Limitation and other issues - an early Christmas present from the TCC - Part 2

Part 2 – the extent of designers’ obligations and the effect of settlement agreements

In the recent case of Lendlease Construction (Europe) Limited v Aecom Limited [2023] EWHC 2620 (TCC) the Technology and Construction Court (TCC) has provided a useful judgment giving guidance on a wide range of issues of general interest and application to the construction industry. While the judgment outcome is inevitably fact and contract specific, the careful reasoning by the judge provides a useful guide for the future on a number of issues that are of wider importance.

Part 1 of this article summarised the court’s findings on limitation, which provided the designer in this case with a complete defence to the claim. However, the court also provided guidance on a number of other useful points, including the extent of the designer’s obligations and the effect of an earlier settlement agreement. In part 2, we will look at some of these further key points raised in this case. By way of reminder:

Background

• Lendlease was engaged by St James Oncology SPC Ltd (the employer) as the main contractor for the design and construction of a new Oncology Centre at St James’ University Hospital, Leeds (the project). Lendlease subsequently engaged Aecom as the M&E consultant for the project under a consultancy agreement (the agreement).
• Project Completion was certified on 14 December 2007.
• Lendlease and Aecom subsequently entered into dispute over allegations of outstanding fees and defects. This dispute culminated in a deed of settlement (the settlement agreement) executed on 28 September 2012.
• In 2016 the employer (and another) commenced proceedings against Lendlease in respect of alleged defects in the design and construction of the project. This claim culminated in 1) a settlement in relation to various M&E defects by which Lendlease agreed payment of approximately £2.9m, and 2) a court judgment in October 2022 for the remainder of the claim by which Lendlease was found liable for various defects and ordered to pay approximately £5m.
• On 30 May 2019, Lendlease issued a claim against Aecom seeking to pass down liability to Aecom for matters included in the claim by the employer against Lendlease, which Lendlease contended were the consequence of Aecom’s breach of the agreement.
• Lendlease’s claim against Aecom was for breach of contract, as it was acknowledged that any claim in negligence would, by this point, be statute barred.

Key guidance provided by the court

Below is a summary of the issues and guidance provided by the court in relation to Aecom’s obligations and the effect of the earlier settlement agreements.

What were Aecom’s obligations under the agreement?

The court considered the extent to which Aecom’s obligations to Lendlease in its appointment were a direct replication of Lendlease’s obligation to the employer in the building contract, as well as the separate but related issue of whether Aecom was required to perform its services i) so as to achieve a particular standard or ii) to exercise reasonable care, skill and diligence – and whether there was a different between those two formulations.

1. Were Lendlease’ obligations under its main building contract directly replicated down to Aecom in the agreement?

The appointment contained the following clause 1.01, which is of a fairly standard type: “The consultant shall be deemed to have notice of and shall observe the employer's requirements and/or the project agreement and/or the principal agreement to the extent the same shall have been issued to the consultant by the contractor and to that extent shall be deemed to have full knowledge of the terms and conditions of the employer's requirements and/or the project agreement and/or the Principal Agreement. to the extent of the obligations of the consultant as set out in this agreement, the consultant shall ensure that no act, default or omission of the consultant shall cause or contribute to any breach by the contractor of any of its obligations contained in the employer's requirements and/or the project agreement and/or the principal agreement.”

It also contained a clause 4.01 stating: “Notwithstanding any other clause in this agreement or the principal agreement or term implied by statute or common law, the consultant shall not be construed to owing [sic] any greater duty in relation to this agreement than the use of necessary reasonable skill, care and diligence…”

The court found that this final wording in clause 4.01 was of “particular significance” and when the appointment was read “as a whole”, the appointment did not step down Lendlease’s obligations in the building contract to Aecom.

2. Was Aecom required to provide a design to achieve a specific result, or to use reasonable skill and care (and was there a difference between the two)?

Under the terms of the appointment, Aecom was required to observe the employer's requirements and the project agreement and to ensure that it did not place Lendlease in breach of the said agreements. But did this imply an obligation for Aecom’s design to achieve a specific result?

The employer’s requirements included the need for compliance with a particular regulation – HTM 81. The court found that the provisions obliging Aecom not to cause a breach of the employer’s eequirements etc were setting the context of what was required in order to perform with reasonable care, skill and diligence, and that therefore, “A failure by Aecom to comply with the standards laid down by the applicable regulations and in particular to produce a design satisfying the requirements of HTM 81 is to be seen as a failure to exercise reasonable care, skill, and diligence in the absence of a compelling explanation to the contrary”.

So in this case, the court found there was no read difference between the two requirements, “in the absence of a compelling explanation to the contrary”.

3. Did Aecom have a continuing duty to warn (which could change when the cause of action accrued)?

It is worth a quick reminder that in this case the court was only concerned with looking at when the cause of action accrued for the breach of contract, not a claim in negligence.

Sometime after handing over its design, Lendlease required Aecom to amend its fire strategy document in October/November 2007 to match the as built construction of a plant room, which was not in accordance with Aecom’s original design, in order for Lendlease to obtain a completion certificate. It was later argued that the revised fire strategy was not compliant with the regulations set out in the employer’s requirements. The court considered whether Aecom had a duty to warn Lendlease that the revised fire strategy would result in non-compliance of the regulations. If so, the cause of action for the claim may have accrued at the time when Aecom should have warned Lendlease, which would have been later than May 2007 and therefore potentially within time for limitation purposes.

The court held that on the facts of this case, Aecom was not obliged to make any such warning. In particular, the instructions given by Lendlease to amend the fire strategy made it clear that Lendlease was relying on its own judgment and that of the local building control which the court found meant that Aecom had “no duty to advise as to the wisdom or otherwise of what was to be said in the revised Fire Strategy nor to warn as to the non-compliance of that….”.

What was the effect of the earlier settlement agreements and judgment?

1. Did the 2012 settlement agreement between Lendlease and Aecom preclude this claim?

In 2012 the parties had entered into a settlement agreement which provided that: “…the parties agree to waive and unconditionally and forever release each other, their insurers, their parents, subsidiaries, affiliates and associate companies (included but not limited to their respective directors, officers, employees, agents, successors, assigns and heirs) from (a) the notified claims and/or (b) any other claims and counterclaims, liabilities or debts (of whatever nature) which are known to the parties or which ought reasonably to have been known to the parties as at the date of this agreement arising out of or in connection with AECOM's provision of services pursuant to the appointment. For the avoidance of doubt, this release shall not extend to AECOM's liability in respect of latent defects.”

The court held that this wording operated to “release any liability which Aecom would otherwise have to Lendlease in respect of defects existing at the date of the settlement agreement provided that Lendlease knew or ought to have known of the defect in question.” And that therefore, the 2012 settlement agreement was “a complete defence in respect of any claim based on a defect which existed at that date and of which Lendlease knew or ought to have known.”

2. What was the effect of the settlement between Lendlease and its employer and the TCC’s 2022 judgment on quantum?

Following a claim in 2016 by the employer against Lendlease for defects (including the Aecom defects) Lendlease and the employer entered into a settlement agreement for some of the defects and Joanne Smith J had made a judgment on the remainder of the defects. In this case Lendlease did not attempt to claim from Aecom the cost of putting the alleged defects right, rather “it was saying that Aecom's actions had put Lendlease in breach of the latter's obligations to Project Co and that the consequence of this was the liability in the amount of Joanna Smith J's judgment” and the value of the settlement agreement.

In relation to the judgment by Joanne Smith J, the court held that "Lendlease has to show without reference to the judgment that Aecom was in breach of the latter's obligations and that this breach caused Lendlease to be liable to Project Co. However, provided Lendlease does that then Joanna Smith J's judgment provides the starting point in relation to the amount of that liability and the onus is then on Aecom to show that the amount of the judgment is not the true measure of Lendlease's loss by reason of Aecom's breach". 

However, this was complicated by the fact that this would only apply where all of the defects were held to have been caused by Aecom, as Joanne Smith J had awarded a global amount and had expressly not made any allocation of sums as between different defects. If there was an argument that not all of the defects that formed part of the judgment were caused by Aecom, it would then be difficult for Lendlease to show that a particular amount awarded by Joanne Smith J was caused by a defect or defects for which Aecom were responsible.

In relation to the settlement agreement amount, the court was satisfied that it was reasonable for Lendlease to have entered into the settlement agreement, but the real question was whether Lendlease had shown that the sums paid were reasonable. The court noted that there is only a low hurdle for a claimant to show that a settlement figure is reasonable. However, in this case, Lendlease had failed to surmount that hurdle. In particular the court held that “…proving the reasonableness of a settlement figure requires the party asserting that reasonableness to do more than to assert that the settlement was for less than was being claimed. There must be some material from which the court and the other party can assess whether the settlement figure was reasonable in the particular circumstances. A party which fails to provide such material has failed to show a precondition for recovery of the settlement sum. Here Lendlease has failed to provide that material in respect of a number of the defects”.

Key takeaways

Some key practical points to take away from the court’s findings noted above are:

• Clear wording will be required to step-down obligations from a main contract into a sub-contract and the contract will be construed “as a whole”.
   
• Consultants should be aware that contractual obligations to comply with and/or not to put the main contractor in breach of certain documents/requirements may imply a requirement for their design to achieve a specific result, even if still in the context of reasonable skill and care.
   
• For a claim for breach of contract, the cause of action generally accrues when the design is handed over to the contractor for construction. Whether any later duty arises to warn of the consequences of any subsequent changes will depend on the specific circumstances of each case.
   
• The wording of any settlement agreement should be carefully considered in the context of any other claims for which the parties are or should reasonably be aware of. Otherwise a party may find themselves unable to pursue another claim which they were or should have been aware of at that time.
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• A reasonable settlement figure may form the basis of a claim, but proof is required to show that any such settlement sum is reasonable.