‘Construction
management’ is the name given to a modern system of building procurement, said
to be especially suitable for ‘fast track’ construction on large-scale
projects. The most important contractual feature of this form of arrangement is
that there is no main contractor in the traditional sense — instead, the work
is split up into ‘trade packages’ and the client enters into a direct contract
with each of the ‘trade contractors’. The whole project is then monitored by a
‘construction manager’, who provides professional contract administration
services but who does not take on legal responsibility for the trade
contractors’ defaults (this distinguishes him from a ‘management contractor’,
who at least pretends to carry such responsibility!).
Because the
construction management system is a relatively new development, it has been
little tested in court, but two recent decisions of the Court of Appeal have
received enormous publicity throughout the property world. Apart from the
intrinsic importance of these decisions (the amounts at stake, which were
awarded at first instance, totalled some £18m), their implications have been
said to range from depriving architects of their power in normal cases to
certify late completion (and thus trigger the client’s right to liquidated
damages) to rendering construction management schemes wholly unworkable. Are
the effects really so drastic? It seems
doubtful.
Broadgate affair
The cases of
Rosehaugh Stanhope (Broadgate Phase 6) plc v Redpath Dorman Long Ltd
[1990] EGCS 87 and its unreported companion Beaufort House Development Ltd
v Zimmcor (International) Inc were both decided by the Court of Appeal
on June 26 1990. Although there were certain differences in the facts of these
cases (one concerned the supply and erection of structural steel, the other
installation of cladding) and in their participants (one included guarantors as
well as the principal contractors), the contractual terms and legal issues
which arose were treated by the court as identical and they certainly produced
identical decisions. It will therefore be convenient to concentrate our
attention exclusively on the Broadgate case.
The facts of
this case were that the plaintiff developers employed the defendants to supply
and erect structural steel during phases 6 and 7 of the Broadgate development,
under a contract which appointed the Bovis/Schat joint venture to be ‘the
construction manager’ and which gave that organisation considerable powers.
Prominent among these were the power to grant extensions of time for completion
of the work in certain circumstances; power to estimate the loss or
damage suffered by the client in the event of certain breaches by the trade
contractor (which would then immediately become payable, even though the
estimate might subsequently be revised); and power to ascertain such
loss or damage on a more final basis (although such ascertainment was expressly
made open to challenge in legal proceedings).
The
defendants did not complete their work by the contractual completion date (as
extended by the construction manager); the latter duly made a bona fide
estimate of the client’s loss (something in excess of £5m); and the client
sought summary judgment for this amount. The defendants, however, claimed that,
since they had at least an arguable case for extensions of time up to and
beyond the date on which they actually completed (a claim which the plaintiff
accepted), summary judgment ought not to be awarded. The official referee
agreed with the plaintiff and awarded it its money, whereupon the defendants
appealed. In the Court of Appeal, the defendants further claimed that they had
an arguable case for compensation, based on delays which were the fault of the
client, the amount of which would at least equal the client’s loss, and that
they should therefore be allowed to set off this claim against the plaintiff.
court rulings
In upholding
the contractors’ appeal on both grounds, the Court of Appeal concentrated its
attention upon the detailed wording of the contract. In the court’s view, the
important point was that the clause giving the construction manager power to
estimate the client’s loss began with the words: ‘If the Trade Contractor is in
breach of any of his obligations . . .’. It did not say: ‘If the
construction manager decides that the Trade Contractor is in breach of any of
his obligations . . .’ and, since the question of ‘breach or no breach’ was
still very much a live issue between the parties, it could hardly be said (as
is necessary for summary judgment under Ord 14 of the Rules of the Supreme
Court) that the defendants had no arguable defence to the plaintiff’s claim
against them. As to the set-off point, again the court ruled in favour of the
contractors — their compensation claims were at least arguable, which meant
that their claim to a set-off was arguable, and that was all that was required to
prevent the plaintiff from obtaining summary judgment. The plaintiff’s argument
that, if the contractual scheme were considered as a whole, it was clear that
the construction manager was intended to decide on the question of breach as
well as that of damage was given short shrift — on the wording of the contract,
this would have meant that he could also adjudicate on tort claims between the
parties and the court could not believe that that was ever intended.
for the construction industry
In attempting
to gauge the effects of this case, the point which has to be emphasised is
surely the nature of the proceedings involved. This was not a full trial on the
merits, but a claim by the plaintiff that it was entitled to a cool £5m without
an examination of those merits. Ord 14 requires a court to be convinced
that there can be no arguable defence to his claim and, given that the
plaintiff here actually conceded that the defendants had arguable claims
to an extension of time (not to mention those arguable claims for compensation
which they sought to set off), it meant that, in order to succeed, the
plaintiff had to convince the court that the contract gave the construction
manager the power to make a decision on those claims which would be binding on
the parties, at least temporarily. And, since the contract did not expressly
give him any such far-reaching power, it is hardly surprising that the Court of
Appeal refused to rule that it did so by implication.
The previous
paragraph contains the key to understanding why the decision does not
necessarily affect the position of an architect under JCT 80 or similar
contracts. These tie a contractor’s obligation to pay liquidated damages for
late completion to the mere issue of an architect’s certificate (a simple fact
which is easy enough to prove in Ord 14 proceedings). And, even if the
contractor then tried to claim: ‘I have an arguable defence to the effect that
you should not have issued the certificate’, he is likely to be met and
defeated by the client’s argument (based on Northern Regional Health
Authority v Derek Crouch Construction Co Ltd [1984] QB 644) that the
court has no power to go behind an architect’s certificate, which can be
challenged only in arbitration at a later-date.
The next
question is whether, in the light of these decisions, construction management
remains a viable procurement system and the answer comes in two parts. First,
it should be emphasised that the plaintiff in this case could, had it wished,
almost certainly have gone some way to protect its position by exercising its
right of set-off in respect of its delay claims against interim payments due to
the defendants. This would admittedly have been a less valuable remedy, in that
not only would it have been limited to the amount of those interim payments but
it would almost certainly have covered only losses already sustained, and not
prospective ones; none the less, its very existence means that a client in a
situation of this kind is far from being without remedy.
The second
point is that, if this remedy of set-off is not good enough for clients, and
they want their construction managers to have the kind of powers which the
plaintiff here claimed that it did have, then it should not be difficult
to draft a contract to that effect. Of course, whether trade contractors could
then be persuaded to take on the work, either at all or at a price which a
developer could afford, would depend upon their relative bargaining strength in
the light of current market conditions in the construction industry. None the
less, recognition that a party who seeks powerful legal remedies in a contract,
in order to protect his position, may find that he has in effect to pay for
these seems a very far cry from signalling the imminent demise of construction management
arrangements altogether.
