David Weare is a partner and Ian Smith is a senior associate at Fladgate LLP
The recent decision in St James’s Oncology SPC Ltd v Lendlease Construction provides helpful guidance to PFI-project companies, design and build contractors, and employers generally when dealing with latent-defect claims.
The case concerned a new oncology centre at Leeds Hospital, designed, built and operated by St James’s Oncology SPC Ltd (the claimant) pursuant to a project agreement under the government’s private finance initiative.
The claimant engaged Lendlease Construction as its design and build subcontractor for the works.
“A building regulations completion certificate is not conclusive evidence that the regulations have been complied with”
The claimant was responsible for procuring that the project operations were at all times performed, “except to the extent expressly stated to the contrary in the trust’s construction requirements or the service-level specifications, in compliance with all applicable NHS requirements”. This included health technical memoranda (HTMs).
Proceedings were commenced against Lendlease three days before expiry of the 12-year limitation period. The claimant alleged that when the oncology centre was built, there were serious fire-safety and electrical engineering defects.
The judge noted “It is common ground that […] where HTMs provide guidance, they are not always applicable to every design solution, and it is possible to agree derogations from that guidance”.
The design and build subcontract specifically addressed the permissibility of alternative engineering approaches provided they achieved a standard of safety equal to or better than the relevant HTM.
As at the date of trial, no remedial work had been undertaken by the claimant. Lendlease alleged that, as the claimant did not intend to implement any remedial work, it was not entitled to damages.
Lendlease also argued that any aspects of the design that were not compliant with the technical specifications had been approved by all relevant parties.
The judge found against Lendlease on almost every point.
What it means
Several key issues and observations arise out of this judgment of which those engaged in PFI projects and construction projects generally should be aware.
First, all specifications and other guidance notes must be reviewed separately to see whether they need to be followed to the letter. In this case, the contract did allow a fire-engineering approach that deviates from the specification, provided it would achieve a standard equal to or better than the contract requirements.
Additionally, the issue of a building regulations completion certificate is not conclusive evidence that the regulations have been complied with, and a design-review procedure does not necessarily relieve a defendant of its design obligation, regardless of whether the revised design is accepted or not.
Readers should also be aware that a holistic design that allows for areas of non-compliance on the basis that the overall design is safe is unlikely to be a good defence.
Furthermore, when considering the measure of damages in defective work cases and the relevance of intention to reinstate, the general rule is that the measure of damages will be the cost of making good unless that cost is disproportionate. Damages for the cost of cure will be awarded provided that the claimant is “seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit”. It is also important to note that the court is not concerned with how the claimant will use any damages that may be awarded, provided that the loss can be established. However, in cases of defective work, the intention of the claimant to carry out remedial work is relevant insofar as it goes to the reasonableness of reinstatement and the extent of the loss sustained.
A claimant may delay carrying out remedial work until damages representing the cost of the proposed remediation are awarded by the court. The cost of proposed remedial work may fairly and properly be assessed as at the date of the trial and not when the defects were or ought to have been known and remediated. A claimant is also entitled to make an allowance for inflation to cover price increases from the award of damages to letting a remedial works contract, and the correct measure of loss is the cost of reinstatement.
When deciding between rival remedial schemes, if two remedial schemes are proposed to rectify a defect and one is implemented on expert advice, the defendant is liable for the costs of that scheme unless it could be said that the expert advice is unreasonable, and finally, it is not an answer to a claimed remedial scheme to demonstrate that the defects could have been rectified through an alternative scheme at a lower cost.
The St James’s Oncology ruling is timely guidance for those engaged in PFI projects and construction projects generally, not least because it highlights a number of observations that parties should be aware of in relation to completed and ongoing works. As fire safety in buildings continues to be a topic of great focus, we may see even closer scrutiny of such work in light of this ruling.