UK: Legal Review of 2009 - Part 1

SUMMARY

We start our review of 2009 with two high-level decisions concerning the interpretation of contracts, highlighting the growing flexibility of at least some judges in this respect.

The first, from the House of Lords (before it was replaced by the Supreme Court) also dealt with issues of the admissibility of pre-contract negotiations (on which we also refer to a Court of Appeal decision) and rectification of contracts. The second, from the Privy Council, was concerned specifically with implied terms.

We then refer to some other cases concerning interpretation of particular contractual terms, terms of a kind not infrequently found in commercial contracts, including contracts in the construction industry ("Not always what it seems to say").

We review cases during the year on the existence or otherwise of a duty of care, both in respect of economic loss and physical damage. The cases on economic loss include potential liability for statements on a website and potential liability of auditors to parties other than their client (i.e. the company whose accounts they are auditing). We include the House of Lords decision in Stone & Rolls Ltd v Moore Stephens, on whether auditors could raise the defence of ex turpi causa against a one-man company engaged in fraud.

It is one thing to owe a duty of care, it is another to be in breach of it. We mention a few cases concerning negligence and the relevant standards of care. Four of these cases concern claims against solicitors, of which three were unsuccessful, and one concerns a claim against a barrister, which was unsuccessful. In the public arena, there is a useful definition of the standard from the Court of Appeal, applied in this case to a man walking his dog. There is also a case concerning a claim against surveyors and the scope of the retainer by their client.

We cover a judgment against engineers, in the Technology and Construction Court and the Court of Appeal, concerning their liability under the Defective Premises Act 1972.

We comment on a judgment concerning apportionment of liability between solicitors and surveyors following a settlement of the claim against the solicitors, which involved a number of complicating factors and a judgment in Scotland concerning the net contribution clause in the conditions published by the Association of Consulting Engineers (the ACE Conditions).

We review cases on limitation during the year, including the Court of Appeal's decision in Axa Insurance Ltd v Akther & Darby Solicitors & Ors.

We consider a number of cases on payment for services in the construction industry, where the contractual entitlement was unclear, or where there was held to be no contract at all. In one of these cases, there was also an issue of fraudulent misrepresentation where the client had been led to believe that a particular person would be working on the job.

We mention a case on the statutory entitlement to interest, where the amount of the principal payment is disputed.

We review a number of cases concerning orders for costs. Courts are now much more flexible in making such orders, but the result is a burgeoning form of satellite litigation. We include a case on cost estimates given by solicitors and a House of Lords decision on the use of "without prejudice" correspondence in subsequent proceedings.

We review a number of cases in the Technology and Construction Court during the year on adjudicator's decisions in the construction industry. We also refer to changes to the legislation passed by parliament during the year, and some cases concerning interpretation of existing statutory provisions.

There were a number of cases during the year on service of legal proceedings, arising out of applications to serve proceedings late. Failure to serve proceedings in time could mean that the claim cannot be pursued, which could lead a claim against the solicitors responsible. We also include a case of a claim being struck out because the claimant had no title to sue.

There were also a number of cases concerning solicitors' undertakings to redeem charges on properties, following sale of the property. The cases illustrate the importance for solicitors of obtaining redemption statements and the mortgagee's agreement to release the properties from all relevant charges upon payment of the ascertained sum, and the danger of any delay in paying over the sums required.

We include some cases that affect insurers particularly, including a case concerning notification of disputes on a construction project, documents held by a firm of solicitors in which the Law Society had intervened and cases involving fraudulent claims.

We end with two major cases involving nuisance claims, including claims arising out of the explosion at Buncefield in 2005.

LEGAL REVIEW 2009

During the year, the judicial functions of the House of Lords were taken over by the newly-created Supreme Court. It was also 10 years since the Woolf reforms, which gave rise to some soul-searching on how much they had achieved their aims. Lord Justice Jackson, a former head of the Technology and Construction Court, was appointed to conduct an enquiry into the costs of civil litigation. His preliminary report was published in 2009 and his final report issued on 14 January 2010.

Interpreting Contracts

The courts have become more flexible in modern times in the way they interpret contracts. If the literal meaning of the words in a contract produces a result which seems commercially absurd, the courts may labour to construe the contract in a different way, taking into account such matters as the presumed intent of the parties to the contract (though not evidence of their actual intentions) and background information presumed to have been known to the parties.

As was said in one of the cases referred to later:

The House of Lords seemed to go further than this in Chartbrook v Persimmon Homes Ltd & Ors (1 July). The case concerned a contract for the development of a site, between the owners of the site and the developers. The agreement was that the developers would develop the site at their own cost and pay the owners a guaranteed amount for each of the various units comprising the development (reflecting its site value), plus a further amount in the event of it being sold (in its developed state) for more than a certain price. The formula in the contract for calculating this further amount seemed clear enough, but produced a result that seemed surprisingly favourable to the owners.

The High Court and the Court of Appeal interpreted the formula following the natural meaning of the words used and held that the developers had to pay accordingly. However, the House of Lords held that, in the words of one of the judgments, something had gone wrong with the language and that the contract should be construed so as to give it the more commercially realistic meaning contended for by the developers, even though that meaning could not really be reconciled with the language actually used.

This disposed of the case, but there were other issues on which the House of Lords also commented.

However flexible the approach to construing contracts may have become, the courts have still set their face firmly against what may seem one approach – ask the parties what they meant. Of course, if they did, they might not get the same answer, but they would have some further evidence to go on.

In the Chartbrook case, the developers had contended that, if the courts had been allowed to consider the pre-contract negotiations between the parties as an aid to construing the contract, there would have been no doubt that theirs was the meaning intended by the parties. However, the House of Lords re-affirmed the old common law rule that pre-contract negotiations were not admissible for the purpose of construing the contract (though they may be admissible for other purposes, including the next issue that the House of Lords considered). The approach to construing contracts, therefore, remains firmly objective.

Another possibility open to the developers had been to seek rectification of the contract. However, this is only possible if it can be shown that there had been a mistake in drafting or finalising the contract, in that the contract had failed to set out what the parties had intended to agree. This presumes a common understanding between the parties prior to the signing of the contract as to what the contract was supposed to say. In order to decide whether there was a common understanding of this nature (and therefore a mistake in the final drafting of the contract), the courts have traditionally admitted evidence of the subjective understanding of the parties – in other words, for this purpose it has been permissible to ask the parties what their understanding was. In this case, the owners disputed the developers' view of what had been intended, and as a result the courts below were unwilling to conclude that there had been a common understanding.

However, the House of Lords expressed the view that the question of whether there had been a common understanding between the parties prior to the contract being signed should be judged objectively, so that evidence of the subjective understanding of either party was irrelevant. If the pre-contract correspondence between the parties in this case had been considered in this way, the courts would be likely to have concluded that the parties must be presumed to have had a common intention that the formula for payment in the contract would accord with the developers' understanding. Rectification would then have been possible.

Such an approach to pre-contract negotiations is consistent with the common law approach to construction of the contract itself and is likely to make rectification of contracts easier.

In Anglo Continental Educational Group (GB) Ltd v Capital Homes (Southern) Ltd (17 March), the Court of Appeal gave some guidance about how the question of the admissibility of pre-contract communications could be dealt with, where the issue arose (for example, where such a communication is referred to in a witness statement), with a view to avoiding time and cost being unnecessarily incurred on such evidence.

Implied Terms

A high-level court also adopted a more flexible approach to the implication of terms in contracts. Traditionally, the courts have only implied a term into a contract if it satisfies various restrictive-sounding tests – a term that goes without saying, a term necessary to give business efficacy to the contract. There has also been the celebrated officious bystander test – would the bystander have received a short answer from the parties (for example, an irritable yes of course) if the bystander had asked them whether the term applied?

In AG of Belize & Anor v Belize Telecom & Ors (18 March), the Privy Council said that there are dangers in treating such formulations of the question as if they had a life of their own. In the words of Lord Hoffmann (who also gave one of the leading judgments in the Chartbrook case):

The Court said that the proper approach is to treat the exercise of implying a term as part of the task of expressing the true meaning of the contract, objectively construed.

There can be no doubting the radicalism of this approach. The officious bystander would seem to be part of history: if the answer to the bystander could actually be as stated above, he could not fairly be described as officious.

Not Always What It Seems To Say

There were a number of cases last year in which an impressionistic or literal reading of an important contractual term was held to be incorrect. For example, it is not uncommon to find this sort of clause in commercial agreements:

In Tele2 International Card Co SA and others v Post Office Ltd (21 January), one party was in material breach of the agreement in failing to provide a parent company guarantee in accordance with the terms of the agreement. The other party, therefore, served notice of termination of the agreement, but did not do so until nearly a year had passed from the date when the parent company guarantee should have been provided. The judge held that it was entitled to terminate the agreement, notwithstanding the delay in doing so, because of the no waiver clause set out above.

However, the Court of Appeal overruled the judge on this point. The no waiver clause made no difference to the fact that the other party had clearly elected, by its conduct in continuing to perform the agreement for so long after being aware of the breach, not to exercise its right to terminate the agreement. It was therefore itself in breach of the agreement in terminating it.

In Port of Tilbury (London) Ltd v Stora Enso Transport & Distribution Ltd and another (23 January), the contract provided that sums due under the contract should be paid without any claim, deduction, counterclaim or set-off. However, if any sum due is genuinely and bona fide disputed by the payer and notice of the dispute has been properly given, the payer may withhold the disputed amount pending determination of the dispute. Did this mean that the exclusion of set-off was subject to the right to genuinely and bona fide dispute a sum due under a notice properly given? The Court of Appeal, overruling the judge below, held that the right under the contract to genuinely and bona fide dispute a sum due applied only to the quantum of the sum in question, and not to a cross-claim for damages.

This did not mean that the payers could not pursue a cross-claim for damages, but they could not set it off against the claim for payment.

Internet Broadcasting Corporation Ltd & Anor v Mar LLC (24 April) concerned an agreement that was deliberately and wrongfully terminated by one of the parties. The contract contained an exemption clause in the following terms:

Would this clause cover liability arising from a deliberate repudiatory breach of the sort that had occurred, as a literal reading of the clause might suggest? The Court held that it would not, for a number of reasons, including the fact that the wording was not strong or clear enough to operate in such an unexpected way, and the fact that such an interpretation would defeat the main object of the contract, which would be commercially absurd.

Duty of Care: Economic Loss

The question of when and how a duty of care is owed, particularly in respect of economic loss, arose as usual during the year.

Patchett and anor v Swimming Pool & Allied Trades Association Ltd (15 July) raised the question of any duty owed regarding the accuracy of statements on a website. The website was that of a trade association of swimming pool installers. The website contained a list of its members and information about its members, including the fact that their experience and work had been vetted and their financial record checked, and that they were covered by a bond and warranty scheme.

Relying on the information on the website, the claimants engaged a company listed as a member to install a swimming pool. The company in question was not, however, a full member but only an affiliate member, which meant that it did not have the benefits referred to, including the bond and warranty scheme. This had not been made clear. The company went insolvent during the works. The claimants sued the trade association on the basis that they had been misled by the website into engaging the company.

The Court of Appeal held (by a majority only) that the trade association did not owe the claimants a duty. The main reason was that the claimants would have been expected to check the information on the website, in particular by obtaining the information pack referred to on the website, which the claimants did not do.

The Court indicated that no special considerations arose from the fact that the misleading information was on a website. In principle, there is no reason why such information should not give rise to a duty of care, depending on all the circumstances, and one of the three judges in this case held (in a dissenting judgment) that a duty was owed in this case.

Not surprisingly perhaps, during an economic downturn, there have been claims arising out of fraudulent schemes and the failure to detect them. So v HSBC bank plc & Anor (3 April) involved a fraudulent investment scheme whereby investors were persuaded to transfer money to an HSBC account in the name of a company that was part of the fraudulent scheme. From there, the money was removed and disappeared. The defrauded investors claimed against the Bank that, in transferring their money to the Bank, they had relied on a letter of instruction and a reference letter stamped and issued by the Bank. The Court of Appeal, disagreeing with the judge on this point, held that the stamping and issuing of these documents constituted a representation to the investors that the Bank had accepted the instructions in the documents and would comply with those instructions. The Court also held that the Bank owed the investors a duty of care in making these representations and were in breach of that duty.

The Court rejected the argument that the Bank was not vicariously liable for the action of the official who stamped and issued the documents, and held that the normal principles of vicarious liability for tortious acts on the part of an employee apply to misrepresentations.

The claim against the Bank failed, however, because the investors were found in fact not to have relied on the letter of instruction and reference letter in deciding to transfer their money to the Bank. They had in fact expressed dissatisfaction with these documents and had accepted assurances from the fraudsters.

In Charalambous & Ors v B & C Associates (22 October), the court confirmed the well-established rule that an administrator of a company does not owe a duty of care to unsecured creditors in the absence of a special relationship.

Auditors

Auditors are frequently concerned with claims from third parties who allege they have suffered loss as a result of their audit of a company. The auditors' contractual duty is only to the company whose accounts they audit. Therefore, any such third party has to show that the auditors owed them specifically a duty of care.

In Rushmer v Smith (30 January), the guarantor of a company loan claimed that the auditors of the company's accounts, which had grossly overstated the company's profits, owed him a duty. The case of the claimant, who was virtually the sole owner of the company, was that, had the true position been disclosed in the accounts, the company would have stopped trading, thereby avoiding further losses, including the liability guaranteed by the claimant.

The claim failed because the evidence showed that the claimant had not relied on the accounts and did not believe them. It also showed that the auditors did not know that the claimant had guaranteed a loan by the company.

The Court also held that the claim would have failed anyway, because the claimant's loss as a guarantor would fall to be treated as reflective loss of the company, i.e. it reflected loss for which the auditors would (on the claimant's case) have been liable to the company, and therefore could not be liable to the claimant as well. This is based on the principles set out by the House of Lords some years ago in Johnson v Gore Wood. The Judge followed the more recent decision in Humberclyde Finance Group Ltd v Hicks in applying these principles to a guarantor of company liabilities.

The distinction between losses claimable by a shareholder in a company in a personal capacity and losses that are reflective of the company's losses (or of the company's pension fund's losses) were set out in Webster v Sandersons Solicitors (31 July), a loss of chance claim against solicitors (for failure to serve a claim in time). The company was 99% owned by the claimant and was now in liquidation. Any loss that could be or could have been claimed by the company was not claimable by the claimant, because it was reflective loss. Such losses included loss of dividends, diminution in value of his shareholding, all other payments that might have been obtained from the company and other payments that the company might have made, losses that the company could have claimed but had chosen not to and loss relating to the claimant's personal guarantee of the company's debts.

An important case concerning the potential liability of auditors was the House of Lords decision in Stone & Rolls Ltd v Moore Stephens (30 July). The case concerned the possible liability of the auditors to their client, the company whose accounts they audited, but the case may have wider ramifications. The company in question was a one-man company engaged in fraud. The company claimed that the auditors' negligence prevented fraudulent activity from being detected earlier. The House of Lords held that, as the fraudster was the sole directing mind behind the company, which existed purely as a vehicle for his fraudulent activities, the company was itself primarily, not vicariously, liable for the frauds. In these circumstances, the auditors could raise against the company the defence known as ex turpi causa, the legal doctrine that a person can not pursue a cause of action that arises in connection with his own illegal act. (There was no finding that the auditors had actually been negligent. This was assumed only for the purpose of determining whether the ex turpi causa principle applied)

The House of Lords decision was only by a majority of 3:2. It was pointed out that it could mean that auditors would generally escape liability for failing negligently to detect Ponzi schemes operated by one-man companies.

Duty of Care: Physical Injury and Damage to Property

The question of whether a duty of care is owed in respect of economic loss will usually involve close consideration of the exchanges between the person alleged to have owed the duty and the person alleged to have been owed the duty. It is generally thought that a duty to avoid physical injury or damage to property will more readily arise than a duty concerned with economic loss. However, even here, mere foreseeability of such injury or damage as a result of one's actions (or inactions) is often not sufficient to create a duty. In Mitchell & Anor v Glasgow City Council (18 February), the House of Lords considered a case under Scottish law where a violent tenant of the Council had assaulted and killed a neighbour following a meeting at which the Council had informed the tenant that he was at risk of being evicted due to his anti-social behaviour. The House of Lords held that the Council was not under a duty to the neighbour to warn him of the possibility of the tenant being violent towards him as a result of this meeting. The Council had not assumed responsibility for the safety of the neighbour.

In D Pride & Partners & Ors v Institute for Animal Health & Ors (31 March), the Court held that the laboratories alleged to be responsible for a foot and mouth disease outbreak, together with the Department of the Environment, Food and Rural Affairs, did not owe a duty of care to the claimants in connection with restrictions imposed following the outbreak of the disease. The claimants were livestock farmers and some of the loss for which they were claiming could arguably be characterised as physical damage. However, the claimants fell within a category (people affected by the outbreak) that was too wide to give rise to the imposition of a duty of care for the sort of loss alleged to have been suffered.

Negligence

It is one thing to owe a duty of care. It is another to be in breach of it – i.e. to be negligent. Some of the cases last year are a reminder not to judge this by too high a standard.

Whippey v Jones (8 April) concerned a case where a dog had jumped at the claimant while the claimant was out running causing the claimant to fall and injure himself. The judge held that the defendant, who was taking the dog for a walk but had lost sight of it, had been negligent. The test that the judge had applied was that the responsible carer must take reasonable care to ensure that a dog does not put people in a position where they might reasonably foreseeably suffer some sort of injury. The Court of Appeal confirmed that the defendant had owed the claimant a duty of care but on the question of negligence held that the judge had applied the wrong legal test. The correct test was is whether a reasonable person in the position of the defendant would contemplate that injury is likely to follow from his acts or omissions, not simply whether it was a possibility. Applying that test to the facts of the case, it could not be said that the defendant had been negligent.

Solicitors

McFaddens v Platford (30 January) concerned a claim by solicitors against counsel, who had advised them to apply for an adjournment of a trial on the ground of concerns about their client's mental capacity to conduct the litigation. This had led to the solicitors' client intimating a claim against the solicitors, which the solicitors had settled.

The solicitors' claim against counsel was dismissed. The court held that counsel, in the view he formed about the client's mental capacity, had relied to a considerable extent on information received from the solicitors, and that the advice that he had given had not, in all the circumstances, been negligent. The judge also said that, if he had thought that counsel's advice was open to criticism, he would have ruled that this would have been only an error of judgment on counsel's part, not negligence. He emphasised that the solicitors were under a duty to take an independent view of counsel's advice. He said that had he found that counsel had been negligent, he would have apportioned liability 75% to the solicitors, 25% to counsel.

In assessing the standard to be applied, the judge concluded that the seniority of counsel should not be taken onto account, despite indications in earlier cases that this may be a factor. He held that it would not have affected his conclusion anyway.

Tamlura NV v CMS Cameron McKenna (19 March) concerned a negligence claim against solicitors, who had advised on and negotiated a commercial agreement that turned out, in one respect, to be seriously disadvantageous to their clients. The judge dismissed the claim, holding that the solicitors had followed their instructions and it was a simple case of a commercial bargain turning out to be bad for the claimants.

While it was a claim very much on its own facts, the judge made a few points of more general interest. The judge rejected an argument that the solicitors were under a duty during the negotiations to bring an apparent mistake on the part of the other side's solicitors to the attention of their client, to see if the client would want to take advantage of the mistake to agree something different to what had been intended. This would have prevented the disadvantage that occurred. Given the background, the judge held that the solicitors were under no such duty and were right to correct the mistake and proceed as already instructed.

The judge also rejected the argument that the solicitors were under a duty to explain the possible commercial consequences of the agreement to the client. The client was represented by experienced commercial people.

While the judge did not think there had been any dishonesty on the part of those bringing the claim against the solicitors, he commented that there may have been a form of what he described as litigation wishful thinking:

Solicitors, like other professionals, should not be liable for mere errors of judgment, provided they have exercised the appropriate standard of skill and care. In Levicom International Holdings BV & Anor v Linklaters (21 April), the court found that that the assessment by solicitors of the prospect of success in an arbitration was within the range of opinions that could properly be given, even if some solicitors might have been more cautious.

However, the standard of skill and care to be expected may be affected by the circumstances. In Berry v Laytons & Anor (3 July), the solicitors had held themselves out as having a particular expertise, and they were required to meet the standard of skill and care reasonably to be expected of solicitors with such expertise. They were not liable for errors of judgment, only for errors that no reasonably informed and competent member of the profession with such expert knowledge could have made.

Lexi Holdings v Pannone & Partners (26.10.09) concerned a situation where solicitors had allowed payments to be made out of their clients account in a way that was in breach of the obligations of the client in question to pay all such moneys to a particular account with the client's bank. The solicitors, however, had acted on the instructions of the client's managing director, who, as it turned out, was acting fraudulently on his own account.

The court held that it was within the usual authority of a managing director to give instruction for the payment out of money held on trust for the company in a solicitors client account, and there was no general duty on solicitors to make an enquiry about the reasons for any such instructions.

Surveyors

However, the scope of a duty, like the standard of care, will often be determined by particular circumstances. Littlewood v Radford & Anor (13 October) concerned the retainer of a surveyor to act for a client on an application for an extended lease. The surveyor agreed all the terms with the landlord, apart from the premium, and advised the client of the deadline for applying to the Leasehold Valuation Tribunal to fix the premium, failing which the application for an extended lease would be deemed to have been withdrawn.

There was a dispute over whether, before the deadline, the retainer of the surveyor had been terminated. The Court of Appeal, overruling the judge, ruled that it had not. Professional people need to be clear about whether or not they are still retained.

Given that the surveyors were, therefore, still retained at the time of the deadline for making the application to the Tribunal, there was then the question of whether the surveyor was under a duty to the client to repeat the advice about the deadline. The Court stated there was no duty in general terms to repeat advice already given:

However, in the circumstances of this particular case, with an inexperienced client likely to be relying on the surveyor to remind her about the deadline, the Court held that there was a duty to that effect, and the surveyors were therefore liable.

How might illegality on the part of a claimant affect a claim for professional negligence? In K/S Lincoln & Ors v CB Richard Ellis Hotels Ltd (2 October), valuers charged with professional negligence in valuing properties alleged that the property purchases by the claimant may have been structured in a way to evade tax, and that this should mean that the claim against them would fail. The Court held (on an application to strike out this part of the defence) that it was very unlikely that any such illegality (if it had occurred) would have that effect on the claim, because it could not be argued that the contract engaging the valuers was tainted. It might affect part of the quantum claim, the part that represented the payment which had allegedly been made for the purpose of tax evasion.

Defective Premises Act

Contractors and consultants may be liable for defects in dwellings under the Defective Premises Act 1972. Under the Act, anyone taking on work in connection with the provision of a dwelling owes a duty –

This is, of course, a strict, fitness for purpose obligation, where no proof of negligence is required in order to establish liability. It only applies to dwellings.

In Bole & Anor v Money & Anor Ltd (13 March), the court considered the question of when a dwelling could be said to be unfit for habitation for the purpose of the Act. The Court of Appeal later (20 October) upheld the court's judgment. The property in question had suffered cracking and other surface defects due to defective design of the foundations, the depth of which had failed to make sufficient allowance for heave. The house was not in danger of imminent collapse. The surface defects had been patched up from time to time, but a permanent solution would require new underpinning works, which would mean the owners having to vacate the premises for a substantial period.

It was held that the premises were not fit for habitation within the meaning of the Act. This is a judgment to be formed by looking at the situation overall. The time for which the house owners would have to vacate the property for permanent remedial works to be carried out was an important factor – in some situations, this may be irrelevant, but here, where the fundamental defect affected the stability of the house, it was highly relevant. All the defects here were attributable to the defective foundation design. One should look at the effect of all the defects as a whole, throughout the house, in order to decide whether the house was fit for habitation, not at the effect of each defect in isolation, or even in conjunction with other individual defects.

The engineers who designed the foundations were, therefore, held liable. On behalf of the engineers, it was argued that they should not be liable for the cost of remedying all the defects but only for making the house habitable. The Court of Appeal accepted that they should only be liable in respect of damage that was contemplated by the Act, which meant the foreseeable loss and damage flowing from the fact that the building was unfit for habitation. The judge had held that this covered the cost of remedying all the defects, and the Court of Appeal held that the judge was entitled to reach this conclusion.

Arguably, the Court of Appeal did not properly address the point on damages.

Contribution

Where more than one party may be liable for the same damage, claims for contribution under the Civil Liability (Contribution) Act 1978 can be made, between the parties so liable. This is quite common in the construction industry, where loss and damage is often alleged to have been caused by more than one party.

Nationwide B.S. v Dunlop Haywards (DHL) Ltd & Anor (18 February) concerned a claim arising out of a fraudulent valuation against solicitors (for negligence) and surveyors (for deceit). The solicitors settled the claim against them and sought a contribution towards the settlement sum from the surveyors. This claim for contribution following a settlement raised a number of issues, by no means straightforward.

The apportionment of liability between the solicitors and surveyors was applied not to the settlement sum but to the estimated loss and damage for which both parties were liable to the claimant (or would have been liable if the claimant's claim had not been settled). The solicitors were only entitled to recover from the surveyors the balance of the settlement sum over and above the amount of the estimated loss and damage apportioned to them.

Therefore, the higher the estimated loss and damage above the settlement sum, the less the solicitors would recover on apportionment (and if the loss and damage was estimated to be above a certain amount, the solicitors would recover nothing, though this did not happen).

However, the estimated loss and damage did not include the extra damages for which the surveyors were solely liable for in deceit. Damages for deceit are potentially far wider in scope than damages for negligence and include losses that are not reasonably foreseeable.

It was also helpful to the solicitors that the estimated loss and damage was reduced to reflect their defence of contributory negligence against the original claimant, even though the surveyors, being liable in deceit, could not make a claim for contributory negligence.

However, the estimated loss and damage was not reduced to the amount of the cap on liability in the solicitors' contract.

Net Contribution

Many professional contracts in the construction industry contain a net contribution clause, reducing the liability of the service provider by the amount that is or would be apportioned to another party in respect of the matter giving rise to liability.

In a Scottish case, Langstane Housing Association Ltd v Riverside Construction (Aberdeen) Ltd (3 April), the Court considered the net contribution clause in the Association of Consulting Engineers conditions. This clause is in fairly standard form and therefore is typical of many such clauses. The Court held that this clause is not subject to the Unfair Contract Terms Act. This arguably is a controversial decision, which should be treated with some caution. The Court also held that, if it is subject to the Act, it would consider it to be fair and reasonable.

Limitation - When Damage Occurs

Related to the question of liability for economic loss is the recurring issue of when damage occurs in such cases. This is the date when the cause of action in tort accrues and thus the limitation period starts running.

A particular problem concerns the situation where a person incurs a contingent liability as a result of the negligence of a professional adviser. In 2006, in Sephton v Law Society, the House of Lords held that, in the case of a purely contingent liability, no damage is suffered for the purpose of a claim until the contingent liability becomes (or begins to become) an actual liability. However, there have been other cases where damage has been held to have been suffered at the time when the contingent liability is incurred, as a result of the contingent liability being incurred, even though it may only be some time thereafter that the contingent liability materialises into an actual liability, if indeed that ever happens at all.

Axa Insurance ltd v Akther & Darby Solicitors & Ors (27 March and 12 November) involved a claim by legal expenses insurers providing "after the event" cover for the costs of bringing legal claims. The insurers' claim was against solicitors on its panel instructed to vet claims in order to assist the insurers in deciding whether to provide cover for those claims, or, more precisely, to advise whether a claim has a better than 50% chance of success, in which case cover for that claim would be provided. It was alleged that the solicitors negligently advised that some claims had a better than 50% chance of success when this was not the case. The Court of Appeal held by a majority (in line with the court below) that damage would have been suffered by the insurers when they issued the policies, even though liability under the policy was at that stage contingent only. The effect was that the negligent vetting claims were statute-barred. Distinctions have arisen in this area of the law which seem difficult to rationalise and the judge giving the majority decision recommended that the matter should be revisited by the Supreme Court.

This will almost certainly not be the last word on this topic. In particular, the appeal in the case of Pegasus Management Holdings SCA v Ernst & Young was heard in October and judgment has been reserved.

Ironically, if the proposed changes to the law of limitation had become law, the issue would have ceased to be relevant, at least as regards cases that would have arisen thereafter. Under the proposed law, there would have been no special six-year limitation period for claims in tort running from the date when damage is suffered. Instead, there would have been one primary period of limitation applying to claims in tort and most other civil claims - a three-year period running from the date when the claimant acquires a requisite degree of knowledge concerning the claim.

However, the legislators now seem to have decided that there is no need for reform, and the proposals, recommended by the Law Commission ten years ago, are not being proceeded with.

In the field of personal injury claims, where the courts have a discretion to disapply the limitation period, the Court of Appeal, in AB & Ors v Nugent Care Society (29 July), gave guidance on the exercise of the court's discretion in cases of historic abuse of children, following last year's decision of the House of Lords in A v Hoare. The latter decision had simplified the question of when knowledge had first been acquired by the claimant, making it more likely that claims brought later in life would be barred by limitation, subject to the court's discretion. One effect of the Court of Appeal's decision is that factors that would no longer be relevant on the issue of knowledge (for example, inhibitions and memory blockage on the part of the claimant) would now be relevant to the discretion issue, which is likely now to be a more complex issue, with more matters to take into account, not just the likely prejudice to the defendant.

Payment

A number of cases in the construction industry concerned, as usual, payment for services rendered, which meant considering the terms of the contract and sometimes having to decide whether there has been a contract at all.

The latter question sometimes arises where work has been commenced following the issue of a letter of intent. In RTS Flexible Systems Ltd v Molkerei Alois Muller GMBH & Co KG (12 February), the letter of intent had expired without a formal agreement having been executed. The judge concluded, as mentioned in our review of 2008, that nonetheless a contract had been formed. The Court of Appeal said that the judge was wrong and that no new contract was formed after expiry of the letter of intent. The parties had been negotiating unsuccessfully for a contract on the MF/1 conditions, clause 48 of which prevents a contract coming into being without a written agreement being agreed.

Furmans Electrical Contractors v Elecref Ltd (10 March) concerned a dispute over payments made by electrical contractors to cabling contractors, where invoices had over a number of years been based on a daily rate, without any agreement over the number of hours on which this rate was based. The electrical contractors eventually disputed the rate charged by the cablers, who sued for unpaid invoices. The court made an order substituting a lower rate than that claimed by the cablers and therefore reducing the amounts claimed. The effect of the court's judgment was that the cablers were also obliged to repay some amounts already paid (though not to the extent claimed by the electrical contractors).

The Court of Appeal ruled that there was no basis on which invoices already paid could be reopened. There had been no agreement over the number of hours, and therefore there was no agreement or representation by reference to which it could be said that the cablers had been overpaid.

The Court of Appeal also made the point that the fact that an essential term as to payment had not been agreed did not mean that there was no contract between the parties. The cablers were therefore entitled to a reasonable sum rather than restitution on a quantum meruit basis, which may be claimed where there is no contract.

However, in Whittle Movers Ltd v Hollywood Express Ltd (11 November), the Court of Appeal stated that where essential terms had not been agreed, the proper approach is to conclude that there is no contract, and if services have been provided, for the service provider to be entitled to a restitutionary remedy. In this case, a successful tenderer for distribution services started work and invoiced for it without a formal contract having been executed (the tender process had been "subject to contract"). It was contemplated that a formal long-term contract would be executed and prices were charged on that basis. However, after 15 months the employer terminated what it said was an interim agreement.

The court at first instance held that no long-term contract had been concluded but that the parties had concluded an interim contract, terminable on six months' notice. The Court of Appeal ruled that no contract had been concluded at all. The subcontractor was therefore entitled to seek remuneration for services provided by means of a claim for restitution, on the basis that the party to whom the services were provided had been unjustly enriched by having paid prices fixed by reference to a long-term contract.

In Fitzroy Robinson Ltd v Mentmore Towers Ltd (7 July), the claim was for architects' fees under their contract of engagement. Payment of the fee by periodic instalments had been agreed. However, delays had occurred to the project, which had eventually come to a halt. The architects contended that they were entitled to payment of the agreed instalments for the periods in question, even though the services performed during those periods were not what had been envisaged, due to the delays. The court held that, on a proper construction of the contract, the fees payable could be and should be adjusted to reflect the delays and the services actually performed.

Another issue that arose in this case concerned the resignation of the architects' team leader during the project. The client had particularly wanted this person to work on the project and had been told that this would happen. In fact, before the architects' contract was agreed, the team leader had handed in his notice. The architects did not inform the client of this (and made the team leader work out his notice).

The court held that the architects' assurances during negotiations that this person would work on the project throughout amounted in law to representations of fact (as opposed to mere statements of intent). At the time they were given, they may have been true, but after the team leader had given notice (and rejected a counter-offer), the representations retrospectively became misrepresentations and the architects at that point came under a duty to disclose the situation prior to entering into the contract. Their failure to do so meant that they were guilty of fraudulent misrepresentation.

The client may not have suffered much claimable loss as a result of this. The team leader's resignation did not cause delay or disruption to the project itself. It may have caused internal disruption and duplication within the architects' organisation, in which case that would be reflected in assessment of the Architects' fees.

However, whatever the consequences in terms of a claim for damages, no one would welcome being found guilty of fraudulent misrepresentation.

Interest

If the contract does not provide for interest to be paid on late payment, the payee will now normally be entitled to interest under the Late Payment of Commercial Debts (Interest) Act 1998. This Act imposes a high statutory rate of interest on payments that are made late (though it does not apply where the parties to the contract have made their own agreement for payment of interest, provided the rate agreed is "substantial"). In Ruttle Plant Hire Ltd v Secretary of State for Environment etc (27 February), the Court of Appeal gave guidance on the operation of the Act where the principal sums claimed may be open to challenge. The fact that an invoice may be wrong (for example, because incorrect rates have been applied) does not mean that the payee has not given notice of the amount due for the purpose of triggering the right to statutory interest. If the payer wishes to withhold payment and rely on the remission provisions in the Act, he would be wise to make clear his grounds for withholding payment at the time. Where an amount claimed is reasonably in doubt, the payer may withhold that amount and interest on the amount should then be remitted, as provided by the Act. What the payer cannot do in those circumstances is not pay anything at all and expect to escape payment of interest under the Act.

Costs

The courts continue to show considerable flexibility when awarding costs. Other factors, where relevant, will be taken into account to modify the basic rule that the successful party's costs are paid by the unsuccessful party. Costain Ltd v Charles Haswell & Partners Ltd (24 September) was a claim by contractors against consulting engineers engaged by them. The contractors tendered for works on the basis of the design for foundations prepared by the engineers. The contractors' tender was successful and the works commenced, but after problems had been encountered in attempting to implement the engineers' design, the engineers advised that the design be altered to a piled design.

The contractors were successful in their claim for negligence against the engineers. However, they were much less successful over the amount that they could recover. The amount that they claimed originally was over £3.5m. This was reduced to £1.8m by start of trial. The court, however, only awarded £163, 478.51.

There were a number of reasons for this. For example, the contractors had sought damages for delay in the project up to the completion of the foundation design and construction of the buildings thereon, but were only entitled to damages for delay to the project as a whole (so that later savings in time would be taken into account) and only to the extent that such delay was caused by the change to the foundation design. They had no proof of any prolongation costs attributable to this localised element of delay, and so did not recover anything under this head. They also sought the costs of the piling works, but were only entitled to the amount which they would have included in their tender, not the actual costs. The contractors claimed for other losses for which they had no evidence or which were overstated.

These matters were reflected in the order for costs, under which the contractors, although treated as the successful party, only recovered about 38% of its costs from the engineers. Their recovery of damages and costs in total from the engineers fell well short of the total costs that they had to pay themselves. The award of interest on damages was also reduced due to delay in bringing the proceedings.

As a result, in net terms, they ended up out of pocket, despite having "won" the action.

The engineers also suffered in costs (i.e. the amount that they had to pay would have been even less) for not having made a Part 36 offer. The contractors had made Part 36 offers which were far higher than what they eventually recovered. The engineers, therefore, were quite justified in not accepting those offers, but they were told that they should have made counter-offers in response.

However, in Bray v Bishop & Anor (19 June), the Court of Appeal held that the judge had placed too much weight on a party's non-engagement with a Part 36 offer, especially as that party had suggested mediation. Nor had the judge had sufficient regard to the issues on which that party had succeeded, albeit that they were not the main issues. For this and other reasons, the Court of Appeal substituted no order for costs for the judge's order that one party pay the whole of the other party's costs.

In Fitzpatrick Contractors Ltd v Tyco Fire & Integrated Solutions (UK) Ltd (20 February), a Part 36 offer made by the claimant was accepted but not until quite a long time after the period for acceptance, during which time substantial further costs were incurred. The court held that the claimant was not entitled to indemnity costs from the date from the end of the period for acceptance, as would normally be the case had there been judgment for a sum equivalent to the offer following a trial. The court did award the claimant interest on costs, at one per cent over base rate.

In Colour Quest Ltd & Ors v Total Downstream UK PLC & Ors (22 April), the case arising out of the explosion at the Buncefield oil storage depot (see below), the claimants were entitled to indemnity costs on the issue of negligence, on the ground that it was unreasonable for the defendants to have denied fault for two years before eventually admitting it. The situation was different on the issue of foreseeability of damage, where the defendants' case, although abandoned on the third day of trial, was not so manifestly weak as to justify indemnity costs.

One of the claimants, who made a Part 36 offer, was entitled to indemnity costs on all issues and also to interest on its costs.

Business Environment Bow Lane Ltd v Deanwater Estates Ltd (31 July) involved a situation where a party was ordered to pay the costs of a preliminary issue, but went on to win the case. On assessment of costs, the costs of the preliminary issue were, in the light of the eventual outcome of the case, reduced to nil. However, the court held that that was the wrong approach, and that the costs of the preliminary issue should be assessed and paid, in accordance with the order then made, without reference to what happened thereafter.

In special cases, there might possibly be an argument for such an order being varied or revoked in the light of later circumstances.

Green v Sunset & Vine Productions Ltd & Ors (4 November) was a case in which the claimant had failed against all three defendants, and the question was the extent to which the unsuccessful claimant, as well as paying all the costs of the main proceedings, should also pay the costs of Part 20 proceedings between the successful defendants.

To the extent that the contribution proceedings, which would be expected in a situation like this, did not raise any particular new issues, the costs were to be paid by the claimant. However, the defendants were ordered to bear the costs of issues between them that were not inextricably entwined with the issues in the main action, and where the claimant had joined a defendant on the basis of assertions made by another defendant, the truth of which could only be known to the two defendants in question, it was held that it would not be just to make the claimant pay the costs of both defendants relative to that issue.

At one time, an unsuccessful claimant in such a situation would normally have been ordered to pay all the costs, on the simple basis that they all flowed from commencement of the action, save to the extent that it could be shown that costs had been incurred unreasonably.

The much greater flexibility on costs that is now shown may seem fairer than the draconian simplicity of former times. However, it means that arguments over costs have now burgeoned into a significant form of satellite litigation.

One must also remember that the starting point is still that the unsuccessful party pays the successful party's costs, and failure of the successful party on a particular issue will not necessarily affect the situation. For example, in Levicom International Holdings BV & Anor v Linklaters (21 April) (see above), although there had been no negligence on the part of solicitors in the views they had formed about their clients' case, there had been negligence in a failure to convey the advice properly, but there was no proof of causation (i.e. that client would have acted differently if the advice had been properly conveyed), and so the claimants were awarded nominal damages only. On costs (6 May), the court held that there was no basis for departure from general rule that successful party (i.e. the solicitors) gets its costs

How should an estimate of costs given by solicitors affect the later assessment of their costs? This question arose in Mastercigars Direct Ltd v Withers LLP (30 March), where the estimate had been exceeded. The Court criticised the conventional approach of adding a percentage to the estimate to determine the amount. The decision in this case, to add a margin of 20%, gave the appearance of being arbitrary, and the decision could not stand. The Court decided that the correct approach was to determine the amount that it is reasonable for the client to pay, taking into account the client's reliance on the estimate and all other relevant factors.

Without Prejudice Correspondence

In Ofulue & Anor v Bossert (11 March), the House of Lords ruled that "without prejudice" correspondence, written with a view to settling proceedings, would not be admissible in subsequent proceedings between the same parties, unless it was wholly unconnected with the issues in the subsequent proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.