Fire safety defects and limitation issues: a review of recent PFI disputes

Two recent decisions handed down by the Court of Appeal and the Technology and Construction Court (TCC) highlight the increasing number of fire and other safety related disputes arising out of private finance initiative (PFI) contracts which are reaching expiry.

Sheffield Teaching Hospital v Hadfield Healthcare & ors [2023] ^[1]

In 2004, Sheffield Teaching Hospital Foundation Trust (the Trust) engaged Hadfield Healthcare Partnerships Limited (Project Co) to design, build, commission and operate the Hadfield wing at the Northern General Hospital in Sheffield. The Project Co entered into a construction contract with Kajima Construction Europe (UK) Limited (Kajima) for the design, construction and commissioning of the Hadfield wing. It also entered into a Hard Services Agreement for the provision of facilities management services from completion of construction works onwards.

Key background facts:

• Practical completion of the Hadfield Wing was achieved on 26 March 2007.
• In 2017-2018, the Trust identified potential defects in the fire compartmentation and other fire protection works in the Hadfield Wing.
• The Construction Contract contained a limitation clause which barred any claims after the expiry of 12 years from the "Actual Completion Date". However, following discovery of the defects, the parties entered into a series of standstill agreements suspending time for the purpose of any defence based on limitation.
• In 2018, South Yorkshire Fire & Rescue Service issued a prohibition notice under the Regulatory Reform (Fire Safety) Order 2005, informing the Trust that, in its opinion, the Hadfield Wing constituted an "excessive risk to persons in case of fire".
• On 3 December 2018 the Trust vacated the Hadfield Wing and relocated to temporary accommodation. Remedial works were carried out by Kajima and Project Co between 2019-2021.
• In December 2020, the Trust commenced proceedings against Project Co seeking damages of around £13 million in respect of alleged design and construction defects throughout the Hadfield Wing, in particular concerning fire compartmentation and fire protection issues. It also initially commenced proceedings against Kajima but subsequently discontinued that claim.
• In August 2021, Project Co commenced Part 20 proceedings against Kajima, alleging that any liability to the Trust was caused by Kajima's failure to design and / or construct the Wing in compliance with the Construction Contract.
• Kajima denied liability, contending that certain of the losses alleged by the Trust arose from maintenance failures which amounted to breaches of the Project Agreement and/or breaches of the Hard Services Agreement.
• In May 2022, Project Co commenced further Part 20 proceedings against the Hard Services provider (the Second Part 20 Defendant).

Kajima's summary judgment application

In January 2023, Kajima issued an application for summary judgment and / or strike out, arguing that Project Co had no real prospect of succeeding on certain elements of its claim.

The limitation issues

The first issues related to limitation. Kajima contended that Project Co's claims in the proceedings were not within the definition of "Dispute" in the first standstill agreement entered into between the parties, since the relevant definition in that agreement did not include the Construction Contract.

Project Co submitted that the omission of the Construction Contract from the relevant definition was a mistake which did not reflect the parties' intent as to the effect of the standstill agreement. The evidence confirmed that the intention of the parties was to include Project Co's claims against Kajima within the scope of the standstill agreement.

The Court found that Project Co's construction of the standstill agreement was "arguable", with "more than a fanciful prospect of success". Accordingly, it dismissed Kajima's application for summary judgment.

Did Kajima owe Project Co concurrent duties of care in contract and tort?

Kajima also sought summary judgment in respect of Project Co's damages claim for alleged breaches of Kajima's common law duty of care.

The relevant parts of Project Co's case were that Kajima:

1. owed it a duty of care at common law to take reasonable care in the performance of its obligations under the Construction Contract;
2. was in breach of that common law duty on the grounds that defects in the design or construction of the Hadfield Wing were "caused by negligence in the performance of Kajima's design and/or workmanship obligations";
3. was therefore liable in the tort of negligence for Project Co's losses, including pure economic losses.

Counsel for Kajima submitted that it did not owe Project Co the alleged duty of care at common law: no duty of care at common law arose in circumstances where the parties had entered into "sophisticated" contractual documents allocating risk and responsibility "with considerable care". Kajima contended that it is settled law, following the case of Robinson v PE Jones (Contractors) Ltd [2012],^[2] that a contract for construction works does not amount to an assumption of responsibility so as to give rise to a common law duty of care to avoid pure economic loss.

Alternatively, Kajima submitted that if the alleged duty of care did arise (which it denied), such duty did not extend to liability in the tort of negligence in relation to defects in the building giving rise to purely economic loss caused by defective workmanship or materials.

Counsel for Project Co, on the other hand, argued that the law on these issues is far from settled. The case of Robinson v PE Jones could be distinguished from the present case since in contrast with the particular terms of the contract in that case, the Construction Contract did not include either a sole remedy clause or exclude Kajima's liability in tort to Hadfield.

As a result, it submitted that Project Co's claim had a real prospect of success and should be heard at a full trial.

TCC decision

The TCC agreed with Project Co that "whether a concurrent duty of care at common law not to cause pure economic loss by virtue of defective workmanship or the use of defective materials can arise in circumstances such as the Construction Contract, remains unsettled and is controversial."

Mrs Justice O'Farrell examined the extensive review of the authorities on concurrent duties of care in contract and tort set out by the Court of Appeal in Robinson v PE Jones. She held that the following principles can be derived from that judgment:

1. When A assumes responsibility to B in the Hedley Byrne sense, A comes under a tortious duty to B, which may extend to protecting B against economic loss;
2. The existence of a contract between A and B does not prevent such a duty from arising;
3. The existence of a contract between A and B does not automatically give rise to such a duty of care in tort co-extensive with the contractual terms and carrying liability for economic loss;
4. One must consider the parties' relationship, together with the factual and any contractual matrix, in order to ascertain in any given case whether A assumed responsibility to B in the Hedley Byrne sense, so as to give rise to a concurrent duty of care in tort; and
5. The allocation of risk in the contract between A and B, including any exclusion or limitation of liability, on a proper construction, may preclude the imposition of any duty of care in tort.

She also agreed with counsel for Project Co that it was "arguable" that Robinson v PE Jones could be distinguished on its facts.

In light of the above, the TCC held that the issue was not suitable for determination on a summary basis and dismissed Kajima's application. The full trial is expected to be heard in late 2023.

Kajima Construction Europe (UK) Ltd & Anr v Children's Ark Partnership Ltd [2023]^[3]

We reported on the TCC's first instance decision in this case in our insight of September 2022. In brief summary:

• In 2004, Children's Ark Partnerships Ltd (CAP) entered into a Construction Contract with Kajima Construction (Kajima) for the design, construction and commissioning of the Royal Alexandra Hospital for Sick Children in Brighton. CAP had signed a Project Agreement of the same date with the NHS Hospital Trust for the design, building and financing of the redevelopment of the hospital.
• Kajima commenced works in 2004 and the Actual Completion date was 2 April 2007.
• The Construction Contract, as well as the guarantee provided by the defendant's parent company, Kajima Europe, provided that no claim could be commenced against Kajima after 12 years from Actual Completion, i.e. 2 April 2019.
• In around September 2018, concerns were raised about cladding and fire-stopping issues. Kajima agreed to carry out remedial works at its own cost, on a 'without prejudice' basis. These commenced in December 2018 and were sequenced over a long period to avoid disruption at the hospital.
• In light of the remedial works, the parties signed a series of standstill agreements extending the limitation period, which finally lapsed on 29 December 2021.
• CAP commenced proceedings prior to the expiry of the limitation period alleging design and/or construction defects in the works, which the NHS Hospital Trust required it to remedy.
• Kajima applied to strike out the claim, arguing that the court had no jurisdiction to hear the claim or should not exercise its jurisdiction, because CAP had failed to comply with the contractual Dispute Resolution Procedure (DRP), by failing to refer the dispute to the 'Liaison Committee' for a final and binding decision.

The Appeal

The judge at first instance had dismissed Kajima's strike-out application, holding that whilst the DRP was a condition precedent, it was not enforceable due to its lack of "clarity and certainty",

The Court of Appeal upheld the decision at first instance, holding that:

• The judge was right to conclude that the DRP was unenforceable;
• The underlying problem was that the Liaison Committee involved the Trust and CAP, but not Kajima – despite the fact that the Trust were not a party to the Construction Contract and Kajima were;
• This rendered the process "pointless and …unenforceable" and made the Liaison Committee a "fundamentally flawed body". It could not produce an "amicable settlement" in circumstances where Kajima had no representative on the committee, had no right to attend its meetings, and was not entitled to make representations to it or see its documents;
• The judge was right to conclude that setting aside or striking out the claim form would be a "draconian remedy, wholly unsuitable for the circumstances of this case" and that the usual remedy in cases such as this is a stay of proceedings.

Accordingly, the Court of Appeal dismissed Kajima's appeal and its application for strike-out. The Court noted that the parties had settled shortly after the appeal hearing so this case will not proceed to a full trial.

Commentary

In both of the above cases, the disputes arose as a result of defects in the initial construction of the building. As these cases exemplify, there is a growing number of PFI disputes coming before the courts, particularly relating to fire safety defects that were identified in surveys undertaken following the Grenfell tower tragedy in 2017. As Coulson LJ observed in Kajima Construction Europe (UK) Ltd & Anr v Children's Ark Partnership Ltd [2023], the defects that are increasingly coming to light are:

"…hidden, not deliberately, but by the nature of the building works themselves: defective or incomplete fire-stopping is a notorious problem because, once the building has been completed, it cannot usually be identified, save by way of targeted inspections which involve opening up. Such inspections are intrusive, so they usually need a trigger: something to justify them in the first place. Here, that was the Grenfell fire tragedy."

In both cases, the court dismissed the construction contractor's applications for summary judgment and / or strike-out. In another recent Public-Private Partnership (PPP) case, Resource Recovery Solutions (Derbyshire) Limited v (1) Derbyshire County Council and (2) Derby City Council, the TCC has also dismissed an application for summary judgment and / or strike-out by the councils on two issues of contractual interpretation. The TCC observed that "as is common" in PPP and PFI cases, the project agreement was "lengthy and complicated" and that a "full understanding of the technical and economic implications of the parties' competing constructions are matters that it is appropriate for the court to take into account" at a full trial.

Whilst these cases turn on their particular facts, they suggest that when dealing with complex PFI contracts, there is usually no short cut.

If you have any questions about this article, please get in touch with Ashley Pigott, Sarah Dyer or Lindsay Hammond.

Footnotes

[1] Sheffield Teaching Hospital v Hadfield Healthcare & ors [2023] EWHC 644 (TCC)

[2] Robinson v PE Jones (Contractors) Ltd [2012] QB 44 (CA)

[3] Kajima Construction Europe (UK) Ltd & Anr v Children's Ark Partnership Ltd [2023] EWCA Civ 292