Professional negligence on construction projects: an increasing risk?


20 May 2015

There are seemingly ever-increasing pitfalls for professionals acting as project managers or employer’s agents in construction projects.

There are seemingly ever-increasing pitfalls for professionals acting as project managers or employer’s agents in construction projects. The courts are taking a hard line when it comes to professionals’ obligations to protect employers and as a result their roles are ever more unattractive. 

Procuring an executed contract

In The Trustees of Ampleforth Abbey Trust v Turner & Townsend Management Ltd [2012] EWHC 2137, the project manager allowed the works to proceed under a series of letters of intent. When the works were delayed the employer was unable to claim liquidated damages from the contractor because the letters of intent contained no liquidated damages provisions. Conversely the draft building contract (which was never entered into) provided for liquidated damages at a rate of £50,000 per week. 

The employer settled its dispute with the contractor (with no liquidated damages being paid) but then pursued the project manager for its losses arising from achieving a less favourable settlement than it would have done had the building contract been in place. 

The Technology and Construction Court (TCC) found that the project manager failed to exercise reasonable care and skill in managing the project due to its failure to procure an executed building contract, and ordered the project manager to pay the employer damages. 

Limitations on liability

Interestingly in the Ampleforth case, the TCC also found that the project manager could not rely on a liability cap in its professional appointment because that provision offended the Unfair Contract Terms Act 1977, which provides that a person cannot by reference to any contract term exclude or restrict his liability for negligence except in so far as the term satisfies the requirement of reasonableness.

The project manager’s appointment stated:

“Liability for any negligent failure by Us [the project manager] to carry out Our duties under these Terms shall be limited to such liability as is covered by Our Professional Indemnity Insurance Policy terms ... and in no event shall Our liability exceed the fees paid to Us or £1m whichever is the less.”

The fees paid to the project manager were £111,000, and the project manager sought to limit its liability to that amount. 

The court's main reason for holding that the cap did not apply related to the professional appointment's requirement for the project manager to maintain PI cover of £10m. The court commented that it was unreasonable for the project manager to maintain that level of cover, the cost of which would be passed on to the employer as part of its fees, if the employer could not benefit from it because of a cap on liability.

Payment notices

Following the amendments to the Construction Act which came into force in 2011, it is well known that in the absence of a timely payment or pay less notice, a notified sum (i.e. the contractor’s application) becomes payable in full. However, until recently it was general practice for paying parties who had failed to serve the required notices to cross-adjudicate on the actual value of the contractor’s works, and as a result to only pay the true value of the works rather than the whole sum applied for. This gave a defaulting paying party an answer to so-called ‘smash and grab adjudications’ – where a party would attempt to recover all of an applied-for sum on procedural grounds alone.

The TCC has recently, for the first time since the 2011 changes, considered this practice. The net effect appears to be that the counter-adjudication is not possible, potentially opening the door to ‘smash and grab adjudications’:

  • ISG Construction Ltd v. Seevic College [2014] EWHC 4007 (TCC) – ISG (in its first interim application post-PC) applied for a net payment of £1.1m. Seevic did not issue a payment or pay less notice, so at adjudication ISG was awarded the full amount. Seevic commenced a counter-adjudication asking the Adjudicator to value ISG's works – which the adjudicator did, holding that ISG was only entitled to a net payment of £300,000. However, at enforcement the TCC said that Seevic was not entitled to cross-adjudicate: it said that in the circumstances Seevic must be taken to agree ISG’s valuation of works because of its failure to serve the relevant notices.
     
  • Galliford Try Building Ltd v. Estura Ltd [2015] EWHC 412 (TCC) - Galliford Try (GT) issued an ‘indicative final account’ application of £12.66m (£3.9m net), and indicated that its actual final account would only be £4,000 more than this. Estura failed to issue any payment notices and GT was awarded the full sum applied for at adjudication. Estura tried to commence a counter-adjudication, asking for a determination of the true value of GT's works, but (following Seevic) the adjudicator said he had no jurisdiction. At enforcement, the TCC confirmed that Estura could not cross-adjudicate and that the first decision was enforceable (although in the event Estura was only ordered to pay £1.5m of the £3.9m awarded, the remainder being stayed because the court said to do otherwise would have caused Estura serious injustice).

It is often the case that professionals (acting as project managers or employers agents) are contractually responsible for issuing payment notices. In both of the above cases the relevant payment notices were not issued because the professionals appointed as contract administrators did not understand their obligations and/or did not act within the time allowed. 

In circumstances where the court is now refusing to allow paying parties to cross-adjudicate in relation to the true value of the contractor’s works, the risk of not issuing the correct payment notices is even greater: the only point at which an overpayment can currently be recovered is at the final account, and to recover such sums may often require the employer to commence proceedings, especially where the disputed sum is significant. The obvious recourse for the paying party, forced to pay sums that might otherwise not be due on an interim basis, is against the professional responsible for issuing notices – particularly where a contractor in receipt of an overpayment becomes insolvent before a final account is settled. Following the Ampleforth case, there seems little doubt that such claims would succeed.

Conclusion

The nature of professional roles, which often overarch the entire project, exposes professionals to the possibility of criticism when almost anything goes wrong on a project. It is vital therefore for professionals to understand their obligations and to have sufficient PI cover to protect themselves in the event of any negligence claims. Recent case law shows that the courts will show little sympathy to those that get things wrong.

For further information on this topic, please contact Carolyn Porter in Birketts’ construction and engineering team. Birketts offers risk management training for professionals: for further information, please contact Carolyn in the first instance.

This article provides only a general summary and is not intended to be comprehensive. Specific legal advice should be taken in any individual application. Law covered as at May 2015.