partners, UK
Document harvesting and disclosure in
international construction disputes

2012 presented the English High Court with an opportunity to consider the difficult logistical issues
which can face parties preparing for disclosure in large international construction disputes. As this
case shows, a failure to plan early for disclosure can lead to embarrassment and a loss of credibility
at a later stage in proceedings, not to mention serious cost consequences. We consider the lessons
this case holds more broadly for those preparing for disclosure in international construction
disputes, whether before a court or an arbitral tribunal.

The West African Gas Pipeline Company (WAPCo) engaged a
subsidiary of Willbros Global Holdings (WGH) under an EPC
contract to construct the onshore works for a gas pipeline in
West Africa (for supplying gas from Nigeria to Benin, Togo
and Ghana). More than three years after the contract had
been entered into WAPCo terminated it and completed the
work with other contractors. WGH had guaranteed its
subsidiary’s duties under the contract and WAPCo ultimately
sued in the English Technology and Construction Court to
recover approximately US$ 274 million from WGH for its extra
costs of completing the pipeline following termination.
In the litigation the parties were each ordered to give
‘standard disclosure’ under the English court rules - as is
usual (or rather was; since April 2013 the courts will more
actively consider narrower forms of disclosure from a
‘menu’). ‘Standard disclosure’ requires a party to disclose
any documents relied upon by it or which support the
opposing party’s case or which are adverse to either party’s
case. After disclosure it became apparent that WAPCo’s
disclosure was deficient. After a number of attempts by
WGH to obtain further disclosure, it emerged that WAPCo
had not properly prepared for disclosure or managed the
process. WGH sought an order for wasted costs as a result.
The court was critical of WAPCo and noted the following
key deficiencies in its disclosure:
—— WAPCo’s disclosure team had failed properly to
assemble or ‘harvest’ the relevant documents under
WAPCo’s control.
The importance of properly and thoroughly carrying out an
initial ‘harvesting’ of the documents received particular
emphasis from the court:
‘The second main area of difficulty has been the failure
by WAPCo to gather together or ‘harvest’ a consistent
and complete set of electronic data for the purpose of
electronic disclosure. This was not a case where there
are particular complexities in the important initial
process of identifying the repositories of electronic
documents, contacting custodians and identifying
relevant folders and sub-folders so as to ensure that a
comprehensive compilation of electronic documents is
obtained. There were a number of errors identified
above, in particular, the provision of a copy of Livelink
with incomplete e-room documents, the failure until 14
October 2011 to obtain a copy of the relevant folders
and sub-folders on Livelink and the failure, in
consultation with the relevant custodians, properly to
gather those custodians’ documents. It is evident that a
considerable amount of disclosable documentation has
now been disclosed from the additional custodians and
that is documentation which should have been gathered
together initially. Another aspect which has come to
light is the incomplete disclosure of the documents
stored at the Lagos Beach Compressor Station. I consider
these to be serious mistakes and from the evidence it is
apparent that the mistakes resulted from an inadequate
initial review and gathering together of a complete set of
electronic documentation.’

—— The review of documentation which had been
harvested was outsourced to a low-cost entity in India,
which ultimately failed to review the documents
properly and excluded relevant key documents.
—— WAPCo’s disclosure was not sufficiently de-duplicated,
so that multiple copies of individual documents were
disclosed to WGH.
Unfortunately such a state of affairs is not uncommon in
international construction disputes. Geographical and
language barriers can easily conspire to make an
exhaustive harvesting exercise difficult. Almost always,
information initially received from individual custodians
or from in-house IT staff proves to be incomplete or
subject to qualification.

—— Other more technical problems such as WAPCo’s failure

to provide searchable text copies of documents or to
provide appropriate searchable fields within the
disclosure database.

32 | CMS London - English construction law developments 2012: An international perspective

At a very high level, harvesting will usually need to be
directed at five levels in an organisation:
1. At site-level: to capture all information stored in
hard copy and electronically on local computers or
project servers.
2. At a central IT level: to capture all back-up systems,
e-mail archive stores and other centrally
maintained information.
3. At an individual custodian / personnel level: to capture
all information held on individual laptop computers or
portable devices and any physical photographs or notes
held individually.
4. At a third party level: to capture all available
information held by third parties such as storage
providers or consultants (to the extent they are obliged
to provide information).
5. At a governance level: to capture those reporting
structures from site-level upwards which record
information and decision making processes in relation
to the project.
Completing the harvesting process at each of these levels
may take months and require persistent monitoring.
Individual custodians / personnel can prove to be
particularly time-consuming as they require one-on-one
treatment with any information recovered compared to the
time periods when they were involved with the project to
ensure completeness.
Once properly carried out, however, an exhaustive
harvesting exercise provides a party with a number of
advantages during the course of any subsequent court or
arbitration proceedings:
—— First and foremost, the exercise allows a party to make
detailed and informed submissions to the court or
tribunal about the scope of disclosure. For example, it
enables ready analysis to be carried out on any
proposed category of disclosure and for an objection
to be fashioned if the likely number of documents
falling within that category will be too large. In a
similar vein, statistics can be generated to indicate
what categories of documents or keywords are likely
to be most prevalent and on that basis more targeted
orders for disclosure can be sought in relation to the
other party’s documents.
— — Having carried out a detailed harvesting exercise
will help a party win the confidence of a tribunal
and, particularly where the opposing party has not
done likewise, will make it difficult for any
meaningful criticism to be made of the disclosure
ultimately provided.
—— Such an exercise will also enable attacks to be made
on the opposing party’s disclosure, particularly if they
have not carried out a similarly detailed harvesting
exercise. If gaps exist and the tribunal can readily see
that there is a large imbalance in the way each party
has approached disclosure, it is more likely to make
further orders.
—— A detailed harvesting exercise also enables a deeper
analysis of a party’s own case at an early stage in
proceedings. Particularly when coupled with an
appropriate database system and reviewing solution,
large amounts of information can be analysed
relatively swiftly, particularly if certain key periods or
issues have been identified. The more information that
has been harvested, the more effective these initial
searches will be.
References: West African Gas Pipeline Company Ltd v
Willbros Global Holdings Inc [2012] EWHC 396.
33
Maintaining privilege in international
construction disputes

As noted earlier in this publication, the Walter Lilly litigation has raised a number of issues which
affect construction claims made under English law. A further issue considered during the course of
the litigation in 2012 was the extent to which privilege applied to advice given by claims
consultants retained during the course of the works. Privilege was found not to apply and the
decision is therefore worth bearing in mind when retaining similar consultants on international
construction projects. We also consider below some of the broader implications of debates over
privilege in the context of international construction projects.

Walter Lilly
As mentioned earlier in this publication, the Walter Lilly
litigation concerned a claim by a contractor for additional
time and money in relation to the construction of a luxury
residential project in London. Part way through the project,
one of the proposed owners and occupiers of the
development, Mr Mackay, became disillusioned with the way
the project was being managed and retained the services of
a claims consultancy, Knowles Ltd, to provide him with
‘contractual and adjudication advice’. In the later litigation
Mr Mackay unsuccessfully claimed that the documents
recording Knowles’ advice to him attracted legal advice
privilege and therefore he was not obliged to disclose those
documents to Walter Lilly. In English law, legal advice
privilege applies to all communications passing between a
client and its lawyers, acting in their professional capacity, in
connection with the provision of legal advice. Fundamentally,
therefore, it depends upon who is giving the advice.
Mr Mackay submitted evidence to the court that the advice
sought from Knowles was of a legal nature and that he had
believed the people advising him were lawyers. Although those
people were not practicing solicitors or barristers at the time
Mr Mackay received their advice, it was argued that Mr Mackay’s
mistaken belief that they were practicing lawyers was sufficient.
For the purpose of claiming legal advice privilege, the crucial
issue was to determine the capacity in which Knowles were
retained by Mr Mackay. If Knowles were not retained by
Mr Mackay as barristers or solicitors then Mr Mackay’s
mistaken belief was irrelevant. As the court noted:
‘The reality is that the Defendants retained Knowles not as
barristers but as an organisation to provide them with claims
and project handling advice. In this respect, their position is no
different from the claimants in the Prudential case who
employed accountants. The fact that Mr Mackay honestly
understood that the two gentlemen with whom he was dealing
at Knowles were qualified and practising barristers or solicitors is
immaterial because their employer was not retained by the
Defendants to provide the services of barristers or solicitors.’
The Prudential case referred to by the court was very
recently upheld in the English Supreme Court. In that case
legal advice privilege was held not to apply to accountants
who were retained to give legal advice in relation to
complex tax matters. Once again, the reasoning in
Prudential was that legal advice privilege extends only to advice
obtained from persons who are retained in their capacity as
practicing lawyers. It is worth noting, however, that whilst
English law draws a clear distinction between lawyers and
non-lawyers for the purposes of the classification of legal advice
privilege it does not draw a similarly stark distinction between
English and non-English lawyers for this purpose, as will be
discussed below.
Although Walter Lilly involved domestic parties, the case reflects a
pattern not infrequently occurring in international construction
projects. When a project suffers stress, large consultancy firms are
often engaged to advise on a range of issues, from programming
and project management through to claims preparation. In such
circumstances, it will often seem appropriate for such firms to
provide advice on legal issues as well. Although not in the business
of legal practice, members of such firms will often have legal
qualifications and will be able to draw from a wealth of previous
experience on other projects. Despite this, English law is now very
clear that such advice will not be privileged from disclosure in any
subsequent dispute unless formal legal proceedings are already
contemplated and the advice is sought to that end (in which case a
different type of privilege called litigation privilege can be claimed
but this may not be until near the end of a project).
Parties would be well advised, therefore, to involve practicing lawyers
when seeking legal advice during the course of a project when
formal legal proceedings are not yet contemplated. This need not
exclude the input of experienced consultancy firms on such issues,
however. Provided that the legal views of such firms are given by way
of instructions to practicing lawyers and for the purpose of receiving
advice from those lawyers, they will also be protected by legal advice
privilege under English law. Careful thought should therefore be
given before the engagement of such consultancy firms as to how
privilege may best be claimed in respect of any legal advice received.
English law privilege in an international context
Whilst most parties involved in international construction
projects will be keen to obtain the protection of documentary
privileges in appropriate circumstances, the protection of those
privileges in an international context can pose difficult issues of
local and private international law. Where arbitration
proceedings are concerned, the law of the seat of the arbitration
may be different to the law of the contract, which may be
different again from the location of the works or each of the
parties’ relevant place of business. Parties may seek to assert

34 | CMS London - English construction law developments 2012: An international perspective

privileges arising under the laws of each of these locations,
leaving an arbitral tribunal with the difficult task of
attempting to identify which, if any, ought to be upheld.
The tribunal’s power to decide such matters will flow from the
procedural law applicable to the arbitration, usually the seat of
the arbitration unless otherwise stated by the parties. Such
procedural laws often confer a wide discretion upon the arbitral
tribunal to decide upon issues surrounding the disclosure of
documents and the extent to which it will accept claims to
privilege arising under laws foreign to the seat of the arbitration.
More restrictive procedural laws may sometimes be found,
however, which limit the tribunal’s powers to the specific rules of
evidence adopted under the law of the seat.
To complicate matters further, both local laws as to privilege and
local conflict of law rules as to foreign privileges vary considerably
from country to country. In England, for example, legal advice
privilege and litigation privilege will apply to advice given by
foreign lawyers in a foreign country or in relation to foreign
proceedings, even if no privilege applies in those foreign countries
(In re Duncan). English ‘without prejudice’ privilege (which
protects against the disclosure of genuine settlement negotiations)
also applies to protect settlement negotiations held in a foreign
country, however, unlike legal advice and litigation privilege, an
English court will not restrain the use of without prejudice material
in a foreign country unless the parties have expressly agreed that
negotiations are to be privileged (Prudential Insurance Co of
America v Prudential Assurance Company Ltd). The ‘without
prejudice’ rule is a local or ‘procedural’ rule of English law whereas
legal advice and litigation privilege are ‘substantive’ rights which
English law will protect extraterritorially.
These difficulties can mean that a simple analysis of privilege
flowing from the law of the seat of the arbitration is unattractive,
as it may result in the violation of privileges specifically protected
by jurisdictions closely connected with the arbitration. For
example, the legal advice and litigation privileges granted by civil
law jurisdictions are usually more restrictive than under English
law. An arbitrator sitting in a civil law country and applying only
the law of the seat to determine questions of disclosure might
therefore order the production of documents which would
otherwise be privileged under the laws of a common law country
such as England. As such documentary privileges are often based
upon public policy considerations, such an approach could
potentially prejudice the enforcement of any award in those
countries. Under English law, for example, the wrongful admission
of privileged material in an arbitration can result in allegations
that any award is or will be tainted by bias on the basis that the
arbitrator has wrongly seen material which has or will make a fair
hearing impossible (see Brown v CBS (Contractors) and Francis
James v Griffin Shopfitters).
These considerations usually lead (where the procedural law
of the arbitration allows it) to the more pragmatic outcome
noted in Russell on Arbitration:
‘In practice a combination of wishing to preserve the
privilege of a party who under the rules of his own
jurisdiction had a legitimate expectation of it, and not
wishing to treat the parties differently, means that in most
cases both parties will be able to claim privilege in
accordance with whichever applicable rules are most
restrictive about the requirement to disclose.’
This broad approach is also reflected in the IBA Rules on the
Taking of Evidence in International Arbitration 2010.
Paragraph 9.3 permits a tribunal when considering privilege
claims to take into account the following matters (subject to
any mandatory rules determined to be applicable):
‘(c) the expectations of the Parties and their advisors at the time
the legal impediment or privilege is said to have arisen; …(e) the
need to maintain fairness and equality as between the Parties,
particularly if they are subject to different legal or ethical rules.’
This broad approach to privilege reinforces the point made
above that parties should give careful thought as to how best to
claim privilege over advice received during the course of a
project and in any negotiations over claims. Particular
consideration should be given to appointing local lawyers and/
or entering into express ‘without prejudice’ agreements with
counterparties to settlement negotiations. Provided the
appropriate persons are involved and the appropriate rules are
followed, parties can be confident that their legitimate
expectations as to privilege will be given weight in any
subsequent arbitration.
References: In re Duncan [1968] P 306; Brown v CBS
(Contractors) [1987] 1 Lloyd’s LR 279; Francis James v Griffin
Shopfitters Ltd, 8 March 1991, unreported; Prudential Insurance
Co of America v Prudential Assurance Company Ltd [2003]
EWCA Civ 1154; Russell on Arbitration (23rd Edition, 2007);
Walter Lilly & Company Ltd v Mackay [2012] EWHC 649.
35
What CMS offers

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