AMEC Foster Wheeler Group Ltd v Morgan Sindall Professional Services Ltd & Anor

Under a business sale agreement transferring responsibility for construction liabilities, liability for defects depended on the contractual wording. Actual discovery of a defect, or notice of its discovery, was required where the agreement used language such as “made aware”; constructive knowledge of the defect was insufficient. Obligations to complete work transferred only where the work remained outstanding at completion. A contractor had no freestanding obligation under defects-liability provisions to remedy defects without the contractually required instruction. While carrying out remedial works, however, the contractor remained subject to obligations concerning the discovery of non-compliant work. Constructive knowledge could be relevant to whether the contractor ought reasonably to have known that an act or omission would create liability, but not to whether it knew of the defect itself.

The claimant had sold its construction business to the defendants under a business sale agreement. The defendants assumed specified liabilities under existing building contracts from completion until a defects liability certificate was issued. The dispute concerned defective cladding at a hotel and apartment development, and whether a certificate issued by the employer’s agent covered both sections of the works.

The court determined preliminary issues concerning the construction of the assumed-liabilities clause, the effect of the building contract’s defects provisions, actual and constructive knowledge, and the imputation of knowledge held by transferred employees or subcontractors.

1. Certificate. The certificate issued on 18 August 2008 was a certificate of making good defects for the Apartments only. The contractual document had to be construed in the context of the communications under which it was issued and from the perspective of the parties to the contract. The references to the Apartments in the certificate and covering emails outweighed the inclusion of both sectional completion certificates.
2. Construction of clause 7.3(c). The first limb transferred performance obligations and liabilities falling due after completion and before the relevant defects liability certificate. It included work identified as outstanding at sectional completion which remained incomplete on 27 July 2007. It did not transfer obligations that had already been discharged before that date.
3. The defects-liability provisions imposed no freestanding obligation to repair defects appearing before or during the defects liability period unless the employer issued an instruction under clauses 16.2 or 16.3. Clause 8.7 applied where non-compliant work was discovered, or its discovery was notified, while the contractor was carrying out the Works, including remedial work. The decisive contractual touchstone was actual discovery, not whether the contractor ought to have discovered the defect.
4. Third limb. Liability required that the defendants had been made aware of the defect. Constructive knowledge of the defect was insufficient. The phrase requiring that the defendants knew or ought reasonably to have known concerned whether they knew, or ought to have known, that failure to act after being made aware would give rise to liability. The clause did not create a freestanding obligation merely because a defect later became known.
5. A common-law duty to report a discovered defect could arise in appropriate circumstances, particularly where safety risks were apparent, but such a duty would ordinarily require reporting rather than remedial work. Knowledge of transferred management employees could be imputed to the defendants if the employee retained the relevant knowledge and ought reasonably to have appreciated the potential liability. A subcontractor’s knowledge was not relevant on the material before the court.
6. The preliminary issues were answered accordingly. No final factual findings were made on whether the cladding defects had been discovered or whether the defendants were still carrying out the Works at the relevant times. Questions of relief and costs were reserved.