Construction Brief: latest decisions August 2018

This update includes a round-up of recent court decisions raising issues relating to design responsibility, damages for wrongful termination, oral variations to contracts and the employment status of independent contractors.

Employment status of independent contractors

Pimlico Plumbers Ltd and another (Appellants) v Smith (Respondent) [13.06.2018]

The Supreme Court has held that a self-employed plumber fell within the definition of a “worker” rather than a freelance contractor, thereby entitling him to certain employment rights.

Smith worked for Pimlico Plumbers (Pimlico) from 2005-2011. In 2011, Smith issued employment tribunal proceedings against Pimlico, claiming (1) unfair dismissal, (2) unlawful deduction from wages, (3) failure to receive holiday pay and (4) disability discrimination. Smith was found by the employment tribunal not to be an “employee” under a contract of employment, and therefore unable to claim unfair dismissal. However, it found that Smith did count as a “worker” within the meaning of the Employment Rights Act 1996 and the Working Time Regulations 1998, and had been in “employment” for the purposes of the Equality Act. Claim (1) therefore failed, but claims (2) – (4) were able to proceed.

Pimlico appealed against the findings on claims (2) – (4), claiming that Smith was a freelance contractor and not a worker. The appeals to both the Court of Appeal and the Supreme Court were unsuccessful.

For Smith to be a “worker”, it was necessary for: (a) Smith to have undertaken to personally perform his work or services for Pimlico; and (b) Pimlico not to be either his client or customer.

The Supreme Court held that: (a) the terms of the contract were clearly directed to performance by Smith personally, and any ability to substitute performance was significantly limited; and (b) Smith’s contract included tight controls over his attire and the administrative aspects of any job, severe terms as to timing and amount of payment, and a suite of covenants restricting his working activities following termination, which were inconsistent with Pimlico being a client or customer of Smith. Accordingly, the tribunal was entitled to consider Smith’s complaints as a “worker”.

Related item: Pimlico Plumbers – Supreme Court confirms worker status

Contact: Matthew Leake

Oral variations to contracts

Rock Advertising Limited (Respondent) v MWB Business Exchange Centres Limited (Appellant) [16.05.2018]

The Supreme Court has held that a “no oral modification” clause (NOM clause) was legally binding, overturning the Court of Appeal decision that an oral agreement between the parties was valid despite the NOM clause.

Rock Advertising entered into a licence agreement with MWB to occupy office space. The agreement contained a NOM clause, which provided that all variations to the licence must be “agreed, set out in writing and signed on behalf of both parties before they take effect”.

Rock was in licence fee arrears and purportedly agreed a revised payment schedule with MWB orally. A dispute arose as to whether the revised schedule had been accepted. At first instance, the court held that there was an oral agreement, but that it was invalid because it did not satisfy the formal requirements of the NOM clause. The Court of Appeal disagreed, holding that the oral agreement also amounted to an agreement to dispense with the NOM clause. The Supreme Court disagreed with the Court of Appeal, reinstating the first instance decision, and stating that the safeguard against any injustice in rendering oral agreements unenforceable lay in the various doctrines of estoppel.

Parties must therefore exercise caution when agreeing oral variations to contacts when a NOM clause is present, and should ensure that any variations comply with the conditions set down by the contract.

Related item: Oral variation of contracts - consultants beware

Contacts: Michael Smale, Helen Birchall and Helen Johnson

Damages for wrongful termination

Redbourn Group Limited v Fairgate Developments Limited [13.04.2018]

The TCC held that the claimant was not entitled to damages for wrongful termination, as the defendant would have been permitted to terminate the appointment before the claimant became entitled to any additional remuneration.

Redbourn was appointed by Fairgate as development manager and project manager on a proposed development in London. A year after the appointment was signed, Fairgate terminated Rebourn’s appointment for material breach. Redbourn disputed the breach and commenced proceedings for wrongful termination, which were successful. Redbourn claimed damages for repudiatory breach, the quantum of which was subject to a separate hearing.

Redbourn’s fee had consisted of a fixed fee split into two tranches – the first £200,000 payable monthly during the initial design period (which Fairgate agreed to pay), and the second £200,000 payable upon obtaining planning consent. There were also additional fees payable upon achievement of future milestones.

Redbourn claimed it was entitled to all fees it would have earned had the contract services been fully carried out. Fairgate disputed Redbourn’s entitlement to the second £200,000 tranche and additional fees. The court agreed with Fairgate, holding that despite the relatively narrow termination clause, and the absence of a termination at will provision:

  • Fairgate had contractual discretion to approve any application for planning permission and therefore Redbourne never had a guaranteed right to that fee.
  • The project had actually become unrealistic to pursue (due to a lease falling through), and therefore Fairgate would have been justified in deciding not to pursue the project and terminating the appointment in any event.

This case serves as a reminder that contractual provisions on termination and its consequences should be carefully drafted to ensure they are clear and unambiguous.

Contacts: Helen Birchall and Helen Johnson

Contractors’ design responsibility

SSE Generation Ltd v Hochtief Solutions AG and another [10.04.2018]

This was a Scottish appeal case concerning the collapse of a tunnel forming part of a new hydroelectric scheme in the Scottish Highlands. The tunnel collapsed soon after the completion of the works under an NEC2 contract, within the defects liability period (losses circa £110 million).

There had been two first instance decisions in this case - one regarding joint insurance issues and one concerning liability for the costs of repair. On appeal, the joint insurance decision was upheld, but the liability decision overturned.

The central issue in the appeal was which party was liable for the costs of repairing the tunnel. At first instance, the judge decided this was an employer’s risk, as (a) there was no “defect” under the definition in the contract, and (b) the contractor could rely on a “reasonable skill and care” defence under Option M of the contract.

On appeal, the court overturned this decision (on a majority of two to one), deciding that:

  • There was a “defect” under the contract, as the tunnel did not have the 75-year design life required by the works information, and the tunnel was not “in accordance with the design that had been accepted by the Project Manager”.
  • The “reasonable skill and care” defence under Option M did not apply, because the defect was not in the “design that had been accepted by the Project Manager”, but a defect in the contractor’s “implementation” of the design (in effect, a workmanship issue rather than a design issue).

Permission for further appeal to the Supreme Court has been granted, and so it remains to be seen whether this decision will be upheld.

Contact: Helen Birchall and Helen Johnson

Consultants’ design responsibility

Midlothian Council v Bracewell Stirling Architects & Others [27.03.2018]

This was another Scottish appeal case concerning an architect’s liability for a £12 million loss of a social housing development, which was rendered uninhabitable as a result of carbon dioxide ingress from disused mine workings.

The council sued: (1) the ground investigation sub-contractor; (2) the sub-contractor appointed to “peer review” the ground investigation reports; and (3) the architect (on the basis that under the contract, it had assumed overall design responsibility for the works, including the ground investigation works specifically).

The appeal case concerned the architect’s liability only. At first instance, the judge held that the architect was not liable for the errors in the ground investigation. On appeal, the council argued that the contract wording clearly placed liability on the architect, both for the overall design and specifically for all site investigation works.

The appeal judge dismissed the appeal, agreeing with the first instance judge that the contract could not be construed to place all liability on the architect for anything that might go wrong with the design, no matter its cause. In addition, the clause regarding responsibility for ground investigation should be interpreted to refer only to ground investigation carried out by the architect and its sub consultants, and not any other party. The judge commented that to assume responsibility for other parties with whom the architect had no contractual relationship would be “an unusual step and one carrying very considerable risks”, which may not have been insurable.

Contact: Helen Birchall and Helen Johnson

Read other items in the Construction and Engineering Brief - August 2018