COURTS ENFORCE AN OVERRIDING DUTY OF CARE CLAUSE

An overriding duty of care clause (limiting duties to reasonable skill and care) has in recent years become more common and more desirable to negotiate into contracts. In a key recent decision in which Beale & Company Solicitors LLP acted for AECOM, the successful party, the court[1] upheld the effect and importance of an overriding duty of care clause. The presence of this clause played a key part in the Consultant being able to resist liability in the face of a broad ‘flow-down’ clause which contained a strict obligation not to cause or contribute to a breach of the obligations contained in the upstream agreements. The decision also underlines the importance of a contractual limitation clause, and provides useful clarity on the view the court will adopt where a contract is clearly stated to take effect as a deed, but has been executed incorrectly.

Background

Lendlease, the design and build contractor, engaged AECOM to provide MEP and fire engineering services in relation to the construction of an Oncology Centre at St James’s University Hospital in Leeds (the “Appointment”). When defects arose after practical completion, Lendlease sought to pass their upstream claims down the chain to AECOM. As is set out further below (and also in our previous article), the claim against AECOM was dismissed in its entirety.

Overriding duty to use reasonable skill and care

The Appointment contained a flow down clause which Lendlease used to assert that its obligations to the upstream client under the upstream contracts were stepped down to AECOM, such that AECOM was obliged to achieve the outcome which Lendlease had contracted to achieve under the upstream contracts. The flow down clause read:

“The Consultant shall be deemed to have notice of and shall observe the Employer’s Requirements and/or the Project Agreement and/or the Principal Agreement to the extent the same shall have been issued to the Consultant by the Contractor and to that extent shall be deemed to have full knowledge of the terms and conditions of the Employer’s Requirements and/or the Project Agreement and/ or the Principal Agreement. To the extent of the obligations of the Consultant as set out in this Agreement, the Consultant shall ensure that no act, default or omission of the Consultant shall cause or contribute to any breach by the Contractor of any of its obligations contained in the Employer’s Requirements and/or the Project Agreement and/or the Principal Agreement.”

Also contained in the Appointment was an overriding duty of care clause which stated that under no circumstances would AECOM be required to exercise a standard of care more onerous than reasonable skill and care. Such clauses have become more and more commonly agreed in the current contractual market, and they are increasingly important from a professional indemnity insurance perspective. The RIBA Professional Services Contract is an example of such a contract which contains an overriding duty of care clause, while the NEC4 Professional Services Contract limits the liability for Defects to the failure by a party to exercise skill and care.

The precise wording of the clause in the AECOM Appointment was as follows:

“Notwithstanding any other clause in this Agreement or the Principal Agreement or term implied by statute or common law, the Consultant shall not be construed to owe any greater duty in relation to this Agreement than the use of necessary reasonable skill, care and diligence pursuant to this Clause 4.01.”

The court held that the natural meaning of the overriding reasonable skill and care clause was to qualify the strict duties which would otherwise have been owed by AECOM under the flow down clause. As a result, the flow down clause did not ‘bite’ and AECOM were not found to be in breach of their Appointment by virtue of the obligations in the upstream contracts having not been met.

The court was not persuaded by Lendlease’s argument that the cases of Hojgaard[2] or Martlet Homes[3] meant that that the duty to use reasonable skill and care was ‘trumped’ by the more onerous strict obligations contained in the flow down clause, as the specific clauses in play in the Appointment did not contain inconsistent design obligations, nor competing requirements for specified performance criteria of the kind referred to in Hojgaard. The judge relied on the “proper interpretation” of the relevant clauses in the context of the Appointment read as a whole.

Limitation

A separate contractual issue that arose from the judgment in question relates to limitation, as the claim was brought more than 12 years after the design of the Oncology Centre was complete. AECOM relied on the failure to comply with the technical requirements for execution of a deed to argue that the Appointment operated as a contract and not as a deed, with the consequence that the limitation period was 6 years (rather than 12 years). It was held, however, that the Appointment took effect as a deed despite it not being properly executed. Again, the judge emphasised the need to look at the context as a whole.

No company seal was affixed to the Appointment by AECOM, and the two individuals who signed the agreement were neither statutory directors nor the company secretary. The judge relied on the notion that where a person has been held out as having a particular position/ authority to execute a document, an estoppel can arise preventing the company from later denying that the person has that position/ authority. Those who signed for AECOM were purporting to execute the document as a deed and were held out as having the authority to do so. Also relevant was the fact that the agreed contractual limitation period was 12 years. This further supported the judge’s finding that the parties intended for the Appointment to be a deed.

Despite the fact that the Appointment was found to be a deed, however, Lendlease’s claims were still statute barred and fell outside of the limitation period due to the wording of the limitation clause:

“No action or proceedings under or in respect of this Agreement in contract or in breach of statutory duty shall be commenced against the Consultant after the expiry of 12 years after the Completion Date for the Works”.

The court held that this should be interpreted as a contractual longstop provision, providing a protection against claims brought after a certain date, and not as extending the period in which claims which would otherwise be statute-barred could be brought. The court dismissed Lendlease’s claims because the 12-year limitation period had elapsed in respect of the original design.

Key Takeaways

This judgment provides two key findings:

• If an overriding reasonable skill and care clause is used correctly, it has the power to override and successfully limit otherwise onerous strict obligations within a contract. The judgment provides useful support for consultants (and contractors in a design and build context) to request an overriding duty of care in their contracts, the inclusion of which is becoming more commonly agreed within the industry and can also be important from a PI perspective; and
• It is important to agree a contractual limitation period and make it clear whether the contract is to be a “simple contract” or a deed. Failure to comply with the technical requirements for execution alone may not be enough to make a deed a contract, as the courts will rely on estoppel where the contract has been signed by individuals without the requisite authority, for example, but is clearly marked as a deed.

Please do get in touch if you would like to hear more, as we would be pleased to assist in reviewing and amending your contracts or standard terms to reflect the above findings.

[1] Lendlease Construction Limited v AECOM Limited [2023] EWHC 2620

[2] T Hojgaard A/S v E.ON Climate [2017] UKSC 59

[3] Martlet Homes Ltd v Mulalley & Co Ltd  [2022] EWHC 1813 (TCC)