Why Turner & Townsend school case is important

The recent case of Ampleforth Abbey Trust v Turner & Townsend is important for three reasons.

First, it's actually a case about whether the well-known construction consultants, Turner & Townsend (T&T), were negligent as project managers for allowing a construction project for Ampleforth School to proceed by way of letter of intent and not contract. They were, which is notable in itself, it being rare for project managers to be found liable by the courts.

Second, it is also another reminder of the risks of using letters of intent.

And finally its decision on the cap on liability has, potentially, wide reaching ramifications. T&T’s appointment had a net contribution clause with a further overall cap of the lesser of £1 million or the total of the fees paid under the project (£111,321). In addition, the appointment required T&T to hold £10 million of professional indemnity (PI) cover. The court held that the cap did not apply and Ampleforth had access to T&T’s £10 million PI cover.

David Phillips, a senior solicitor in our insurance team, who specialises in construction claims, said:

“Many consultants in the construction industry are required to hold insurance not purely as a contractual obligation, but as a condition of membership of their profession. To that extent the insurance provisions of each contract/appointment entered into are often not considered in a broader commercial context, but are limited to ensuring that the level of cover is met. Often this review is carried out by the broker in isolation from a review of the interrelationship between those provisions and the consultant’s standard terms.

While Ampleforth turns on its own unique facts and its general application should not be exaggerated, it does highlight the approach a court will take when considering liability caps, and the importance of understanding the correlation between a contract’s insurance provisions and each party’s liability to the other under that contract. One lesson to take from it is that holding PI cover is not only a way for a consultant to manage its own exposure to claims, but also a way of understanding how risk is seen by the court to be apportioned between the parties to a contract. If its reasoning is followed, it is difficult to see how a professional who is contractually obliged to have annual PI cover in place can limit its liability substantially below that cover.”

The cap was challenged on the basis that it had not been incorporated into the contract because the contract was not signed. The judge rejected this, effectively holding that the parties had contracted on the unsigned terms.

The cap was also challenged on the grounds that it fell foul of the reasonableness test under the Unfair Contract Terms Act 1977. The judge held that it did. His reasoning was that there was a huge gap between the amount of professional indemnity insurance offered (£10 million) and the damages recoverable under the cap - a bit over £111,000. Absent a valid explanation as to why this was the case, the cap was unfair.

Stuart Pemble, a partner in our construction and engineering team, believes the decision was correct but disagrees with the judge’s reasoning.

“This decision is difficult to reconcile for two main reasons. In Photo Productions Ltd v Securicor Transport Ltd, the House of Lords stressed the "importance of leaving commercial parties 'free to apportion the risks as they think fit”. The agreement reached should therefore be binding, irrespective of how fair or unfair the judge felt it was.

The judge also suggested that the cost of the PI insurance of £10 million would have been born by Ampleforth in the fee paid to T&T and that it was effectively unfair of T&T to deny Ampleforth the benefit of insurance cover it had paid for. In fact, PI insurance is one of the many overheads (eg, rent, salaries and power) that a firm of consultants has to pay. The PI premium will be paid once a year and covers all contracts, not just this one.”

Conclusion

Having said that, Stuart is of the view that the decision is probably correct because the cap on liability was arguably not incorporated at all. The more onerous a term, the greater the notification needs to be given to party who will suffer from it

This was the third project T&T had done for Ampleforth. In the first two, the cap on liability had not been included. It was only included in this contract and that change was not brought to the attention of Ampleforth. It may therefore be that this case turns on its own unique set of facts.