B e f o r e :
MR. JUSTICE EDWARDS-STUART ____________________
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Peter Fraser Esq QC & Miss Camille Slow (instructed by Pinsent Masons LLP) for the Claimant Stephen Dennison Esq QC (instructed by Herbert Smith Freehills LLP) for the 1st Defendant Miss Stephanie Barwise QC & Riaz Hussain Esq (instructed by Ward Hadaway LLP) for the 2nd Defendant Hearing dates: 22 and 23 July 2014 ____________________
HTML VERSION OF JUDGMENT ____________________
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Mr. Justice Edwards-Stuart:
Introduction
These proceedings are brought under Part 8 of the Civil Procedure Rules ("CPR"). They arise out of the construction of facilities at two hospitals in Newcastle for the Second Defendant, an NHS Foundation Trust ("the Trust"). The project was undertaken under a Private Finance Initiative scheme ("PFI"). The Claimant is the Contractor who entered into an agreement dated 4 May 2005 with the First Defendant ("HSN") to design and build the facilities. That is the Construction Contract. HSN entered into an agreement with the Trust on the same day by which it agreed to design, build and finance the redevelopment of the facilities and to provide other related services. That is the Project Agreement.
The two hospitals which are the subject of this PFI are the Royal Victoria Infirmary and the Freeman Hospital in Newcastle. The arrangement is that on completion of the project the Trust will pay a charge to HSN for the use of the facilities over a period of 35 years.
Under both the Construction Contract and the Project Agreement there is provision for an independent professional to act as the Independent Tester. The Independent Tester has various functions of inspection and certification under the contracts. Faithful & Gould Ltd was appointed as the Independent Tester. That was by a separate contract also made in 2005 and known as the Independent Tester Contract.
The works under the Construction Contract were to be carried out in nine phases. Phases 1 to 7 involved the various clinical facilities and have been completed. Phase 8 concerned two Clinical Office Blocks ("COBs") which, as their name suggests, were to be used as offices by the hospital staff.
The Claimant contends that Phase 8 was completed in mid 2012. However, the Phase Certificate of Practical Completion has not been issued by the Independent Tester. That is what has given rise to the present dispute. The Claimant seeks declarations in relation to the manner in which the Independent Tester is to act when deciding whether or not to issue a Phase Certificate of Practical Completion.
Unfortunately this is not the first time that this dispute has been before the courts. In August 2012 the Trust brought proceedings in this court to obtain an injunction preventing the Independent Tester from certifying completion of Phase 8. These were heard by Ramsey J. The other parties were HSN and the Independent Tester. The application failed because the Trust felt constrained to discontinue its application during the course of the hearing. But this initial skirmish has done nothing to assist in the resolution of the dispute. For the past two years the COBs have been empty and the hospital staff remain in their original office accommodation.
The Independent Tester has identified, and continues to identify, five areas of the works about which the Trust has complained and which it, the Independent Tester, says are preventing it from issuing the necessary completion certificate. It is probably helpful at this stage to set out what these are. They are as follows:
ii) Daylight levels. The Trust contends that there is insufficient daylight in some of the offices by reference to the requirements of the relevant British Standard.
iii) Window restrictors. The Room Data Sheets ("RDS") required certain rooms to have window restrictors fitted that prevent the top hung windows from opening more than 120 mm. These were not fitted or, at least, the restrictors that were fitted permitted the Windows to open to a greater extent.
iv) The link bridge steelwork. There are two bridges connecting the COBs to the main hospital buildings. They include certain structural steelwork and high level windows that the Trust contends are not shown in the drawings and should not be there.
v) Potential overheating. There is a dispute about the maximum room temperatures permitted by the contracts, how these should be interpreted and what levels can be achieved in practice when the buildings are in use.
In short, the dispute between the parties is whether the Trust is correct in asserting that any breach of contract relating to the quality or conformity of the works requires the Independent Tester to withhold the completion certificate, or whether, as the Claimant contends, all that is required is compliance with the Completion Criteria set out in Schedule 12, Part 2, of the Project Agreement (Schedule 12 to the Construction Contract is in materially the same terms). These have been referred to as the wider construction and the narrower construction, respectively.
At the conclusion of the hearing, on Wednesday, 23 July 2014, I was told by counsel that there was some urgency and that it would be much appreciated by the Claimant and HNS, in particular, if I could give my decision on Monday, 28 July 2014. I undertook to meet this request if I could, but I made it clear that any judgment produced in that timescale would of necessity be fairly brief and that I would only be able to give my reasons in fairly summary terms. The parties appeared content to accept this.
The terms of the contracts
The Construction Contract
This contained the following provisions:
Schedule 37, under the heading "General", said this:
"Defects" and "Latent Defects" were both defined as defects that appeared after practical completion. But it is to be noted that the provision is not confined to Defects or Latent Defects.
The Project Agreement
This contained the following provisions:
Schedule 1 to each contract contained the definitions, which were in almost materially identical terms save where the context required otherwise (shown in square brackets). These included definitions of the following expressions:
Schedule 12 to each contract
Schedule 12 to each contract was in materially at the same terms. The agreements did not contain any hierarchy of documents, so Schedule 12 - like all the schedules - ranks equally with other contractual documents in terms of priority. It consisted of two parts, and associated programmes, each of which was headed: "SCHEDULE 12, Outline Commissioning Programme". Part 1 was sub-headed "Completion Process", and Part 2 was sub-headed "Completion Criteria".
For convenience I will set out the relevant provisions in the schedule to the Project Agreement. Part 1 contained the following:
This was described as a seven-stage process which was a guide for the Independent Tester to adopt in his ultimate programme. On the next page there was a reference to the commissioning activities being set out in "the following draft programmes", each of which was described as "[XYZ] outline commissioning programme".
Part 2 set out the various phases and there are forecast completion dates. It then provided:
In relation to Phase 8, the relevant criteria were as follows:
The Independent Tester Contract
Both the Construction Contract and the Project Agreement provided the text of the Independent Tester Contract at Schedule 15 to each contract. The Independent Tester Contract contained the following provisions:
Part 1 of Appendix 1 set out the scope of the services. Paragraph 3.1 provided as follows:
Paragraph 5.5 contained procedures for witnessing samples of a proportion of the testing and commissioning procedures, prescribing that the Independent Tester was to witness no less than 50% of all tests and to review 100% of all test results. Paragraph 5.6 is important and provided that the Independent Tester shall:
The submissions of the parties
The submissions of Mr. Peter Fraser QC, who, with Miss Camille Slow, appeared for the Claimant, instructed by Pinsent Masons, were for the narrower construction. They submitted that the obligations of the Independent Tester when certifying whether practical completion of a Phase had taken place were to consider the Completion Criteria set out in Part 2 of Schedule 12 and nothing else.
Mr. Fraser argued that clause 22.5.1 of the Project Agreement was absolutely clear in requiring the Independent Tester to issue the completion certificate if he was satisfied that completion of a Phase had occurred "in accordance with the Completion Criteria". This provision was echoed in Schedule 12 itself. He relied also on the provisions in clause 22.1.5, which required HSN to give three months notice to the Independent Tester of the date on which it considered that any Phase of the Works would be complete "in accordance with the Completion Criteria", and in particular the fact that such notification was to trigger the activities of the Independent Tester under that clause.
He said that there was no provision in the Project Agreement that required the Independent Tester to be satisfied that all the work had been carried out strictly in accordance with the contract before issuing a completion certificate. He said that the provision in paragraph 5.6 of the Independent Tester's scope of services simply referred back to the obligations under the Project Agreement.
Leaving aside the fifteen particular criteria that were identified in Part 2 of Schedule 12, which I understood Mr. Fraser to accept would have to be complied with strictly if they were in absolute terms (for example, the requirement for all furniture and equipment shown on the Room Loaded Drawings to have been installed), Mr. Fraser submitted that the opening bullet points in relation to Phase 8 were focused on the major elements of the building and the use to which the building would be put. He submitted that expressions such as "available", "ready for Trust use", "fully commissioned" and "complete and operational" clearly demonstrate that this was the intention.
In short, Mr. Fraser was effectively submitting that the building had to be fit for use and occupation consistent with the purposes for which it had been designed and built, as reflected by the provisions of the Project Agreement. As I understood it, his submissions amounted to this: a breach of the specification that did not have any materially detrimental effect on the amenity value and functional use of the building was not one that should prevent the issue of a completion certificate. Still less, the existence of a dispute between the Trust and the Contractor as to what the contracts meant. Mr. Fraser relied on the fact that the terms of the agreements did not preclude the Trust from making a claim for damages in respect of any nonconformity or defects that existed at the time of practical completion.
I was referred to the observations of Lord Clarke about the approach to the construction of commercial contracts in Rainy Sky SA v Kookmin Bank [2011] UK SC 50 , at [21]-[30]. Of course, I bear these in mind. In support of his arguments Mr. Fraser also referred to well known authorities on practical completion to the effect that practical completion allowed the employer to take possession of the works and use them as intended (for example, per Salmon LJ in Jarvis & Sons v Westminster City Council [1969] 3 All ER 1025, at 1031). Whilst the general practice in the industry is obviously relevant by way of background, if the words of a particular contract pointed to a contrary conclusion then those words must prevail.
Mr. Stephen Dennison QC, who appeared for HSN, instructed by Herbert Smith Freehills, largely supported the submissions of Mr. Fraser and Miss Slow. He submitted that the requirement of the Project Agreement was no more sophisticated than saying that completion is achieved once the Completion Criteria are satisfied. They were the benchmark by reference to which the Independent Tester was to certify or refuse to certify completion.
Miss Stephanie Barwise QC, who, with Mr. Riaz Hussain, appeared for the Trust, instructed by Ward Hadaway, contended for the wider approach. I should mention at once that at the time of the injunction proceedings in 2012 the Trust was represented by different solicitors and counsel.
Miss Barwise relied on clause 22.5 of the Construction Contract, which required the Contractor to give three months notice to the Independent Tester and HSN, amongst others, of the date on which it considered that any Phase of the Works would be complete "in accordance with the Trust's Construction Requirements, the Completion Criteria and this Contract". This showed, she submitted, that in order to achieve completion of a Phase the Contractor would have to comply with all three sets of obligations - the provision would make no sense otherwise. She submitted that it would be a perverse construction of the agreement if completion could be certified even if the works did not accord in significant respects with the TCRs. This submission may be correct, but of course it depends on what is meant by "significant respects".
Miss Barwise invited the court to step back and remember that this project concerns of a healthcare facility. She submitted that we would not be having this debate if what we were talking about were small defects in the machinery in, for example, the renal osmosis room. Again, that may well be correct: as I suggested in argument, the Independent Tester may well have to take a zero tolerance approach where clinical facilities and equipment are concerned - not least, perhaps, because the Independent Tester may not be a clinician.
However, her principal argument was founded on clauses 22.1.1 and 22.1.2 of the Project Agreement, which she described as the crux of the matter. She submitted that the clear intention of clause 22.1.1 was that the Trust was to provide HSN with a draft of the Final Commissioning Programme relating to the relevant Phase, which was then to be discussed and agreed by the parties (or, failing agreement, resolved by the contractual Dispute Resolution Procedure). She did not adopt the argument that had been advanced in the injunction proceedings that the existence of a Final Commissioning Programme was a condition precedent to the issue of a completion certificate: her argument was rather more subtle.
She pointed out, correctly, that both Parts 1 and 2 of Schedule 12 contained the heading that I have set out at paragraph 13 above. This was not an error, she said, because the Final Commissioning Programme that would be worked up during the Completion Process was intended to define what the tests on completion would be. As I understood her submissions, the Final Commissioning Programme would contain all the points that the Trust and the Independent Tester wished to raise in relation to that Phase of the development. She submitted that was clear not only from clause 22.1.1 but also from what happened in practice although, in the case of Phase 8, the Final Commissioning Programme was never in fact agreed. She pointed out that testing and commissioning in accordance with the Final Commissioning Programme was one of the identified Completion Criteria.
In argument, she put it this way (at Day 1/149):
In these circumstances she submitted that, where clause 22.1.2 referred to the Final Commissioning Programme replacing the Outline Commissioning Programme, it meant, in effect, that it replaced the entirety of Schedule 12. The fact that both parts of Schedule 12 were headed "Outline Commissioning Programme" reinforced this conclusion. Miss Barwise accepted that what the parties actually did is not an admissible aid to construction, but I understood her to rely on it as an example of how the contractual machinery worked in practice. Effectively, her submission was that once the Final Commissioning Programme was agreed, neither part of Schedule 12 was needed any more because the whole schedule became subsumed within the Final Commissioning Programme.
Miss Barwise did not shrink from the conclusion that, if her argument were correct, it meant that if the Trust could identify any non-conformity with the terms of the contract and bring it to the attention of the Independent Tester, he would be bound to refuse to issue a completion certificate if he agreed that the nonconformity alleged did in fact exist. On Miss Barwise's approach it did not matter whether the nonconformity would or would not adversely affect the amenity value or functional use of the offices. Beguilingly though it was argued, this was clearly a bold submission.
My conclusions on the effect of the contract
In my view, the operative clause of the Project Agreement is clause 22.5. This is the clause that says how the Independent Tester is to go about issuing a Phase Certificate of Practical Completion. It requires the Independent Tester to issue that completion certificate when he is satisfied that completion of a Phase has occurred in accordance with the Completion Criteria. It goes on to provide that, absent manifest error, bad faith or fraud, the certificate shall be conclusive evidence for the purpose only of ascertaining the relevant Payment Commencement Date and that the Phase Actual Completion Date has occurred on the date stated in the certificate. It is relevant, in my view, that the certificate is not conclusive evidence of the quality of the work or that the buildings as built are in accordance with the specification.
The Completion Criteria are defined in Schedule 1 to mean "the Completion Tests as defined in Part 2 of Schedule 12 (Outline Commissioning Programme) and as may be applicable to each Phase". The Completion Process is defined as the process and procedures for carrying out notifications, testing, inspections and completion certification as set out in Part 1 of the Schedule.
In my judgment, the ITPs referred to in Part 1 of Schedule 12 are not just confined to commissioning activities as usually understood. This is made clear on the second page of the document, which refers to various types of inspection that are to take place before commissioning even begins.
As I have already mentioned, Part 2 of Schedule 12 reiterates that the Completion Criteria set out in the document are to be satisfied to enable the Independent Tester to issue the Phase Actual Completion Certificate.
It seems to me that the real difficulty with Miss Barwise's argument is that it overlooks the definition of Outline Commissioning Programme which I have set out above. That is confined expressly to the programme for each Phase set out in Part 1 of Schedule 12. There is no reference to Part 2 of Schedule 12 in that definition. As I have already mentioned, Part 1 of Schedule 12 lists a number of draft programmes for various stages of the works, each of which is called an "outline commissioning programme". In my view it is an inescapable conclusion, as Mr. Fraser submitted, that those are the programmes referred to in the definition of Outline Commissioning Programme.
This conclusion fits with the structure of the Completion Criteria set out in Part 2 of Schedule 12. Several of those criteria do not involve any sort of commissioning: for example, whether finishes are complete in accordance with Room Data Sheets or whether all the relevant signage has been installed. Those are matters of checking and counting, not commissioning. In addition, the fifth item on the list of Completion Criteria, which is where the only place where the Final Commissioning Programme is mentioned, concerns the mechanical and electrical services installations, which are installations that usually require commissioning.
As I have already noted, in some of the fifteen particular criteria set out there will be little or no room for any exercise of judgment as to whether or not they have been satisfied: for example, either the internal finishes are complete in accordance with the Room Data Sheets or they are not. The same goes for the installation of the furniture and equipment shown on the Room Loaded Drawings. By contrast, the requirement for all the internal and external drainage systems appropriate to the Phase to have been installed and be operational may leave some room for judgment. Suppose, for example, some of the runs or falls of the external drains do not accord precisely with the detail shown in the drawings, yet the drains may be complete and, in the view of the Independent Tester, fully operational.
More generally, the references in the opening bullet points to the COBs and the link bridges to be "available and ready for use by the Trust" are not precise. In my judgment the phrases "use by the Trust" or "Trust use" mean the anticipated use of the offices following proper performance of the Project Agreement. Therefore any material departure from the specification or the Trust's Construction Requirements ("TCRs") would be potentially likely to have an adverse effect on the amenity and functional utility of the offices. As I have already noted, even a fairly minor departure from a clinical requirement may well lead the Independent Tester reasonably to conclude that it is likely to have a material effect on the Trust's ability to use that facility safely and properly.
But in my view if the Independent Tester reasonably considers that a departure from the specification or the TCRs has not had and will not have any material adverse impact on the ability of the Trust to enjoy and use the buildings for the purposes anticipated by the contract, then he may conclude that the Completion Criteria have been met. As a matter of business efficacy and commercial common sense, I can see no justification for importing a requirement that any breach of the specification, however technical or minor, must prevent the Phase Certificate of Practical Completion from being issued.
It follows also that the existence of a dispute between the Trust and the Contractor as to whether or not some particular nonconformity with the specification or TCRs either exists at all or prevents the offices from being taken into use in the manner anticipated by the contract cannot be relevant to the exercise of the Independent Tester's judgment. He must decide for himself, having received any representations from the parties, as to whether or not the nonconformity alleged (assuming that he accepts that it is a nonconformity) has or is likely to have a materially adverse effect on the enjoyment and use of the building by the Trust in the manner contemplated by the agreements. If he concludes that it will not, then he can issue the completion certificate and leave the Trust to its remedy in damages.
This is quintessentially a matter of fact and degree. During argument I put to Miss Barwise a hypothetical example. Suppose that the Contractor had misread the drawings with the result that the vertical distance between the floor slabs on each level was 50 mm less than it should have been. The Contractor takes steps to mitigate the effect of this by reducing the void above the false ceilings by 25 mm. The result is that the ceilings on each floor are 25 mm lower than they should have been.
If, for the purposes of the argument, one assumes that the slightly lower ceilings will make absolutely no difference to people using the offices, for example, by raising the ambient temperature, and are barely noticeable from an aesthetic point of view, is the Independent Tester bound to refuse to issue a completion certificate? Miss Barwise says yes. Mr. Fraser says no.
Of course, the practical answer may be that in those circumstances no reasonable body in the position of the Trust would object and so the question would be academic. However, experience shows that people and corporate bodies do not always behave reasonably. The hypothetical trust may already be in dispute with the contractor and so seizes on this nonconformity as a commercial lever to delay completion and improve its position in the negotiations. There is a suggestion that that is what is happening here, and it certainly looks as if there may have been an element of exaggeration in some of the witness statements, but that is not an issue before me and so I do not propose to say any more about it.
The declaratory relief sought
The declarations sought by the Claimant are appended to this judgment.
As to declaration 1, I consider that the Claimant is entitled to a declaration along the lines sought but, subject to hearing counsel on the precise form of words, I would suggest that the declaration is along the following lines:
In relation to declarations 2 and 3, both HSN and the Trust submit that circumstances have not arisen that would justify such declarations. Whilst they have not made any specific submissions in opposition, they invite the court not to make the declarations sought. I agree. It is usually inappropriate for the court to make declarations that are directed to a hypothetical situation. There is no evidence of any proposal to introduce a "third party certifier" and I therefore conclude that I should not make any declarations along those lines.
As to declaration 4, I consider that this adds nothing of any value to declaration 1. I therefore decline to make that declaration. Subject to anything that may be said by counsel, the same goes for declaration 5.
I decline to make declarations 6 and 7, and I think that on reflection Mr. Fraser concluded that he could probably not pursue them because essentially they raise matters of fact and degree that are inappropriate for investigation in Part 8 proceedings. But whether or not that is so, I consider that they are not appropriate for that reason.
I have considered the counter-declarations proposed by Mr. Robin Smith, on behalf of the Trust, but I do not consider that any of them are appropriate, largely for the reasons I have given in relation to the other declarations.
Conclusion
I consider that the Claimant is entitled to a declaration on the lines that I have set out above, but only in relation to declaration 1. I am unpersuaded about declaration 5, but if it is to be submitted that it adds something to declaration 1, then I am prepared to hear counsel further.
I refuse the application in so far as it relates to declarations 2-4 and 6-7.
I will hear counsel on any questions of costs or other issues arising out of the form of relief.
That the issue of the state of completion of the works that are the subject of the Construction Contract generally, and in particular Phases 8 and 9, should be considered by the Independent Tester against the Completion Criteria contained in the Construction Contract, without those criteria being amended, varied or otherwise influenced by any extant dispute between the Project Company and the Trust under the Project Agreement.
That any agreement between the Project Company and the Trust to appoint a further "third party certifier" (whether as described in the letter of 11 February 2014 from the Project Company to the Claimant, or at all), whether to evaluate compliance with the Building Regulations 2006 and/or issue a "completion certificate" and/or otherwise, would not be binding upon the Independent Tester (and to that extent therefore would be void) and of no legal effect upon the function of the Independent Tester under the Construction Contract.
That any agreement that the Project Company and the Trust may enter into inter se to appoint a further or additional "third party certifier" (whether as suggested in the letter of 11 February 2014 or at all), whether to evaluate compliance with the Building Regulations 2006 and/or issue a "completion certificate" and/or otherwise, would not be binding upon (and to that extent therefore would be void) and of no legal effect upon the Claimant's rights and obligations under the Construction Contract.
That the existence of any dispute between the two Defendants themselves about the works does not of itself constitute one of the Completion Criteria against which the Independent Tester should consider the question of completion of the works in Phase 8 and/or Phase 9.
That the Completion Criteria against which the Independent Tester must consider the progress and completion of Phase 8 of the works are those identified in Schedule 12 Parts 1, 2 and 14 of the Project Agreement, incorporated into the Construction Contract by Clause 19 and Schedule 1 thereto.
That upon the proper construction of the Construction Contract the matters listed in paragraph 4.8 of the Independent Tester Monthly Report of February 2014 are not matters included within the Completion Criteria for Phase 8 contained in Schedule 12 Part 1 of the Project Agreement, such that resolution or status of those matters has no effect upon consideration of the Phase 8 Completion Date under clause 19.1 of the Construction Contract.
That upon the proper construction of the Construction Contract the matters listed in paragraph 4.8 of the Independent Tester Monthly Report of February 2014 are not matters included within the Completion Criteria for Phase 9 contained in Schedule 12 Part 1 of the Project Agreement, such that resolution or status of those matters has no effect upon consideration of the Phase 9 Completion Date under clause 19.1 of the Construction Contract.
Note 1 My emphasis. [Back]
Note 2 My emphasis [Back]
Note 3 My emphasis. [Back]