Last year’s floods triggered a myriad legal disputes and insurance claims. What have we learned?
A year ago, the UK was coming to terms with the impact of floods that had a devastating effect not only on local communities, but also on a large part of the UK’s construction, insurance and transport industries. It has been estimated that the total cost to these industries was around £2.5bn.
Twelve months on, the consequences of those events have lingered through a myriad legal disputes and insurance claims. The question now is, what lessons have been learned in terms of protection against such damage?
In terms of the construction industry, many projects were at least hindered, and at worst terminated, because of the deluge. All efforts were initially focused upon the clean-up of the sites to allow projects to continue. As time elapses, disputes invariably arise between employers and contractors in relation to project delay and, in particular, whether the contractor is entitled to an extension of time to complete the works and/or a claim for direct loss and expense. These disputes are generally hotly contested.
Looking at the provisions of the JCT Design and Build Contract, the phrase ‘the devil is in the detail’ applies.
In relation to extensions of time, the contractor is required, as soon as it becomes apparent that the project is being, or is likely to be, delayed, to give notice to the employer of the ‘material circumstances, including the cause or causes of the delay’. The contractor is also required to provide an estimate as to any expected delay to the completion of the works beyond the contractual completion date. Where the cause of the delay constitutes a ‘relevant event’, the employer is obliged to give an extension of time it considers fair and reasonable.
The term ‘relevant event’ is defined within the JCT suite of contracts as including ‘exceptionally adverse weather conditions’. It is, however, important for both contractors and employers to note that only exceptional, adverse weather will automatically constitute a ‘relevant event’.
While the phrase ‘exceptionally adverse weather conditions’ is not defined within the JCT suite of contracts, it is generally accepted that to meet that definition the weather must, during a calendar month, exceed the long-term average for the time of year and in the location of the project by a significant amount.
Accordingly, under the terms of the JCT form of contract, contractors are required to bear the risks associated with non-exceptional weather conditions, and will often take these into account when negotiating the contract sum and the construction programme.
‘Relevant event’ under the JCT contract also includes loss or damage occasioned by any of the ‘Specified Perils’ and force majeure. With flooding both expressly included within the JCT definition of ‘Specified Perils’, and also arguably an event outside the control of the contracting parties, these additional provisions may provide the contractor with alternative grounds for an application for an extension of time where the weather conditions responsible for the delay are not sufficiently exceptional.
The position in relation to a contractor’s entitlement to claim direct loss and/or expense incurred as a result of flooding from its employer under the JCT form of contract is, however, somewhat different to its entitlement to an extension of time. A contractor will only be entitled to submit a claim for direct loss and/or expense where regular progress of the works has been impeded, either as a result of a deferment on the provision of possession of the site by the employer, or by a ‘relevant matter’.
Crucially, weather conditions, however ‘adverse’ they may be, do not constitute a ‘relevant matter’ under the JCT form of contract. Consequently, the contractor is not entitled to any additional payments for costs incurred as a result of adverse weather conditions.
It is of course standard practice for physical damage to the works and site materials to be protected during construction by an all-risks insurance policy. The JCT form of contract requires either the employer or the contractor to maintain all risks insurance in joint names until the earlier of practical completion of the works or the termination of the building contract. Clearly, the extent of any insurance recovery will depend on the specific wording of the policy, although the courts have given some guidance on the meaning of a ‘flooding’ for indemnity purposes.
The authorities suggest that there must be sufficient volume and suddenness: some abnormal, violent situation, involving a rapid accumulation or sudden release of water from a natural or possibly manmade source. It appears that a slow seepage or build-up of less than around 3 inches of water may be deemed insufficient to trigger insurance cover.
It is also worth considering that it may be possible to bring a claim in nuisance in respect of loss caused by escape of water from a neighbouring property. The duty of nuisance is limited to doing that which is reasonable in all the circumstances to prevent or minimise the known risk of damage, or injury to one’s neighbour or to his property.
There is also the possibility of a claim against the Environment Agency or utility companies, for example for failure to dredge rivers or sewerage overflow, although it is difficult to establish in practice. Where a statutory authority is entrusted with a mere power (as opposed to positive duty), it cannot be made liable for damage sustained by a member of the public as a result of failure to exercise that power.
In exercising a discretionary power, the only duty owed to individuals is not thereby to increase the damage that would have been suffered had they done nothing.
The legal issues arising from the floods remain highly relevant for practitioners. The threat posed by bad weather is constant and this winter could well see an unwelcome return of last year’s troubles.
Jonathan Hyndman is a partner at Rosling King