England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		04/05/2016

MR JUSTICE EDWARDS-STUART :

1. This is a judgment following the hearing of some preliminary issues, known as Stage 1, which were directed to be heard separately by an order of the court made on 13 November 2015. The issues to be determined were agreed between counsel for the parties and subsequently lodged with the court.
2. I shall refer to the Claimant as "AMEC" and the Defendants collectively as Morgan Sindall or "MS". In many documents the Defendants are referred to as Morgan Ashurst, but nothing turns on that.
3. On 1 November 2005 AMEC entered into a building contract in an amended JCT Standard Form with Malmaison (Liverpool) Ltd to design and build a hotel and apartment complex in Liverpool for the sum of £16,150,000. I shall refer to this contract as the "Building Contract". The Building Contract provided for the works to be completed in two sections: section 1 was the construction of the Hotel, and section 2 was the construction of the Apartments. The Hotel was on floors 1-6 and the Apartments were on floors 7-11. There was a common plant room on the 12^th floor.
4. During the course of the Building Contract AMEC and Morgan Sindall entered into a Business Sale Agreement (the "BSA") under which AMEC agreed to sell its construction business to Morgan Sindall. Completion of the sale under the BSA took place on 27 July 2007, described in the BSA as the Completion Date. Somewhat unusually, there was reverse consideration for the sale in that AMEC paid Morgan Sindall about £44 million. However, it needs to be made clear that AMEC's construction business appeared to have liabilities which were of the order of £100 million, which probably explains - at least in part - the very substantial reverse consideration. Schedule 16 to the BSA contained a list of contracts which were on foot at the time of the BSA but which were not novated to Morgan Sindall. Instead, Morgan Sindall assumed responsibility for discharging AMEC's liabilities under those contracts from the date of completion of the BSA, 27 July 2007, until the issue of a Defects Liability Certificate ("DLC") under each contract.
5. Unfortunately, it appears that the work carried out by AMEC under the Building Contract was defective in a number of respects, the most important of which involved the fixings of the cladding panels to the building. One particular problem was that the screws used to secure the panels to the building were made of a metal that was vulnerable to corrosion. These were unsuitable for the marine environment in Liverpool with the result that, following corrosion of the fixings, in November 2008 a cladding panel fell from the building. Fortunately, it caused no injury. However, it revealed a widespread problem with the quality of the fixings such that the cladding had to be replaced in its entirety. As a matter of practicality, AMEC instructed Morgan Sindall to carry out this work but there is a dispute as to which party should bear the ultimate cost. It is not necessary to mention in any detail the various other defects that are alleged to have existed.
6. Put shortly, the issue at the heart of the case is whether under the terms of the BSA Morgan Sindall assumed responsibility for the cost of repairing the defects or any of them. Very little evidence about the nature of the defects was given at the hearing, but in order to give a factual context to the preliminary issues some evidence, mainly documentary, was directed to the question of whether any and if so what defects appeared in relation to the cladding panels during the Defects Liability Periods.
7. AMEC was represented by Mr Alexander Hickey QC and Mr Thomas Crangle, instructed by Reed Smith, and Morgan Sindall was represented by Mr James Leabeater, instructed by RPC. I am grateful to all of them for their helpful submissions and to AMEC's solicitors for the preparation of the well-organised bundles.
8. Before I set out the issues it is necessary to give a brief explanation of the background to the dispute, which I take largely from the Claimant's skeleton argument.

The relevant events in outline

9. Work under the Building Contract was duly started and, after some delays, Malmaison's agent, Jones Lang Lasalle ("JLL") issued a Sectional Completion Certificate for the Hotel on 26 January 2007 and a further Sectional Completion Certificate for the Apartments on 6 July 2007, but backdated to 22 June 2007. By the terms of the Building Contract there was a 12 month Defects Liability Period for each section, which expired on the anniversary of the relevant Sectional Completion Certificate. Accordingly, the Defects Liability Period for the Hotel and the Apartments, respectively, expired on 26 January 2008 and 22 June 2008. The Building Contract contained a provision that if any defects or other faults appeared during the Defects Liability Period, the employer could instruct the contractor to make good the defects, provided that such instruction was issued not later than 14 days after the expiry of the relevant Defects Liability Period.
10. In the meantime, on 11 April 2007, Malmaison's architects, Leach Rhodes Walker Ltd, carried out an inspection of the works, which included an inspection of all the external elevations. At paragraph 2.02 of the site inspection report they said this:

"The Aluminium frame - horizontal rails, have been secured to the Vertical rails using Sheradised Steel screws. If Salt water gets into this area electrolytic action will occur and premature decay will set in. However I would have expected that Carea who designed and supplied the system would have considered this at the design stage. ?"

11. Two things are to be noted about this observation. First, the use of sheradised screws was only anticipated to pose a potential problem if salt water got into the area behind panels. Second, the author of the report said that he would have expected the designer to have considered this point. Although this is not a question of fact which I have to determine at this stage, it does seem to me that this falls short of a discovery of non-compliant work within the meaning of clause 8.7. Mr Hickey described it as "the identification of a potential problem" (Day 1/56), which is perhaps a fair description. The author of the report was, very prudently, raising a matter that he thought merited investigation - presumably by the architects. That seems to me to be what is suggested by the floating question mark at the end of the paragraph. In evidence Mr Redmond accepted that he would have seen this report and he said that it "would have been JLL's position to have confirmed with Leach Rhodes Walker and with AMEC that the items had been closed out" (Day 2/88). The evidence does not disclose what happened.
12. On 20 June 2007 Liverpool City Council issued its Completion Certificate under the Building Regulations in respect of the building described as Plot 5, Malmaison Hotel, Princes Dock, William Jessop Way, Liverpool 3, in which it said "so far as the authority has been able to ascertain the requirements of the Building Regulations are satisfied". At paragraph 74 of the Amended Particulars of Claim, AMEC said that it believed that by this time all the cladding tiles had been installed.
13. It is not disputed that a certificate of Making Good Defects issued under the Building Contract would amount to the issue of a DLC within the meaning of the BSA. However, there is an issue as to whether or not a document which was entitled Certificate of Making Good Defects and issued by JLL on 18 August 2008 satisfied the requirement of a DLC under the BSA or, alternatively, was a DLC in respect of the Apartments only.

The issues

14. The Stage 1 Issues that fall to be determined are the following:

a. Whether the certificate issued by JLL on 18 August 2008 constitutes a DLC within the meaning of clause 7.3(c) of the BSA in respect of both the Hotel and the Apartments?

b. What is the meaning of the words in clause 7.3(c) "all performance obligations and liabilities arising . . . and which arise or fall due for performance from and after Completion up until a defects liability ("DLC")"?

What type of obligations and liabilities are they? In particular:

Do they include obligations to carry out and complete incomplete/defective work which has not been certified as having achieved practical completion; or where such certification is subject to qualifications in relation to such specific work or defects?

What is the position where the work covered by qualifications was (purportedly or in fact) completed prior to Completion?

Alternatively, are MS's obligations limited to making good defects under the defects liability provisions of the relevant building contract?

c. Do the Assumed Liabilities include incomplete work and/or defects which MS:

i. Knows about (or, if different, is "made aware") within the period commencing from 27 July 2007 and ending on the date a DLC is issued; and/or

ii. Ought reasonably to know about within the period commencing from 27 July 2007 and ending on the date a DLC is issued;

even if the incomplete work and/or defects have not been the subject of a notice listing the incomplete work or defect by the Employer or Employer's Agent?

d. Are the Defendants fixed with actual or constructive knowledge of defects and/or incomplete works from Transferring Employees and/or sub-contractors for the purposes of the Assumed Liabilities in clause 7.3 and if so in what circumstances?

The principles to be applied

15. The classic formulation of the approach to be applied when seeking to ascertain the intentions of the parties to a contract was given by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, at 912, where he said:

"Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract."

16. Mr Leabeater reminded me of the observations of Lord Steyn in the earlier decision in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, at 771:

"In determining the meaning of the language of a commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on the niceties of language."

17. However, he referred me also to the observations of Lord Neuberger PSC in Arnold v Britton & others [2015] AC 1619, paragraph 17, where he said:

". . . the reliance placed in some cases on commercial common sense and surrounding circumstances (eg in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision."

I am in respectful agreement with this observation because judges - even specialist commercial judges - are not, perhaps, always best placed to reach conclusions in any particular situation as to what constitutes commercial common sense.

18. When considering the meaning of the relevant clause in the BSA and the arguments about the true scope of the certificate dated 18 August 2008 I shall keep all these observations firmly in mind.

The relevant terms of the Building Contract

19. For the purpose of the issues which arise at this stage it is necessary only to set out the substance of clauses 5.5, 16 and 8.7 of the Building Contract, together with paragraph 570 of the Employer's Requirements.
20. Clause 5.5 (as amended) is as follows:

"Before the commencement of the Defects Liability Period for a Section the Contractor shall without further charge to the Employer supply 4 copies of [as built drawings] together with detailed maintenance and operations manuals for all aspects of such Section of Works . . . together with the Health and Safety File for such Section and manufacturer's guarantees and (where applicable) unqualified commissioning certificates for all plant and equipment and proprietary materials incorporated in that section of the Works."

Practical Completion was defined in the Schedule of Amendments as follows:

"a state in which the Works or a Section are complete in all respects and free from apparent defects save for any minor items of incomplete work or minor defects the existence, completion or rectification of which would not, in the opinion of the Employer's Agent, prevent or interfere with the use . . . of the Works by the Employer . . . and the documents specified in clause 5.5 have been delivered to the Employer."

21. Clause 16 is as follows:

"16 Practical Completion and Defects Liability Period

16.1 When a Section has reached practical completion and complied with clause 5.5 the Employer shall give the Contractor a written statement to that effect, which statement shall not be unreasonably delayed or withheld, and practical completion of such Section shall be deemed for all the purposes of this Contract to have taken place on the day named in such statement...

16.2 Any defects, shrinkages or other faults which shall appear prior to the commencement of or in a Section within the Defects Liability Period for such Section and which are due to failure of the Contractor to comply with his obligations under this Contract… shall be specified by the Employer in a Schedule of Defects for such Section which he shall deliver to the Contractor as an instruction of the Employer not later than 14 days after expiration of the said Defects Liability Period, and within a reasonable time after receipt of such Schedule the defects, shrinkages and other faults therein specified shall be made good by the Contractor at no cost to the Employer unless the Employer otherwise instructs and if the Employer does so otherwise instruct then an appropriate deduction in respect of any such defects, shrinkages or other faults not made good shall be made from the Contract Sum.

16.3 Notwithstanding clause 16.2 the Employer may whenever he considers it necessary to do so, issue instructions requiring any defect, shrinkage or other fault which shall appear prior to the commencement of or in a Section within the Defects Liability Period for such Section and which is due to failure of the Contractor to comply with his obligations under this Contract… to be made good and the Contractor shall within a reasonable time after receipt of such instructions comply with the same at no cost to the Employer unless the Employer otherwise instructs and if the Employer does so otherwise instruct then an appropriate deduction in respect of any such defects, shrinkages or other faults not made good shall be made from the Contract Sum. Provided that no such instructions shall be issued after delivery of a Schedule of Defects for such Section or after 14 days from the expiration of the Defects Liability Period for such Section.

16.4 Where the Employer's Requirements specify a period or periods within which any defects notified to the Contractor shall be remedied, the Contractor shall comply with such requirements.

16.5 When any defects, shrinkages or other faults which the Employer may have required to be made good under clauses 16.2 or 16.3 shall have been made good he shall issue a notice to that effect, which notice shall not be unreasonably delayed or withheld, and completion of making good defects in the relevant Section shall be deemed for all purposes of this Contract to have taken place on the day named in such notice (the 'Notice of Completion of Making Good Defects').

16.6 When practical completion of all the Sections has been achieved… the Employer shall give the Contractor a written statement to that effect and Practical Completion of the Works shall for the purpose of clause 30.5.1 be deemed to have taken place on the day named in such statement."

22. Clause 8.7 of the Building Contract provides:

"If during the carrying out of the Works any work or any materials or any goods are discovered not to be in accordance with this contract, the Contractor shall, upon such discovery or being notified of such discovery, state in writing to the Employer the action which the Contractor will immediately take at no cost to the Employer to establish that there is no similar failure in work already executed or materials of goods already supplied…"

23. Paragraph 570 of the Employer's Requirements was as follows:

"570 PROPOSALS FOR RECTIFICATION OF DEFECTIVE WORK/PRODUCTS

As soon as possible after any part(s) of the work or any products are known to be not in accordance with the Contract, or appear that they may not be in accordance, submit proposals to CA for opening up, inspection, testing, making good, adjustment of the Contract Sum, or removal and re-execution.

Such proposals may be unacceptable to the CA and contrary instructions may be issued."

24. As Mr Hickey pointed out during his oral submissions, clause 8.7 and paragraph 570, which themselves have to be read together, have to be read also in the light of the definition of the Works, which was the subject of a specific amendment to the standard form. The revised definition of the Works in the Building Contract was as follows:

"the Works briefly described in the First recital and referred to in the Employers Requirements and the Contractor's Proposals and including any change made to those works in accordance with this Contract including any remaining work required to complete the provision of the construction phase Health and Safety Plan in a form acceptable to the Planning Supervisor and any making good of defects following Practical Completion."

(The words in italics were added by amendment)

In my view, this amendment extends the definition of the Works beyond practical completion so as to include the actual work of making good defects, whether done during the Defects Liability Period or subsequently pursuant to a schedule of defects issued pursuant to clause 16.2. But what the amendment does not do is to extend the obligation to notify imposed by clause 8.7 until the issue of a certificate of Making Good Defects irrespective of whether or not the contractor is actually carrying out work at the time. The discovery of the non-compliant work has to occur "during the carrying out of the Works". I can see no warrant for giving it some more expansive interpretation.

25. Paragraph 32 of the Amended Particulars of Claim contained the following assertion in relation to the meaning of clauses 16.2 and 16.3:

" 'Defects' in clauses 16.2 and 16.3 included omissions, in particular incomplete work, including (as a result of the amendments added to the standard clause) such matters that were apparent before the defects liability period commenced including matters that should have been notified by Morgan Sindall pursuant to its obligations under clause 8.7."

26. Whilst this paragraph implicitly refers to the obligation under clause 8.7 as extended by the amended definition of the Works, it is not an averment that appears to add anything to my understanding of the effect of clause 8.7 read together with the amended definition of the Works.

Clause 7.3(c) of the BSA

27. By clause 7.2 of the BSA Morgan Sindall was to be responsible for "Assumed Liabilities". Clause 7.3(c) of the BSA defined Assumed Liabilities in the following terms (I have substituted the words "Morgan Sindall" for the words "the Buyer or any member of the Buyer's Group" where they appear in the clause):

"7.3 In this Agreement, "Assumed Liabilities" means, in relation to the Business:

…

(c) all performance obligations and liabilities arising under or in respect of each of the Completed Contracts and which arise or fall due for performance from and after Completion up until a defects liability certificate ("DLC") is issued in respect thereof together with all liabilities arising from any such performance that is defective or from the acts or omissions of [Morgan Sindall] after Completion in connection with the defects of which [Morgan Sindall] is made aware to the extent [Morgan Sindall] knew or ought reasonably to have known such liability arising in respect of the period from Completion to the issue of a DLC."

28. In his skeleton argument Mr Leabeater split the clause up in the following way in order to facilitate its construction (although I have added the Roman numerals in [3]):

[1] all performance obligations and liabilities arising under or in respect of each of the Completed Contracts and which arise or fall due for performance from and after Completion up until a defects liability certificate ("DLC") is issued in respect thereof

together with all liabilities arising

[2] from any such performance that is defective or

[3] from (i) the acts or omissions of [MS] after Completion (ii) in connection with defects of which [MS] is made aware

to the extent [MS] knew or ought reasonably to have known of such liability arising in respect of the period from Completion to the issue of a DLC".

29. By way of a general observation, Mr Leabeater submitted that the first limb was primarily concerned with an obligation to put right defects created by AMEC, whereas the second and third limbs were concerned with liabilities that arose from things done or not done by Morgan Sindall. I agree with that observation. Mr Leabeater submitted also that the commercial rationale behind the arrangements under this clause was that Morgan Sindall would be required to make good defects arising during the Defects Liability Period in return for the release of the retention which would be payable to Morgan Sindall when the defects had been made good.
30. I propose to take each limb of the clause in turn.

The first limb

31. The "performance obligations and liabilities" referred to here are those arising under the Building Contract from 27 July 2007 until the issue of a certificate of Making Good Defects. That is common ground because they are obligations that fall due for performance after that date. In the case of both sections, this was a period that started to run during the Defects Liability Period.
32. However, it is not common ground that, in relation to any particular section, a Making Good Defects certificate for that section amounts to a DLC within the meaning of clause 7.3(c). Mr Hickey submits that the certificate dated 18 August 2008 cannot constitute a DLC because it was issued in relation to the Apartments only. Alternatively, he submits that, if it is a DLC, it is a DLC in respect of the Apartments alone. Either way, he submits that there is no DLC in respect of the Hotel. I did not understand Mr Leabeater to take any point on the difference between a "defects liability certificate" (DLC), referred to in clause 7.3, and a certificate of Making Good Defects within the meaning of the Building Contract. Morgan Sindall's case is that the certificate of 18 August 2008 met the requirements of a DLC because it covered both sections.
33. It is clear from clause 16.1 of the Building Contract that when a section has reached practical completion the Employer is to give the Contractor a written statement to that effect. Clause 16.2 requires the Contractor to make good any "defects, shrinkages and other faults" which shall appear prior to or within the Defects Liability Period for a section and which are specified in a notice given by the Employer within 14 days of the expiry of the Defects Liability Period. The making good of the defects is to be done within a reasonable time after receipt by the Contractor of the Schedule of Defects. The Defects Liability Period is defined in the Building Contract as

"the period named for each section in Appendix 1 (Sectional Completion) under the reference to clause 16.2"

In Appendix 1, against the reference to clause 16.2, the Defects Liability Period, it said:

"if none stated is 6 months from the day named in the Employer's statement as to practical completion of the Section."

In fact, a figure of 12 months was stated to apply to both the Hotel and the Apartments.

34. The Certificates of Sectional Completion for the Hotel and the Apartments, respectively, specified the expiry of the Defects can liability Period, which, in accordance with Appendix 1, was 12 months after the date of Sectional Completion recorded in the certificate. There can be no doubt, therefore, as to the date of expiry of the Defects Liability Period for each of the two sections.
35. Mr Hickey advanced in argument that at the time when the sectional completion certificates were issued for both the Hotel and the Apartments, neither had achieved practical completion as defined in the Building Contract. I was not impressed by this point: I am quite unable to see why the state of the work in each case did not meet the contractual standard when the relevant sectional completion certificate was issued. JLL obviously thought that the contractual definition of practical completion was met, and I can see no reason to disagree with its assessment. So far as the Hotel is concerned, the fact appears to be that Malmaison took it over and operated it from then onwards in the usual way. Any failure to fulfil the strict requirements of practical completion was waived. In any event, clause 16.1 makes it clear that practical completion of a section is deemed for all purposes to have taken place on the day named in the statement of sectional completion.
36. In the ordinary course of events, once a section has reached completion the Employer takes possession of it from the Contractor. The Contractor would then cease to work on that section unless required to go back to make good any defects. That will generally be after the expiry of the Defects Liability Period but, as clause 16.3 provides, the Employer may at any time prior to the expiry of the Defects Liability Period issue an instruction to the Contractor to make good a particular defect, in which case the Contractor must return to that section and, within a reasonable time, make good the defect in question. Thus to the extent that Mr Hickey emphasised the fact that during the Defects Liability Period Morgan Sindall was on site and would therefore have been aware of what took place during the Defects Liability Period, this was not in my view an entirely fair description of the position. Of course, during the Defects Liability Period for the Hotel Morgan Sindall would have been working on the Apartments and would therefore have been physically on the site of the building, but it would not have had any presence in the Hotel itself unless it had been specifically required to make good a particular defect following an instruction issued under clause 16.3.
37. However, it is clear that the certificates of Sectional Completion were issued subject to a list of incomplete items. In the case of the Hotel one of these was:

"All external cladding subject to completion, final clean and client snagging."

In my judgment, this referred to the need to finish off any sections of the cladding that had not been installed (perhaps, for example, where an external hoist had prevented the fixing of certain panels), to clean the cladding and to deal with any snagging items which had been identified by the Employer at the time of sectional completion. I do not consider that this reference to "all external cladding subject to completion" can be read as imposing a requirement to put right any latent defects in the construction of the cladding. It was, in my view, no more than a requirement to finish off any work that was obviously incomplete.

38. In the case of the Hotel, it would have been AMEC's responsibility to complete the outstanding work listed in the Certificate of Sectional Completion because by that time the relevant obligations under the BSA had not come into effect. It is also likely that, if AMEC had completed the outstanding work within a reasonable time, it would have been completed by 27 July 2007 and therefore before Morgan Sindall took over responsibility for the work during the Defects Liability Period. However, to the extent that any of the listed items had not been completed by AMEC, which was a continuing obligation to make them good, then by virtue of the first limb of clause 7.3(c) it would become Morgan Sindall's obligation to complete it.
39. But, apart from the obligation to complete any of the listed items that were still outstanding on 27 July 2007, Morgan Sindall would have no other obligations in respect of the Hotel until the end of the Defects Liability Period unless, in the meantime, the Employer issued an instruction to rectify a particular defect under clause 16.3. So far as I am aware, no such instruction was issued in relation to the Hotel, but I am not in a position to make a finding of fact to that effect.
40. Accordingly, so far as the Hotel is concerned, Morgan Sindall's only other obligation was to make good the defects that were identified in the schedule that was issued following the expiry of the Defects Liability Period. This schedule did not contain any references to the fixings of the cladding, although it did contain references to three cracked windows (items 14, 15 and 16), to a leaking window in the corner of a boudoir (item 17), and to leaks in one suite and two bedrooms (items 52, 61 and 64). It seems to me unlikely that any of these defects would have been caused by the use of inappropriate fixings, but this is not a question that arises for investigation at this stage.
41. Morgan Sindall's obligation was to make good these defects within a reasonable time of receipt of the schedule. In my judgment, there is nothing in either clause 16.2 or 16.3 of the Building Contract which imposes on the Contractor a freestanding obligation to make good (or to pay the cost of making good) defects which have appeared during or prior to the Defects Liability Period in the absence of an instruction from the employer to make good those defects.
42. However, in his skeleton argument Mr Hickey submitted, at paragraph 86:

". . . there is authority for the proposition that a contractor is required, during the defects liability period to rectify defects of which he is aware that ought to have precluded practical completion from being certified. In particular, in Pearce & High v Baxter, the employer sought to rely upon defects that had become apparent during the rectification period but which had not been notified to the contractor during, or at the end of, that period and which had first been notified in the employer's defence and counterclaim."

43. In support of that submission, Mr Hickey relied on the following passage in the judgment of Evans LJ in the Court of Appeal, at [1999] BLR 101, at pages 103-104:

"I can readily agree that this obligation [in clause 2.5 of the JCT Minor Works form to rectify defects at the contractors own cost] cannot be enforced against the contractor unless he is first given notice of the defect, whether by the employers or by the architect on their behalf. The giving of notice can therefore be regarded as a condition precedent to the employer's right to require compliance with the clause, though different considerations might arise if the contractor became aware of the defects from some other source. It seems to me that "defects [etc.] which appear" during the period has to be read objectively, as a description of those defects to which the clause applies. The defect must become apparent, meaning become patent rather than remain latent, during the notice period, regardless of whether any particular person has actual knowledge of it"

(Mr Hickey's emphasis)

44. In order to put these observations in context it is necessary to note what was said by Evans LJ in the immediately preceding paragraph of his judgment, which was this:

"Before considering these authorities, I shall describe the background against which clause 2.5 operates. The contractor's obligation is "with due diligence and in a good and workmanlike manner [to] carry out and complete the Works in accordance with the Contract documents using materials and workmanship of the quality and standards therein specified" (clause 1.1). When the architect issues his certificate of practical completion (clause 2.4), the contractor leaves the site. He has, apart from special arrangement, no more work to do. Clause 2.5 then provides for "defects . . . or other faults" which appear during the defects liability period which follows. The only express provisions are that these "shall be made good by the Contractor entirely at his own cost unless the Architect shall otherwise instruct."

45. In my view, in these passages of his judgment Evans LJ was considering the circumstances under which the contractor was under any obligation to carry out work by way of repair of defects after practical completion. The defects liability clause in that form of contract, clause 2.5, did not require any notice to the contractor, which may explain why Evans LJ said that the obligation on the contractor to repair a defect "cannot be enforced" against the contractor unless, by one means or another, he was made aware of it.
46. What I think Evans LJ was suggesting was that the absence of any notice of the defect given to the contractor was not of itself a condition precedent to his liability for the cost of repairing it if he was aware of it at the time. It is less clear whether or not he was saying that if the contractor became aware of a defect in the original work during or after the Defects Liability Period he was under an obligation to make it good without an instruction from the employer. He would, of course, be liable for breach of contract by virtue of the existence of the defect in the original work carried out prior to practical completion and therefore for the reasonable cost of repairing it. However, he may not be liable for breach of an obligation to make it good during or after the Defects Liability Period if he had not received an instruction to do so. This distinction may sound academic, but it would not be at all academic if the original breach had been committed outside the limitation period but the so-called obligation to make it good during or after the Defects Liability Period occurred within the limitation period.
47. However, whatever the correct interpretation of the passages in the judgment of Evans LJ, in my view the position is different in this case because both clauses 16.2 and 16.3 require there to be an instruction to make good the defect to be given to the contractor either during the Defects Liability Period or within 14 days after its expiry. I therefore reject the submission that, after sectional completion has taken place, the contractor was under some obligation under clause 16 to make good a defect in that section in the absence of an instruction to do so given under either clause 16.2 or 16.3 of the Building Contract: clause 16.2 states specifically that the Schedule of Defects is given to the contractor by way of an instruction, and clause 16.3 refers only to an obligation to make good following the issue of instructions.
48. However, this discussion so far overlooks the impact of clause 8.7 and the extended definition of the Works. Accordingly, for the reasons that I have already given, if, during the rectification of the items listed in the certificate of sectional completion or in the course of making good defects during or after the Defects Liability Period, non-compliant work was discovered (or Morgan Sindall was notified of such a discovery) then Morgan Sindall would be under an obligation to take the steps set out in clause 8.7 which would, in effect, include an obligation to make good the defects discovered or any defects discovered during subsequent opening up.
49. In my view the crucial ingredient here is that the relevant non-compliant work must be discovered whilst Morgan Sindall is carrying out the Works.
50. There was some discussion about the relevance of the distinction between latent and patent defects. I did not find this to be of much assistance. A patent defect is one that is there to be seen: sometimes it may be obvious, for example, a cracked window pane. Other defects may be apparent only to someone with particular expertise, such as an architect or an engineer. The latter may only be discovered if an inspection is carried out by a person with the relevant experience or expertise. Thus the distinction between a latent defect and a patent defect can be blurred.
51. It is far better, in my view, to stick to the words of the contract. In this respect the contract is clear: the touchstone in clause 7.3(c) of the BSA is actual discovery of the defect and such discovery being made known to Morgan Sindall. Although Mr Hickey submitted that liability would attach if Morgan Sindall ought to have discovered a defect, in my judgment that is not what clause 7.3(c) of the BSA or any provision of the Building Contract actually says. For the reasons that I give later in this judgment, under the third limb of clause 7.3(c) constructive knowledge is relevant only to the awareness that a liability might attach if something was or was not done by Morgan Sindall.
52. As I have already mentioned, whilst there are references in the documents to leaks into the building or to misaligned or damaged panels, none of these suggests, at least on its face, that anyone had discovered that the fixings of the panels were defective. The only reference to the fixings is in the report of 11 April 2007, to which I have already referred. This, of course, is an area which will require a factual enquiry of a type that does not form part of the exercise to be carried out at this stage. Here I am merely recording my impressions.
53. As I have already said in relation to the Hotel, and the same appears to apply to the Apartments, so far as I am aware no instruction in relation to the defects in the fixings of the cladding was issued under either clause 16.2 or 16.3 at any time prior to the expiry of a period ending 14 days after the Defects Liability Period for either section.
54. On 18 August 2008 JLL issued its certificate of Making Good Defects, the scope of which is in dispute. Neither party has been able to identify "the schedule of defects delivered to the Contractor", although it seems that schedules of defects in relation to the Apartments were issued from time to time.
55. However, it appears from the documents that from then onwards Morgan Sindall regarded the works as complete: for example, on 29 August 2008 Mr Snowdon, of Morgan Sindall, sent an e-mail to Mr Redmond of JLL, which was as follows:

"I confirm that the works outstanding to the apartments, agreed at our meeting on 13^th August, have been completed."

56. On 10 September 2008 Mr Dalziel of JLL sent the Final Payment Certificate No. 30 under cover of a letter in which he said:

"Please find enclosed the Final Payment Certificate No. 30 for the above Works carried out by Morgan Ashurst (formerly AMEC Construction Ltd). The Final Certificate corresponds with the signed Statement of Final Account dated 12 June 2008 in the sum of £17,250,000 and releases the 1.5% Retention held against the Apartments Section of the Works following the issue of the Making Good Defects Certificate."

57. So far as I am aware by the time this certificate was issued Morgan Sindall was no longer carrying out any works to the Hotel. Although AMEC contends that no certificate of Making Good Defects had been issued in respect of the Hotel, there is no material in the documents before the court on this hearing to suggest that Morgan Sindall was still carrying out work to the Hotel. Indeed, since the Final Payment Certificate had been issued it would be very surprising if Morgan Sindall was still on site: having been promised payment in full it had no reason to remain on site.
58. Accordingly, if it was the case that by about mid September 2008 Morgan Sindall was no longer carrying out any work on site, then it would have no further liability under clause 8.7. Further, for the reasons that I have now given, in the absence of any instruction issued under clause 16.2 or 16.3 to make good any defects in the cladding, or the discovery during the carrying out of the Works of defects in the fixings of the cladding, Morgan Sindall would be under no liability under the first limb of clause 7.3(c) in respect of the costs of making good any such defects.
59. In these circumstances, namely the absence of any discovery of the defects in the fixings of the cladding prior to mid September 2008 (if that was the case) and the absence of any instruction to make good any defects in the fixings to the cladding, the liability for the defects in those fixings would rest with AMEC (assuming that those defects were the result of a breach by AMEC prior to practical completion of the terms of the Building Contract).
60. I must emphasise once again that I am assuming at this stage that the facts are as I have indicated in the previous paragraph. On the material before the court at this hearing I am not in the position to make any conclusive findings of fact one way or the other.

The second limb

61. In the light of the conclusions that I have reached in relation to the first limb, this limb does not add anything. This limb would apply where, for example, pursuant to its obligations under the first limb, Morgan Sindall has attempted to make good a defect following an instruction given under clause 16.2 or 16.3 but has done so defectively. Neither party suggests that that was the case here.

The third limb

62. It is clear from the wording of this part of the clause that there can be no liability on Morgan Sindall in connection with defects unless it was made aware of those defects. In the absence of knowledge of the defects, no liability can arise under this limb of the clause. I reject Mr Hickey's submission that constructive knowledge of a defect would suffice. Mr Leabeater submitted that the words "is made aware" related back to the word "defects" that appeared a little earlier in the sentence, and that the words "knew or ought reasonably to have known" referred to constructive knowledge of a liability. This is a short point of construction and I am quite satisfied that Mr Leabeater's submission is correct.
63. The further precondition of liability is that Morgan Sindall knew or ought to have known that a failure to do something after being made aware of the defect would give rise to a liability on its part.
64. At the heart of this limb of the clause is the meaning of the phrase "liabilities arising from . . . acts or omissions of" Morgan Sindall. As Lord Wright pointed out in Grant v Australian Knitting Mills [1936] AC 85, at 103:

"It is essential in English law that the duty should be established: the mere fact that a man is injured by another's act gives in itself no cause of action: if the act is deliberate, the party injured will have no claim in law even though the injury is intentional so long as the other party is merely exercising a legal right: if the act involves a lack of due care, again no case of actionable negligence will arise unless the duty to be careful exists."

Accordingly, clause 7.3(c) must be concerned with acts or omissions that are legally relevant, in the sense that they constitute the breach of some duty. This part of the clause does not limit the duty to one imposed by the Building Contract, and I can see no reason why it should not extend to duty of care at common law. When I pressed Mr Hickey on this, I did not understand him to be advancing any wider submission. Thus the mere fact that, at some point in time after the expiry of both Defects Liability Periods, Morgan Sindall is made aware of a defect does not necessarily give rise to a duty to do anything. If there is a duty to do anything in the light of that knowledge, either it must be found in the terms of the Building Contract or it must be a duty that arises at common law. In my view clause 7.3(c) does not impose a freestanding liability on Morgan Sindall simply because at some time it becomes aware of a defect.

65. For the reasons that I have already given, under this form of Building Contract a contractor is under no obligation under clause 16 to make good a defect which appears after the expiry of the Defects Liability Period. He may have a duty to pay damages for breach of contract in carrying out non-compliant work in the first place, but that is a general secondary obligation arising as a consequence of a failure to fulfil a primary obligation under the Building Contract. So the contractor's omission to act upon being made aware of a defect which has appeared after expiry of the Defects Liability Period is not likely to be a legally relevant omission, unless the contractor is still carrying out the Works at the time (in which case the obligations under clause 8.7 may come into play). That is because, in general, there is no duty on the contractor in those circumstances to do anything.
66. The qualification to these general statements is that circumstances may exist which do impose a duty on the contractor to do something upon being made aware of a defect. For example, suppose that whilst the contractor is on site after the expiry of the Defects Liability Period at an inspection to see whether or not notified defects have been made good, he is told by the window cleaners that a cladding panel appears to be loose. A senior employee of the contractor then inspects the panel in question using the window cleaners' hoist. He discovers at once that there is a problem with the adequacy of the fixings and a distinct possibility that, if left unremedied, the panel may become loose and fall.
67. In those circumstances a court might need a great deal of persuasion to be satisfied that in such a situation the contractor did not owe a duty to someone to do something: in this case a duty owed to the building owner and, perhaps, to the public at large, to report the defect. However, the contractor would be under no duty to repair the defect: indeed, he would have no right to do so in the absence of the consent of the building owner. Accordingly, in this hypothetical situation the contractor would probably discharge any duty of care by reporting the existence of the defect to the building owner (or, perhaps, to a proper authority).
68. The position is much the same under clause 8.7, save that this clause continues to apply where the defect is discovered or its discovery brought to Morgan Sindall's attention during the carrying out of the Works.
69. If this is a correct analysis of the third limb of the clause, then it is consistent with and gives content to the proviso at the end of the clause. Reverting to my example, the contractor who fails to report the discovery of the defect with the fixings of the cladding panel would only be liable under clause 7.3(c) if he knew or ought reasonably to have known that his discovery of the defect required him to report it, with the consequent liability if he failed to do so. Construing the clause in this way protects the contractor from being held liable in circumstances where he was reasonably unaware of the existence of any duty to act and, therefore, that he might incur a liability if he failed to do so. I therefore disagree with Mr Hickey's submission that this creates an illogical distinction.
70. It is important to emphasise that this potential duty at common law to report the existence of a defect does not carry with it any obligation to make good that defect. But, as I have already said, subject to one point compliance with a duty to warn would have no effect on the contractor's liability for breach of contract in installing the panels with defective fixings in the first place. My qualification, which is purely for the sake of completeness, is in relation to quantum. By reporting the existence of a defect after completion of the Works, the contractor would in effect enable the employer to mitigate his loss (and therefore reduce the potential claim against the contractor) by carrying out remedial works sooner rather than later and also, one would hope, by taking steps to prevent the risk of any more panels falling and causing damage.

The events leading to the Making Good Defects Certificate of 18 August 2008

71. On 27 May 2008 Morgan Sindall and Malmaison agreed in principle the final account under the Building Contract in the sum of £17.25 million: this was evidenced by e-mail sent on 27 May 2008 from Mr Michael Bibring, of Malmaison, to Mr Steve Slater, of Morgan Sindall. In that e-mail Mr Slater said:

"Also, I hope our completion of defects on the hotel and substantial completion of the defects works on the flats will allow you to pay the balance without holding any retention. The team will remain on site dealing with current issues."

It appears from this that, at the time of reaching this agreement in principle, both parties understood may have that completion of defects on the Hotel had not been achieved. This is because the references to completion may have been referring to completion in the (near) future.

72. However, whether or not all concerned were aware that no certificate of Making Good Defects had been issued in respect of the Hotel becomes clear beyond any doubt from an e-mail sent a few days later, on 3 June 2008, from Mr Rodwell, of Malmaison, to, amongst others at JLL, Mr Redmond. In that e-mail Mr Rodwell wrote:

"Yes Michael has done the deal with Steve Slater, you will be glad to hear.

Please therefore produce a final account statement for signature, we won't release the monies until the drainage issue is sorted and the hotel certificate of making good of defects is issued.

We should withhold the retention on the apartments, Michael what did you agree with Steve here, if you let us all know then JLL can produce the appropriate statement."

73. On 13 June 2008 Morgan Sindall wrote to Malmaison in the following terms:

"Please find attached your statement of Final Account . . . stating that we agree to accept a sum of £17,250,000.00 in full and final settlement for the works and services executed under our contract to the Works to the Malmaison Liverpool duly signed on the understanding that:-

Retention of £88,080.65 + VAT to be released upon issue of the Defects Completion Certificate

Works outwith the agreed Scope of the Main Contract undertaken by Morgan Ashurst for Malmaison (Liverpool) Ltd (eg. water drainage repairs, extra bollards and silicone to pods) are valued and paid for separately to this agreement."

74. On 26 June 2008 Mr Herbie Boyle, representing the property group that owned many of the apartments, sent an e-mail to Malmaison, with the subject "Emailing: apartments at malmaison". It was in the following terms:

"Gentlemen

Please see the attached letter.

I am fed up with the ongoing problems that we are having. I would like to arrange a meeting about these problems before Jones Lang Lasalle sign off the defects period. Can we meet early next week in London?

In addition to the enclosed note, I have just heard today that flat 36 has been flooded due to balcony leaks from the penthouse floors above. This is an ongoing problem and can only be solved by the balcony floors being sealed.

We are suffering ongoing losses with tenants having to be relocated while the flooding issue is dealt with. I have not been able to let the penthouses because of ongoing issues like this and I am now claiming loss of rent from either MWB or from the retention monies held from Morgan Ashurst.

I look forward to hearing from you. This is very urgent."

75. On 10 July 2008 Mr Duncan Gaunt, of Morgan Sindall, sent an internal e-mail to various other employees of Morgan Sindall which was in the following terms:

"As it's been nearly 12 months since the business sale, all the Schedule 16 projects should in theory be through the defects period. As you know, once we have the DLC certificate, liability reverts back to AMEC.

To make sure we return to AMEC what is rightfully theirs, could you please by 17^th July forward copies of all the DLC certificates we have in relation to the Schedule 16 projects. If we have not yet achieved completion of defects, could you advise the likely date for completion instead."

76. On 23 July 2008 Mr Stuart Snowdon, of Morgan Sindall, wrote to Malmaison giving a brief update on the progress of the repairs to the balconies of the apartments. In his e-mail he indicated that all the proposed repairs would be completed by 8 August 2008.
77. On 30 July 2008 there was a meeting at Liverpool to review the 12 months defect process in relation to the apartments. In an e-mail sent to those attending, together with representatives of Malmaison, Mr Redmond noted that it had been agreed by all present that, amongst other things, there would be a "completion of defects period sign off meeting on Monday 11^th August 2008 @ 10:00".
78. On 4 August 2008 Mr Redmond sent an e-mail to Mr Rodwell, of Malmaison, headed "Re Malmaison Apartments Liverpool - 12 Months Review" which was in the following terms:

"Please see attached email issued last week relating to progress and open issues, with Monday 11^th August scheduled for final sign off meeting at Princess dock, the main issues which are still rumbling around which JLL cant comment upon is Herbie's insistence on recovering lost revenue from someone and altering the layout of the carpark."

79. On 14 August 2008 Mr Snowdon sent an e-mail to Mr Redmond, headed "Malmaison Liverpool, 12 Months Defect Inspection, Apartments" in which he noted various points arising from an inspection previous day and concluded:

"Look forward to issue of Making Good Defects Certificate on Monday 18^th August."

80. On 21 August 2008 Mr Redmond intended to send to Mr Dalziel, by an e-mail sent at 9:47 pm with a copy to Mr Stuart Snowdon of Morgan Sindall, a draft of the certificate with a request to "fill in the contractual bits highlighted on the attached, certificate, which I do not have access to at present". The "Subject" line of the e-mail said:

"Malmaison Liverpool - Apartments Making Good Defect Certificate."

The e-mail continued with some banter which suggested that Mr Redmond thought that the issue of this certificate would effectively be the end of the job.

81. Mr Redmond said in evidence that he was very careful about the wording of the subject line of his e-mails so that recipients would know exactly what they were about. I accept this evidence because I thought it was consistent with the impression that I formed of him. I do not consider that any recipient of this message who was familiar with the project would have assumed that the inclusion of the word "Apartments" in the subject line of the e-mail was some sort of oversight.
82. In fact, in error the draft certificate was not attached by Mr Redmond, as Mr Snowdon pointed out the following day. Mr Redmond then re-sent it – it was agreed that this was on 29 August 2008 (although I suspect that a relevant e-mail may be missing, nothing turns on the precise date).
83. Mr Redmond explained in evidence that the Making Good Defects Certificate was one of a suite of templates in the JLL document library. This appears to be confirmed by the footer on the draft sent to Mr Dalziel, which was: "13.9 - Making Good Defects Certificate.doc."
84. The material parts of the certificate were in the form set out below, save that the Jones Lang LaSalle name and logo appeared in the top left-hand corner and that at the foot of the document was a distribution list, which included boxes, which were to be ticked where applicable, for the Contractor, the Funding Surveyor, the Purchaser and the Employer.

		Making Good Defects Certificate
Issued by:	Jones Lang LaSalle 82 King Street Manchester M2 4WQ	Job reference:	A
Employer:	MWB 1 West Garden Place Kendal Street London W2 2AQ	Certificate number:	001
Contractor:	Morgan Ashurst Amec House Yarm Road Darlington DL1 4JN	Date of issue:	18.08.08

 

Works:	Construction of 48 apartments, common areas, associated plant, passenger lifts and car parking to agreed specifications
Situated at:	The Malmaison Development, Princess Dock, Liverpool
Contract dated:	TBA (JCT 98/05 With/Without Quantities, with Contractor's Designed Portion and Sectional Completion and Amendments 1-???

 

Under the terms of the above-mentioned Contract.   I/We hereby certify that the defects, shrinkages and other faults specified in the schedule of defects delivered to the Contractor as an instruction have in my/our opinion be made good.   This Certificate refers to:   *1.  The Works described in the Certificate of Practical Completion Serial no. 001 dated____________________________   *2.  The Works described in the Certificate of Partial Possession of a relevant part of the works. Serial no.______________ dated__________________________

*For the avoidance or removal of doubt it is mutually declared, acknowledged and agreed that the final certificate or any other certificate issued by the Employer's Agent is not intended to and shall not operate as conclusive evidence that any of the work or materials or goods or workmanship conforms to description or is in accordance with the contract.

Signed: ___________________________ On behalf of Jones Lang LaSalle

85. The two parts highlighted are those that Mr Redmond left to Mr Dalziel to complete. When Mr Dalziel completed the certificate he changed the wording following the words "This Certificate refers to:" so that it read as follows:

This Certificate refers to:   *1.  The Works described in the Certificate of Practical Completion   Certificate No. 01 dated 26 January 2007   Certificate No. 02 dated 22 June 2007   *2.  The Works described in the Certificate of Partial Possession of a relevant part of the works. Serial no.______________ dated__________________________

The first certificate related to the Hotel and the second to the Apartments. At some point, although it is not clear whether it was done by Mr Redmond or by Dalziel, the footer was changed so that it read: "Malmaison Liverpool - Making Good Apartment Defects Certificate 18 08 08.doc". In addition, "I/We" and "my/our" in the operative paragraph have been changed in the final version, presumably by Mr Redmond, to "We" and "our", respectively (those changes did not appear in the version as amended by Mr Dalziel).

86. On 3 September 2008 Mr Redmond sent the Certificate of Making Good Defects to Mr Snowdon of Morgan Sindall, with copies to Mr Stephen Rodwell, of Malmaison, and Mr Dalziel and a Mr Kelly of JLL. The subject line of the e-mail read: "Princess Dock Apartments - Certificate of Making Good Defects" and the text of the e-mail was as follows:

"Stuart

Please find attached the certificate of making good defects for the Princess Dock apartments."

87. Great importance is attached by both sides to the form of this certificate and, by AMEC, to the terms of the covering e-mail. AMEC's case is that, when properly read, the scope of the certificate must be limited to the Works described, namely the construction of the 48 apartments, etc. By contrast, Morgan Sindall contends that the operative part of the certificate is the part beginning with the words "We hereby certify that . . .". Since Mr Dalziel expressly included a reference to both certificates of sectional completion, Morgan Sindall contends that the subject matter of the certificate must be the works that were the subject of those two certificates. In other words, that it is a certificate of Making Good Defects for the entire works.
88. As I have already mentioned, both counsel have reminded me that the document must be construed as it would be understood by a reasonable person in the position of the parties who was in possession of the knowledge that the parties would reasonably be expected to possess. The subjective intention of either of those who put the document together is, of course, irrelevant.
89. For these purposes the parties are the parties to the contract, namely Malmaison and Morgan Sindall (now, by virtue of the BSA, standing in the shoes of AMEC). Mr Leabeater submitted that the document must be construed also as it would be understood by those who might be interested in or affected by it: for example, the funding surveyor who was one of those in respect of which the box was ticked on the distribution list. In fact, the funding surveyor would not himself be in any way affected by the certificate, although the party that he represented may well have been. The point lying behind this submission was that the funding surveyor, and others in his position, would very probably see the certificate only and not any covering e-mail under which it was sent to Morgan Sindall.
90. In my view, this is clearly a contractual document and so, as Lord Steyn said in the passage quoted above, it must be construed in the light of the principles that apply to the construction of the contract itself. That requires the court to have regard to the reasonable man in the position of the parties, not a reasonable man representing a party who may have some financial interest in the outcome of the contract.
91. I consider that an appropriately informed reasonable person in the position of the parties at the time when the certificate of 18 August 2008 was issued could be expected to know (or not know) the following:

(1) Although the Works were split into two sections - the Hotel and the Apartments - there was only one building. There was only one set of foundations, one frame and one type of external cladding for the building.

(2) That the external skin of the building as a whole would have to be reasonably complete in order that the part occupied by the Hotel would be sufficiently weathertight to enable the Hotel to open for business. Further, the plant in the plant room on the 12^th floor, which served both the Hotel and the Apartments, would have to be complete and functioning.

(3) That the City Council had issued its completion certificate in June 2007.

(4) It would not be obvious, perhaps, to the reasonable man whether the cladding would be the subject of the sectional completion certificate issued in respect of the Hotel or that issued in respect of the Apartments. There was nothing in the Building Contract which, as it were, allocated the cladding to one section rather than the other.

(5) As between the parties to the contract, a certificate of making good defects would be of particular importance to the contractor, because it would signal the end of his on site obligations (but possibly not off site obligations, such as the obligation to provide as built drawings, operational manuals, and the like).

(6) If a certificate of making good defects was not issued when it should have been, the party best placed to press for its issue would undoubtedly be Morgan Sindall.

(7) The defects that had been the subject of discussions and remedial work by Morgan Sindall during the six weeks or so leading up to the issue of the certificate of 18 August 2008 were defects relating to the Apartments.

(8) Malmaison released the retention relating to the Hotel on 30 June 2008 and, at Morgan Sindall's request, released the final moiety of the retention shortly after the issue of the certificate dated 18 August 2008.

92. The subject line of each of Mr Redmond's e-mails of 21 August, 29 August and 3 September 2008 clearly described the certificate attached (or which should have been attached) as relating to the Apartments. Mr Snowdon's e-mail of 29 August 2008 to Mr Redmond also referred to "Liverpool Malmaison, Apartments". On the basis of these documents, no one in the position of Malmaison (through JLL) or Morgan Sindall could have thought that the certificate attached to the relevant e-mails related to anything but the Apartments, and to the Apartments alone.
93. As to the certificate itself, the limited description of the Works, namely "Construction of 48 apartments, common areas, associated, passenger lifts and car parking to agreed specifications" was unambiguous and could not be reasonably understood as relating to the Hotel. However, Mr Leabeater's point that the operative part of the certificate is that following the words "We hereby certify . . ." is a powerful one. The question becomes whether the reasonable man in possession of the knowledge available to the parties, who must therefore be taken to know that the first certificate related to the Hotel and the second to the Apartments, would understand the reference to both sectional completion certificates as representing the entirety of the Works, or, by contrast, he would think that both certificates had been included because parts of the Works were common to both sections.
94. If the certificate stood alone, I might have been tempted to favour the approach contended for by Morgan Sindall. However, when the certificate was originally produced, both in draft and in its final version, it was sent (or was meant to be sent) to Morgan Sindall by JLL (acting for Malmaison) under cover of an e-mail which stated clearly that it related to the Apartments. Mr Leabeater submitted that the certificate should be construed in isolation from any of the e-mails under which it was sent out, either in its final form or in draft. I do not agree. The question is how the certificate would be understood by the parties to the contract: that is because it is a contractual document. It is not an announcement that is intended for consumption by the public at large or an identified group of readers, such as shareholders. It is a document that is intended to regulate the position as between the employer and the contractor, and nothing more.
95. Given that the certificate represented the achievement of an important milestone in the contract, to the benefit of the contractor, I see no reason why the court should strain to construe it in Morgan Sindall's favour. After all, nothing could have been simpler than to query the scope of the certificate with JLL when it was issued - but Morgan Sindall did not do this.
96. Whilst it appears to be the case that both parties treated this certificate as representing the conclusion of the Works, it seems to me likely that this was simply because by August 2008 those acting for both parties at the time had overlooked the fact that no certificate of Making Good Defects had been issued for the Hotel (although that had been mentioned earlier). However, that is not a good reason for construing the certificate of 18 August 2008 in a manner that would fill the gap.
97. In reaching this conclusion, I have not taken into account the evidence given by Mr Redmond as to what he intended when he prepared the draft certificate and subsequently signed the final certificate after it had been amended by Mr Dalziel. That evidence, as would have been any similar evidence from Mr Dalziel, is not a permissible aid to the construction of the contract.
98. Mr Hickey had a further argument based on the fact that no certificate of practical completion pursuant to clause 16.6 of the Building Contract was ever issued. Mr Leabeater submitted, and I agree, that the practical completion certificate to be issued under clause 16.6 is relevant only because it triggers the six month period within which the contractor must submit his final account. So far as I can see it has no material reference to the issues in this case.

Knowledge of former employees of AMEC

99. Since a company has no mind it can possess knowledge only through its employees. Whether and in what circumstances the knowledge of a particular employee acquired in the course of his employment can be imputed to the company that employs him is a question of fact and degree in every case. In some circumstances perhaps only the knowledge of the managing director will do, in other circumstances the knowledge of a site foreman may suffice. Much depends on the reason why the employee in question has the knowledge and what use he would be expected to make of it in the ordinary course of his duties: see, for example, the discussion of this topic by Lord Hoffmann in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500.
100. I do not have sufficient material before me to make findings of fact as to precisely which employees of AMEC who were subsequently transferred to Morgan Sindall under the terms of the BSA might have possessed knowledge of relevant defects that would subsequently be imputed to Morgan Sindall. Mr Hickey, rightly, did not pursue the contention that the knowledge of a subcontractor could be imputed to Morgan Sindall.
101. Mr Hickey suggested the following individuals: Mr Adam Lea, the senior quantity surveyor on the project; Mr Paul Oliver, the site manager; Mr Steve Slater, the operations director; and Mr Snowdon, the operations manager. Although Mr Leabeater was not prepared to agree with this list, I did not detect very strong dissent. Both parties appear to accept that knowledge of senior employees can be imputed to their employers depending on the circumstances and, in particular, the type of knowledge in question. In principle, I would have thought that the knowledge of any of those identified by Mr Hickey about the discovery of defects during the course of their employment with AMEC would - absent special circumstances - be capable of being imputed to Morgan Sindall.
102. However, Mr Leabeater had another point. He submitted that the words "made aware" in clause 7.3(c) imported a requirement that the person transferred must communicate that knowledge to another employee of Morgan Sindall. Subject to one qualification, I reject that submission. I can see no reason why Morgan Sindall should not be "made aware" of something if they take on a new employee who has the relevant knowledge.
103. I have already concluded that clause 7.3(c) does not impose liability on Morgan Sindall unless, first, it knows of the defect in question and, second, it ought reasonably to have known that knowledge of the defect would give rise to liability if it took no action in the light of it. It would seem strange if the knowledge of an employee of the existence of a defect was to be imputed to Morgan Sindall, so that its acts or omissions in the light of that knowledge might give rise to liability, if the employee in question did not reasonably appreciate that knowledge of the defect by Morgan Sindall could give rise to liability. In these circumstances it seems to me that the knowledge possessed by a transferred employee must be not only knowledge of the existence of the defect but also knowledge acquired in circumstances such that the employee ought reasonably to know that if Morgan Sindall took no action in the light of it, it might incur a liability.

My answers to the preliminary issues

104. Whether or not Morgan Sindall is under a liability for a particular defect must be considered in the light of this judgment as a whole. I do not find it easy to mould my conclusions to some of the issues, but I will do my best in the following paragraphs.

Issue (a)

105. The certificate issued by JLL on 18 August 2008 is a certificate of Making Good Defects for the Apartments only. There appears to have been no corresponding certificate for the Hotel.

Issue (b)

106. This is: "What is the meaning of the words in clause 7.3(c) "all performance obligations and liabilities arising . . . and which arise or fall due for performance from and after Completion up until a defects liability ("DLC")"? My answers are as follows.
107. In general terms, see paragraphs 31 to 61 above. Taking the subsidiary questions that I have set out in the three bullet points, my conclusions can be summarised as follows:

Do they include obligations to carry out and complete incomplete/defective work which has not been certified as having achieved practical completion; or where such certification is subject to qualifications in relation to such specific work or defects?

Yes, but only if the work had been identified as outstanding at the time of sectional completion and had not since then been rectified by AMEC prior to 27 July 2007.

What is the position where the work covered by qualifications was (purportedly or in fact) completed prior to Completion?

Morgan Sindall can have no liability to do anything prior to 27 July 2007. If the work subject to a qualification in a sectional completion certificate remained unrectified as at 27 July 2007, Morgan Sindall came under a duty to complete it. If the defective work was rectified prior to 27 July 2007, Morgan Sindall has no liability.

Alternatively, are MS's obligations limited to making good defects under the defects liability provisions of the relevant building contract?

Morgan Sindall was obliged after 27 July 2007 to make good defects under the defects liability provisions of the Building Contract. Further, whilst it was carrying out the rectification of any defects, which formed part of the carrying out of the Works, Morgan Sindall was under the duty imposed by clause 8.7. Otherwise it has no liability.

Issue (c)

108. This is: "Do the Assumed Liabilities include incomplete work and/or defects which MS either knew about, was made aware of, or ought reasonably to have known about, within the period commencing 27 July 2007 and ending on the date when a DLC was issued". My answers are as follows.
109. (i): if, after 27 July 2007, a defect was discovered (or Morgan Sindall was informed of its discovery) whilst Morgan Sindall was carrying out the Works, which included making good defects, then Morgan Sindall came under the obligations imposed by clause 8.7 of the Building Contract. It seems likely (although I make no finding of fact about it) that Morgan Sindall stopped carrying out the Works by mid-September 2008 (at the latest). If that was the case, any defect discovered thereafter is not the responsibility of Morgan Sindall.
110. (ii): Morgan Sindall is not liable to rectify any defect of whose discovery it was unaware even if it ought reasonably to have known of it. Actual knowledge of the existence of a defect is a precondition of any liability under clause 7.3(c).
111. For the avoidance of doubt, I should mention that if a defect was discovered prior to 27 July 2007 and AMEC failed to take the step required by clause 8.7, namely to tell Malmaison of the action which it proposed to take to ensure that there were no similar failures in the Works, I do not consider that that failure imposed a continuing obligation that became, as it were, inherited by Morgan Sindall after 27 July 2007. This is because it was not a performance obligation that fell due for performance after 27 July 2007.

Issue (d)

112. If a defect was discovered during the carrying out of the Works and that was known to a member of AMEC's management, such knowledge would become the knowledge of Morgan Sindall if that employee was subsequently transferred to Morgan Sindall (but only if that employee was aware at the time of transfer - in other words, he had not forgotten - of the discovery of the defect and did not believe that it had been rectified). However, for the knowledge of that employee to be imputed to Morgan Sindall under clause 7.3(c), the employee in question ought reasonably to appreciate that if Morgan Sindall took no action in the light of that knowledge it might incur a liability. The knowledge of a sub-contractor is not relevant.
113. Whether or not an employee is to be regarded as a member of AMEC's management will depend on all the circumstances, including the nature of the knowledge and whether the employee would be expected to do anything that knowledge. In general, I would not expect knowledge of anyone below the level of the site manager to be knowledge that should be imputed to Morgan Sindall.

AMEC's Further Note

114. When I handed down this judgment in draft I indicated that I would hear counsel on any points with which I had omitted to deal. This prompted AMEC to make further submissions to deal with what it described as the issues of agency and duty to warn, which AMEC indicated that it had raised in its closing submissions. Those points were summarised as follows:

"AMEC's case on these points is that: (1) Morgan Sindall was AMEC's agent following Completion under the BSA and was therefore obliged to notify AMEC of defects of which it was or ought to have been aware; and (2) Morgan Sindall was under an implied duty to warn Malmaison of defects which it was aware or ought to have been aware which risked causing personal injury or damage to property if not rectified."

115. Neither point was raised in AMEC's opening submissions for the Preliminary Issues, which is hardly surprising since in my view neither point was covered by those issues. However, the question of whether there was any liability under the BSA in respect of defects about which Morgan Sindall ought reasonably to have been aware was clearly within the Preliminary Issues. That question was answered at paragraphs 51 and 62, and 108-110, of the judgment.
116. In response, Morgan Sindall submits that there is no pleaded case that Morgan Sindall acted as AMEC's agent and that it is too late to introduce such a case now. So far as the Preliminary Issues are concerned, I accept that submission. In any event, for the reasons that I give below I regard it as a point that is not capable of advancing AMEC's case.

The relevance of the agency relationship

117. At paragraph 7 of its Further Note AMEC submits baldly that Morgan Sindall's duties as AMEC's agent "required Morgan Sindall to inform AMEC of significant defects of which it was or ought to have been aware following Completion under the BSA" (my emphasis). No authority is cited for the proposition that this duty extended to informing AMEC of significant defects of which Morgan Sindall ought to have been aware. That is hardly surprisingly because the proposition seems to me to be obviously wrong: a person can inform another of a fact which he knows, but he cannot inform another of something which he does not know, even if he ought to have known of it. I cannot see how an agent's duty of good faith could be translated into a duty to discover defects of which the agent was unaware.^[1] But, irrespective of this, I concluded in the judgment that there is no liability on Morgan Sindall under clause 7.3(c) of the BSA in respect of defects unless it was made aware of those defects (see paragraph 62). The duty now asserted by AMEC is inconsistent with this conclusion.
118. At paragraph 8 of its Further Note AMEC submits that:

"In addition to its obligations to AMEC pursuant to its agency, as part of the "performance obligations and liabilities" under clause 7.3(c), Morgan Sindall was also under a duty to inform or warn Malmaison of significant defects of which Morgan Sindall knew or ought to have known."

(My emphasis)

This is simply a restatement of a proposition that I have already rejected: see, for example, paragraph 51 of the judgment.

119. AMEC relies on a decision of the Court of Appeal in Plant Construction plc v Clive Adams Associates [2000] BLR 137, but in that case the question of the situation where the contractor did not know, but arguably ought to have known, of a dangerous design was specifically left undecided. However, I have held that the liability under clause 7.3(c) is limited to defects of which Morgan Sindall was made aware, so this decision is of no relevance.
120. Another decision of the Court of Appeal relied on by AMEC, Stag Line Ltd v Tyne Shiprepair Group Ltd (the "Zinnia") [1984] 2 Lloyd's Rep 211, but that was a case where there was actual knowledge. It is no authority for the proposition that the contractor would be liable for any failure to warn about a defect of which he was unaware, even though he should have known of it.
121. In its Further Note AMEC repeatedly elides actual and constructive knowledge as if the two always went together - this is another example of it. In my view, that is not only wrong in principle, but also it wholly ignores the fact - explained at length in the draft judgment - that clause 7.3(c) applies only to defects of which Morgan Sindall is made aware. It is trite law that obligations cannot be found to exist as a matter of interpretation, or be implied, if they are in conflict with the express terms of the contract.
122. For these reasons, I consider that there is no substance in the points made in AMEC's Further Note.

The form of relief and costs

123. I will hear counsel also on any questions arising out of the form of relief and costs of the hearing.

Note 1    I understood Mr Hickey to make exactly the same point in his closing submissions (at Day 3/109), when he said: "Of course, I am not saying they would have to tell us unless they know about it, because obviously if they don’t know about it they can’t tell us".    [Back]