Professional negligence claims against contract administrators – part 2

This follows on from part one of our article on contract administrators, and covers some of the specific types of claim that might commonly be made against those professionals.

By necessity, as with part one, this article is only a short summary of the points raised. It is not intended to be legal advice and should not be taken as such: whilst common themes emerge, every situation is different.

Common claims against contract administrators

Contactor's insolvency: defective works and excessive interim payments

A very common trigger for construction disputes generally is the entry into insolvency proceedings of one of the parties on the project, particularly when this is the contractor.

Construction contracts typically make provision for monthly interim payments, based on the progress the contractor has made each month. As we mentioned in Part 1, certifying payments due to the contractor is normally one of the contract administrator’s roles. Since these monthly payments are interim in nature, the assessments upon which they are based are not intended to be 100% accurate: if progress is slightly overestimated one month, such that slightly too much is certified and paid, the position can normally be corrected the following month or later.

However, if the contractor goes bust, it will be unable to complete the project, and the payment position as between the employer and the contractor will be frozen, probably for good: the employer is unlikely to be able to recover from the contractor anything it believes it has overpaid.

In those circumstances, the employer might seek to claw back from the contract administrator sums that it will argue should never have been certified as due to the contractor. The basis for such a claim could be that the contract administrator has unreasonably overestimated the progress which has been made (notwithstanding the fact that, as above, the assessment is not intended to be 100% accurate). Another allegation might be that defective works by the contractor have been accepted (or simply not identified) by the contract administrator, which has therefore certified that payment for those works is required.

The latter type of claim will typically assert that the contract administrator negligently failed to inspect the works at appropriate intervals, such that the contractor was able to get away with poor or incorrectly specified work. Whilst a contract administrator does not warrant that a contractor will not breach the construction contract, it is generally expected to undertake inspections at core points in the project, and particularly at the point at which it is assessing and signing off applications for payment. This is particularly relevant where parts of the work become inaccessible or will shortly be covered up.

The contract administrator’s precise duties in relation to inspection will, of course, depend on the terms of its engagement, as well as the area of its core expertise and the complexity of the project. For example, if the contract administrator is a quantity surveyor, it is likely to need (and be entitled to) input from the architect and engineer(s) on the project in relation to the quality of the contractor’s works. As we explained in Part 1, the contract administrator must exercise its own independent judgment in assessing that advice, however.

Statutory payment notices

With some exceptions (notably where the employer is a residential occupier and the works are on their home), most construction contracts are subject to the requirements of the Housing Grants, Construction and Regeneration Act 1996, commonly known as the Construction Act.

The Construction Act imposes very strict obligations in relation to interim payments to the contractor, including notices which must be served in response to applications for interim payments, and the timing of those notices.

If an employer intends to pay less than the sum for which the contractor has applied, it is required to serve one or more notices within rigid timescales set out in the Act. If it fails to serve a compliant notice (or notices) by the deadline in the legislation, the contractor is entitled to be paid the full amount for which it has applied.

In reality, it is the contract administrator which certifies the sum due (and therefore effectively decides whether the employer is going to pay less than the sum for which the contractor has applied), and the contract administrator which is responsible for issuing the requisite notices on the employer’s behalf.

On projects which have become adversarial and where trust has broken down, it has been known for contractors to submit grossly inflated applications for interim payments. In turn, it has been known for contract administrators to miss the deadlines to serve the notices required to enable the employer to pay less than the total of the application. As a result, the employer has had no option but to pay the full, inflated amount.

In this situation, the employer is faced with funding the cost of the payment it was not expecting to have to make, and the costs of recovering the overpaid sums from the contractor. Where this is at the end of the project, such that the overpayment cannot be addressed in further interim payments, this can be problematic. If the contractor goes into insolvency proceedings, it is potentially much worse. Whatever the loss caused by the failure to serve notices in time, the employer can be expected to look to the contract administrator (and its Insurers) to make it whole again.

Practical completion

Another area of risk for contract administrators is erroneously certifying (or failing to certify) Practical Completion (“PC”).

PC, in essence, refers to the stage a project has reached when there are only minor “snags” left for the contractor to address, where there are no significant issues remaining and where the premises are ready for the employer to occupy and use as intended. It is for the contract administrator to certify that this stage has been reached (and, as above, whilst it must exercise its own judgment, it will normally do so with the benefit of input from the other professionals on the project).

Larger construction contracts usually contain a requirement for the contractor to pay liquidated and ascertained damages (“LADs”) to the employer in the event that it fails to complete the works by the agreed date for PC. The employer is normally entitled to deduct such LADs from any sums which would otherwise be due to the contractor (subject to serving the required notices in time – see above).

LADs are based on a contractually agreed rate which must be a genuine pre-estimate of the loss which will be suffered by the employer per week, or whatever other interval the parties agree, if PC is delayed beyond the agreed date. The rate cannot constitute a “penalty”. For example, if an employer knows that it will be able to let a property for £x per week once it has been completed, the rate in the construction contract for LADs might broadly be £x per week of delay.

Certification of PC therefore stops the clock running: the employer will not be able to recover LADs for any period after PC has been certified, and a contract administrator could be liable to the employer in relation to a claim for the “lost chance” of recovering/withholding sums under the building contract in the event that it certifies PC prematurely.

On the other side of the coin, if the contract administrator incorrectly delays certification of PC, as a result of which the employer incorrectly deducts LADs from the contractor, the contract administrator could find itself responsible for the losses suffered by the employer in paying those LADs back to the contractor (albeit probably not the principal amounts of the LADs themselves, which should never have been deducted in the first place).

Delays and extensions of time

A related category of claim concerns delays and extensions of time (“EoTs”). A construction contract will usually contain provisions entitling the contractor to a postponement of the agreed deadline for PC where a delay has occurred which the parties have agreed should not be the contractor’s responsibility. In this way, the contractor is relieved of its obligation to pay LADs in respect of delays it has been agreed are beyond its control. The contract administrator is responsible for assessing and certifying these extensions of the time for PC.

For obvious reasons, disputes often arise about the contractor’s entitlement to an EoT (and the length of any EoT granted). One common cause of disputes, for example, is the severity and impact of inclement weather. A contract administrator may face criticism for failing to assess delay events properly and granting or refusing EoTs without adequate or appropriate analysis, including awarding EoTs which are too long or too short.

As with the certification of PC, where poor administration results in the loss of a contractual remedy such as LADs (through granting EoTs which should not have been granted), the contract administrator may ultimately find that it is liable to the employer for some or all of the loss in question. Also as with PC, if defective administration results in the contractor not being awarded EoTs to which it is entitled, and LADs are deducted as a result, the contract administrator is likely to be responsible for any loss associated with reimbursing the contractor.

Similar issues arise in the treatment of variations in project scope, loss and expense claims by the contractor, and defects liability (in a defined period following PC, the contractor is required to return to site to remedy faulty workmanship, defective materials and design errors, and this, again, is administered by the contract administrator).

Conclusion

The broad spectrum of potential claims against contract administrators is a function of their wide-ranging role. We addressed risk management in Part 1 of this discussion, but it is worth reiterating that the following measures will assist in reducing the likelihood of claims arising:

• Make sure that a carefully scoped and unambiguous written appointment with appropriate limitation of liability clauses is in place from the outset
• Ensure that the contract administrator’s team knows the construction contract and any relevant legislation (including, in particular, the Construction Act) back-to-front
• Certificates and decisions should be clear and unambiguous
• Keep a clear record of each decision made in relation to the project – including the detailed reasoning behind those decisions – and that make sure that everything else is properly documented and recorded, including the outcome of inspections
• Seek the advice of other professionals on the project where appropriate, but be sure to exercise independent judgment in considering that advice, and maintain a record of that independent assessment