CEO Explains Delegation of Stormwater Outfall Pipe Project - Essay Sample

Introduction

In the meeting we had earlier this week, in your capacity as the firm's Chief Executive Officer, you explained that Agua Utilities ("the owner") wanted to construct a stormwater outfall pipe off the coast of Blackpool (the "works"). To this end, your firm engaged Tuberia Larga Limited ("the contractor") to generate a design before delegating the work of building the Works to a sub-contractor of choice.

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The contractor then sub-contracted the project to Subsea Limited (the "sub-contractor"). You explained that after the stormwater pipe was completed, it was later discovered that it was defective after local fishermen snagged their nets on it. While conducting investigations, the Coast Guard, discovered these nets had become ensnared in the stormwater pipe because it had become detached from the seabed.

You reported in our discussions that a technical expert hired by your firm confirmed that what the Coast Guard reported was true. The expert went on to explain that the detached pipe is also a shipping hazard, hence it must be re-attached to the seabed at a substantial amount of money.

Your expert's suggested that the Works may have become detached from the seabed because (i) the sub-contractor used HDPE plastic rather than steel to build the Works; and (ii) the sub-contractor had used an inadequate amount of concrete collars to fasten the Works onto the sea bed.

Unhappy with this turn of events, your firm arranged a meeting to consult with the contractor and the sub-contractor on the way forward. During this June 4th meeting, the subcontractor's representative(s) produced a report from their expert which suggested that the design approved by the contractor's agent was defective and that this is why it got detached from the seabed. The contractor refused to attend the meeting because they believe that the defects detected in the Works for the subcontractor to address.

Because of the complex nature of the legal relationships between your firm, the framework contractor and the sub-contractor, you turned to this law firm for legal advice.

Contract Law

The general rule is that a contract is a legally binding agreement between two parties (Turner, 2014, p.2). Hence, as it was explained in 'Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Co. Ltd (1915),' it is only parties to a contract who can have a cause of action against each other under contract law The exceptions to this general rule are :

Tort law- when a third party shows that parties to a contract owed them a duty of care and a violation of this duty results in personal injury. This was the court's reasoning in the celebrated case of 'Donahue v Stevenson (1932).'For example, in White v Jones (1995) beneficiaries of a testator successfully sued a solicitor for the latter's negligence while drafting a will.

Assignment -the assignment process, transfers the benefit of a contract to an assignee from an assignor. This right of assignment is however not absolute. In 'Lidens Gardens Trust Ltd v Lenesta Sludge Disposal Ltd (1994)' public policy demands that some assignments can't be done without prior consent.

Agency-the creation of an agency empowers a person to act on behalf of another (the principal). Hence an agent may enter into a contract on behalf of their principal. Thus a principal is privy to a contract even if they are constructively a third party. The general rule set in 'Dunlop Pneumatic Tyers Co.Ltd v Selfridge Ltd (1915)' is that for a principal to have third party rights to a contract entered into by their agent, they must have provided the consideration the agent used while contracting.

Collateral contracts-at common law a collateral contract may be used to ensure gratuitous promises by an offeree on how they will execute the terms of the contract are enforceable in court(Walker & Hughes-D'Aeth, 2016). Thus if your firm was hired as contractor to paint a pier . If a subcontractor then made representations about the quality of the paint they intend to use to your employer. In the eyes of the law, these representations about the quality of paint by your subcontractor will amount to a collateral contract (warranty).In accordance with the judgment in 'Shanklin Pier Ltd v Detel Products Ltd (1951)'your employer can sue your subcontractor even though they weren't privy to the construction contract .

Insurance - The Privity doctrine is avoided if an insurance contract stipulates that benefits are to be paid to third parties(Poole,2014).

The Contract (Rights of Third Parties) Act of 1999 is a statutory exception to the rule excluding third party rights in a contractual relationship. The justification for these exceptions is that there is a public interest in guarding against the potential risks associated with not having a general rule which requires contracting parties to act in an open way during their negotiations (Mupungavanha, 2015).

According to judicial precedents, contract law distinguishes itself from other branches of private law by making economic losses its exclusive concern (Poole, 2014.p.7).Since the harms caused by latent defects which are discovered after construction work has been completed are consistently interpreted by our courts to be economic in nature, contract law has an impact in the tripartite arrangement between your firm , the contractor and the sub-contractor to build the stormwater pipe.

Collateral Warranties

In 'Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd (1965)' Lord Denning said that promises or assurances about how a contract will be executed through a collateral warranty (contract) by a contracting party are binding. In practice, collateral warranties have become the way a direct link is created between the owner (employer) and a subcontractor. This link is needed because latent defects result in economic losses which can only be covered by contract law (Poole 2014).The lack of privy in the principal covenant between a contractor and a subcontractor means that an owner can't sue a subcontractor on the basis of breach of contract if latent defects are subsequently discovered.

Company Law

Your business is registered as a limited liability company in accordance with the Companies Act of 2006. According to this statute and judicial precedents, limited liability companies are 'artificial persons.' Hence in line with the thinking of Lord MacNaghten in 'Salomon v Salomon & Co. ltd. (1897),'the debts of a company belong to the company, not its members. As a creature of law, a company like yours cannot act without help from human actors. Thus there is a maxim that the board of the company is that 'brains' of the operation and its ideas are executed by the Chief Executive Officer (CEO)as well as all the employees subordinate to the CEO. This was the conclusion arrived at in National Westminster Bank Plc v Spectrum Plus Ltd and Ors(2005). Since a limited liability entity such as yours can only act in the real world through human intermediaries, when it engages in fraud , the corporate veil will be pierced so as to attach personal liability the persons responsible for the fraud (Macintyre, 2011, p.106-108).

Tort of negligence.A tort amounts to deliberate conduct which harms other people's private rights that 'are not derived from contract law' (Uff, 2013, p.461). This is because in some instances, the law feels that it must intervene and regulate private relationships between people without their consent(Birks,1995). The tort of negligence has an impact in construction law because there may be obligations owed to the parties to a construction contract which may exist years after the works have been competed (Uff , 2013). Furthermore, tort law distinguishes itself from contract law by focusing in consequential harms(Murphy,2007).These harms encompass personal injury and damage to property(Cattle v The Stockton Waterworks Company [1875]).

Hence, in 'Dutton v Bognor Regis UDC (1972)' Lord Denning advocated for a contractor or subcontractor may be held liable for the tort of negligence when a construction project has 'latent defects.' These defects are latent because the owner of the project couldn't easily spot it at first. Similarly in Pearson Education Ltd v Charter Partnership Ltd (2007), the claimant successfully sued a negligent architect who had specified an under-sized guttering system for a warehouse which resulted in damage to the claimant's stored property when the warehouse flooded.

The general rule set in 'Donoghue v Stevenson (1932)' is that there must be a violation a duty of care which causes damage that is not 'remote' from the conduct of an alleged tortfeasor. In 'Caparo Industries Ltd v Dickman (1990)' it was held that (1) duty of care exists if the harm suffered by the claimant was reasonably foreseeable ; (2) there is proximity between the defendant's conduct with the harm suffered ; and (3) it is fair, o impose a duty of care on the defendant.In 'Barnett v Chelsea & Kensington Hospital (1969)' it was held that causation is proof of proximity. In Re: Wagon Mound No.1 (1961) it was held that a defendant is fully responsible for all the consequences even if the harm suffered by the claimant is much greater what would have been reasonably expected.

Insurance Law

The law of insurance has an impact on construction law . In the celebrated case of 'Prudential Insurance Co v Commissioners of Inland Revenue (1904)' it was determined that an insurance contract (1) secures a benefit triggered by specified future events; (2) because these events are uncertain; and (3) they are averse to the insured's interests.

The court also delineated contingency insurance contracts which provide for a pre-determined benefit upon the happening of a particular event from indemnity insurance contracts common in the construction industry. These indemnity insurance contracts seek to compensate the insured for losses incurred by paying them a pre-determined amount of money. According to statutes and decided cases, this amount payable is already decided and does not reflect on the actual loss suffered (per Brett LJ in Castellain v Preston and Others [1883])..

In Appleby v Myers (1876), it was held that a contractor is not relieved of its obligation to complete the works simply because they are destroyed during the building process. The contractor must instead complete the works and, in the absence of any other express contractual term; they have the duty to do so without any additional payment. Hence Insurance contracts interact with the construction industry by covering additional costs of demolition and completion, or compensation for the delay of construction. After the works are complete, risk and responsibility transfer to the owner away from the contractor.

Insurer's obligations arise when civil liabilities are established against the insured. This is when insurance indemnifies the insured from claims by third parties. It is common for professional indemnity insurance to 'cover for third parties who suffer loss as a result of a breach of the insured's professional duties or the insured's negligence' in construction projects(Surahyo,2018,pp.107-125). In practice, professional indemnity policies need the insured to notify their insurer of actual and possible claims based on 'any circumstances which may/might/could or are likely to give rise to a claim'(per Rix J in Rothschild Assurance plc & Ors v Collyear & Ors [1998]).

The Insurance Act of 2015 now regulates insurance contracts using several the principles among which is that the consequences of a breach of warranty are reduced (Patten and Mirchandani, 2017). Under this Act, a qualified breach removes an insurer's obligation to pay. To understand what a qualifying breach amounts to, one must appreciate that the import from...