It is increasingly common for businesses, when undertaking an IT project, to employ a project manager to oversee the structure, development and completion of that project by dealing with the third-party IT provider on the business’s behalf. In a world where a large proportion of IT projects do not run to time, are over budget or fail to meet the agreed specification, we often see customers issuing proceedings against the service provider, but what of the project manager? Does the project manager’s position in the middle offer them some protection, or do they become the meat in a not-so-tasty sandwich when things go wrong?
The recent judgment of the Technology and Construction Court in Ampleforth Abbey Trust v Turner & Townsend Project Management Limited [2012] EWHC 2137 (TCC) has considered the role of a project manager. Whilst the facts of this case come from the construction sector, the TCC’s ruling offers useful guidance for the IT sector in relation to a project manager’s duty of care and how that impacts on causation; if that was not enough, it also considers our old friend – the limitation of liability clause.
Facts
The Trustees of Ampleforth Abbey Trust (the Trust) entered into an agreement with Turner and Townsend Project Management Limited (TTPM) for it to act as project manager for the building of a new boarding house for girls at Ampleforth College in North Yorkshire. Kier Regional Limited (the Contractor) was the building contractor for the project.
The Trust had commissioned TTPM on two previous construction projects for new boarding accommodation at Ampleforth College, and this particular project was the third in the series. The Contractor commenced works in December 2003 and completed them in November 2004. In short, the works were finished to a suitable standard but behind schedule.
The Trust had instructed TTPM and the Contractor that the project needed to be finished so that the completed boarding house could be marketed to prospective students as part of the academic package for the following academic year. The project scope was amended in order to reduce costs for the Trust, and, to make sure work could begin quickly whilst the final scope and design were finalised, the Trust and the Contractor entered into a letter of intent that had been drafted by TTPM. Subsequently, no contract was ever entered into by the parties, and, instead, the project proceeded on the basis of a number of letters of intent that had been drafted by TTPM. By the time the project was completed, there were eight letters of intent in place, but still no contract.
Following the late completion of the project, the Trust and the Contractor were in dispute; the Trust claimed liquidated damages of £750,000 for the delayed completion, whereas the Contractor argued that an extended completion date, with further payment, had been agreed. The Trust argued that no further payment should be made to the Contractor as the letters of intent stated that no further payments would be made if the contract was never entered into by the parties. The Contractor argued that no contract had ever been entered into so, whilst the draft contract had set out liquidated damages of £50,000 per week if the project was delayed, the letters of intent made no reference to such damages. The Trust and the Contractor entered into mediation and settled the dispute with no additional payments being made to the Contractor and no liquidated damages being paid to the Trust. The contract was eventually executed after the project had been completed and based on the terms agreed at the mediation, such that there was no entitlement for the Trust to claim liquidated damages for late completion.
However, the Trust then issued proceedings against TTPM on the basis that it had breached its duty to exercise reasonable skill and care in its provision of the project management services to the Trust by not ensuring that the contract was entered into; that failure had meant that the Trust could not claim liquidated damages from the Contractor, and, if the contract had been signed, the Trust’s position would have been more advantageous. TTPM argued that there had been no negligence and counterclaimed for unpaid fees in relation to the Trust’s dispute with the Contractor.
TTPM had a limitation of liability clause in its agreement with the Trust for the provision of services, which limited its liability under the agreement to what was covered by its indemnity insurance and, in any event, to not more than the lower of the fees paid by the Trust to TTPM and £1,000,000.
Judgment
Judge Keyser QC in the TCC decided that TTPM had acted negligently in not using reasonable skill and care to ensure that the contract was entered into.
Duty of care
The TCC ruled that TTPM owed a duty of care to the Trust to act with reasonable skill and care in the performance of its obligations under its agreement with the Trust. That duty of care came about at both common law and under the Supply of Goods and Services Act 1982, s 13. The judge considered that the finalisation of a contract for the project was a central part of TTPM’s role and was fundamental to the progression of the project. Whilst building projects sometimes proceeded on the basis of a letter of intent and without a contract in place, it was extremely unusual for that to be the case.
Judge Keyser QC said that TTPM was not necessarily wrong in failing to ensure that the contract was signed; however, it had still not done enough to discharge its duty of care. He decided that it should have performed its role using practical judgement and common sense, and, as such, it had not taken adequate steps to ensure the contract was signed, had failed to appropriately advise the Trust of the importance of having the contract completed and had failed to properly manage the Contractor in relation to the project. The judge also decided that TTPM should not have put together the letters of intent if it was not sufficiently competent to understand the effect of those letters of intent and that the letters of intent did not incorporate the liquidated damages provision from the draft contract; in that instance, it should have recommended to the Trust that legal advice was required.
Causation of loss
The TCC also ruled that TTPM’s actions had caused the loss suffered by the Trust. Given the facts, the TCC said that the Trust would have insisted on having the contract signed if it had been advised to do so, and, if the Trust was pursuing that advice, there was a real and substantial chance that the Contractor would have signed the contract, including the reference to the liquidated damages. If the contractor had signed, Judge Keyser QC considered that the Trust’s position would have been improved when compared with the situation where no contract was in place.
Assessment of loss
Based on the facts, the TCC decided that the value that the settlement between the Trust and the Contractor if the contract had been in place would have been £340,000, taking into account the probable price the Trust would have had to pay to achieve execution of the contract. The judge considered that there was a two in three chance of the Contractor signing the contract with the liquidated damages provisions in it, and so valued the Trust’s claim against TTPM at £225,667. However, TTPM did succeed in its counterclaim for unpaid fees in respect of the Trust’s dispute with the Contractor, which would have been incurred in a situation of delay even if the contract had been entered into.
Limitation of liability
The TCC ruled that the limitation of liability in TTPM’s contract with the Trust could not be relied upon as it was unreasonable under the Unfair Contract Terms Act 1977. UCTA contains two sections that are relevant to this case:
Section 2(2) – a person cannot exclude or restrict his liability for negligence except insofar as the term or notice satisfies the requirement of reasonableness (except where that negligence causes personal injury or death, where liability cannot be excluded or restricted at all).
Section 3(2) – a person cannot exclude or restrict any liability in respect of the breach of written standard terms of business except insofar as the contract term satisfies the requirement of reasonableness.
The TCC decided that TTPM’s limitation on liability under its standard terms and conditions, on which it was relying in relation to the Trust’s claim, was unreasonable.
TTPM’s professional indemnity insurance cover was valued at £10,000,000, such that a limit on liability at the lower of the fees paid by the Trust to TTPM and £1,000,000 under the contract with the Trust was not reasonable, particularly as the cost of that level of insurance cover would have been passed on to the Trust by TTPM despite the fact that the Trust could not benefit from it. (However, this view does seem to go against market practice where a project manager would have insurance cover for all clients as a whole, rather than on a project-by-project basis.)
Judge Keyser QC also considered that the Trust had no reason to read TTPM’s terms and conditions for this third project in detail as they held a justified presumption that the terms would be the same as for the previous two projects that TTPM had undertaken for the Trust; those previous terms did not contain the limitation relied upon by TTPM and, as such, the Trust was entitled to expect that the same terms would apply unless the Trust had been specifically warned of the addition of that limitation clause.
Conclusions
One of the main things to take from the TCC’s ruling is the risk that a project manager, in any sector, leaves open when providing services. Defining specific obligations in a contract can help (and there was a specific contract in this case between the Trust and TTPM). However, the courts will take other things into consideration, such as how commercially experienced the customer is (which, in the case of the Trust, was “not very”). Judge Keyser QC said that the scope and role of a project manager will change depending on the specific facts of each case; however, the judge made clear that common sense and practical judgement were key parts of a project manager’s role rather than just technical expertise. Project managers should ensure that they have appropriate people in place with sufficient experience to provide appropriate commercial and practical advice. Given the breadth of the responsibilities that the TCC seems to have put on TTPM in this case, which go beyond technical expertise, a project manager’s risk could be argued to be much wider than many might expect to be the case.
It should be remembered that TTPM was not found liable for failing to ensure a contract was entered into; rather, the liability was failing to use its reasonable skill and care in trying to ensure the contract was signed (ie TTPM could have fulfilled its obligations and divested itself of any liability by the effort it put in even if the contract was not signed).
In terms of the liability cap, the TCC assumed that TTPM passed the cost of its insurance on to its clients. Even if that was true, it is often the case that insurance is obtained on a blanket, rather than client-by-client, basis; as such, any cost of that insurance passed on to the Trust would likely have been relatively small. However, the TCC placed some weight on the cost being passed on to the Trust and yet the Trust was unable to benefit from the full level of insurance cover.
The interesting thing about the TCC’s ruling is that, if TTPM had decided, in this case, to obtain insurance cover of only £1 million, thereby opening itself up to further risk that the insurance would not cover its liability, the limitation of liability clause in its standard terms may have stood a greater chance of being considered reasonable. Conversely, TTPM choosing to obtain a higher level of insurance to cover its liability and minimise its risk meant that its comparably lower liability cap was more likely to be considered unreasonable. Limitation of liability is intended to reduce a supplier’s risk by excluding and limiting liability as much as possible, but it works much better in tandem with a good insurance policy; the question is whether to go for a higher or lower value of insurance. This poses an interesting question for a service provider. A lower value increases the risk in relation to the insurance itself, whereas a higher value, when not properly linked to the limitation clause, increases the risk in relation to limiting liability. The conclusions of the TCC in this case are certainly food for thought both when drafting a limitation clause and when arranging insurance.
TTPM should also have made clear to the Trust that its terms had changed since the previous projects undertaken by TTPM, so that the Trust would have become specifically aware of the limitation of liability clause being included in the standard terms. It is sometimes not enough with standard terms and conditions to simply hide away a limitation clause and hope for the best; rather, it seems that it is safest to inform clients of the presence of the limitation clause in standard terms specifically in order for that clause to be enforceable. This is in line with UCTA rules on reasonableness, which attach weight to whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard to any customs of the trade and any previous course of dealing between the parties).
Simon Weinberg is a solicitor in the Commercial/IP/IT team at Matthew Arnold & Baldwin LLP. Paul Gershlick is a Partner there: www.mablaw.com
