IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION – OFFICIAL REFEREES BUSINESS
(HIS HONOUR JUDGE HAVERY QC)
Royal Courts of Justice
Strand, London WC2A 2LL
Wednesday 9th February 2000
LORD JUSTICE KENNEDY
LORD JUSTICE THORPE
and
LORD JUSTICE MANCE
___________
HILSON MORAN PARTNERSHIP
Appellant
THE ENVIRONMENT AGENCY
Respondent
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
____________
NICHOLAS DENNYS QC and STEPHEN DENNISON (instructed by Messrs Herbert Smith, Exchange House, Primrose Street, London EC2A 2HS) appeared on behalf of the appellant/first defendant.
RICHARD SEYMOUR QC (instructed by Messrs Masons, 30 Aylesbury Street, London EC1R 0ER) appeared on behalf of the respondent/plaintiff.
Judgment
As Approved by the Court
Crown Copyright ©
Wednesday 9th February 2000
1. LORD JUSTICE THORPE: Between 1982 and 1984 Speyhawk Project Management Limited (Speyhawk) developed a site at King’s Meadow Road, Reading. The building work was done by a subsidiary company, although sub-contractors were used for specialist services. Spratley Cullearn were appointed architects. Hilson Moran were appointed consultant engineers. Their letter of appointment is dated 27th July 1984. Paragraph three of the letter is headed Collateral Warranty and is in the following terms:
“It is a condition of your appointment that you will be required to enter into a Deed of Collateral Warranty which acknowledges that your duties and obligations to Speyhawk are extended to the Institutional Fund financing the development. It is also anticipated that you will be required to enter into a similar document with the eventual Tenant. The format of the deed will be decided by the Employer.”
2. Although that term suggests the retention of the construction in fact Speyhawk were about to enter into a contract of sale of part of the development to the Thames Water Authority (TWA) as offices.
3. Paragraph eight of the letter of appointment, headed Practical Completion Procedure, provided:
“The Consultant is required to produce to the Architect, seven days prior to practical completion, the following:
As built Mechanical – Electrical services drawings, including all test certificates, operating instructions and schedules of plant and material suppliers, guarantees and warranties appertaining thereto.
The policy document related to practical completion is attached and the consultant should note the responsibilities in this respect.”
4. The contract of sale between Speyhawk and TWA was dated 17th August 1984. It is necessary to set out paragraphs 1(E) and (F) in full:
“(E) The `Practical Completion Date’ means the date upon which the Architect shall have certified in writing (as evidenced by his Certificate of Practical Completion issued in accordance with the Building Contract for the erection of the Development) that the Development has been practically completed and shall have further certified that (i) all building operations on the Site which relate solely to the Development (but not further or otherwise) have been completed save for any operations of a maintenance or snagging nature and (ii) the plant and mechanical services forming part of the Development are in good working order and the words `practically completed’ shall be construed accordingly save that for the purpose of clause 10 hereof `the Practical Completion Date’ shall mean the date upon which the Architect shall have certified in writing (evidenced as aforesaid) that the Development has been practically completed.
(F) `The Completion Date’ means the latest of (i) 31 August 1984 (ii) the day which is five working days after the Practical Completion Date and (iii) the day which is five working days after all of the conditions which must by virtue of an Agreement pursuant to Section 52 of the Town and Country Planning Act 1971 more particularly detailed in Part A of the Schedule hereto be complied with before the offices to be provided by the Development can be occupied are complied with or the Vendor shall have procured a letter or letters from the Reading Borough Council stating that the offices to be provided by the Development may be occupied notwithstanding that all of the said conditions have not been fully complied with.”
5. Speyhawk’s financial year closed at 31st August (or possibly 30th September) and it was anxious to include the proceeds of sale within the financial year that was about to close. Obviously the architects certificate of practical completion was a necessary prerequisite. However the building was not complete. Matthew Hall Mechanical and Electrical Engineers Limited (Matthew Hall) was the sub-contractor responsible for mechanical installations. Matthew Hall had installed sophisticated central heating and air conditioning systems which had not been completed and commissioned. On 22nd August Hilson Moran wrote two letters to Speyhawk. These letters are the crux of this appeal and it is necessary to set out the body of each letter in full:
“Dear Mr Winter
Kings Meadow Road Reading
We confirm that the Mechanical and Electrical Engineering Services installations are now in a state of Practical Completion.
The major commissioning works have been completed and only the final minor adjustments remain to be made.
Acceptance of the installations is subject to a schedule of defects which we will issue shortly.
Yours sincerely,
PC Moran
Dear Graham
Kings Meadow Road Reading
I enclose our letter of today’s date confirming that the various mechanical and electrical installations are suitably complete to achieve Practical Completion.
You are aware that due to the problems of poor workmanship on the electrical installation, this is not strictly correct. The main switchgear bus-bar has been damaged and will require replacement. This has prevented the refrigeration system operating at full load which together with wiring errors, has delayed commissioning of the air conditioning plant.
We shall do all we can tomorrow to ensure that the demonstration to Thames Water Authority’s Architect goes well.
Yours sincerely
PC Moran”
6. On the same day the architects issued their certificate of practical completion stating that the work had been practically completed on 20th August and that the defects liability period ran from that date. (There were typographical errors on the certificate and a fresh certificate in correct form was issued on the following day.) On 31st August the contract of sale was duly completed and on the same day Hilson Moran entered into the deed of warranty with TWA. The material part is relatively brief:
“In consideration of TWA completing the said Agreement with the Developer the Partnership warrants to TWA that they have exercised and will exercise all proper professional skill and care in relation to the Development and in the performance of their duties under their contract with the Developer.”
7. TWA occupied the development later that year and experienced recurring problems particularly with the central heating and air conditioning systems. Remedial works were undertaken by Matthew Hall in 1986 and 1987 but seemingly the problems were only resolved after TWA brought in fresh contractors in 1988. TWA were involved in considerable expense and in September 1995 they issued a writ against both Hilson Moran and the architects claiming against Hilson Moran damages of about £470K, subsequently reduced by amendment to £438,326.39. The action came on before the Official Referee, Judge Havery QC, and lasted four weeks. The case against the architect settled on the second day. However Hilson Moran contested every issue and on 11th May judgment was given against them in the sum of £50,568 plus interest. By his reserved judgment Judge Havery found for TWA on the principal issues of liability and causation but on his appraisal of the individual items claimed disallowed the majority, both in number and in value, principally on the basis that they had not been proved to his satisfaction. Hilson Moran sought leave to appeal on the issues of fact. Their application was partially granted on paper then more extensively at an oral hearing on 17th December 1998. In a skeleton argument prepared by Mr Nicholas Dennys QC in April 1999 he stressed that the judgement sum represented 11.5% of the plaintiff’s pleaded claim and that `the parties have probably incurred in excess of £1M on costs’.
8. Before considering Mr Dennys’ attack on the judgment I express my dismay at the futility of the litigation. Hopefully the Woolf reforms ensure that similar cases no longer develop.
9. Mr Dennys’ attack on the judgment was three pronged. First and foremost he submitted that the judge was wrong to hold Hilson Moran liable to TWA under the terms of the warranty. Second he submitted that in any event the claim failed on causation. In the event that he did not succeed on those submissions, he relied on the submission that the judge was wrong to have found item 19 on the Scott schedule proved. The impact of the third submission, if successful, would be powerful since it accounts for £38,250 of the plaintiff’s judgment.
10. Before considering Mr Dennys’ submissions on liability it is necessary to record how the judge found for the plaintiff on this issue. Put shortly his conclusion was that Hilson Moran had acted thoroughly unprofessionally in writing one letter for their client and another for the world well knowing that the second was untrue and misleading. He then found the consequential chain of architects certificate and premature completion to have been to the advantage of Speyhawk and the detriment of TWA. In adopting that analysis the judge was handicapped by a paucity of direct evidence. Mr Moran, the writer of the letters, was not called. The recipient was but the judge said, `I lack confidence in the reliability of Mr Winter’s evidence’. Relying on obvious inferences the judge concluded thus:
“I find that Hilson Moran wrote the first letter dated 22nd August 1984 at the request of Speyhawk. That letter contained false statements that the mechanical and electrical services were in a state of practical completion and that the major commissioning works had been completed. Hilson Moran wrote that letter when it must have been foreseeable that it would be processed by the architects so as to lead to the issue of a certificate of practical completion. Hilson Moran thereby failed to exercise all proper professional skill and care in relation to the performance of the duties accepted by them under their contract with Speyhawk. Hilson Moran were in breach of the warranty given on 31st August 1984 as soon as they gave it.”
11. Mr Dennys’ first submission is that whatever the appellants did on 22nd August it was not a breach of their contract with Speyhawk. At that date they had no obligations to TWA and their obligations arising out of the deed of warranty were not more extensive than their obligations to the developer. Secondly he demonstrates that the case eventually found against the appellants by the judge was not the case pleaded in the amended statement of claim where what was asserted was a failure to provide adequate design and supervision in respect of the works alternatively a failure to comply with supervisory obligations. The judge’s conclusion amounted to a finding of professional misconduct, if not fraud, and such a case demanded plain pleading and proper proof. Thirdly Mr Dennys challenges the basis for all the judge’s inferences. There was no evidence as to how the letters of 22nd August were transmitted or when they were received. There was no evidence that the architects saw the open letter or relied upon it before issuing their certificate on the same day. Indeed it was extremely unlikely that the architects saw the open letter before certifying. There was no evidence that either certificate contributed to completion on 31st August. There was no evidence of compliance with clause 1(E)(ii) or of clause 1(F)(iii) of the agreement for sale. It was very likely that swift completion suited TWA as much as Speyhawk. TWA may well have required early possession and it was in the contemplation of all concerned that works of completion and commissioning would continue between completion of contract and TWA’s occupation later in the year.
12. Although Mr Dennys advanced these submissions skilfully and powerfully they did not persuade me. In my opinion the judge was perfectly entitled to draw the inferences which he did and to reach the conclusion which he did on the basis of those inferences. The appellant’s well knew that they would be required to enter into a deed of warranty with TWA when they wrote the two letters. It is obvious that the letters were written in order to assist the client who was remunerating them and who might engage them for future work. They promised that they had exercised and would exercise `all proper professional skill and care in relation to the development’. In acting as they did on 22nd August I do not consider that the appellant exercised all proper professional skill and care. Indeed their action strikes me as thoroughly unprofessional.
13. The plaintiff’s case on causation was that, but for the appellants’ breach, the certificate of practical completion would not have been issued, there would have been proper testing, commissioning, and inspection, those processes would have revealed the defects, and the withholding of the certificate would have served as a lever on the contractors to perform their obligations to due finality. The judge having considered an alternative analysis concluded:
“I am satisfied on a balance of probabilities that the defects would have been remedied without cost to the plaintiff’s if the practical completion certificate had not been issued. It is not disputed that the proper measure of damage is the cost of repairs.”
14. Again Mr Dennys submits that there was no evidence that the appellants’ letter resulted in the certificate of practical completion and no evidence of connection between the letter and the completion of the contract of sale. What was crucial to those stages was not the appellants’ certificate but the demonstration which the longer letter of 22nd August shows was due to take place on the following day. That was likely to have been crucial to TWA’s decision on completion and the judge had had no evidence of the outcome of the demonstration. There was no link between breach of warranty and damage suffered. Had the certificate not been issued the chances of remedy by Matthew Hall would not have been enhanced. The schedule adopted allowed Matthew Hall to continue with commissioning and other works after completion. Had they been operating against a deadline or against a withheld certificate their remedial works would have been less rather than more effective. The judge’s finding of facts was incomplete as was the reasoning of his conclusions. Once again there was an over reliance on unfounded inference.
15. Mr Seymour QC in response draws attention to the importance of the commissioning of mechanical installations. The judge found:
“As part of the commissioning, all water circuits required balancing and temperature measurements were required to be taken in all rooms and the readings tabulated in schedule form, together with hourly ambient external temperature readings taken over the measuring period. Following the proving tests, all installations were required to be left in correct working order read for hand-over.”
16. Mr Seymour said that the evidence he had called proved that these installations were not duly commissioned until 1988. Without commissioning the defects went undetected and so unremedied. Only when the systems were properly commissioned were the defects fully revealed and properly remedied.
17. Again I am of the opinion that the judge was entitled to draw the inferences that he did and was entitled to reach the conclusion on causation which he did. No doubt the evidence was in many respects incomplete and unsatisfactory. The judge is not to be criticised for seeking a realistic conclusion with the aid of inference.
18. Mr Dennys’ attack on the finding against the appellants in respect of item 19 on the Scott schedule turns on an analysis of the underlying facts. There were three stages to the installation of the pipework necessary to either heat or cool the interior of the building. First on completion the pipework required chemical cleaning by circulating through the system treated water intended to remove grease and other contaminants from the inner surface of the pipes. Second the pipes had to be drained and then filled with clean water and a chemical to prevent corrosion. Third maintenance thereafter depended upon regular testing of the chemical content of the water topping up the chemical (dosing) as required. These stages were not carried out by Matthew Hall prior to practical completion and they were not called in to carry out this necessary work until after the expiration of the defects liability period in early 1986. Accordingly in 1986 Matthew Hall duly flushed out the system and relied upon a specialist contractor, KJ Water Treatment Limited (KJW), to test the system for chemical concentration and to maintain sufficient levels by dosing. The correspondence within the core bundle shows that in June 1986 KJW reported to Matthew Hall that `both systems have adequate reserves of chemicals and at this present time do not require any additional dosing’. That conclusion was repeated following further tests in early July. Later that month KJW, after a further test, suggested some additional dosing. However in April 1987 Matthew Hall had obtained an independent report which suggested that there was harmful corrosion within the system caused by the failure of the dosing chemicals to do their job. KJW responded accepting that the deposits of silica found within the system were probably attributable to the failure of the chemical to do its work and they recommended flushing out the chilled water system to remove all trace of the chemical then in use and thereafter to replace it with an alternative. The last letter in the core bundle from Matthew Hall to KJW includes the sentence `naturally we expect this work to be carried out at no charge to ourselves or our client’.
19. TWA’s claim under item 19 was for flushing out and chemical cleaning and other remedial works done between October and December 1988 at a cost of £65,920. More particularly the remedial works were (i) flushing and cleaning all parts of the pipework, (ii) replacing blocked sections of the pipework and establishing full bore through all parts of the installation, (iii) replacing all of the 266 control valves, and (iv) chemically treating the systems to prevent further corrosion. The judge disallowed item (iii) but allowed the other items at £38,250, being £65,920 less £27,670, the cost of the control valves. He rejected the appellants’ submission that, in view of the developments in 1986 and 1987, they could not be liable for remedial works done at the end of 1988. The judge said:
“I am not satisfied that the matter was properly rectified in 1986. Mr Dennison submitted that the reason why the 1986 remedial works failed was because the wrong chemicals were used thereafter to dose the system. That may be so but I am satisfied that the problem would not have arisen if the system had been fully commissioned before the issue of the certificate of practical completion. I am also satisfied that, whilst lack of maintenance may have contributed to the state of the system in 1988, the primary cause was the initial failure to commission the system.”
20. Mr Dennys persuasively submits that, whilst the failure to ensure commissioning in 1984 is accepted, commissioning was properly carried by Matthew Hall free of charge in 1986 and successfully. Subsequent problems were caused by the deficient dosing for which KJW were solely responsible. Had the commissioning been carried out prior to completion, as it should have been, the only consequence would have been to accelerate the timetable by which Matthew Hall commissioned and then sub-contracted the responsibility to regulate and to dose. Mr Seymour’s only answer was to emphasise that commissioning was all important and that the need for the item 19 works was only thrown up by the commissioning done in 1988. In my opinion the judge’s reasoning on this one issue cannot be supported. The remedial works done by Matthew Hall in 1986 were no less than they would have been required to do in 1984 had the appellant not been in breach. The evidence establishes that it was not any deficiency in that work but the failure of the chemicals introduced by KJW that caused the problems in 1987. The judge recognised the submission, with the phrase `that may be so’, but did not explain its rejection. In my opinion Mr Dennison is entitled to succeed in the submission that in respect of item 19 alone causation was not established.
21. The consequence is that TWA’s recovery sinks to £12,318 which Mr Dennison calculates to be 2.8% of what was claimed in the amended statement of claim. This only further emphasises the futility of this litigation. The judge ordered the appellants to pay all the costs below, despite the plaintiff’s major failures. The appellants challenge the costs order but counsel agreed that submissions in relation to the costs below should be taken together with submissions as to the costs of the appeal following the delivery of our considered judgments.
22. LORD JUSTICE MANCE: I agree with all that my lord, Lord Justice Thorpe, has said, and with the consequence expressed in his final paragraph. I add only this with respect to the deed of warranty on which the claim depends. This recites in general terms that:
“TWA have entered into an Agreement with Speyhawk …. (…. `the Developer’) whereby inter alia TWA will purchase freehold land and the building in the process of erection thereon known as King’s Meadow House, King’s Meadow Road, Reading, Berks (`the Development’)”.
23. It then contains the warranty which my lord has set out in full, whereby Hilson Moran warranted that:
“…. they have exercised and will exercise all proper professional skill and care in relation to the Development and in the performance of their duties under their contract with the Developer”.
24. Nothing suggests that TWA had or would have had sight or knowledge of the particular terms of Hilson Moran’s contract with Speyhawk, or indeed any of the contracts for the development of King’s Meadow House. It would be wrong I consider to treat Hilson Moran as having given a warranty which would continue in all circumstances to apply, regardless of any waiver or estoppel (or, presumably, express variation) affecting the performance required of Hilson Moran under whatever may have been the original terms of their contract with Speyhawk. I cannot agree with the judge’s contrary view on that point.
25. The judge, in the light of statements by Judge Esyr Lewis QC in an unreported decision in Tesco Stores Ltd v Norman Hitchcocks Partnership Ltd (8th October 1997) was prepared to treat the word and appearing between the phrases `in relation to the Development’ and `in the performance of their duties under their contract with the Developer’ as conjunctive. I find it unnecessary to decide whether that is so in all cases, especially in unusual circumstances like the present. Assuming a disjunctive construction, this is clearly a case of improper professional conduct in relation to the Development. Assuming a conjunctive construction, the warranty that Hilson Moran should have exercised and should exercise all proper professional skill and care in the performance of their duties under their contract with the Developer was clearly given in relation to and for the bona fide purposes of the Development of which TWA were (as the expressed consideration for the warranty) to complete the purchase. The warranty cannot conceivably be satisfied by conduct by Hilson Moran, at Speyhawk’s instance, calculated to assist Speyhawk to misrepresent the state of the development to others, particularly the architects and through them TWA. This has more the flavour of conspiracy than contractual performance.
26. LORD JUSTICE KENNEDY: I agree with both judgments.
Order: Appeal allowed in part. Judgment varied to the sum of £12,318.00. First Defendants to pay the Plaintiffs half their costs in the court below. Plaintiffs to pay to the first Defendant half their costs of the appeal.
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