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

1)        INTRODUCTION

1.         These proceedings concern development works at Bodmin Jail in Cornwall.  Bodmin Jail was constructed during the 18^th century and operated as a prison until 1927 after which it fell into disrepair.

2.         The Development Works include:

-           The construction of a hotel;

-           The construction of a visitor attraction, one part of which is known as the Dark Walk;

-           The construction of a hospitality venue.

          These proceedings concern the Dark Walk attraction only.

3.         The Claimant changed its name to Tudor Hotels Collection Ltd on the 8^th March 2022 but both parties have continued to refer to the Claimant as Mallino.  Mallino was the developer and employer for the construction of the Dark Walk.   The Defendant (“EDC”) entered into a contract executed as a Deed dated the 24^th April 2018 based upon the JCT Standard Building Contract Without Quantities Form 2016 Edition (The Contract).

4.         In the First Recital of the Contract, it was stated that:

“the Employer wishes to have the following work carried out:

The expansion of existing visitor attraction (new build works only). The Dark Walk Attraction contract consists of constructing a new building to extend the existing visitor attraction. This includes the installation of attraction associated external works and drainage.

at

Bodmin Jail. Berrycoombe Rd, Bodmin, PL31 2NR (“the Works”)

and has had drawings and either a specification or work schedules prepared which show and describe the work to be done;”

5.         The Contract Sum was £3,874,017.22.  However, the work was broken down into three sections as set out in the Contract Particulars as follows:

6.         On the same date the parties entered into a further contract (“The Variation Contract”) which at clause 2 headed “Variations of Contract” stated that:

“2.    Variation of Contract

2.1    With the agreement of the Contactor which is hereby given the Employer shall issue tenders for the works comprised in the Development save for the demolition works in respect thereto and shall invite the Contractor to tender for the same.

2.2    Following receipt of tenders issued pursuant to the agreement in clause 2.1 above the Employer shall award and enter into a contract for the whole of the works comprised in the Development and the Contract (New Contract).

2.3    In the event that the New Contract is awarded to and entered into with the Contractor then the Contract shall be deemed terminated and the Contractor shall proceed with the works under the terms of the New Contract. In which event: all payments made to the Contractor by the Employer under the Contract shall be deemed paid under the New Contract; All works carried out under the Contract shall be deemed carried out under the New Contract; All obligations owed by one party to the other under the Contract as at the time of termination shall be deemed owed by such party to the other under the New Contract.

2.4    In the event that the New Contract is awarded to and entered into with a contractor other than the Contractor (New Contractor) then at the option of the Employer, the Employer may by notice in writing served on the Contractor no later than 7 days after entering into the contract with the New Contractor either terminate the Contractor's employment under the Contract or novate the Contract to the New Contractor.

2.5    In the event that the Contract is terminated then: The Employer shall within 21 days pay to the Contractor all sums due under the Contract for the work undertaken by the Contractor together with the Contractor's reasonable costs of demobilisation; The Contractor shall not be entitled to loss of profit or overhead contribution on works not completed under the contract.

2.6    In the event that the Employer novates the Contract then: The novation shall be deemed as if entered into between the Contractor and New Contractor ab initio; The Employer shall procure that the New Contractor accepts the Contract as novated to the New Contractor and is bound to the Contractor in a relationship of main contractor and Trade Contractor and accepts that the terms of the Contract are deemed varied to reflect that relationship with the New Contractor assuming roles within the Contract normally undertaken by the Main Contractor and relieving the Contractor of the roles and obligations under the Contract usually performed by a main contractor; The Contract shall be deemed a trade contract for the demolition works only and not a main contract; the works to be performed under the Contract shall be limited to the demolition works; the obligations of the Contractor for all matters associated with a main contractor shall forthwith cease and be deemed included in the New Contract and the Contractor's role shall be limited to that of a trade contractor with no obligations for matters, without limitation, such as CDM, design, coordination, programming; Not withstanding that the Contract shall be deemed novated ab ignitio [sic], the Employer shall within 21 days of entering into the New Contract pay the Contractor for all work undertaken by the Contractor up to the date of the Employer entering into the New Contract; the Employer guarantees to pay to the Contractor any sum due to the Contractor from the New Contractor which is not paid by reason of the insolvency of the New Contractor.”

7.         EDC carried out the Section 1 and Section 2 works.  However, Mallino proceeded to appoint another contractor PIN-CM to carry out the Section 3 works without inviting EDC to re-tender or indeed without undertaking any competitive re-tendering process at all.  This dispute concerns EDC’s alleged entitlement to recover its lost profit and overhead contribution suffered as a result of Mallino’s breach of clause 2 of the Variation Contract.

8.         The dispute has already been the subject of two adjudications.  In those adjudications Mallino denied that it had breached its obligations to EDC and denied that EDC was entitled to recover any lost profit or overhead contribution.  The Adjudicator found in EDC’s favour and awarded EDC a proportion of its claimed losses.

9.         In these proceedings, Mallino now admits that it did breach its obligations when it failed to invite EDC to re-tender for the Section 3 works. Notwithstanding that admission, it alleges that the Adjudicator was wrong as a matter of law to award EDC any loss of profit or overheads. In short, Mallino says that EDC's losses should be assessed by reference to Mallino's 'minimum contractual obligation', which would have entitled it to terminate EDC's employment without compensating it for lost profit or overheads. Mallino also says that, even if it had re-tendered the Section 3 works, it would not have selected EDC in any event.

2)           CHRONOLOGY OF EVENTS

10.      The chronology of events I find relevant to the issues raised in these proceedings is as follows:

3)           THE AGREED FACTS

11.      Following the transfer to the Part 7 procedure, Mallino did not seek leave to amend its Particulars of Claim and has continued to accept that it is bound by certain findings made in the Adjudicator’s Decisions.

12.      The following matters remain agreed in these proceedings :

.1       the Building Contract and the Variation Contract constitute a single overarching contract;

.2       Mallino breached clause 2 of the Variation Contract when it failed to re-tender its Section 3 Works;

.3       the purported termination notice dated 22^nd November 2019 was ineffective because, in breach of clause 2.4 of the Variation Contract, it was issued more than 7 days after Mallino appointed PIN-CM to undertake the Works;

.4       EDC was entitled to recover the value of the work carried out but not yet paid and its reasonable demobilisation costs; and

.5       EDC would have been able to carry out the Section 3 Works if it had been appointed.

13.      The fifth proposition is controversial but I accept the submissions on this point advanced by Emma Healiss for the Defendant and find that the fifth proposition is an agreed fact.   If I may summarise the position on the pleadings:

.1       PoC, para. 27 states:

“(a)        Loss of a chance is not available as a remedy because, on the balance of probabilities, EDC would not have been able to perform the Contract in any event.  This is a question of fact and Mallino accepts the Adjudicator’s decision is temporarily binding;”

However, the Adjudicator held that EDC would have been able to carry out the Section 3 works if appointed, see paragraph 5.24 of the Decision in the Second Adjudication where he states:

“… I am satisfied that had it been successful in procuring the contract, EDC would have been able to assemble the appropriate resources and skills to perform the contract”

PoC, para. 27 further states:

“(b)   There is no loss of a chance as a matter of fact (because EDC would not have been appointed).  This is a question of fact and Mallino accepts that the Adjudicator’s decision is temporarily binding.

However, the Adjudicator held that EDC would not have been excluded at the pre-qualification stage, see paragraph 5.20 of the Decision in the Second Adjudication where he states:

“I  reject the submission that EDC would have been excluded at the pre-qualification stage.”

These are two separate points:

-           EDC would not have been able to perform the contract;

-           EDC would not have been appointed.

.2       The Reply at paragraph 15 stated the factual allegation “that had Mallino re-tendered the Section 3 Works, EDC would have been awarded the new contract is specifically denied”.

          However this denial only goes to the second point above, it does not formally challenge the first point.

.3       The Reply at paragraph 17 reiterates that “Mallino accepts that the Adjudicator’s decisions are temporarily (not permanently) binding to the extent set out in the Particulars of Claim”.

Accordingly, the Adjudicator’s finding that EDC would have been able to carry out the Section 3 works is an Agreed Fact.

4)         THE FACTUAL EVIDENCE

14.      Mallino called two Witnesses of Fact:

Robert Cox, the Chief Executive of Mallino

15.      His evidence was that he was a qualified building surveyor but not a quantity surveyor.  He started his career at E.C. Harris in 1999 where he worked in the Hotels Team until 2009 when he moved to the role of Head of Hotels at T&T.

16.      T&T were the Project Managers, Cost Managers and Quantity Surveyors appointed by Mallino for the Bodmin Jail Development.  In the Summer of 2017, Robert Cox was asked to take over the project management responsibilities at Bodmin Jail.

17.      As Robert Cox explained in his Witness Statement:

“15.     In the summer of 2017, I was asked by my Managing Director at T&T to support our Bristol office in the delivery of the Bodmin Jail Hotel Project.  At the time T&T Costs Management were appointed as the Quantity Surveyors for Mallino and receiving Project Management support from Phil Toghill of T&T.  I became one of the project leads alongside my QS colleague Mark Rogers, with responsibility for achieving Mallino’s intended timeframes and budgets for delivery of the whole project.”

“17.     I held the role of project lead for the Bodmin Jail Project at T&T from October 2017 to October 2018, at which point I moved directly to the role of Managing Director at Mallino where I continued my work on the Bodmin Jail Project, now acting as the client rather than one of the client’s appointed professional consultants.

 18.      In October 2021, I was promoted to my current role of CEO of Mallino.”

18.      I found Robert Cox a difficult witness.  He seemed somewhat brisk in his answers.  For example, when asked on Day 1, page 119 questions about the Variation Agreement he commented as follows:

“Q.      The point I’m focussing on at the moment, Mr Cox, is the wording of clause 2.1, which you’ve agreed was drafted by EDC   

A.           It is, yes.

Q.        And the proposition I’m putting to you is that it would make no commercial sense for EDC to propose this clause and thereby require its participation in this retender process if it thought it had no prospect of carrying out those works, would it?

  A.      I can only assume it was drafted by a solicitor, not by a contractor.”

This seems a somewhat surprising answer when one would have expected Mallino’s Project Manager at least to have read and to have understood the terms of the Variation Contract.

Given the Agreed Facts set out above, Robert Cox clearly did not understand how the Variation Contract was intended to be operated.

Furthermore, Robert Cox appeared in his answers and conduct during his cross-examination to be unnecessarily argumentative and partisan.

Timur Gorman

19.      Timur Gorman was born in Russia and attained British Citizenship on the 29^th November 2018.  As his Witness Statement explains

“11.    I previously was a major shareholder and CEO of a leading cosmetics company in Russia, called Concern Kalina ("Kalina"). I was the CEO and later the Chairman of Kalina from 1996 to 2011 and my current business-partner and fellow board member at Mallino, Mr Alexander Petrov, was the Chief Financial Officer.

 12.     Kalina was sold to Unilever in 2011, at which point I began the process of moving to the United Kingdom and becoming a British citizen.

 13.     As part of the process of naturalising to the UK, I changed my surname and those of my family by deed poll to 'Gorman' in September 2020. My name at birth was Timur Goriaev (alternatively spelled Goryayev). I note that my witness statement in the adjudication concerning the Dark Walk contract used my former surname Goriaev.”

20.      It is clear from his Witness Statement drafted after Mallino had lost two adjudications and after Mallino had agreed for the purposes of these proceedings that:

“Mallino breached Clause 2 of the Variation Contract when it failed to re-tender the Section 3 Works.”

that Timur Gorman still does not understand how the Variation Agreement was intended to be operated.

At paragraph 44 of his Witness Statement he states:

“44.     I understand that it is EDC's position in these proceedings that Mallino failed to carry out re-tendering exercise for the works. Mallino did in fact go through a tender process, which involved several potential companies and lasted for several months and ultimately concluded with the appointment of PIN CM.”

21.      If Timur Gorman understood the case advanced by EDC in the two adjudications and in these proceedings that statement would never have been included in his Witness Statement.

22.      Like Robert Cox Timur Gorman stated that:

“… we never intended for EDC to carry out the construction works.  We were aware that they had submitted a price for the purpose of the contract but this was not an attractive proposition for us” 

See paragraph 54 of his Witness Statement.

However I do not accept this evidence.  The witnesses may have persuaded themselves  to say this because they failed to re-tender the Section 3 Works.  However during the course of two adjudications and these proceedings Mallino’s witnesses views regarding EDC have hardened in respect of EDC’s competency to carry out the Section 3 Works who I consider would have been a satisfactory contractor for the Section 3 Works if the works had been re-tendered.

23.      I consider it unfortunate that Timur Gorman on Day 2, page 39 described EDC as “monkeys” in the course of his evidence.  This emerged as follows during his cross examination: -

“Q.      Okay. I'm just going to ask you my question one more time because I don't think that you answered it, is whether you will accept that if you had been told EDC had plenty of experience to carry out the Dark Walk works and it had submitted a tender substantially cheaper than PIN's, you would have appointed EDC?

A.           If I would receive recommendation from T& T, that there is a brilliant company with a lot of successful projects, I would consider this company as a potential contractor. EDC as a name popped up several times during this project and not always in a very positive context. A small company, errand company, doing, you know, some chores -- we call such companies "monkeys" normally -- doing small jobs, and I would never consider a handyman to be instructed to build a stately manor it's just not how it works in the real world.”

That description of EDC was odd particularly given during his evidence:

-           he would not challenge the statement that no one from Mallino or T&T had asked EDC about their experience in construction; and

-           this project was not to construct a stately manor. 

As Robert Cox in his Witness Statement stated the Dark Walk:

“Was a conventional new build project for a construction contractor to price and ultimately to construct.”

24.      For the Defendant only one witness was called for cross-examination.

Stephen Baker

25.      Stephen Baker is a director of EDC and had worked in the demolition and construction industry for 46 years and had been a director of EDC since 1998.  He maintained in his Witness Statement at paragraph 3.14 to 3.16:

“EDC'S PRIOR EXPERIENCE

3.14  I understand that Mallino has previously suggested that it had concerns about EDC's alleged lack of experience in undertaking building works and that was a crucial factor in it appointing an alternative contractor to undertake the Section 3 Works.

3.15  As confirmed at the start of this witness statement, I have been a director of EDC since 1998. I am therefore able to explain EDC's prior experience in delivering a project like the one at Bodmin Jail.

3.16   Whilst EDC is a specialist demolition contractor, the company also delivers complex building projects. Had EDC been given the opportunity to re-tender the Section 3 Works, I would have worked with the team to ensure that further details of its building experience were included to support the re-tender.”

I found Stephen Baker to be an impressive witness.  His answers were clear and concise and he avoided arguing his case or resorting to exaggeration or obfuscation.

With regard to the deleted email accounts I accept Stephen Baker and Malcolm Hepburn's explanation as to why and when these email accounts were closed and I do not draw any adverse inferences because neither EDC or Mallino had access to Steve Padmore, Michael Corridan and Malcolm Hepburn’s email accounts.

5)         LIST OF AGREED ISSUES

26.      The parties have agreed a List of Issues for use at Trial.  During the Opening and Closing Oral Submissions little, if no, reference was made to the Agreed List of Issues.  I intend to only use this Agreed List of Issues as the broad framework for the remainder of this Judgment.

27.      The parties have an agreed introduction to the Agreed List of Issues which states:

“This list of issues has been agreed by the parties for use at trial. It is intended to reflect the main issues in the case so as to provide an agenda for the trial of this matter, but is not intended to repeat the pleadings or to constrain the parties' entitlement to raise pleaded issues at trial.

Mallino’s primary case is that the claim and counterclaim may be determined by resolution of a legal question as to the correct measure of EDC’s loss and that, as such, there is no need for the Court to consider the underlying facts. That case is put forward on the basis that, save as expressly put in issue, the Adjudicator's findings are temporarily binding on the parties. If Mallino is correct about this, it says that issues 4 and 6-10 below will ultimately not be relevant. For the avoidance of doubt, EDC does not agree with that analysis. Its case is as per the next paragraph.

EDC’s case is that, in order to determine the claim and counterclaim, it will be necessary for the Court to consider the factual background. EDC’s position is therefore that all issues set out below are relevant and will need to be determined.

For the purposes of these proceedings, the following facts are assumed to be correct: (i) the Contract and the Variation are a single overarching contract; (ii) Mallino was in breach of clause 2 of the Variation for failing to tender section 3 of the Works; and (iii) the letter of 22 November 2019 particularised at paragraph 13 of the Particulars of Claim was ineffective as a termination notice.”

28.      The Agreed List of Issues is then split into two sections:

-           Correct Measure of Loss;

-           EDC’s Alleged Lost Profit and Overhead Contributions.

         “Correct measure of loss

1.         Is EDC entitled to recover profit/fixed overhead contribution for works that it may have secured as a result of a successful tender for section 3 of the Works, as part of a loss of a chance claim or at all?

(POC para 19, 21, 22, 23, 27, 30, 31, 33; Def para 26, 34, 36)

2.         What are the principles by which EDC’s entitlement (if any) to recover lost profits and/or loss of overheads contribution in respect of the Section 3 Works are to be measured?

(POC para 19, 21, 22, 23, 27, 30, 31, 33; Def para 26, 34, 36)

3.         By way of sub-issues to issues 1 and 2 above:

a.       Is the correct measure of loss for assessing EDC's claim to assess the minimum contractual obligation that would have been available to Mallino? If so:

i.        On a proper construction of clause 2 of the Variation and/or in any event, what was the minimum contractual obligation available to Mallino?

ii.       Is clause 2.5 engaged when considering EDC's entitlement to payment?

b.      What, if anything, is the relevance of the principles concerning loss of a chance to this analysis?

4.         If Mallino is wrong about issue 3 above (i.e. the correct measure of loss is not to assess the minimum contractual obligation that would have been available to Mallino):

a.       Is EDC entitled to recover damages for its lost profit and/or overhead contribution in full if it proves that it would have been the successful tenderer on the balance of probabilities?

b.      Alternatively, if EDC establishes that it lost a real chance of winning the contract for the Section 3 Works, is it entitled to recover damages that reflect the loss of opportunity in making a profit and contributing to overheads?

c.       In the further alternative, is EDC's loss to be measured by reference to what the Court considers, on balance, Mallino would have done had it tendered the Section 3 Works in accordance with Clause 2.1 of the Variation (by reference to the relevant economic and other surrounding circumstances)?

(POC para 33, Def para 36)

5.         Is Mallino entitled to the declarations sought at paragraph 34 of the Particulars of Claim (which seek to put into effect, on Mallino's case, the answers to issues 1 and 2 above)

          EDC’s alleged lost profit and overhead contribution

6.         Had Mallino tendered the Section 3 Works in accordance with Clause 2.1 of the Variation, would EDC have been the successful tenderer on the balance of probability, alternatively did EDC lose a real chance of winning the contract for the Section 3 Works? (Def para 36(3), Rep para 15)

7.         What was EDC's loss of profit and/or overhead contribution? (Def para 41; Rep para16,19)

8.         If loss of opportunity is the correct measure of lo ss, how is this assessed? (Def para 42; Rep para 16, 20)

9.         What if any sums are due to EDC? (Def para 41, 42; Rep para 19, 20)

10.      What if any interest is due to EDC? (Def para 43; Rep para 21)

(POC para 34; Def para 37; Rep para 16)”

          The Agreed List of Issues somewhat unnecessarily complicates matters.  I will concentrate in this Judgment on the following issues:

-           The correct measure of loss;

-           Would EDC have been appointed for the Section 3 Works;

-           EDC’s alleged lost profit and overhead contribution.

6)         THE CORRECT MEASURE OF LOSS

29.      Mallino’s case is that:

7)         WOULD EDC HAVE BEEN APPOINTED FOR THE SECTION 3 WORKS?

35.      EDC’s primary case is that the Court should conclude that EDC would have been the contractor for the rest of the works.  In other words EDC should recover the entirety of its Counterclaim without deduction for the loss of a chance/the risk that it would not have won the contract.

36.      I consider that on the evidence that goes too far.  EDC’s success in any re-tendering exercise could not be regarded as a dead certainty on the balance of probabilities.  There was always a risk that another contractor might enter the race or that PIN-CM might have produced a more competitive price.

37.      As Mallino in their written opening opinion stated that:

“The Court is familiar with the principles governing loss of a chance: if the Court finds that the minimum contractual obligations principle does not apply then it will need to consider what might have happened had the retendering exercise anticipated by the variation agreement taken place.  If it finds that Mallino might have awarded the contract to EDC then it may award damages in that regard discounted by a percentage to reflect the Court’s analysis of the probability of EDC being awarded the work.”

8)         QUANTUM OF CLAIM AND/OR COUNTERCLAIM

46.      In Order to establish the quantum of their claim.

-1           EDC must assess the value of any benefit if it had been awarded the contract for the Section 3 Work.

-2           Then there must be an assessment of the size of the chance that they might have been awarded the contract for the Section 3 Works.

47.      Taking each in turn.

.1            The value of any benefit if EDC has been awarded the contract for the Section 3 Work.

48.      EDC’s Counterclaim has been broken down and explained in their written opening as follows:-

.1            EDC claims 5% on the base cost for the Section 3 Works in the sum of £128,735.69. This was the declared overhead and profit allowance in the Building Contract.  Mallino accepts at paragraph 55 of its opening that, if EDC succeeds in principle on its counterclaim, it is entitled to recover this sum.

.2            The Building Contract also expressly included an allowance of 9% for management of risk.  As Mr Baker explains, the nature of the Section 3 Works was such that a 3% allowance would very likely have been sufficient to account for any risks. EDC therefore claims the balance of 6% in the sum of £154,482.94, as this would have been realised as additional profit.  Mr Whaley's view, which is based on an analysis of a number of helpful comparators, is that it is reasonable to conclude that EDC would have realised between 4-6% as additional profit.

.3            The Building Contract also expressly included an allowance of 3% for additional management.  Mr Baker explains that most of the management could have been done from afar (i.e. utilising head office resources) and that 2 of the 3% (£51,046.55) would therefore have been realised as additional profit.  Mr Whaley agrees that EDC may have recovered up to 2% additional profit from this allowance.

.4         EDC claims a further £102,988.63, which is the additional profit it would have made by negotiating better prices with its sub-contractors and suppliers once the contract for the Section 3 Works was in place (commonly referred to as 'better buying'). As Mr Baker explains, his experience is that this can typically deliver savings of 3-5%.  EDC's claim is the equivalent of 4% of the Section 3 base costs.   Mr Whaley agrees that EDC may have recovered up to 4% additional profit through better buying.

          .5         EDC claims £38,620.74 for the savings it would have secured through value engineering the designs for the Section 3 Works. Mr Baker's experience is that, through value engineering, EDC can typically save 1-2%.  EDC's claim is the equivalent of 1.5% of the Section 3 base costs.

.6         EDC claims a further £38,620.74 for the additional profit it would have made on provisional items and variations. As Mr Baker explains, this claim is based on an estimate made by EDC at the time that it would make additional profits of 1.5% on provisional items and variations.  Mr Whaley's assesses this element of the counterclaim at £19,310.37.

49.      The Court has had the assistance from two independent expert witnesses Stuart Hardy instructed on behalf of the Claimants.  Alan Whaley instructed by the Defendants.

50.      The experts have helpfully agreed on a figure as figures basis that the following sums are associated with EDC’s counterclaim for loss of profit and overhead contribution.

51.      Alan Whaley in his report provides a very helpful table showing the overall range of possible recovery of OH&P as set out below.

52.      On the issue as to what documentation should have been retained by EDC to support this Counterclaim I prefer the somewhat more pragmatic approach of Alan Whaley suggesting that a contractor of the size of EDC would not be expected to retain much documentation relating to the original tender or the Counterclaim generally.

53.      With regard to each head of counterclaim I find on the balance of probabilities as follows:

.2       The assessment of the size of the chance that EDC might have been awarded the contract for the Section 3 Works

54.      As the Editors of Hudson Building and Engineering Contracts 24^th Edition point out at paragraphs 7-021.

“Once it is found that the chance is real and not merely speculative, then the quantification of that chance is a matter of measure of damage and not causation.  A claimant must therefore show that the defendant's actions have caused the loss of a real or substantial chance which would have represented a benefit to the claimant on a balance of probabilities.  Once the chance has been established, the value of the benefit lost will be assessed according to the likelihood of the benefit accruing to the claimant. This may involve an assessment at less than 50 per cent.”

9)         CONCLUSION

57.      In these circumstances EDC is entitled to damages assessed at 66% of £321,391.71 being £212,118.53.

58.      I will hear the parties at a date to be fixed on all questions of interest and costs and how the sum paid pursuant to the Second Adjudication Decision should be dealt with insofar as these matters cannot be agreed.

Martin Bowdery Q.C.

Sitting as a Deputy High Court Judge

10^th June 2022