The case of Great Eastern Hotel vs Laing is the first time that a court has turned a construction manager upside down and given him a good shake. On this occasion, £10m fell out of Laing’s pockets. So, has the game fundamentally changed, or was this case the exception the proves the rule?
It has been suggested that nobody is ever accountable if a construction management contract goes wrong. One reason is that, although it is usually the obligation of a construction manager to plan, programme and organise projects, and the trade contractors that actually carry out the work, the client contracts directly with those contractors and retains the risks as to time and cost.
The case of Great Eastern Hotel vs John Laing Construction has given the lie to that suggestion. The case arose after a luxury hotel by Liverpool Street station in London overran by a year and cost £61m rather than the £38m budgeted for. And it is the first time, I believe, that a construction manager has been found publicly to be in breach of its obligations, and liable to its client.
On this project, the construction management agreement, or CMA, provided that Laing should exercise all the reasonable skill, care and diligence to be expected of a properly qualified and competent construction manager, experienced in carrying out services for a project of similar size, scope and complexity. The construction manager was also required to ensure that each trade contractor complied with all of its obligations under its trade contract.
Judge Wilcox, who heard the case in the Technology and Construction Court, decided that this imposed obligations on the construction manager of a professional person performing professional services. This does not mean that Laing was the guarantor of the job, or an easy target because the job went horribly wrong. However, Laing was an important member of the professional team and therefore owed clear and enforceable obligations to the client. Laing’s responsibility under the CMA extended to selecting, managing, administering, planning and co-ordinating the work with the trade contractors, scoping their works and doing so in a professional manner.
The construction manager must seek to minimise the elements of risk to the client. For example, Laing’s responsibility extended to procuring satisfactory trade contracts – ones that do not expose the client to uncertainty and risk – and imposing a regime of strict supervision and monitoring to ensure reasonable levels of performance by the trade contractors. The fact that it had no contract with them, and so was unable to force them to meet certain performance standards, is not a defence. The construction manager must actively seek the resolution of difficulties. This might include insisting on additional resources being allocated or holding regular monitoring meetings with the trade contractors’ directors.
Judge Wilcox described the construction manager as being “at the centre of the information hub of the project”. It is uniquely placed on site. It has access to all the information. It is best placed to report to the client on the true position of the works at any given time. Further, the construction manager would be expected to recognise the importance of the impact of any changes to the likely completion date. Where the completion date was subject to change, Laing had a clear obligation to accurately report any change from the originally projected completion date as well as the effect on costs.
The fact that Laing had no contract with the suppliers and so could not force them to meet given standards was not a defence
A key reason many clients adopt CM route is so that the construction manager can manage any delays and variations that may arise and thereby minimise their effect. The management of these problems includes not only dealing with problems that have arisen but also anticipating potential problems that may arise. A construction manager must investigate the risks involved in site activities and balance them against the potential advantages. Significantly, if major decisions are to be taken, a construction manager should provide accurate information to the client and then seek to involve the client in the taking of these decisions. If the construction manager did not do this, it may be responsible for money wasted by the client in pursuit of ill-informed decisions.
The failure to accurately report delays and face up to them significantly contributed to the problems at the Great Eastern. Had Laing accepted and reported the true nature and extent of delays, it would have had the opportunity to reorganise contracts before a number of the trade contractors commenced. Work packages would have been properly co-ordinated in accordance with the actual progress on site – another of the key skills a construction manager should bring to any project. Laing’s failure properly to report progress meant that it was unable to do this.
The under-reporting of the problems and delays to one of the key components of the project, the temporary roof, had the effect of masking both its critical importance and the fact that steps urgently needed to be taken to identify and deal with the problems. The under and misreporting also meant that the client and the professional team were unaware of their true position. Consequently their additional combined resources could not be brought to bear uon Laing or the defaulting trade contractors to secure better performance and safeguard the client’s position. Laing did not take steps to minimise the elements of risk to the client.
The result of this was that as a direct consequence of Laing’s breaches, the Great Eastern Hotel was exposed to claims from the trade contractors for prolongation, delay and disruption.
On the evidence, the dominant cause of this trade contractor delay was found to be the delay to the project as a whole caused by Laing.
In addition, Laing was held liable for acceleration payments.
Laing’s misreporting meant that the client and the professional team were unaware of their true position
Laing had suggested that the claim for acceleration costs must fail, because the payments made to bring about the accelerations measures were not wasted. That was not accepted. Again, the starting point was Laing’s responsibility for the delay to the project as a whole. Even if some acceleration could be demonstrated, it followed that the delays to completion would have been greater without this acceleration, and thus Laing’s liability for costs consequent on such delays would be that much greater. The acceleration measures, even if partially successful, were measures adopted in order to mitigate the growing losses and as such the cost of such measures were recoverable from Laing.
Another key responsibility of the construction manager is the scoping of the individual trade packages. This responsibility remains even though others may have had an initial responsibility to design and provide the contents. The ultimate obligation to make sure each package is workable and complete remained with Laing under the CMA. The construction manager was again there to safeguard the client.
Here, Laing failed to take reasonable steps to include all of the subject works in the relevant packages. As a consequence, instructions had to be issued to enable those omitted works to be carried out. The expert evidence demonstrated that carrying out work as a variation was not as economical as carrying it out as part of a competitively tendered trade package. Judge Wilcox held that what was recoverable was the element representing the enhanced cost caused by the failure to have the works carried out at the economical package rate, namely 15% of the cost of the instructed variation.
Finally, the case has demonstrated again just how important it is that an expert understands and complies with the primary duty that they owe to the court. Judge Wilcox here found that one of the experts had failed to understand that duty.
An expert must thoroughly research all the evidence available. What they should not do is uncritically accept the evidence put forward on behalf of those instructing him. This is particularly the case when the experts on the other side put forward evidence that challenges and contradicts that picture. In such circumstances an expert must revisit their earlier expressed views.
Judge Wilcox made it clear that the court is looking for an expert who bases their conclusions on sound and thorough research, who has extensive practical experience in the discipline in which they are claiming expertise (and it helps if he has relevant experience of operating under similar contractual provisions as exist in the particular case) and who is prepared to make concessions when their independent view of the evidence warranted it.
In conclusion, the judgment is an important decision for CM’s and the wider industry, and confirms that the construction manager is central to the professional team and the entire project.
Jeremy Glover is a partner in Fenwick Elliott, which acted for Great Easter Hotel in the case