Delay and Disruption
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KEYWORDS: |
Fire, Delay, Liquidated Damages, Concurrent Liability, tort, contract, damages, evidence, consequential loss, negligence, duty of care, limitation of liability, project insurance, warranty, contractual scheme, exhaustive remedy, independent contractor, vicarious liability, extra hazardous work, dangerous operations, Mr Justice Ramsey. |
In Biffa Waste Services Limited v Maschinenfabrik Ernst Hese GmbH [2008] EWHC 6 (TCC) Mr Justice Ramsey examined a wide range of issues which are of importance in the construction industry.
The central issue was liability for the consequential loss following a fire during the construction of a recycling facility to dispose of domestic waste. As is usual in construction and particularly PFI contracts, there was a chain or net of contracting arrangements. This required Mr Justice Ramsey not only to consider the factual cause of the fire and the consequent delay, but the effect of the contracting arrangements on liability, both in contract and tort, and the effect of liquidated damages clauses on the measure of damages.
Biffa Leicester entered into a PFI Contract for the Plant with Leicester City Council ("LCC"). Biffa Leicester entered into a back-to-back Works Contract with an associated company Biffa Waste who effectively agreed to undertake Biffa Leicester's obligations for the construction of the Plant.
Biffa Waste engaged Maschinenfabrik Ernst Hese GMBH ("MEH"), to design and build the Plant under a Design and Build Deed. MEH was required to sub-contract the supply of the the main part of the Plant, a large rotating drum known as the Ball Mill, to Outokumpu Wenmec AB ("OT").
MEH also entered into a warranty in favour of Biffa Leicester known as the Direct Agreement. This therefore was an agreement between non-contiguous parties in the contractual chain of the project.
MEH sub-contracted the work to an associated company Hese Umwelt GMBH ("HU") and HU in turn entered into a contract with OT to design, supply and install the Ball Mill at the recycling plant. After commissioning tests, modifications were carried out and then further works of repair. OT engaged Pickfords to supply materials, labour and welding during the repair work but not to carry out any particular specified work. OT also engaged Millteam to provide two employees to be present at the site while the repair work was being carried out. It was during the repair work carried out by Pickfords that the fire occurred.
Biffa Waste and Biffa Leicester, together "Biffa", brought proceedings against MEH and OT to recover losses resulting from the delay to the operation of the Plant caused by the fire. The reinstatement costs were recovered from an insurance policy taken out by LCC under the PFI Contract.
The first point of general interest is the inference, if any, which can be drawn from the absence of witness evidence.
OT had submitted statements from two witnesses, signed as being true. Both witnesses were located outside the jurisdiction of the court and were not called to give evidence. Biffa submitted that an adverse inference should be drawn from the absence of the witnesses.
The principles were set out by Brooke LJ in Wisniewski v. Central Manchester Health Authority [1998] EWCA Civ 596.
Mr Justice Ramsey considered that the explanation for the absence of the witnesses was not wholly satisfactory. Nonetheless, he did not consider it appropriate to draw an adverse inference from the absence but instead it only went to the weight to be attached to their statements.
After consideration of the evidence, Mr Justice Ramsey concluded that the fire was caused or materially contributed to by the negligence of the personnel of HU and Pickford.
Mr Justice Ramsey held that the effect of the contractual provisions was that MEH owed Biffa Waste a contractual and non-delegable duty to carry out its duties under the Design and Build Deed with reasonable skill and care. He held that MEH was in breach of that contractual duty.
In addition he held that MEH was in breach of the warranty to Biffa Leicester in the Direct Agreement that it had complied and would comply with its obligations to Biffa Waste and had exercised and would continue to exercise the necessary skill, care and diligence. That followed from MEH's breach of its contractual duty under the Design and Build Deed.
Mr Justice Ramsey observed that case before him was an allegation of negligence in causing a fire and the loss sought was economic loss for the resulting delay. He referred to the judicially approved passage in Margarine Union GmbH v Cambay Prince Steamship Company Ltd [1967] 2LLR315 QB that there was nothing in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] UKHL4 1LLR485 2AllER575 to affect the common law principle that a duty of care which arises from a risk of direct injury to person or property is owed only to those whose person or property may foreseeably be injured by a failure to take care. If a person was within the scope of the defendant's duty to take care then he could recover both direct and consequential loss which was reasonably foreseeable.
Applying the principle, Mr Justice Ramsey held that the case before him must be founded on principles which apply to cases where there is physical injury or damage to property not, as in Hedley Byrne, pure economic loss.
Mr Justice Ramsey restated the requirements when considering whether there was a duty of care in tort owed by MEH to Biffa (i) whether Biffa each had sufficient proprietary or possessory interest in the Ball Mill (ii) the impact of the contractual relationship on the existence of the duty of care.
Mr Justice Ramsey referred to the principle stated Lord Brandon in Leigh & Sillavan Ltd v Aliakmon Shipping Company [1986] 2LLR1 HL. A person claiming in negligence for loss caused to him by loss or damage to property must have had either the legal ownership of or a possessory title to the property concerned at the time when the loss or damage occurred. It was not enough for him to have only contractual rights in relation to such property.
In relation to Biffa Leicester the head lease with LCC leased the premises to them for 25 years which included the buildings and other structures. When the Ball Mill and other plant were installed it became part of the premises. Accordingly it was held that Biffa Leicester had sufficient interest to impose a duty of care in relation to damage to the premises.
In relation to Biffa Waste the Design and Build Deed contained the usual terms for transfer of property in unfixed materials and goods delivered to or placed on the site. It also provided that in any event materials and goods fixed to the land became the property of Biffa Waste. Accordingly it was held that Biffa Waste had a sufficient interest to impose a duty of care in relation to damage to the plant.
Mr Justice Ramsey recognised that as the law had developed the existence of a contract regulating the relationship of the parties will not preclude a duty of tort existing between the same parties either in parallel or in addition to the contractual duties. He reviewed the decision in the House of Lords in Henderson v Merrett Syndicates Ltd [1994] UKHL5 3ALLER506 and particularly of Lord Goff that a concurrent liability in tort would not be admitted if its effect would be to permit the plaintiff to circumvent or escape a contractual exclusion or limitation of liability for an act or omission that would constitute a tort, but otherwise the common law was not antipathetic to concurrent liability, the one imposed by law and the other attributable to the will of the parties. He also examined the judgment of Brooke LJ in the Court of Appeal Cooperative Retail Services Ltd v Taylor Young Partnership [2001] 1LLR461 upheld in the House of Lords [2002] BLR272 and Lord Mackay of Clashfern in British Telecommunications v James Thomson and stated the four propositions based on the authorities.
Mr Justice Ramsey observed that there was a limited contractual scheme involving Biffa Leicester, Biffa Waste and MEH. The PFI Contract required Biffa Leicester to take out insurance for all risks of loss, destruction or damage to the Facilities, the Works and/or the Services from any cause. The insurance expressly excluded consequential loss which arose from the physical damage and there was no agreement that such loss should be insured. The insured parties included not only LCC and Biffa Leicester but sub-contractors and suppliers of any tier and separate or agents acting on their behalf in respect of the facilities, the works and /or the services. Under the Works Agreement all insurance proceeds received were to be applied to reinstate the works. Under the Design and Build Deed Biffa Waste was to pay to MEH the amount received by Biffa Waste from its insurer for the cost incurred by MEH in reinstating and repairing Works damaged or destroyed after delivery to the Sites.
Mr Justice Ramsey distinguished the contractual scheme from that in Cooperative Retail Services Ltd v Taylor Young Partnership [2001] 1LLR461 in which there was also project insurance covering the contractor Wimpey and subcontractor Hall. In CRS Wimpey was entitled to an extension of time for loss caused by fire and as against Hall the risk of delay caused by fire was expressly provided for. The Court of Appeal held that neither Wimpey and Hall were liable to CRS for the consequential loss. The Court of Appeal held that there was no question of Wimpey being liable to CRS for anything once the contractual scheme had worked itself out.
Mr Justice Ramsey held that the Design and Build Deed demonstrated that Biffa Waste and MEH had agreed the contractual allocation of the risks of the reinstatement of physical damage caused to the plant during construction. He held that the contractual allocation of risks left MEH with a contractual liability to pay Biffa Leicester and Biffa Waste damages for consequential loss caused by physical damage to the plant.
Accordingly, Mr Justice Ramsey held that MEH was not protected by a contractual scheme. To the extent that the fire was caused by MEH's negligence, there was no reason why MEH should not owe a duty of care to Biffa Leicester and Biffa Waste for the loss consequent to the physical damage caused by the fire including reinstatement costs and delay costs. He held that the elements of foreseeability and proximity were made out and it was fair, just and reasonable to impose a duty of care on MEH.
The effect of the liquidated damages provisions in the Design and Build Deed on the extent of liability required examination of the contract provisions.
Mr Justice Ramsey was required to consider the effect of the liquidated damages provisions in the Design and Build Deed not only on MEH's liability to Biffa Waste in contract but also possible liability in tort. He was also required to consider the effect on MEH's liability to Biffa Leicester in contract and tort. In particular he was required to consider whether the liquidated damages provisions were an exhaustive remedy for losses due to delay.
The Design and Build Deed included a provision for liquidated damages for delay which was on usual terms relating to the obligation to complete within the Time for Completion. The clause included two particular provisions which were highly relevant to the issues
"... the Contractor shall pay to the Employer the relevant sum ... as liquidated damages for such default ... (which sum shall be the only monies due from the Contractor for such default) ..."
and
"... The payment or deduction of such damages shall not relieve the Contractor from its obligation to complete the Works or from any other of its obligations and liabilities under the Contract and shall be without prejudice to any other right or remedy of the Employer. ..."
Mr Justice Ramsey held that the words "any other right or remedy of the Employer" in the sentence above referred to rights or remedies which were not monetary rights or remedies, in the context of the words in parentheses. If a contractor failed to complete the employer had rights and remedies other than damages which in the instant case included rights in relation to rates of progress and termination or at common law. It was those other rights which are not prejudiced.
Mr Justice Ramsey did not accept the argument that the liquidated damages clause made a distinction between a "simple" failure to complete and a failure to complete caused by breach of another obligation. He held that if there was a breach of another obligation and that breach caused a failure to complete then liquidated damages was still the only monies due for that default - a breach of contract causing a failure to complete on time.
Mr Justice Ramsey considered that such a distinction did not make commercial sense. He referred to the purpose of the liquidated damages clause as stated by Lord Upjohn said in Suisse Atlantique Société d’Armement Maritime S.A. v N.V. Rotterdamsche Kolen Centrale [1966] HL 1LLR529. It was for the benefit of both parties. The party establishing breach need prove no damage in fact. Mr Justice Ramsey observed that the assessment of damages for delay was a difficult process and the advantage of certainty in the sum payable as liquidated damages provided advantages to both sides. He considered that if that benefit were limited to cases of "simple" delay the commercial purpose would disappear. A party seeking to avoid liquidated damages would attempt to find some other breach of an implied or express term to hang the delay on. A party seeking to uphold the clause would be trying to disprove that another breach was the cause of the delay.
Mr Justice Ramsey held that his view was consistent with the decision of HH Judge Gilliland QC in Piggott Foundations Ltd v. Shepherd Construction Ltd [1993] 67BLR48 at 68 where he held that the liquidated damages provision prevented the avoidance of the overall limitation of damages by claiming general damages for the breach of any other provisions or obligation under the contract which resulted from the failure of the plaintiff to complete the work within the contract period. Similarly, it was implicit in the decision of HH Judge Fox-Andrews QC in Surrey Heath Borough Council v. Lovell Construction Ltd (1988) 42BLR25 where he found that the liquidated damages were an exhaustive remedy for delay where a building had been damaged by a fire.
Mr Justice held that paragraph 9-006 of Keating on Construction Contracts (8th Edition) set out the position. Whether liquidated damages was an exhaustive remedy for delay caused by breach of an obligation other than the obligation to complete was primarily a question of the construction of the contract. He held that on a true construction the provision in the Design and Build Deed was a complete remedy in damages for delayed completion. As a result Biffa Waste could not recover from MEH other than liquidated damages for delay caused by the breaches of the Design and Build Deed.
Mr Justice Ramsey held that Biffa Waste could not recover the cost of taking reasonable steps to mitigate delay as an extra head of damages because those damages were included within the exhaustive remedy of liquidated damages. The cost of taking reasonable mitigating steps was generally recoverable as part of the damages for the breach per Winn LJ The World Beauty [1970]. The cost of taking steps to avoid delay loss was treated as being included in the pre-estimate of loss which formed the basis of the liquidated damages clause. To permit further damages to be recovered for the reasonable costs of steps to mitigate the default was contrary to the express terms of the liquidated damages clause.
Mr Justice Ramsey observed that warranties such as in the Deed Agreement gives the beneficiary a contractual remedy directly against the parties who design and construct the project in the event that there is breach of the underlying construction contract. The beneficiary does not have to rely on an action in contract against the next party in the contractual chain who may have no assets or, particularly in the case of a PFI contract, might be an associated company. The arrangement also avoids the "legal blackhole" which might arise if one participant suffered the loss but another party retained the cause of action, but raises the possibly of double or multiple recovery.
Mr Justice Ramsey referred to the House of Lords decision in Alfred McAlpine Construction Limited v Panatown Limited [2000] UKHL 43 BLR 331 and particularly the judgments of Lord Goff and Lord Millett. He observed that the existence of a cause of action by both Biffa Leicester and Biffa Waste against MEH gave rise to similar problems of double recovery. In the absence of a liquidated damages provision, the court could stay proceedings or stay a judgment to ensure that there was no double recovery. The liquidated damages clause (i) defined the liquidated amount to be paid per week by MEH to Biffa Waste as an exhaustive remedy for delay, and (ii) limited the overall liability of MEH to Biffa Waste for delay to 7.5% of the Contract Price.
The Direct Agreement provided that the liability of MEH to Biffa Leicester should be no greater than if Biffa Leicester had been named as provider under the supply contract. Accordingly, Mr Justice Ramsey held that although Biffa Leicester had an entitlement to damages any payment of liquidated damages was an exhaustive remedy for the particular delay. He held that both Biffa Leicester and Biffa Waste could not make a recovery for the same delay. If MEH paid Biffa Waste liquidated damages then MEH had complied with the terms of the Design and Build Deed and had no remaining liability so that Biffa Leicester can recover nothing. Biffa Leicester's claim was stayed to avoid double recovery using the mechanism in Panatown.
Mr Jusice Ramsey considered whether the contractual terms were sufficient to exclude or limit liability in tort and the guidelines set out by Lord Morton of Henryton in Canada Steamship Lines v The King [1952] AC 192
Mr Justice Ramsey held that the apparent rigour of the guidelines in Canada Steamship has been reduced by subsequent decisions including HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] 2LLR61. He set out the following four propositions based on the authorities.
Mr Justice Ramsey held that the Direct Agreement included a limitation clause, which stated that MEH owed no liability, duty or obligation to Biffa Leicester which was greater than would have existed if Biffa Leicester had been named as "Provider" under the Design and Build Deed. The liquidated damages clause also provided a limit of liability of 7.5% of the Contract Price. He held that the terms of the Direct Agreement was sufficient to limit MEH's liability in tort for delay caused by negligence to no more than the liquidated damages for delay under the Design and Build Deed. Although there was no express reference to "negligence" in the clause of the Direct agreement the reference to "liability" and "duty" was sufficient to cover liability in tort for negligence. He held that a duty of care should not be permitted to circumvent or escape the contractual limitation of liability for acts or omissions that also constituted the tort.
The analysis of OT liability in tort followed the propositions set out above. The points of interest are the differences which led to a different conclusion.
Mr Justice Ramsey observed that there was no contractual scheme in relation to HU, OT or Pickfords. Under the agreement between MEH and HU there was no provision as to insurance, although the project insurance covered HU. In the contract between HU and OT there were requirements for OT to take out certain insurances. Although the project insurance covered OT, there was no contractual term to that effect. Delay damages were limited to 5% of the contract value. There were no relevant provisions of the agreement between OT and Pickfords or Millteam.
Mr Justice Ramsey held that OT was not protected either by a contractual scheme or a scheme of co-insurance which prevented Biffa Leicester and Biffa Waste recovering from OT losses consequential on the fire. The elements of foreseeability and proximity were made out and it was held that it would be fair, just and reasonable to impose a duty of care on OT. There was no contractual relationship between OT and Biffa Leicester or Biffa Waste and there was no relevant exclusion of limitation clause in any contract between those parties.
Lord Goff stated in Henderson that in cases of physical damage the sub-contractor might be protected from liability by a contractual exemption clause authorised by the building owner. Mr Justice Ramsey held that there was no suggestion that the limitation of liability clause between HU and OT was authorised by any party higher up the chain, in particular Biffa Waste or Biffa Leicester, so the clause did not limit or exclude liability to Biffa.
The issue in relation to OT's liability to MEH in tort was whether MEH had sufficient proprietary interest. It was held that it did because the rights of MEH were not limited to contractual rights in the Plant, it was given responsibility to care for the Plant until Taking-Over and as such had possession of the Plant for that purpose. The closer relationship of MEH to OT in the contractual chain did not alter the position. In relation to the limitation of liability clause between OT and HU, there was no evidence that such a clause was authorised by MEH.
The fire was caused by the negligence of the personnel of HU and Pickford so it was necessary to consider whether MEH and OT were in breach of their respective duties in tort to establish any liability. It was held that Pickford's employees were not acting as independent contractors but instead were acting in a role that imposed vicarious liability on OT for their negligence. As to MEH it was accepted that there was no basis for imposing general liability for the servants of OT. Instead it was held that MEH could not delegate its duties of care to HU so as to avoid liability for extra hazardous or dangerous operations.
Accordingly it was held that OT was liable to Biffa for the negligence of Pickfords and that MEH was liable to Biffa for the negligence of HU.
The judgment of Mr Justice Ramsey is a practical application of the various principles of law which apply in a complex net of arrangements in construction, where claims are made in both contract and tort.
The effect of the liquidated damages clause on the measure of damages was a central issue in the case. The decision is not authority for the proposition that liquidated damages clauses act as limitation clauses per se, since the emphasis in this case was on two particular terms of the liquidated damages clause and on a cap. Nonetheless it is difficult to avoid the conclusion that liquidated damages clauses will have the effect of being both limitation clauses and an exhaustive remedy for monetary compensation as suggested in Temloc Ltd v Errill Properties Ltd [1987] 33BLR30. It is suggested that it will require clear words in a contract to depart from that general proposition.