Are we agreed? Making the most of preliminary issues hearings

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

Following a hearing on 19 January 2016, Mr Justice Fraser handed down judgment in Larkhill Limited v Allison Homes Eastern Limited [2016] EWHC 195 in the Technology and Construction Court (TCC). The decision was of note because Fraser J gave guidance on when it will (or will not) be suitable to ask the court to decide a preliminary issue.

This case also dealt with the potential consequences of a contractor agreeing to take on liability in respect of third parties. The contractor was found to have extended its liability for claims beyond the normal six year limitation period because its obligations as drafted were not sufficiently clear as to when such obligations ceased.

This briefing focuses on Fraser J's comments in respect of preliminary issues hearings.

Background

The claim relates to losses Larkhill alleged it incurred in respect of remedying defects to the foundations of three residential plots. On receipt of the particulars of claim, Allison Homes made an application, either to strike out the claim or, alternatively, to obtain summary judgment in its favour on the basis that the Larkhill's claims were statute barred pursuant to the Limitation Act 1980.

At the application hearing, His Honour Judge Raeside QC ordered that rather than striking out Larkhill's claim or giving summary judgment in favour of Allison Homes' defence, there should be a preliminary issues hearing on the issue of whether Larkhill's claim was in fact statute barred.

What does the TCC guide say about preliminary issues hearings?

As part of the court's wider case management powers, it has the discretion to order trials in respect of preliminary issues. In this case, the dispute was heard in the TCC and therefore the parties were subject to the rules of the TCC Guide. The TCC Guide (paragraph 8.2) states that a preliminary issue hearing should be capable of one of the following:

• resolving the whole proceedings or a significant element of the proceedings; or
• significantly reducing the scope, and therefore the costs, of the main trial; or
• significantly improving the possibility of a settlement of the whole proceedings.

A preliminary issue should ideally be raised at the first CMC but can be raised at any time during the litigation.

Most commonly, a preliminary issue should be used to deal with matters of legal construction or interpretation that require little or no evidence. The TCC Guide does state that a limitation defence (such as that raised in Larkhill) might be appropriate but that there may be a risk that extensive evidence is required relating to matters such as when the damage occurred. In these circumstances, the preliminary issues hearing could lead to duplication of evidence and therefore costs. It may therefore not achieve one or more of the aims set out in the TCC Guide.

Preliminary issues in Larkhill

The issue related to the effect of a bespoke amendment at clause 2.5.5 of the building contract which read as follows:

"The Employer [Larkhill] will register the site with NHBC under the Employers registration and the contractor warrants to accept responsibility for any defect and any expense incurred due to defective work for the period of 10 Years for the NHBC warranty."

At the hearing itself, the parties were not yet in agreement as to the terms of the preliminary issues to be decided. Larkhill proposed two preliminary issues as follows:

"Issue 1: When does the claimant's cause of action under clause 2.5.5 for breach of the obligation to accept responsibility for defects accrue?

Issue 2: When does the claimant's cause of action under clause 2.5.5 for expense incurred due to defective work accrue?"

It can be seen that these two issues presuppose the existence of two separate causes of action, whereas Allison Homes proposed a single issue as follows:

"Issue 3: Does clause 2.5.5 of the Building Contract operate to preclude claims for defects (whether in contract or in tort) from being brought against the defendant after expiry of the 10 year NHBC warranty period?"

The parties had therefore framed the preliminary issues to be heard quite differently. At paragraph 22 of his judgment Fraser J said:

"The undesirability of hearing and deciding preliminary issues where the wording of the issues themselves is not only not agreed or ordered by the court, but the approach to the issues is different, is obvious."

It was also apparent at the hearing that one of the heads of claim brought by Larkhill was in tort but that there was no agreement between the parties in respect of the date the damage actually occurred. Fraser J observed that the court cannot in a summary way make findings on disputed issues concerning the relevant dates for limitation purposes at a preliminary issues hearing. In the absence of an agreed set of facts, it would have required him to consider disputed facts based on documents alone without hearing oral evidence. This was clearly not appropriate in line with the TCC Guide.

Accordingly, Fraser J refused to make a finding in respect of whether or not Larkhill's claim was time barred in tort.

He did go on to hear the parties' submissions as to the proper legal interpretation of clause 2.5.5. In summary he concluded that there was in fact only one cause of action, and that it accrued when Allison Homes refused to accept responsibility for the defects; alternatively, when Allison Homes failed to accept responsibility having been asked to do so.

The effect of this was to extend the contractor's liability beyond the six-year limitation period prescribed by statute and up to the 10 years covered by the NHBC warranty. Despite the fact the clause in question was bespoke (and therefore interpretation of it has general application) the underlying principle serves as a useful reminder to approach the drafting of such clauses with caution.

Conclusion

Fraser J's decision in Larkhill emphasises the importance of considering the TCC Guide when assessing if a matter is suitable for a preliminary issues hearing. Parties should consider:

• Does the issue satisfy the requirements of paragraph 8.2 of the TCC Guide (as set out above)?
• If yes, does the preliminary issue turn on the facts?
• If yes, are those facts agreed / subject to a schedule of agreed facts?
• If yes, it may be a suitable issue for a preliminary issues hearing.
• If no, it should be considered whether or not the level of evidence required at the preliminary issue hearing is likely to exceed the threshold for "limited or no" evidence as set out in the TCC Guide.

Ideally, parties should use this guidance to consider the suitability of an issue for a preliminary issues hearing well in advance of the first CMC in order that any areas of disagreement can be flagged to the court.