Construction projects nearly always involve a number of parties. For example, in addition to the employer and the contractor, most projects include the services of consultant engineers and architects, with various sub-contractors engaged along the contractual line. Sometimes there are funders and developers too. Therefore, it is not unusual for disputes to arise between a number of different parties and for one party to find itself “stuck in the middle”, defending claims while, at the same time, seeking to pass on liability to others further down the contractual chain.
This is exactly what happened to the M&E sub-contractor on the fit-out works at Linklaters’ office premises.
Linklaters v McAlpine and others
Back in 1995, the M&E sub-contractor entered into a sub-contract with the main contractor. That sub-contract included an indemnity from the sub-contractor to the contractor. It also entered into a sub-sub-contract for one aspect of the air-conditioning work (the insulation to the pipework in the risers). Collateral warranties were given to the leaseholder, Linklaters.
Jumping forward to 2006, a leak was found at the premises and, after investigation, severe corrosion in the pipework was discovered. Linklaters took the decision to replace the pipework. It also looked at its collateral warranties from the main contractor and the sub-contractor. Proceedings were inevitably started. The main contractor looked at the sub-contract, and noted the indemnity. Part 20 proceedings followed. Separately, the sub-contractor went after the insulation sub-sub-contractor.
All this came before Akenhead J in November 2010. In the substantive judgment, he held that the main contractor and the sub-contractor were liable for the defective pipework; the sub-sub-contractor was not liable at all. The main contractor looked at its indemnity from the sub-contractor and everyone looked to the sub-contractor for their costs.
Lessons for us all
Akenhead J’s costs judgment is a reminder to all of us involved in construction litigation, who are familiar with the issues that may arise with these tangled webs. As Akenhead J suggests, parties need to address these issues early. The financial consequences of not doing so may be considerable.
Here, on top of damages of £2.845 million, the sub-contractor has ended up with a very large legal bill (interim assessments for Linklaters and the main contractor alone stood at £4.6 million). Some of those costs may not be recoverable (for example, the court questioned the disproportionate size of Linklaters’ bill, and what may happen on assessment where a party represents itself) but of those that are, some will be awarded on an indemnity basis. There are also the sub-sub-contractor’s costs and its own to consider. Ouch!
Are more proceedings necessary?
Akenhead J described this as a piece of “old-fashioned litigation” in the way the parties were brought into the proceedings one by one, but could not understand why the sub-contractor issued separate proceedings against the sub-sub-contractor when “one set of proceedings would have sufficed to encompass all three claims”.
Akenhead J suggested that parties should think long and hard as to whether it is necessary or desirable to bring in third or fourth parties:
“…it is rarely a good idea to bring in a new party just in the hope that the new party might ‘chip in’ to any settlement pot which might be passed around, unless there is a reasonably good case against the new party.”
Do parties need to stay the course?
Akenhead J was very critical of the sub-contractor’s conduct in a number of respects:
- It’s refusal to accept the 100% nature of the indemnity with the main contractor. (Its acceptance only came during final speeches at trial.)
- Refusing to release the main contractor from the proceedings, despite the indemnity.
- Failing to settle with the sub-sub-contractor after the exchange of experts’ reports, when it must have been clear that its case against the sub-sub-contractor was weak.
- Failing to accept Linklaters’ part 36 offer in September 2010.
These factors all feature in the court’s judgment on awarding indemnity costs against the sub-contractor. A multi-party settlement after exchange of expert evidence would have been best for all, but to achieve that, all the parties had to cooperate. For some reason that cooperation was not forthcoming and all parties found themselves before the court.
Akenhead J talks of the “good” or possibly “bad” old days of the 1970’s and 1980’s being long over and he is right, with case and costs management now at the fore in the courts, we can’t afford not to learn the lessons from these complex multi-party actions.