Tag: Construction

1
Wrongful Termination and Failed Wasted Costs Claim
2
Court of Appeals Confirms One-Year Statute of Limitations for Disgorgement Claims That Is Not Subject to the Discovery Rule
3
COVID-19: Update – What You Need to Know As New Jersey and New York Construction Projects Begin to Reopen
4
COVID-19: UK Public Sector Construction – Cabinet Office publishes Guidance Notes for PPN02/20
5
Pennsylvania Construction Amid COVID-19
6
COVID-19: UK Public Sector Construction – Cabinet Office publishes FAQs regarding PPN02/20
7
COVID-19: UK Public Sector Construction – Cash Flow Relief for Suppliers
8
‘Fitness for Purpose’ and Conflicting Obligations in Offshore Wind Projects
9
COVID-19: Coronavirus Concerns Prompt Two-Week Halt to All Construction in Boston
10
K&L GATES HONORED WITH MULTIPLE QATAR BUSINESS LAW FORUM AWARDS

Wrongful Termination and Failed Wasted Costs Claim

By: Nita Mistry

CIS General Insurance Ltd v. IBM United Kingdom Ltd

The Technology and Construction Court has recently handed down authoritative guidance on wasted costs and the characterization of damages arising out of termination of a contract. The court was asked to determine whether the claimant was entitled to recover £128 million in damages for wasted costs arising from the alleged wrongful termination of a contract.

Mrs. Justice O’Farrell ruled that IBM (the defendant in the case) was not entitled to exercise any right of termination because CISGIL (the claimant in the case) disputed a particular invoice within the time prescribed in the contract, and nonpayment of the invoice in those circumstances did not entitle IBM to terminate. Accordingly, IBM’s purported termination amounted to a repudiatory breach, which CISGIL was entitled to accept. Nonetheless, the court decided that IBM was ultimately entitled to payment of the invoice, set off against the damages awarded to CISGIL.

This case is another stark reminder of the inherent risks involved with terminating a contract and why termination should always be regarded as a measure of last resort. It is advisable to take legal advice when considering termination.

Background

CISGIL (a wholly-owned subsidiary of the Co-operative Group Limited), a company involved in the underwriting and distribution of general insurance products, engaged IBM to supply a new information technology (IT) system and manage the system for a term of 10 years. The services agreement between the parties provided for payment against certain milestones.

In early 2017, an issue arose as to whether or not the requirements of a particular milestone had been met. IBM submitted an invoice in the sum of c. £2.8 million on the basis that it considered the applicable milestone events and requirements to have been met.

CISGIL’s position was that the milestone had not been met (nor payment authorized), and it refused to accept or pay IBM’s invoice for the milestone payment. Following setoff notices (by CISGIL) and final payment notices (by IBM), IBM purported to exercise a contractual right of termination based on CISGIL’s failure to pay the invoice. CISGIL disputed IBM’s right to terminate and treated the purported termination as a repudiatory breach, which it accepted.

CISGIL brought a claim before the High Court seeking damages of £128 million, which it characterized as expenditure incurred in relation to the alleged wrongful termination by IBM, along with a number of alternative claims regarding breach of contractual warranty and delay claims. The characterization of CISGIL’s claim was significant, as the limitation of liability provision in the services agreement excluded claims for loss of profit, revenue, or savings.

IBM counterclaimed in the sum of c. £2.8 million for the unpaid invoice.

Judgment

A key issue considered by the court was whether IBM exercised a valid right of termination by reason of CISGIL’s failure to pay the invoice or whether its purported termination amounted to a repudiatory breach, which repudiation CISGIL was entitled to, and did, accept.

CISGIL’s position was not simply that the milestone had not been achieved. It also argued that it had not approved achievement of the milestone, which it said was a prerequisite to payment. CISGIL also argued that the invoice was not payable because (i) IBM failed to meet prior milestones, and (ii) the invoice was not correctly prepared or properly submitted. CISGIL also argued that (i) it was entitled to setoff against the invoice, (ii) IBM lost any right of termination by its delay, and (iii) IBM was in willful default as defined in the services agreement.

IBM’s position was that the milestone was not dependent on the achievement of any other milestones and that the invoice was correctly prepared and properly submitted. IBM argued that CISGIL did not dispute the invoice within the time frame prescribed by the services agreement and had failed to assert any rights of setoff against the invoice until the time for doing so had expired. IBM rejected CISGIL’s allegations of delay and willful default, arguing that notice of termination was served by IBM within a reasonable time of CISGIL’s purported default. Consequently, IBM maintained that it was entitled to payment of the invoice in the sum of £2,889,600.

The court concluded that:

  1. CISGIL was obliged to approve the achievement of the milestone and was in breach of this obligation. CISGIL was not entitled to benefit from its own default in seeking to avoid payment by asserting the invalidity of the invoice based on the absence of approval.
  2. CISGIL’s complaints that the invoice was defective and/or not properly submitted had no merit.
  3. CISGIL did, however, validly dispute the invoice in accordance with the contractual mechanisms, entitling it to withhold payment against the invoice.
  4. The provisions of the services agreement, read together, were clear and unambiguous: they introduced a “pay now, argue later” principle, but they did not exclude any right of setoff; CISGIL would retain its right of setoff against future payments due and would retain its right to counterclaim for damages. However, there was a provision that restricted the exercise of such setoff rights against invoices to those in respect of which a valid notice of dispute had been given within seven days.
  5. IBM was not entitled to exercise any right of termination under the services agreement because CISGIL disputed the invoice within seven days of its receipt. In those circumstances, the purported termination amounted to a repudiatory breach, which CISGIL was entitled to accept. There was, however, no willful default.
  6. The court considered “A high-risk strategy was adopted on both sides; the AG5 milestone payment, a modest sum in relation to the high value of the overall project, was the vehicle used to bring the project to an end.”

Regarding the quantum of the claim, CISGIL’s position was that its claim for wasted expenditure was not a claim for loss of profit (which would be excluded by the limitation of liability provision in the services agreement). CISGIL argued that compensation for wasted expenditure puts it into “a break-even position” and that its benefits from IBM’s performance would have been worth at least as much to CISGIL as the amounts expended in reliance on the contract.

Applying principles from relevant authorities, Mrs. Justice O’Farrell said, “The starting point is to identify the contractual benefit lost as a result of IBM’s repudiatory breach of contract.” The contractual benefit CISGIL anticipated was “substantial savings, increased revenues and increased profits” from the new IT solution, which IBM promised to supply. The loss of bargain suffered by CISGIL comprised the savings, revenues, and profits that would have been achieved had the IT solution been successfully implemented. Mrs. Justice O’Farrell said, “CISGIL is entitled to frame its claim as one for wasted expenditure, but that simply represents a different method of quantifying the loss of the bargain; it does not change the characteristics of the losses for which compensation is sought” and concluded that CISGIL’s claim was excluded “whether it is quantified as the value of the lost profit, revenue and savings, or as wasted expenditure.”

As a result of the court’s findings, CISGIL was awarded damages of £15.9m in respect of additional costs incurred arising out of IBM’s wrongful termination instead of the £128 million in damages that CISGIL’s had claimed for wasted costs. The court also concluded that IBM was entitled to payment of the unpaid invoice in the sum of £2,889,600 and that IBM was entitled to setoff this sum against CISGIL’s claims.

Court of Appeals Confirms One-Year Statute of Limitations for Disgorgement Claims That Is Not Subject to the Discovery Rule

Authors: Timothy L. Pierce, Hector H. Espinosa, and Samira F. Torshizi

In a recently published case dealing with issues of first impression, the California Court of Appeal Second Appellate District in Los Angeles held that the disgorgement penalty under Business and Profession Code § 7031(b) must be made within one year of completion or cessation of the performance of the project, and that time is not extended by the discovery rule.  Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc., 2020 WL 5035826 (Cal. Ct. App., Aug. 26, 2020).  BPC § 7031(b) permits a party who uses the services of an unlicensed contractor to recover any and all money paid to the contractor for its work—regardless of the quality of the work (indeed, even if the construction was flawless).  The purpose of this harsh forfeiture provision is to deter unlicensed contractors from performing construction.

Read More

COVID-19: Update – What You Need to Know As New Jersey and New York Construction Projects Begin to Reopen

Authors: Patrick J. Perrone, Loly Garcia Tor, and Tara L. Pehush

On 13 May 2020, New Jersey and New York announced that construction in both states would resume, but projects that are reopening must adhere to detailed and specific guidance. This alert addresses the new requirements for construction operations in New Jersey and New York.

CLICK HERE to read more.

COVID-19: UK Public Sector Construction – Cabinet Office publishes Guidance Notes for PPN02/20

Author: Kiran Giblin

Further to our recent blog alerts “COVID-19: UK Public Sector Construction – Cash Flow Relief for Suppliers” and “COVID-19: UK Public Sector Construction – Cabinet Office publishes FAQs regarding PPN02/20”, the Cabinet Office has published construction sector-specific Guidance Notes to assist contracting authorities implementing PPN02/20 into existing works contracts.

Read More

Pennsylvania Construction Amid COVID-19

Authors: Richard F. Paciaroni, Justin N. Leonelli, and Reymond E. Yammine

COVID-19 has made its way into various industries throughout the world, and Pennsylvania’s construction industry is no exception. All commercial construction activities throughout the Commonwealth, with a few limited exceptions, have been halted indefinitely to assist in mitigating the ongoing spread of the coronavirus. Similarly, construction supply chains in Pennsylvania, the U.S., and abroad have either limited supply or halted material production altogether, which may result in severe construction delays throughout Pennsylvania once construction projects are cleared to continue. Given the current (and likely ongoing) state of flux faced by Pennsylvania’s construction professionals, it is important that contractors familiarize themselves with the state-specific legal concepts currently at play and consider practical efforts to help curtail the economic impact of COVID-19.

CLICK HERE to read the full alert.

COVID-19: UK Public Sector Construction – Cabinet Office publishes FAQs regarding PPN02/20

Authors: Matthew E. Smith, Inga K. Hall, Kiran Giblin

Further to our recent blog post “COVID-19: UK Public Sector Construction – cash flow relief for suppliers” on 31 March 2020, in which we set out guidance on the Government’s Procurement Policy Note – Supplier relief due to COVID-19 PPN 02/20 (“PPN02/20”), the Cabinet Office has published a FAQs note providing further clarity and guidance regarding implementation of PPN02/20 in practice.

The 17 initial questions addressed in this FAQ note range across providing definitional clarity on terms used, further detail on how to make use of the Model Interim Payment Terms also published, the extent to which suppliers can also make use of other relief, such as via the Coronavirus Job Retention Scheme, and employers’ rights in terms of repayment, continued discharge of obligations, protection from double payments and the preservation of other contractual rights and remedies.

To read the full alert, please click here.

COVID-19: UK Public Sector Construction – Cash Flow Relief for Suppliers

 Authors: Daniel T. Lopez de ArroyabeInga K. HallKevin Greene

The impact of COVID-19 on the construction industry has been the subject of much debate this week, as discussed in our blog article “COVID-19 Construction Industry – Operating in a Pandemic”, with businesses split over whether or not to shut down operations in order to protect the health and safety of those working on construction sites. The division has been exacerbated by the lack of a clear Government directive either way, meaning that it has – for the time being at least – been left in the hands of individual companies to decide whether or not to stop work.

While that issue continues to divide opinion, what is clear is that the pandemic and the fall-out from it will place an unprecedented strain on supply chains, and one of the main challenges currently faced by the industry is how to maintain cash flow so that businesses are able to survive and continue working once we emerge through the other side. In this regard the Government has taken steps to provide further clarity and guidance, with the publication on 20 March of Procurement Policy Note – Supplier relief due to COVID-19 PPN 02/20 (“PPN02/20”).

Taking immediate effect until 30 June 2020, PPN02/20 applies to all contracting authorities (including central government departments, executive agencies, non-departmental public bodies, local authorities and NHS bodies) and covers goods, services and works contracts being delivered in the UK.

To read the full alert, please click here.

‘Fitness for Purpose’ and Conflicting Obligations in Offshore Wind Projects

Authors: Charles Lockwood and Owen Chio

Two recent cases in the UK illustrate the tricky issues Employers and Contractors have to grapple with in defining the responsibilities of contractors involved in the construction of offshore wind projects.

There are no established standard form contracts for offshore wind farm projects. The standard forms that are often adapted for this purpose include traditional offshore forms used in the oil and gas industry such as the LOGIC forms and standard engineering contracts more commonly used for onshore projects such as FIDIC, particularly the FIDIC Yellow Book.

Neither form is ideally suited for use in the offshore wind industry and they are often heavily amended, particularly in relation to design obligations. The cases summarized below illustrate some of the tensions that can arise, particularly in relation to design and fabrication of monopiles and transition pieces and requirements that they should be fit for their intended purpose.

To read the full alert, please click here.

COVID-19: Coronavirus Concerns Prompt Two-Week Halt to All Construction in Boston

 Authors: Steven P. WrightJohn L. Gavin

Another industry felt the impact of coronavirus (COVID-19) on Monday, March 16, when, amid growing concerns over the spread of COVID-19, Boston Mayor Martin J. Walsh announced a two-week halt to all construction projects in the City of Boston. Boston’s construction ban went into effect on Tuesday, March 17, and will last at least two weeks. Although the implementation of COVID-19 prevention measures has increased across the nation in recent days, Boston’s construction ban is the first of its kind in the United States. This alert discusses the impacts of the construction ban, as well as the broader implications of the ban in Boston and for the rest of the nation.

To read the full alert, please click here.

For more information and resources on COVID-19, please click here.

K&L GATES HONORED WITH MULTIPLE QATAR BUSINESS LAW FORUM AWARDS

The K&L Gates Qatar-based Construction & Infrastructure team received two awards during the recent 2019 Qatar Business Law Forum Awards, retaining the “Property and Construction Firm of the Year” title for a second consecutive year, as well as earning a new recognition for “Alternative Dispute Resolution Firm of the Year.” The annual forum and awards ceremony recognizes exceptional achievement within Qatar’s legal community and is judged by a panel of nearly 30 industry leaders, academic practitioners, and government officials. The firm is honored to receive these awards, which highlight our commitment to not only the Qatari market but also our Middle East practice.

This image has an empty alt attribute; its file name is Qatar_Business_Law_Forum_2019-1.jpg

Copyright © 2019, K&L Gates LLP. All Rights Reserved.