Project management: A risky business?29 August, 2012
The recent TCC decision in Ampleforth Abbey Trust v Turner & Townsend Project Management Limited has served as another reminder of the dangers of relying on building works being procured under letters of intent rather than formal building contracts.
It has also provided a stark warning to project managers of the scope of their standard of care and to construction professionals in general of the risk of ‘unreasonable’ limitation of liability clauses within their standard terms and conditions being held as unenforceable.
The dispute arose after Turner & Townsend acted as project managers on three construction projects for the provision of student accommodation at Ampleforth College, a well known school in North Yorkshire. The building contractor for the works was Kier Northern.
There was some urgency in the project relating to the accommodation being needed for use by students at the start of the academic year in September 2004. Kier commenced works on site in December 2003, but, although the works were satisfactory as to quality, they were completed significantly later than had been envisaged in November 2004.
A dispute arose initially between Kier and the College where Kier contended that it was entitled to extensions of time and to additional payments in respect of the prolongation of the works. The College in turn sought liquidated damages of £750,000 for delay. The dispute went to a formal mediation at which agreement was reached on the basis that Kier did not receive additional payments and the College did not receive liquidated damages.
However, a formal building contract had never been entered into for the project and the works were exclusively carried out by Kier under a series of eight updated letters of intent issued by the College from time to time (containing no mention of liquidated damages). The building contract was only entered into long after the works had been completed and then on terms, agreed at the mediation, that excluded any entitlement on the part of the College to liquidated damages for delay.
The College subsequently claimed against Turner & Townsend for damages for professional negligence. It was alleged that if Turner & Townsend had acted with the care and skill reasonably to be expected of a project manager, then it would have procured Kier’s execution of the building contract earlier in the process. Kier would have therefore been liable to pay liquidated damages for the delay and the College would have achieved a more advantageous outcome of the dispute.
In summary, the Court held that:
• Turner & Townsend had owed to the College a duty to exercise reasonable care and skill for the purpose of procuring from Kier an executed building contract. They were in breach of that duty in that they ‘failed to exercise sufficient focus on the matters holding up execution of the contract or to exert sufficient pressure on Kier to finalise the contract’.
• The breach of duty caused the College loss because if Turner & Townsend had not been in breach of its duty, then (a) the College ‘would have taken sufficient steps to ensure that, so far as lay within its power, it procured a contract’, (b) there would have been a real and substantial chance of Kier executing a contract that contained a provision for liquidated damages and (c) the existence of such a contract would have been of a material benefit to the College in its dispute with Kier when completion of the works was delayed.
Challenging limitation clauses
Another aspect of the case was that, when considering the amount of damages that Turner & Townsend must pay to the College, the court held that a limitation clause found in the project manager’s appointment fell foul of the Unfair Contract Terms Act 1977 and was not effective.
Section 3 of the Act requires a term that tries to restrict or exclude any liability for breach found in one of the contracting party’s set of standard terms and conditions to satisfy a requirement of ‘reasonableness’. The appointment was based on the project manager’s original fee proposal, which was unsigned by either party, but which included an 11-page document headed ‘Terms of Appointment’. These ‘Terms of Appointment’ contained a clause stating:
“Liability for any negligent failure by Us 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 £1 million whichever is the less.”
Turner & Townsend argued that this clause would limit any damages owed to the College to the extent of the fee paid to them. However, the court held that the limitation clause was unreasonable.
The main persuading factor was that the contract imposed on Turner & Townsend an obligation to take out professional indemnity insurance to a level of £10 million, the costs of which would, as a matter of commercial reality, be passed on to the College within the fees payable. Yet the effect of the limitation clause would be to impose a limit of liability equal to the fees payable to the project manager. The court could not find any explanation as to why there would be stipulated insurance cover of £10 million when a limitation of liability has been imposed to less than £200,000. The effect of upholding the limitation clause would be the College paying for insurance of £10 million when the greater part of that insurance would be redundant.
In addition, the court commented that, whilst the College should have read the documentation more closely, the College did not do so in circumstances where they simply asked for a fee proposal and where Turner & Townsend had not pointed out to them that they were seeking to include new terms in the contract from the terms that were imposed for previous works.
Firstly, the case is a timely reminder that a formal building contract should always be put in place as soon as possible. Indeed, the court commented that ‘The execution of the contract is to be seen not as a mere aspiration but rather as fundamental’. Letters of intent are notoriously uncertain and usually lacking in key detail. Any legal requirements for a building project should be included in a correctly executed formal building contract, which usually takes the form of an amended standard industry contract tailored to the particular project in hand.
In this case, it was noted that the lack of an executed building contract did not automatically render the project manager negligent. The court acknowledged that sometimes it is appropriate that a letter of intent is used in order to start works in time to comply with a strict programme. However, expert evidence established that it was ‘extremely unusual’ for a project of this scale to reach completion under a letter of intent. The project manager’s breach of duty arose from a failure to exercise ‘practical judgment and common sense’, rather than technical skill, and it seemed to be a lack of active management in dealing with the outstanding items that rendered them liable to the negligence claim. If the project manager had provided the employer with better advice on the risks of using a letter of intent, or if they had adopted a more assertive approach with the contractor, they may have had a better argument that they had exercised reasonable skill and care in their duties.
It was also noted that it was no excuse for the project manager to claim that they misunderstood the effect of the letters of intent, thinking that the letters had incorporated liquidated damages provisions as they had been mentioned in discussions over the building contract. They had nonetheless prepared the contract documents and letters of intent and if they did not feel competent to do this, they should have advised the employer of the need for professional legal advice.
Finally, contractors and consultants of all disciplines regularly try to incorporate limitations of liability within their standard terms and conditions. This case reiterates once again a position that is already well established in English law that, in order to give the best chance of such a clause being effective, it needs to be expressly brought to the attention of the client and their agreement to the position obtained. It is no help trying to bury a clause deep within the small print of a set of standard terms and conditions because there is a significant risk that it will ultimately be unenforceable.
Reviewed in 2015