Background to the dispute
Mr Clin owned two adjoining properties within the Kensington Palace Conversation Area. In September 2012 Mr Clin engaged the contractor, Walter Lilly, to carry out works at the properties comprising “part demolition, extensive groundworks, refurbishment, reconstruction [and] extensions to a pair of terrace houses to form a single house on completion”.
A dispute arose between the parties as to the extent of demolition works involved in the project and, hence, whether a sufficient planning consent had been obtained. In July 2013, the local planning authority (LPA) informed Walter Lilly that the proposed work amounted to “substantial demolition” that necessitated conservation area consent. Absent such consent, activity at the properties ceased. Mr Clin asserted that Walter Lilly had over-emphasised the extent of work required and that the works did not amount to “substantial demolition”.
Nevertheless the parties decided to apply for planning permission, which was duly granted in June 2014. Work recommenced in August 2014. Walter Lilly issued a claim for loss and expense and an extension of time, amounting to 53.2 weeks. This was refuted by Mr Clin.
Issues before the Court
A number of issues were put before the Court of Appeal to determine. This blog will consider three of them:
- Was the first instance judge right to hold that a term was implied into the building contract, making the employer responsible for obtaining all necessary consents?
- If so, what was the scope of that implied term?
- How would such a term impact on risk allocation under the building contract?
The implied term and the employer’s general obligation
The building contract was silent on whose responsibility it was to obtain “planning approval”. As such, both parties accepted that a term needed to be implied to determine who was responsible for obtaining any planning permission/conversation area consent.
Reviewing the case law and the facts, the Court of Appeal upheld the judge’s decision, finding that “in this case, under this contract” the onus of applying for planning permission, or ensuring that permission was applied for, clearly lay with Mr Clin.
In the context of building contracts, in the absence of an express term, the court considered that the employer would generally be responsible for obtaining the necessary planning permission, since execution of the works would otherwise be unlawful. However, such a term will not always be implied. In reaching this decision, the Court of Appeal considered that the individual procuring the works was best placed to know “what he wanted to do, [as] the contractor does not find out until he is invited by tender”. By tender stage it may be too late to obtain the necessary consents. Further, a reasonable person who wishes to develop their land should anticipate whether or not planning permission may be needed.
What was the scope of the implied term?
The Court of Appeal, clarifying the nature of the implied term suggested by Edwards-Stuart J at first instance, held that the implied term did not impose an absolute obligation on the employer, since there was a discretionary element to both the granting of the consent and its timing which fell within the control of the LPA.
Although employers may be relieved at this, the bar is still set quite high. The Court considered that the employer should use “all due diligence” to obtain any required planning consent in respect of the Works.
In its ordinary meaning, to act with due diligence means to take such steps as would be reasonable for a person to take in order to comply with an obligation. This is likely to involve a measure of prudence, responsibility and expedition. The Court of Appeal identified (non-exhaustively) the following steps that an employer may need to demonstrate to show it had used “all due diligence” to obtain planning permission:
- Making a timely application for permission.
- Providing sufficient information to the LPA in support of the application.
- Co-operating with the LPA in the statutory process.
The court considered what amounted to “due diligence” in the carrying out and completion of construction works in SABIC UK Petrochemicals Ltd v Punj Lloyd Ltd. It held that the obligation of “due diligence” imported, but was not limited to, an obligation to carry out and complete the works industriously, assiduously, efficiently and expeditiously. In SABIC the court noted that whether an action amounted to “due” diligence would depend on the “object to which the obligation attached”, which would in turn be determined by the factual matrix.
Impact on contractual risk allocation
The Court of Appeal was clear that the implied term to obtain planning permission:"must be taken together with the existing terms of the contract in which the parties' respective obligations and responsibilities, and their respective risks, are expressly provided for."
The Court considered that the terms of the contract adequately addressed the consequences of the implied term, and potential non-compliance with that term. It ruled out retrospectively implying further terms to legislate for the allocation of risk between the parties. However, it left open what further provisions would need to be implied if this were not the case.
Avoiding unplanned surprises
The case clarifies the nature of the implied term and reinforces the need to draft carefully and expressly allocate risk under a building contract. Traditionally, the fundamental principle (that risk should sit with the party best able to bear it) would indicate that risk in respect of land lies with the landowner. That said, many employers, particularly in relation to unusual or specialist development works (such as demolition in conservation areas, as in this case) may argue that this is much more a matter falling within an experienced contractor’s remit.
Employers need to be mindful that, absent express provisions to the contrary, they are likely to be held responsible for obtaining planning permission and will need to demonstrate that they have exercised all due diligence in doing so, including demonstrating that they have applied for permission in a timely manner, provided sufficient information and co-operated with the LPA. Otherwise there is the risk of an unplanned surprise!
A version of this Expert Insight first appeared on the Practical Law Construction Blog on April 11, 2018.