When something goes wrong on a construction project, the client will ask the natural question – who is to blame? It may be obvious when a client should pursue an architect or engineer for failures in design or a contractor for defective workmanship but the extent of a project manager’s liabilities have been unclear until recently.
Two recent cases provide us with some clarity on the potential liability of a project manager and stress the need for project managers to proactively progress conclusion of legal documentation or risk being liable!
Can the PM be liable if a contractor fails to deliver a performance bond?
This was considered in the case of Sweett (UK) Limited v Michael Wight Homes Limited [2012] EW Misc 3. Sweett was the Employer’s Agent under a contract relating to the demolition of a factory, construction of six houses and refurbishment of a cottage. In terms of Sweett’s appointment with the Developer, Michael Wight Homes Limited, Sweett were to “prepare contractual documentation and arrange for such documentation to be executed by the parties thereto”. The contractor was obliged to provide a Performance Bond in the amount of 10% of the contract sum but became insolvent before such a bond was procured. The questions for the Court were:
- Did Sweett owe an absolute duty to ensure the bond was procured or was such duty limited to one of skill and care?
- Had Sweett complied with its duty would a performance bond have been procured in this case?
The Court focused on the wording of the service in Sweett’s appointment and stated that the obligation on Sweett to “arrange” for the execution of documents was not the same as an obligation to “ensure” the documentation was executed. The Court held that the service was not an absolute obligation and that in this case Sweett had performed this service with the skill and care required under their appointment – referencing the fact that Sweett had drafted the bond, ensured there was a term in the building contract requiring the contractor to deliver a bond, advised the developer of the importance of procuring a bond and put pressure on the contractor both at meetings and in writing for the bond to be executed.
In this case, the PM had taken positive steps to procure the bond in question – this case should serve as a timely reminder that, in similar circumstances, PMs could find themselves liable if a contractor fails to provide a bond and the PM has not made suitable efforts to obtain it.
Will the PM be liable if a formal contract is never concluded, even if there is a letter of intent?
This was considered in the case of Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited [2012] EWHC 2137 (TCC). The Trustees engaged Turner and Townsend (as project manager) and Kier Regional Limited (as contractor) in relation to a project to build a new boarding house at Ampleforth College. There were key timescales for the build – the boarding house had to be marketed to prospective students for the next school year. To expedite matters, works commenced under a letter of intent prepared by Turner and Townsend to allow the final design and other issues to be finalised. The building contract was never entered into and the works were carried out under a series of letters of intent (eight by the time the works reached practical completion). The works were completed after the date for completion set out in the letter of intent and whilst Kier claimed an extension of time and for loss and expense, the Trustees sought liquidated and ascertained damages (LADs) for the failure to meet the completion date.
Whilst the draft building contract had provision for LADs at £50,000 per week, the Trustees were advised that it was not able to claim LADs as nothing in the letter of intent provided for LADs (the letters of intent stated that neither party was bound by the full contract until this had been executed by both contractor and the Trustees). The Trustees sued Turner and Townsend arguing that the Consultant’s failure to focus on matters holding up the execution of the building contract amounted to a breach of their appointment and that this breach resulted in the Trustees’ loss of a right to claim LADs.
The Court agreed that Turner and Townsend had failed to exercise reasonable skill and care to procure an executed building contract and that the Trustees suffered loss as a result (again as in the Sweett case the court stated that the obligation to procure the building contract was not absolute). However, the court stated that Turner and Townsend “had effectively treated the Contract as a dispensable luxury” and that by not taking steps to resolve the issues outstanding with the Building Contract, not advising the Trustees of the importance of ensuring the building contract was signed and the dangers of proceeding under a series of letters of intent, and not putting sufficient pressure on the contractor to execute a contract, this amounted to a breach.
The Court also stated that if Turner and Townsend did not have the specialist knowledge on certain matters it must persuade the client to seek independent advice (it became apparent that Turner and Townsend misunderstood whether the LADs provisions would be applicable under the Letters of Intent).
Did a financial cap on liability in Turner & Townsend’s appointment apply?
In the case Turner and Townsend sought to rely on a limitation on liability in their standard terms and conditions (which formed the basis of the appointment) such that their liability was limited to the lower of £1M or their fee for the project. Interestingly the Court held that the limitation on liability was “unreasonable” in terms of the Unfair Contract Terms Act 1977 reasoning that in terms of the appointment Turner & Townsend were obliged to maintain professional indemnity insurance of £10M and that this level of insurance would be “illusory” if a lower limitation on liability was included. The court also referred to the passing of cost of professional indemnity insurance to the developer when its fees were agreed. It will be interesting to see if this analysis is followed in subsequent judicial decisions.
Summary
The two cases above are useful illustrations of circumstances where a client may seek to pursue a project manager when a construction project does not go as planned. It is interesting to note the consideration given by the courts to the action (in the Sweett case) and inaction (in the Turner and Townsend case) when considering whether the parties had exercised the requisite skill and care in attempting to procure the concluded documentation.
To view the decision in Sweett (UK) Limited v Michael Wight Homes Limited click here.
To view the decision in Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited click here.