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International Developments Brochure - June 2013 PDF
International Developments Brochure - June 2013 PDF
eps
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
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.
5
Execution formalities An example last year from Australia illustrates well this risk
(which applies where English law governs the relevant
Deeds play a central role in construction and engineering bond). In Segboer v AJ Richardson Properties a contractor
projects. Many construction and engineering contracts, arranged for a bank to issue an on-demand performance
and similar contracts such as collateral warranties, are bond in favour of a developer as security for the
entered into as deeds. The primary advantage of doing so contractor’s obligations under its building contract with the
is to secure the benefit of a longer limitation period developer. The performance bond was issued by the bank
(sometimes referred to as ‘prescription’ in other as a deed, however, following a call on the bond by the
jurisdictions) than if the contract were not a deed (12 years developer, the contractor contended that the bond had not
instead of 6). Rights under deeds therefore last longer. been properly ‘delivered’ as a deed and was therefore
invalid. The ‘delivery’ of a deed is a formal requirement of
Deeds also perform a special role when it comes to English law and will ordinarily take place upon execution
on-demand performance bonds. Such bonds are usually unless circumstances suggest that some later time for
issued unilaterally by a bank or financial institution in delivery was intended (which was the argument made by
favour of parties with whom it will have no direct the contractor in Segboer).
commercial relationship and from whom it will receive
nothing in return. There will therefore usually be The contractor’s argument did not succeed and the
insufficient ‘consideration’ to form a binding contract at performance bond was ultimately held to be enforceable.
common law. In such circumstances, the bond will need It is notable, however, that once the contractor had made
to be executed as a deed if it is to be enforceable by the its objection the bank refused to pay under the bond. This
beneficiary. If, however, there is an irregularity concerning necessitated court proceedings by the developer, in which
the bond so that it does not constitute a deed, the bond the bank claimed against the contractor under its cross-
will not be enforceable. indemnity (that being the only route by which the bank
could be assured of recovering against the contractor if it
It is surprising in this context that one often finds paid out under the bond). Accordingly, even though the
performance bonds which are expressed to be subject to contractor’s argument was unsuccessful, it still resulted in
English law and yet are not properly executed as a deed. considerable delay and expense in enforcing what was
The requirements for execution under English law are not intended to be a cash-equivalent security.
particularly complex and all that is usually needed is for the
document to state that it is ‘executed as a deed’ and to be The proceedings in Segboer provide a helpful warning for
signed and /or witnessed by the appropriate persons employers and owners to scrutinise the execution
depending on the nature of the company executing the formalities of English law performance bonds delivered by
deed. Non-compliance with such formalities can, however, contractors. If the formal requirements for the execution of
have far reaching implications. deeds have not been met, the contractor may be able to
successfully challenge payment by the bank.
It is sometimes said that the formalities of execution are
less important when dealing with large well-known References: Esal Commodities v. Oriental Credit CA [1985] 2
financial institutions, as they are less likely to rely on legal Lloyd’s Rep. 546; Siporex Trade SA v. Banque Indosuez
technicalities to avoid their obligations. Such comments [1986] 2 Lloyd’s Rep. 146; I.E. Contractors v Lloyds Bank
overlook the fact that an institution’s willingness to pay out [1990] 2 Lloyds Rep 496; Trafalgar House Construction v
on a bond is usually tied to the confidence it has in being General Surety and Guarantee [1996] 1 AC 199; Gold Coast
able to recover the sums paid from its client and/or under Ltd v Caja De Ahorros [2001] EWCA Civ 1806; Paget’s Law
the applicable cross-indemnities. No bank will willingly pay of Banking (13th ed, 2007); Marubeni Hong Kong v
out on a performance bond if it will be left out of pocket. Government of Mongolia [2005] EWCA Civ 395; Vossloh
AG v Alpha Trains (UK) Ltd [2010] EWHC 2443; Segboer v
In such circumstances, any defect in the formalities of A J Richardson Properties Pty Ltd [2012] NSWCA 253;
execution may enable the procuring party (i.e. the bank’s Wuhan Guoyo Logistics Group Co Ltd v Emporiki Bank of
client and usually, but not always, the provider of the Greece SA [2012] EWHC 1715 (and on appeal at [2012]
counter-indemnities) to place pressure on the bank to EWCA Civ 1629).
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.
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 limiting the scope of matters to be taken into account in
a mixed-use development known as ‘Creekside Village West’ considering ‘reasonable endeavours’. As the construction
in Greenwich, London. Telford agreed to provide a long works themselves had not been affected, Telford was unable
lease of the commercial parts of the development to to find any support for its position in the reasonable
Ampurius Nu Homes Holdings Ltd (Ampurius). Telford and endeavours clause. The court’s ruling leaves unclear, however,
Ampurius entered into an Agreement for Lease on how such a clause would apply in circumstances where the
7 October 2008 where, in return for Ampurius’ agreement to cost of the works had risen due to unforeseen circumstances.
take up the lease, Telford agreed to ‘use its reasonable A lack of funding in respect of the additional costs in such
endeavours to procure completion of the Landlord’s Works by circumstances may not be as easily characterised as
the Target Date or as soon as reasonably possible thereafter.’ antecedent or extraneous to the carrying out of the works.
Telford had already commenced work on the development Two previous Court of Appeal decisions provide a useful
at the time the Agreement for Lease was signed. Work comparison with the decision in Ampurius:
continued until March 2009 when, with the onset of the
—— In Phillips Petroleum Company United Kingdom v Enron
credit-crunch, demand for residential units began to dry up
Europe, a contract for the supply of North Sea gas
and Telford was unable to meet the level of pre-sales
contained a number of duties requiring the parties to
required by its development financing. As a result, Telford
use ‘reasonable endeavours’. One was a duty to use
was unable to access additional funds and decided to
reasonable endeavours to co-ordinate the construction
suspend part of the commercial works which Ampurius
of certain facilities. Another duty required the parties to
was to lease. Ampurius subsequently sought to terminate
use reasonable endeavours to agree the date on which
for repudiation and one issue between the parties was
deliveries of gas were to begin (a long-stop date was
whether the ‘reasonable endeavours’ clause justified
also specified in the absence of agreement). Because of
Telford’s suspension. Telford argued that the expression
a fall in the price of gas Phillips refused to agree a date
‘reasonable endeavours’ encompassed financial resources,
earlier than the specified long-stop date. Enron argued
so that a failure to complete due to funding problems
that each party was under a duty to use reasonable
would not amount to a breach provided reasonable
endeavours having regard only to criteria of technical
endeavours had been made to procure finance.
and operational practicability and without regard to
The court accepted that Telford had made reasonable selfish or commercial motives. The Court of Appeal
endeavours to procure finance, but rejected Telford’s disagreed, with Kennedy LJ finding it ‘impossible to say
submission that funding came within the scope of the that [the contract terms] impose on the buyer a
clause. According to Mr Justice Roth, the reasonable contractual obligation to disregard the financial effect on
endeavours obligation was: him, and indeed everything else other than technical or
operational practicality, when deciding how to discharge
‘…designed to cover matters that directly relate to the physical
his obligation to use reasonable endeavours to agree to
conduct of the works, thereby providing an excuse for delay in
a commissioning date prior to 25 September 1996.’
such circumstances as inclement weather or a shortage of
materials for which the Defendant was not responsible. The —— In Jet2.com Ltd v Blackpool Airport Ltd (which we
clause does not, in my view, extend to matters antecedent or reported on in last year’s publication), a contract
extraneous to the carrying out of the work, such as having the between budget airline Jet2.com and Blackpool Airport
financial resources to do the work at all.’ (BAL) contained an agreement that both parties would
‘…co-operate together and use their best endeavours
The court appears to have reached its decision by confining
to promote Jet2.com’s low cost services…and BAL will
the clause strictly to the construction works and thereby
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 or more contracts for the provision of not less than 33500
hours of construction, design and engineering services’. In
In SNCB Holding v UBS AG the English Commercial Court the absence of such additional work, Skidmore was to pay
was asked to consider the implication of a duty of good a further amount to Jacobs.
faith arising under complicated banking arrangements.
Put simply, the agreement conferred a power on UBS to Skidmore argued that literal effect should not be given to
manage a certain part of the arrangements and it had the word ‘award’, in the sense of contracts actually
sought to do so for its own financial benefit and against entered into, as that would allow Jacobs to refuse to
the interests of SNCB, but still within the confines of the accept contracts which Skidmore offered it and thereby
parties’ express contractual terms. SNCB argued that UBS trigger the additional payment. Skidmore therefore
was required, by an implied term, to exercise its discretion argued for an obligation requiring it merely to offer
in good faith and in accordance with the aims of the contracts to Jacobs. The court disagreed, and found that
parties’ agreement. word ‘award’ could be given literal effect, if buttressed by
an implied term of good faith:
The court first reiterated the traditional position under
English law, that: ‘I consider that there were general obligations of good faith
on both sides in order to make this agreement work. …
‘Unlike some bodies of foreign law, commercial contracts [Skidmore] had to consider awarding contracts and Jacobs
are not subject to general duties of good faith and fair had to consider accepting such awards, both in good faith.
dealing and it is trite law that a party does not have to Only when an agreement was reached in good faith could
exercise his contractual rights, once properly ascertained, there be an award of a contract. Beyond that, on this
reasonably. If he has rights, the law will not concern interpretation, I can see no need for implied terms to
itself with the motivation or rationale lying behind his achieve mutuality.’
exercise of them …’
This decision stops a long way short of finding for a
The court accepted, however, that this principle was subject generally implied duty of good faith. Good faith was only
to the usual rules as to the implication of terms, such that a implied because without it the parties’ agreement as to the
term, including one as to good faith, could only be implied ‘award’ of contracts would have been unworkable. This
if it were necessary to make the contract work and not very much accords with the traditional English law
otherwise inconsistent with any express terms. No such approach to implied duties of good faith, which views
implied terms were found to apply to UBS and, aside from them as a measure of last resort. A much more liberal
a requirement to act honestly, UBS was entitled to act in its approach was, however, suggested in February 2013 in
own interests to the exclusion of SNCB’s. Yam Seng PTE Ltd v International Trade Corporation Ltd:
This position may be contrasted with Jacobs UK Ltd v ‘Under English law a duty of good faith is implied by law as
Skidmore Owings & Merrill LLP where a duty of good faith an incident of certain categories of contract, for example
was found to satisfy the test for implication of terms. contracts of employment and contracts between partners
Jacobs had sued Skidmore for the recovery of unpaid fees. or others whose relationship is characterised as a fiduciary
The parties agreed to settle the proceedings for the one. I doubt that English law has reached the stage,
payment of a certain amount together with a promise by however, where it is ready to recognise a requirement of
Skidmore, over the next two years, to ‘award Jacobs ... one good faith as a duty implied by law, even as a default rule,
11
—— CPC Group Ltd v Qatari Diar Real Estate Investment References: Berkeley Community Villages v Pullen [2007]
Company: a clause requiring the parties to act ‘in the EWHC 1330 (Ch); Gold Group Properties Ltd v BDW
utmost good faith towards each other’ in the context Trading Ltd [2010] EWHC 1632 (TCC); CPC Group Ltd v
of a proposed development project was found to Qatari Diar Real Estate Investment Company [2010] EWHC
impose a requirement that the parties adhere to the 1535 (Ch); SNCB Holding v UBS AG [2012] EWHC 2044;
spirit of their contract, which was held to include the Jacobs UK Ltd v Skidmore Owings & Merrill LLP [2012]
seeking of planning consent for the maximum EWHC 3293; Yam Seng PTE Ltd v International Trade
developable area in the shortest possible time, the Corporation Ltd [2013] EWHC 111; Compass Group UK
observance of reasonable commercial standards of fair and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services
dealing, faithfulness to the common purpose and NHS Trust [2012] EWHC 781 (QB) and on appeal [2013]
consistency with the other’s justified expectations. EWCA Civ 200.
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.
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.
The court dismissed Leander’s claim and held that it was The court found that these words were insufficient to
not necessary to imply a term to proceed regularly and exclude the obligation of satisfactory quality implied by the
diligently to make the contract workable. Mulalley was Sale of Goods Act and in doing so, upheld the traditionally
already required to complete the sub-contract works by a strict approach to ousting the Act’s applicability. Although
specified completion date. Mulalley therefore had a section 55(1) of the Act allows the parties to exclude its
discretion as to how fast or slow it would proceed during implied obligations ‘by express agreement’, section 55(2)
certain periods of the works, subject to its ultimate duty to states that, ‘An express term does not negative a term
complete the works by the date specified. The express implied by this Act unless inconsistent with it.’ This
power to terminate for a failure to proceed regularly and provision has been interpreted strictly in the past, to the
diligently was, perhaps surprisingly, found by the court to extent that even a clause excluding all ‘guarantees,
work against the implication of a term. That was because warranties or misrepresentations, express or implied [of]
the right of termination showed that the parties had merchantability, fitness or suitability’ has been held to be
expressly considered the issue, but yet had not provided for insufficient because the terms implied by the Act are legally
any express duty to proceed regularly and diligently (as categorised as ‘conditions’ rather than ‘warranties’: see
opposed to a right of termination). As the court noted, ‘it is most recently, Bominflot v Petroplus Marketing (‘The
impossible to argue that the alleged term is necessary, in Mercini Lady’). Although this rule has been criticised as not
circumstances where the parties must be taken to have representing the true intention of the parties with regard to
considered this eventuality and instead decided to deal such clauses, the approach of the courts has been to
with the potential problem in an entirely different way.’ ‘consider that the parties to this English law contract,
15
Two interesting observations can be made about this decision: responsible for the design or specification of the Permanent
Works’ (expect where specific parts of the Works are stated
—— This decision would appear to be at odds with a
to be the contractor’s design). This therefore forms the
previous decision in which a ‘system’ had been held
minimum express design obligation within the FIDIC 1999
to be ‘goods supplied’ under the Supply of Goods
suite i.e. ensuring the suitability of Plant and Materials. To
and Services Act. In John Lelliott v Byrne Bros
this, however, must be added – where English law applies
(Formwork) Ltd an agreement to provide a
– the more general implied obligations arising under the
‘temporary support system’ (comprising steel tubes
Supply of Goods and Services Act of satisfactory quality
and woodwork, similar to scaffolding) was found to
and, in certain circumstances, fitness for purpose for any
be subject to an implied duty (under the Act and at
materials in which ownership is to pass to the employer.
common law) of fitness for purpose. That obligation
These implied obligations may also apply to distinct parts of
was breached because the system, as opposed to
the works if that part of the works can be distinctly
individual items of which it was made up, did not
characterised as ‘goods’ in its own right. Specific words
provide sufficient support. As the Court of Appeal
must be used to exclude these terms, as Dalmare shows,
noted in Trebor, the question in any given case as to
and they are unlikely to be entirely excluded by the
whether a ‘system’ amounts to goods or not is
standard wording quoted above.
largely a matter of impression, however, it remains to
be seen how far the court’s distinction between
Although all of the FIDIC 1999 suite expressly impose on
bespoke and ‘off the shelf’ products will be applied.
the contractor a ‘fitness for purpose’ duty where it is
—— Quite aside from the Act, it is well established at required to design all or part of the Works, the duty is
common law that a contractor who agrees to design limited to those purposes ‘specified in the Contract’ (Red
and construct works impliedly agrees that the works Book 1999 and MDB) or ‘as defined in the Contract’
will be fit for purpose (IBA v EMI Electronics Ltd). The (Silver and Yellow Books 1999 and Gold Book 1999 and
Court of Appeal’s decision in Trebor would appear to 2008). The duty implied by English law operates more
leave this rule untouched as it does not depend on any broadly by reference to any purpose ‘made known’ to the
requirement for the works to be characterised as contractor by the employer, whether expressly or by
‘goods’ (it is unclear why the common law point was implication. As this implied duty falls within a special
not pursued in Trebor itself). At common law, the category of implied terms under English law (known as an
courts have specifically resisted attempts to divide up ‘implication by law’), it must be expressly excluded. To the
the works, as was done in Trebor, ‘into so many pieces extent that any express term covers part (but not all) of
with differing criteria of liability’ when ‘the … implied the ground covered by such an implied term (as is the case
term of fitness for purpose … prescribes a relatively in the FIDIC 1999 suite), the implied term will continue to
simple and certain standard of liability based on the apply to ‘fill the gaps’: Davy Offshore Ltd v Emerald Field
reasonable fitness of the finished product irrespective Contracting Ltd. Accordingly, under the FIDIC 1999 suite,
of considerations of fault and of whether its unfitness the narrower express terms as to fitness for purpose
derives from the quality of work or materials or design’ restricted to the purpose specified or defined in the
(Viking Grain Storage Ltd v TH White Installations Ltd). 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
Conclusions instances this may impose an unexpected (and
unwelcome) extra burden on the contractor.
These decisions all have the potential to affect international
construction contracts and show the difficult and surprising References: IBA v EMI Electronics Ltd (1978) 11 BLR 29
issues which can be posed by the implication of terms (Court of Appeal); (1980) 14 BLR 1 (House of Lords); Viking
under English law. Grain Storage Ltd v TH White Installations Ltd (1985) 3 Con
LR 52; Davy Offshore Ltd v Emerald Field Contracting Ltd
The relevance of Leander will be minimised for contracts (1991) 55 BLR 1; John Lelliott v Byrne Bros (Formwork) Ltd
with express provisions as to progress, such as that in (1992) 31 Con LR 89; Bominflot v Petroplus Marketing (‘The
clause 8.1 of the FIDIC Red, Yellow and Silver Books 1999 Mercini Lady’) [2010] EWCA Civ 1145; Leander
(‘… shall then proceed with the Works with due expedition Construction Limited v Mulalley and Company Limited
and without delay’). However, parties should not expect [2011] EWHC 3449; Dalmare SpA v Union Maritime Limited
any further or additional duties in this regard to be implied. and Valor Shipping Limited [2012] EWHC 3537; Trebor
Bassett Holdings Ltd & Anor v ADT Fire and Security Plc
Trebor and Dalmare are likely to be relevant in most cases [2012] EWCA Civ 1158.
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 …
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 impossible to present the claim in a more conventional
with an employer (DWM) for the construction of three large fashion. Moreover, it was thought by some that the contractor
houses on the site of what was previously the Earls Court should also show that he was not responsible for whatever
Telephone Exchange. One of the three plots of land was impossibility was present. For example, in London Borough of
owned by Mr Mackay, who was a part-owner of DWM. Merton v Leach the approach was described as follows:
The contract price for Mr Mackay’s property was c. £5 million
and the date for completion was 23 January 2006. ‘If … at the time when the loss or expense comes to be
ascertained it is impracticable to disentangle or disintegrate
Unfortunately, things did not progress according to plan and by the part directly attributable to each head of claim, then,
the time that Practical Completion was achieved in July 2008, provided of course that the contractor has not unreasonably
the relationship between WLC and Mr Mackay was delayed in making the claim and so has himself created the
acrimonious in the extreme. Mr Mackay blamed WLC for the difficulty the architect must ascertain the global loss directly
delays and also for what he felt were defects in the works. attributable to the two causes …’ [emphasis added]
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 This line of authority provided an opportunity for
that it was responsible for the delays to the works and believed defendants to bring an early attack on global claims
that it was entitled to an extension of time, along with relief through attacks on the claimant’s submissions. If a global
from liquidated damages, up to Practical Completion. claim had been pleaded, defendants could justifiably call
for the claimant to assert and/or provide details of why it
Among other defences raised by DWM, it was argued that was said to be impracticable or impossible to disentangle
WLC’s claim should fail on the grounds that it was a ‘global’ the various breaches or events relied upon.
claim. A global claim is one whereby an aggregated loss or
period of time is based on a group of individual breaches or Mr Justice Akenhead’s judgment in Walter Lilly means that
events without attempting to prove the individual impact of this approach is now no longer good law. Having considered
each breach or event. Where the claim is one for money the cases usually relied upon in support of such an approach
rather than time, such claims are often referred to as ‘total (such as Merton), the judge concluded as follows:
cost claims’ reflecting the fact that they often proceed simply
from the contractor’s total cost for the project, less the ‘Obviously, there is no need for the Court to go down the
amount paid to date by the employer. As Mr Justice global or total cost route if the actual cost attributable to
Akenhead (the head of the Technology and Construction individual loss causing events can be readily or practicably
Court) noted, such claims are usually formulated on the basis determined. I do not consider that Vinelott J was saying in the
of ‘numerous potential or actual causes of delay and/or Merton case (at page 102 last paragraph) that a contractor
disruption, a total cost on the job, a net payment from the should be debarred from pursuing what he called a ‘rolled up
employer and a claim for the balance between costs and award’ if it could otherwise seek to prove its loss in another
payment, which is attributed without more and by inference way. It may be that the tribunal will be more sceptical about
to the causes of delay and disruption relied on.’ 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.
Disentanglement
[The] argument that a global award should not be allowed
Before Walter Lilly, certain cases suggested that a ‘global where the contractor has himself created the impossibility
claim’ would only be permitted where a contractor could of disentanglement (relying on Merton per Vinelott J at
show that it was impossible to disentangle or separate out 102, penultimate paragraph and John Holland per Byrne J
those individual losses caused by individual breaches or at page 85) is not on analysis supported by those
events. In other words, a contractor could not simply be lazy authorities and is wrong. Vinelott J was referring to
in presenting its claim, but would need to show that it was unreasonable delay by the contractor in making its loss
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 2. Any other damages which may reasonably be supposed
to have been in the contemplation of both parties at
Aerospace and Global joined forces to develop and sell a the time they made the contract. This category depends
new satellite tracking device for use in the high-end upon additional facts being known to both parties.
aeronautical market. The parties entered into an exclusive In the above example of the factory it may be that lost
worldwide distribution agreement, under which Global production included the loss of a particularly profitable
agreed to produce and supply the device to Aerospace until contract. The loss of such a production contract would
Global gave Aerospace 12 months’ notice of its intention to not be recoverable unless the parties knew, at the time
cease production. the construction contract was entered into, that the
production contract might be lost as a result of a
The venture was a failure and only 17 devices were sold. breach of the construction contract. These are
Following unsuccessful discussions about a new product, ‘consequential’ or ‘indirect’ losses.
Global gave notice that it would cease production of the
devices in 12 months. Aerospace complained that Global In deciding against Global, the court adopted this line of
had, in breach of contract, ceased production of the authority, noting that, ‘parties who draft contracts which
devices earlier than the end of the 12 month notice period are subject to English law can be taken to appreciate
and claimed damages as a result. the difference between the two limbs [from Hadley v
Baxendale].’ The court found no reason to distinguish the
The contract between the parties provided that Global specific circumstances applying to the contract between
would not be liable ‘for any consequential loss or damage, Aerospace and Global and found that the reference to
whether for loss of profit or otherwise and whether ‘consequential’ loss was a reference to losses falling
occasioned by the negligence of [Global] or his employees within the second limb of Hadley v Baxendale.
or agents or otherwise, arising out of or in connection with
any act or omission of [Global]…’. In this context the court viewed the subsequent reference
to ‘loss of profit’ as merely a subcategory of ‘consequential
Several decisions of the English Court of Appeal have loss’. The court ruled that: ‘What is excluded … is liability
ruled that contractual exclusions such as this referring to ‘for any consequential loss or damage’ and an example of
‘consequential and indirect losses’ will usually be limited to this is given as ‘loss of profit’. However, loss of profit does
losses which fall within what is known as the ‘second limb’ not define ‘consequential loss or damage’ it is simply a type
of Hadley v Baxendale. Hadley v Baxendale is an old and of consequential loss or damage.’
well known decision in English law establishing a
fundamental division between two types of recoverable Pushed firmly therefore into the second category of Hadley v
losses for breach of contract: Baxendale, Global attempted to argue that the loss of profit
claimed by Aerospace was not, in any event, direct loss of
1. Damages that may fairly and reasonably be considered
profit within the contemplation of the parties. Once again
as arising naturally, i.e. according to the usual course
the court reaffirmed the usual position that such losses are
of things, from a breach of contract. For example,
direct losses and not ‘consequential’. As the court noted:
if the breach involved the destruction of a factory,
‘the whole purpose of the exclusive distribution agreement
both the cost of rebuilding and losses from the lack of
was distribution and onward sale by ADS to customers and it
production during rebuilding would fall within this first
must have been within the reasonable contemplation of the
category. Such damages are said to be ‘direct losses’.
parties that a wholesale refusal to supply the goods would
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
Point West was the developer of a large residential claiming that Mivan’s liability in respect of those issues was
complex constructed on the site of an old West London not released by the settlement agreed between them. Point
airport terminal. Mivan was engaged as the contractor for West argued that, at the date of the settlement, there was
the fourth phase of the development which consisted of no reason for either party to suppose that Point West was
the design and construction of a marketing suite, sky considering making a claim against Mivan for those issues.
lobby and 48 apartments. Mivan’s final account was There was no actual dispute between Point West and
agreed in 2002 but not paid. Between 2002 and 2007, Mivan in relation to those issues and neither had Point
various remedial works were carried out and finally, in West intimated a claim or even the possibility of a claim in
October 2007, the parties agreed a settlement to ‘enable respect of them. Point West therefore argued that the
Mivan to walk away’. terms of the settlement should be read down to apply only
to claims which were specifically contemplated at the time
The settlement was stated to be ‘regarding Mivan’s Final the settlement was agreed.
Account in respect of all Works carried out, and any
corresponding outstanding matters. The agreement The court disagreed with Point West and considered that
comprises a further payment of £50,000 (including VAT), the wording of the agreement made it clear that it was
representing the final assessment of monies due or to intended to achieve ‘full and final settlement in respect of
become due thus achieving full and final settlement in the above works’, being all of the contracted works,
respect of the above works, together with any and all together with ‘any and all outstanding matters’. The
outstanding matters. We would confirm that this final defects in Flat 1601 were deemed to be ‘outstanding
agreement concludes Mivan’s responsibilities and matters’, despite not being the subject of a dispute
obligations in respect of their works at the above project.’ between the parties, and were therefore included in the
settlement. The judgment confirms that the courts are
At the time of the agreement, both parties were aware that reluctant to find that parties have surrendered unknown
there was a potential issue with the curtain walling and the claims (as already stated by the House of Lords in Bank of
heating and cooling system (although the scope of the Credit and Commerce International (SA) v Ali), but at the
defects was uncertain). The owner of Flat 1601 had made a same time recognised that the intention of parties using
number of complaints over the years in respect of both clauses referring to ‘full and final settlement of all matters’
issues but Point West viewed the complaints as unjustified often was to resolve all possible matters, including those
and minor in nature. As part of the settlement agreement, that might be advanced in the future in respect of the same
Mivan had agreed to assist Point West in the event of a set of circumstances.
dispute with the owner of Flat 1601, though it was
expressly stated that Point West would not look to Mivan The court’s ultimate finding as to the terms of the
to carry out any remedial works. settlement was that it released the issues raised by Flat
1601 together with any ‘other defects in the Point West
The owner of Flat 1601 subsequently obtained a substantial Development which were patent’ as at the date of the
award of damages against Point West in respect of the settlement. Patent defects are those which are either
curtain walling and the heating and cooling system. Point known about or which should have been known about
West sought to recover those damages from Mivan (e.g. upon a reasonable inspection). This naturally raises a
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 The parties then discussed a replacement vessel and an
appeal from an arbitral award striking down a settlement extension of time to 7th/8th May. The charterers’ customer
agreement between the owners of a sea vessel and a in China agreed to extend the shipment date on condition
commercial shipping firm (the ‘charterers’) for duress. The that there be a corresponding reduction in the purchase
owners argued that their behaviour had been lawful and so price. The charterers informed the owners that they would
was not ‘illegitimate pressure’ (that being a precondition accept the replacement vessel, with a discount for the
for economic duress under English law). cargo, but reserved their rights in respect of all claims for
damages arising out of the breach of the charter.
The owners had chartered their vessel to the charterers to
carry a cargo of shredded scrap from the Mississippi River The owners then made a ‘take it or leave it’ offer requiring the
to China. The agreed charter did not provide the owners charterers to waive all claims for loss and damage arising out of
with any right to substitute the vessel and had an agreed the nomination of a substitute vessel with a different laycan and
laycan of 15-21 April 2009. (Laycan means the ‘lay days a late arrival. The charterers said that by that stage they were
and cancelling date’ or the earliest and latest dates on forced to accept the owners’ terms. They responded saying:
which the vessel must be ready to load at the port or be
delivered to the time charterers.) ‘… given the exigencies of the circumstances and our
urgent need to mitigate our losses and accommodate our
Immediately after the charter was agreed, the owners customer in China, we are forced to accept the Owners [sic]
indicated they would like to substitute the vessel for a terms under protest.’
different one with a later laycan. They then agreed to charter
the original vessel to a different charterer without informing In arbitration, the majority of the arbitrators held that the
the original charterers, only later telling them that they charterers’ agreement, under protest, to waive all their
intended to perform the voyage with a possible vessel claims for damages in respect of the repudiatory breach, was
substitution and a laycan of 15-24 April. The charterers obtained by economic duress and was therefore voidable.
meanwhile continued to press for the contracted vessel, with
the original laycan, stating that they had barges waiting with The owners appealed this decision, arguing that economic
the cargo to be loaded. Any substitution, the charterers duress only applied where the victim was subjected to
maintained, was strictly subject to their own and their pressure by unlawful action on the part of the other party.
receiving customer’s approval. On 18 April, the owners In the alternative, they argued that if lawful conduct could
admitted to the charterers that they had made a mistake and amount to ‘illegitimate pressure’, the bar had to be set very
said that they would find an alternative vessel to load high and pressure should only be defined as ‘illegitimate’
between 27 and 30 April. They also assured the charterers where it could be considered on a par with conduct
that they would compensate them for all damages resulting expressly recognised at law as illegal or criminal.
from their failure to supply the contracted vessel.
The High Court dismissed the owners’ appeal, agreeing with
In substituting the vessel without the charterers’ consent the the arbitrators and finding that the exertion of pressure by
owners were in repudiatory breach of the charter contract. lawful means did not prevent the operation of the doctrine of
However, at the time the charterers did not accept that economic duress. Cooke J said that ‘illegitimate pressure’
breach as terminating the contract. The contract therefore could be constituted by conduct which was not in itself
remained alive, although there was no practical chance of unlawful (although he added that it would be an unusual case
fulfilment by the named vessel which was by then engaged where that were so, particularly in a commercial context).
elsewhere, nor of achieving the agreed laycan.
27
Time bars and documentary requirements in
construction contracts
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.
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.
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 The importance of properly and thoroughly carrying out an
subsidiary of Willbros Global Holdings (WGH) under an EPC initial ‘harvesting’ of the documents received particular
contract to construct the onshore works for a gas pipeline in emphasis from the court:
West Africa (for supplying gas from Nigeria to Benin, Togo
and Ghana). More than three years after the contract had ‘The second main area of difficulty has been the failure
been entered into WAPCo terminated it and completed the by WAPCo to gather together or ‘harvest’ a consistent
work with other contractors. WGH had guaranteed its and complete set of electronic data for the purpose of
subsidiary’s duties under the contract and WAPCo ultimately electronic disclosure. This was not a case where there
sued in the English Technology and Construction Court to are particular complexities in the important initial
recover approximately US$ 274 million from WGH for its extra process of identifying the repositories of electronic
costs of completing the pipeline following termination. documents, contacting custodians and identifying
relevant folders and sub-folders so as to ensure that a
In the litigation the parties were each ordered to give comprehensive compilation of electronic documents is
‘standard disclosure’ under the English court rules - as is obtained. There were a number of errors identified
usual (or rather was; since April 2013 the courts will more above, in particular, the provision of a copy of Livelink
actively consider narrower forms of disclosure from a with incomplete e-room documents, the failure until 14
‘menu’). ‘Standard disclosure’ requires a party to disclose October 2011 to obtain a copy of the relevant folders
any documents relied upon by it or which support the and sub-folders on Livelink and the failure, in
opposing party’s case or which are adverse to either party’s consultation with the relevant custodians, properly to
case. After disclosure it became apparent that WAPCo’s gather those custodians’ documents. It is evident that a
disclosure was deficient. After a number of attempts by considerable amount of disclosable documentation has
WGH to obtain further disclosure, it emerged that WAPCo now been disclosed from the additional custodians and
had not properly prepared for disclosure or managed the that is documentation which should have been gathered
process. WGH sought an order for wasted costs as a result. together initially. Another aspect which has come to
light is the incomplete disclosure of the documents
The court was critical of WAPCo and noted the following stored at the Lagos Beach Compressor Station. I consider
key deficiencies in its disclosure: these to be serious mistakes and from the evidence it is
apparent that the mistakes resulted from an inadequate
—— WAPCo’s disclosure team had failed properly to
initial review and gathering together of a complete set of
assemble or ‘harvest’ the relevant documents under
electronic documentation.’
WAPCo’s control.
—— The review of documentation which had been Unfortunately such a state of affairs is not uncommon in
harvested was outsourced to a low-cost entity in India, international construction disputes. Geographical and
which ultimately failed to review the documents language barriers can easily conspire to make an
properly and excluded relevant key documents. exhaustive harvesting exercise difficult. Almost always,
information initially received from individual custodians
—— WAPCo’s disclosure was not sufficiently de-duplicated,
or from in-house IT staff proves to be incomplete or
so that multiple copies of individual documents were
subject to qualification.
disclosed to WGH.
4. At a third party level: to capture all available —— Such an exercise will also enable attacks to be made
information held by third parties such as storage on the opposing party’s disclosure, particularly if they
providers or consultants (to the extent they are obliged have not carried out a similarly detailed harvesting
to provide information). exercise. If gaps exist and the tribunal can readily see
that there is a large imbalance in the way each party
5. At a governance level: to capture those reporting
has approached disclosure, it is more likely to make
structures from site-level upwards which record
further orders.
information and decision making processes in relation
to the project. —— A detailed harvesting exercise also enables a deeper
analysis of a party’s own case at an early stage in
Completing the harvesting process at each of these levels proceedings. Particularly when coupled with an
may take months and require persistent monitoring. appropriate database system and reviewing solution,
Individual custodians / personnel can prove to be large amounts of information can be analysed
particularly time-consuming as they require one-on-one relatively swiftly, particularly if certain key periods or
treatment with any information recovered compared to the issues have been identified. The more information that
time periods when they were involved with the project to has been harvested, the more effective these initial
ensure completeness. searches will be.
Once properly carried out, however, an exhaustive References: West African Gas Pipeline Company Ltd v
harvesting exercise provides a party with a number of Willbros Global Holdings Inc [2012] EWHC 396.
advantages during the course of any subsequent court or
arbitration proceedings:
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 Prudential was that legal advice privilege extends only to advice
obtained from persons who are retained in their capacity as
As mentioned earlier in this publication, the Walter Lilly practicing lawyers. It is worth noting, however, that whilst
litigation concerned a claim by a contractor for additional English law draws a clear distinction between lawyers and
time and money in relation to the construction of a luxury non-lawyers for the purposes of the classification of legal advice
residential project in London. Part way through the project, privilege it does not draw a similarly stark distinction between
one of the proposed owners and occupiers of the English and non-English lawyers for this purpose, as will be
development, Mr Mackay, became disillusioned with the way discussed below.
the project was being managed and retained the services of Although Walter Lilly involved domestic parties, the case reflects a
a claims consultancy, Knowles Ltd, to provide him with pattern not infrequently occurring in international construction
‘contractual and adjudication advice’. In the later litigation projects. When a project suffers stress, large consultancy firms are
Mr Mackay unsuccessfully claimed that the documents often engaged to advise on a range of issues, from programming
recording Knowles’ advice to him attracted legal advice and project management through to claims preparation. In such
privilege and therefore he was not obliged to disclose those circumstances, it will often seem appropriate for such firms to
documents to Walter Lilly. In English law, legal advice provide advice on legal issues as well. Although not in the business
privilege applies to all communications passing between a of legal practice, members of such firms will often have legal
client and its lawyers, acting in their professional capacity, in qualifications and will be able to draw from a wealth of previous
connection with the provision of legal advice. Fundamentally, experience on other projects. Despite this, English law is now very
therefore, it depends upon who is giving the advice. clear that such advice will not be privileged from disclosure in any
Mr Mackay submitted evidence to the court that the advice subsequent dispute unless formal legal proceedings are already
sought from Knowles was of a legal nature and that he had contemplated and the advice is sought to that end (in which case a
believed the people advising him were lawyers. Although those different type of privilege called litigation privilege can be claimed
people were not practicing solicitors or barristers at the time but this may not be until near the end of a project).
Mr Mackay received their advice, it was argued that Mr Mackay’s Parties would be well advised, therefore, to involve practicing lawyers
mistaken belief that they were practicing lawyers was sufficient. when seeking legal advice during the course of a project when
For the purpose of claiming legal advice privilege, the crucial formal legal proceedings are not yet contemplated. This need not
issue was to determine the capacity in which Knowles were exclude the input of experienced consultancy firms on such issues,
retained by Mr Mackay. If Knowles were not retained by however. Provided that the legal views of such firms are given by way
Mr Mackay as barristers or solicitors then Mr Mackay’s of instructions to practicing lawyers and for the purpose of receiving
mistaken belief was irrelevant. As the court noted: advice from those lawyers, they will also be protected by legal advice
privilege under English law. Careful thought should therefore be
‘The reality is that the Defendants retained Knowles not as
given before the engagement of such consultancy firms as to how
barristers but as an organisation to provide them with claims
privilege may best be claimed in respect of any legal advice received.
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
English law privilege in an international context
understood that the two gentlemen with whom he was dealing
Whilst most parties involved in international construction
at Knowles were qualified and practising barristers or solicitors is
projects will be keen to obtain the protection of documentary
immaterial because their employer was not retained by the
privileges in appropriate circumstances, the protection of those
Defendants to provide the services of barristers or solicitors.’
privileges in an international context can pose difficult issues of
The Prudential case referred to by the court was very local and private international law. Where arbitration
recently upheld in the English Supreme Court. In that case proceedings are concerned, the law of the seat of the arbitration
legal advice privilege was held not to apply to accountants may be different to the law of the contract, which may be
who were retained to give legal advice in relation to different again from the location of the works or each of the
complex tax matters. Once again, the reasoning in parties’ relevant place of business. Parties may seek to assert
35
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