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Great Eastern Hotel Company Ltd v. John Laing Construction Ltd. (Technology and Construction Court [2005] All ER 368)


Construction Management is a relatively recent development in the construction industry and reflects the increasing reluctance of major contractors to undertake all the risks inherent in a construction project.

In Great Eastern Hotel Company Ltd. v John Laing Construction Ltd, Judge David Wilcox of the English Technology and Construction Court succinctly described the procurement method:

"The Construction Manager manages the construction of the Project without accepting the principal risks of time and cost, which remain with the client. Thus it is the obligation of a Construction Manager to plan, programme and organise the Project and the Trade Contractors who actually carry out of the work, so that the Clients risks in relation to time and money are minimised. The advantage to the Client of this form of procurement is that the responsibility for the construction can be handed to professionals who can manage the risks and the work can be started before the whole design is complete. The disadvantage from the client's point of view is that he contracts directly with many Trade Contractors and retains the risk as to time and cost. From a Construction Manager's point of view, these risks are borne by the Client and the CM simply receives his agreed fee for managing the construction of the job ".

This method of procurement became popular in the UK in the 1990's, particularly for complex fit-out works, but has not been used extensively in Asia. This may change; several recent casino projects in Macau have been procured on a Construction Management basis.

The decision in the Great Eastern case examines the nature of the duties owed by the Construction Manager and the circumstances in which he may become liable for project overruns resulting from his inadequate management.

Background

The Great Eastern Hotel Ltd ("GEH") appointed John Laing Construction Ltd ("JLC") as its Construction Manager under a Construction Management Agreement for the redevelopment of its hotel. This agreement provided that JLC should exercise the reasonable skill, care and diligence expected of a properly qualified and competent Construction Manager and that it should also ensure that each contractor complied with the obligations under their respective contracts. The project overran and GEH claimed that JLC had caused the overrun by its mismanagement of the project.

In essence, the primary issue was the scope of JLC's obligations under the Construction Management Agreement. GEH attempted to argue that the Construction Management Agreement should be construed as imposing an obligation on JLC to ensure that the various contractors complied with their respective contracts. GEH relied, in particular, on Clause 3.4 of the Construction Management Agreement which provided:

"The Construction Manager shall further procure that each Trade Contractor complies with all of its obligations under and all the requirements of, their respective Trade Contracts".

It was argued that the duty to procure compliance with the Trade Contracts was an absolute obligation.

JLC argued that. as the Employer. GEH was liable for any delay by the contractors. JLC submitted that if it was held to be responsible for such delay it would be tantamount to imposing on it vicarious responsibility for the performance of the contractors and that this would result in JLC being treated as if it was a traditional Main Contractor rather than a Construction Manager. JLC further submitted that even if GEH could prove that JLC breached the contract it could not show that such breaches caused loss or damage.

Judgment

The judge held that the Construction Management Agreement required the Construction Manager to manage the construction of the project but not to accept the principal risks of time and cost which remained with the Employer. However, while JLC was not the guarantor of the project it did owe clear professional obligations to the GEH. JLC had an obligation to manage the project so that risks in relation to time and money were minimised. It was held that JLC had breached this obligation in that it had failed to manage the contractors with the degree of care expected from a professional in JLC's position. The court held that GEH was entitled to recover GBP 8.9 million (approximately HK$130 million) in damages.

Comment

This is the first reported decision in which a Construction Manager has been found liable to an Employer. It illustrates that Construction Management is far from risk free, though the nature of the risks borne are significantly different from those arising on a traditional contracting model.

Herbert Smith, E-Bulletin
31 May 2005

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