Payne Hicks Beach

Payne Hicks Beach

17 September 2014

Construction Law 2014 Conference

All the Hot Topics, 23 September 2014


Payne Hicks Beach partner Dr Julian Critchlow attends as an expert speaker at the Construction Law 2014 Conference discussing Adjudication and, in particular, the recent developments in law and practice.


Adjudication - A Review of Recent Developments

Adjudication continues to be a prolific source of developing case-law.  The last year has seen a number of decisions, mostly in the TCC but one, Aspect Contracts (Asbestos) Ltd v Higgins plc, in the Court of Appeal.  None of them constitutes a significant departure from previous authorities, and there is no obvious common theme, but they do reinforce and refine the existing case law. 

Hillcrest Homes Ltd v Beresford Curbishley Ltd
CILL (May 2014) 3506 TCC
Jurisdiction

Hillcrest engaged Beresford to design and build a substantial residential property in Prestbury.  Disputes arose and Beresford started an adjudication.  Hillcrest considered that the subject matter of the adjudication was outside the ambit of adjudication.  It commenced High Court proceedings seeking declarations as to jurisdiction.  The most significant point, from the perspective of the development of the law, was its claim for damages for breach of contract against Beresford for referring to adjudication disputes not subject to the adjudication provisions.

The Judge dismissed the claim.  To succeed, Hillcrest would have had to have shown that there was an implied term that the parties would not refer to adjudication disputes outside jurisdiction.   Business efficacy did not require such a term to be implied: it was not necessary to do so in order to make the Contract work; neither could such a term be obviously inferred. 

This case is important in that, had it succeeded, it could have opened the floodgates to claims for lost costs in the event of successful jurisdictional challenges. 

Twintec Ltd v Volkerfitzpatrick Ltd
CILL (March 2014) 3476 TCC
Jurisdiction

Volker, as main contractor, employed Twintec under a letter of intent (“LOI”) to construct the floor slabs of a warehouse and wine-bottling plant.  The LOI authorized Twintec to proceed immediately with all works necessary to achieve the Design Programme and Construction Programme in accordance with, amongst other things, minutes of a Tender Review Meeting which confirmed the parties’ agreement to use the DOM/2 standard form subcontract. 

The works were completed pursuant to the LOI.  Following complaints by Twintec’s employer concerning, inter alia, the piles supporting the floor slab and the concrete floor slabs, Volker commissioned investigations.  The employer then commenced High Court proceedings which involved various parties including Volker and Twintec.  Notwithstanding the existing litigation, Volker started an adjudication against Twintec claiming the cost of testing which was caused, it said, by Twintec’s poor workmanship. 

Twintec sought an injunction restraining the Adjudication.  Its primary contention was that the adjudication provisions of DOM/2 had not been incorporated into the LOI and, by purporting to operate them, Volker had initiated an adjudication which lacked jurisdiction.  The Judge agreed.  Proceeding on the LOI “in accordance with” DOM/2 merely meant that Twintec had to carry out all the work necessary to achieve the design and construction programmes in a manner which complied with the documents in the LOI and to do so in a manner which did not put it in breach of any of the DOM/2 provisions.  Other terms of DOM/2, in particular those which, in the standard form, required choices to be made, could not be imported into DOM/2.  The adjudication clause was one such term.  Accordingly, the Adjudicator’s appointment was invalid.

A noteworthy point is that both parties assumed that, despite being a preliminary to the full contract which the parties entered into, the LOI constituted a construction contract in its own right;  ie it was not a letter of intent in the true sense at all.  True letters of intent provide for a party to carry out work at another’s request, but without obligation to do so, with the entitlement to be paid a reasonable sum for such work as might actually be undertaken. 

Twintec also sought to restrain the Adjudication on the grounds that it would undermine the case management of the litigation in the TCC by disrupting its ability to deal with the Court timetable, that it would fragment the multi-party Court proceedings, that it was oppressive and that it had no real prospect of success.  However, the Judge rejected those arguments as they would have overridden Volker’s statutory right to adjudicate at any time.  However, he did leave the door ajar on the point, indicating that the Court might regard an adjudication as oppressive and unreasonable in exceptional circumstances.

A further noteworthy point is that Volker, purporting to operate the provisions of DOM/1, had applied to the President of the RICS for an appointment to be made.  Given that the LOI constituted a construction contract within the meaning of the HGCRA 96, so that the Scheme for Construction Contracts applied, an application to the RICS would have been legitimate in any event.  The Judge rejected the argument that making the right application under the wrong provisions was merely a matter of form rather than substance.  Given the general determination of the courts to uphold the adjudication process, this may be considered surprising. 

Devon County Council v Celtic Composting Systems Ltd
CILL (May 2014) 3501 TCC
Crystallization of a dispute.
Jurisdiction – assignment of right to receive monies directed by the adjudicators. 

Devon engaged Celtic to design and build an in-vessel composting system for waste disposal.  The Contract incorporated NEC 3, Option C, as amended.  There was an arbitration clause, but a decision by way of adjudication was a condition precedent to the entitlement to arbitrate.  There were nine adjudications.  After the ninth, Celtic served a notice of dissatisfaction and referred the dispute to arbitration which included a claim for a 319 day extension of time and the return of £196,000 liquidated damages.  Devon asserted that the arbitrator did not have jurisdiction because that particular dispute had not first been adjudicated.  Celtic said it would prepare a claim and, without further notice, served an Adjudication Notice.  Devon then asserted that a dispute had not yet crystallized and, therefore, the adjudicator did not have jurisdiction.  The matter came before the Court which reviewed the previous authorities, notably Carillion Construction Ltd v Devonport Royal Dockyard Ltd [2006] BLR 15.  It held that there will be a crystallized dispute:

  • if A should make a claim to B in terms which enable B to consider it and decide whether to accept or reject it; and
  • if the claim is not expressly rejected, rejection is apparent from B’s conduct.  If B has had a reasonable opportunity to respond and fails to do so, rejection may be inferred.

It is unnecessary for the claim to be precisely particularized. 

In this case, the relevant claims had, essentially, been notified by way of the arbitration notice and so a dispute existed.  The Judge refused to undertake a detailed exercise to try to unpick the differences between the claims as advanced in the arbitration and the adjudication. 

A second issue arose from the fact that Celtic was insolvent.  Celtic was represented by Knowles.  Celtic had assigned to its representatives, Knowles, the right to receive any monies awarded in the adjudications or arbitration, whilst reserving to Celtic the right to enforce payment against Devon as paying party.  The assignment also provided that Knowles would pay to Celtic the balance of any monies received after deducting its own fees.  Devon was concerned that if it paid to Knowles, with whom it had no contractual relationship, any monies awarded in the adjudication, it would not be able to recover them from the insolvent Celtic. 

The Judge did not have to decide whether the assignment was valid although he did impliedly criticize the arrangement.  However, he did decide that the question of whether or not payment should be made to Knowles was not, a dispute capable of being referred to adjudication.  It was not a dispute “arising under the Contract”.  The Judge said: “to my mind, it is quite different from the sort of dispute which is to be referred to adjudication, which is matters arising as to entitlement under the Contract, and by that I mean substantive entitlement as a result of work carried out and any allegations of breach of obligation and so on”. 

ABB Ltd v BAM Nutall Ltd
CILL October 2013 TCC
Breach of natural justice

ABB employed BAM to remove redundant equipment and design and install new cables for ABB’s main contract with London Underground.  The Subcontract was substantially in the form of NEC3.  Clause 11.1A provided that no alterations or amendments could be made to the Subcontract except where expressly recorded in writing by a document stated to be supplemental to the Subcontract.  BAM notified ABB of a compensation event, and subsequently supplied a quotation for additional work arising in consequence.  The parties then agreed the price.  BAM then supplied a further quotation in respect of additional design time.  ABB said it was reviewing it.  However, in the absence of anything further actually materializing from ABB, BAM issued a Clause 62.6 notice (which provided for a quotation to be deemed accepted where not responded to within five weeks of notification).  ABB made a payment below the quotation value.  BAM issued an adjudication notice, relying upon the earlier agreement and on the Clause 62.6 notice.  Arguments arose as to the interpretation of the agreement and the timing for accepting a quotation.  The Adjudicator found substantially for BAM.

The Adjudicator decided, by reference to Clauses 11.1A and 66, that the Subcontract did not provide a mechanism for the agreement’s existence or validity: specifically, it offended the express wording of Clause 11.1A. 

ABB brought proceedings in the High Court arguing that since neither party had relied upon, or even referred to, Clause 11.1A, and it was not raised by the Adjudicator prior his Decision, reliance upon it amounted to a breach of natural justice.  ABB’s challenge succeeded.  In particular:

  • relying upon the Clause despite its not being referred to before the Decision breached natural justice;
  • that reliance was material to the Decision;
  • if it had been raised, ABB would have had realistic prospects of showing that the Clause was inapplicable.

This decision goes slightly against the run of natural justice cases.  As a matter of public policy, the Courts strive to uphold adjudicator’s decisions and, to do so, will give adjudicators a considerable degree of latitude.  Thus, in Cantillon Ltd v Urvasco Ltd [2008] EWHC 282, TCC, an adjudicator’s decision was upheld even where he decided an entitlement to an extension of time which differed from that contended for by either party, and despite the Court’s acknowledging that, in one respect at least, the adjudicator’s decision was probably wrong.  However, in this case, a material part of the Decision was not referable to the parties’ representations and he had gone on a frolic of his own.

Farrelly (M&E) Building Services Ltd v Byrne Brothers (Formwork) Ltd
CILL (July 2013) 3378 TCC
Breach of natural justice
Waiver

Byrne employed Farrelly as Subcontractor for mechanical and electrical work relating to its Main Contract with London Underground Ltd for the refurbishment of Hammersmith Station.  The Subcontract incorporated NEC 3 Option A, with certain amendments.  Disputes arose from a Farrelly application for payment.  Farrelly commenced an adjudication.  In the course of it, the Adjudicator asked the parties for submissions on whether Clause 63.1 of the Contract Conditions required compensation events should be assessed prospectively or retrospectively.  The parties responded.  The Adjudicator issued his Decision in draft, inviting comments for any small adjustments.  At Byrne’s request, he made a small change and then formally published his Decision.  It was agreed that the draft would not be subject to any change other than of the “slip rule” variety.  Byrne made a natural justice challenge and also raised questions as to Farrelly’s financial position.  Accordingly, Byrne failed to make the payment directed and Farrelly commenced enforcement proceedings.  Byrne agreed that despite the fact that the Adjudicator had raised the issue of how Clause 63.1 should be interpreted, he had decided an important point, which concerned the interpretation of Clauses 62.3 and 64, on a basis which neither party had contended for.  Farrelly said that both parties had had the opportunity to make representations on the interpretation of Clause 63.1.  Furthermore, because Byrne had failed to raise the point when the draft Decision had been made, it had, in any event, waived the right to raise the matter.

The Judge decided that there had been no waiver.  For waiver, a party had to know it had a right to challenge the Decision and then have acted in a way that clearly and unequivocally demonstrated that a waiver was intended.  Byrne’s not objecting when the draft Decision was issued could not be construed as such a waiver.  However, the Judge did say that:

“if a party is subject to such serious procedural unfairness that it breaches the rules of natural justice, the natural reaction on discovering that breach would be to raise it with the adjudicator.   A failure to raise it would then be a matter which could be relied on as demonstrating that the party did not believe that there was any substance if it later contended that there was a  breach of the rules of natural justice”.

As to Byrne’s substantive argument that the Adjudicator had breached natural justice by reaching a decision on clause 63.1 which neither party had argued for, the Judge held that the Adjudicator had not gone off “on a frolic of his own”.  He had decided that there should be a prospective rather than a retrospective analysis and then determined the appropriate rate based on what had been submitted to him.  He was not under a duty to go back to the parties a further time. 

Westshield Ltd v Whitehouse and Whitehouse
CILL (February 2014) 3457 TCC
Stay of execution of adjudicator’s decision, respondent subject to a Company Voluntary Arrangement

Mr and Mrs Whitehouse employed Westshield to undertake work on their house in Wilmslow, Cheshire.  The Contract provided for adjudication.  The works were finished in about April 2009.  At the end of 2010, owing to financial difficulties, Westshield entered into a Company Voluntary Arrangement (“CVA”).  Westshield had claims against the Whitehouses for variations and delays which it proceeded upon by way of adjudication in 2013.  The Whitehouses indicated that they had a substantial counterclaim for negligence.  The Adjudicator awarded Westshield £132,667.56.  Westshield commenced enforcement proceedings.  The Whitehouses raised various jurisdictional defences but also said that even if summary judgment were entered against them, the obligation to pay should be suspended.  The Judge held that the proceedings should be stayed pending the taking of an account of the parties’ respective claims by the Supervisor of the CVA.  The case was analogous to those relating to insolvency, notably Bouyges (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] EWCA Civ 507: although the adjudicator’s decision was enforceable, it was also provisional – it was not final and binding and might be reversed.  If it were, the successful referring party might not be able to repay and monies received pursuant to the adjudicator’s decision.  The Insolvency Rules 1986 provide that where a company goes into liquidation, there will be a mutual set-off between it and its creditors of all entitlements and liabilities, and an account will be taken for that purpose.  However, insolvency and being subject to a CVA are not precisely coterminous situations, and the Judge did leave it open to Westshield to consider applying for summary judgment again after the account had been taken.

Pioneer Cladding Ltd v John Graham Construction Ltd
CILL December 2013/January 2014 3445
Agreements as to payment of costs in adjudication

Graham was appointed as main contractor for a new swimming pool and leisure facility.  It selected Pioneer as a Nominated Subcontractor for cladding and curtain walling.  Despite the fact that Pioneer had gone into administration the year before, it was able to convince Graham that it had substantial assets.  Disputes arose, Pioneer adjudicated and was awarded £193,005.53.  Clause 21(iii) of the Subcontract provided that any adjudicator’s fees would be borne by the party that referred the dispute to adjudication.  Clause 21(v) provided that, within seven days of an adjudicator’s decision in favour of Pioneer, Graham would be required to place the amount directed on deposit with a particular bank.  The Judge held that Clause 21(iii) was invalid.  The requirement that the referring party should pay the adjudicator’s costs in any event could discourage a party from commencing an adjudication (even though the clause was not as severe as that in Yuanda (UK) Ltd v WW Gear Construction Ltd [2010] PLR 435 where the relevant clause required the trade contractor to pay the costs of the reference and the legal costs of the Employer whatever the outcome of the adjudication). 

The purported requirement that monies awarded to Pioneer would be paid into an escrow account was also contrary to the HGCRA 1996, and the Scheme, as it deprived a party of the money it had been awarded and would discourage a party from adjudicating. 

Finally, it was held that Graham was entitled to a stay of execution. Graham had entered into the Contract on the false premise that Pioneer was in a good financial position – Graham, which had “robustly vetted “ Pioneer, had been misled.  Therefore, Pioneer could not defeat the application for a stay by arguing that its finances were no worse than at the time the Subcontract was entered into.  Furthermore, Graham had not caused or contributed to Pioneer’s financial problems so that defence to a stay of execution was also unavailable. 

Aspect Contracts (Asbestos) Ltd v Higgins plc
CILL (February 2014) 3449 CA
Limitation: seeking to reverse an adjudicator’s decision

In March 2004, Higgins entered into a contract with Notting Hill Housing Trust for the demolition and redevelopment of the Ivybridge Estate.  Aspect had conducted an asbestos survey for Higgins on which Higgins had relied when tendering.  Finding more asbestos than Aspect had indicated, Higgins adjudicated, obtaining a favourable decision against Aspect dated 28 July 2009.  On 3 February 2012, Aspect commenced legal proceedings to recover monies it had paid pursuant to the Decision.  Thus, the proceedings were commenced less than six years after the Decision itself, but more than six years after Aspect’s supposed breach of contract.  Higgins argued that, therefore, Aspect’s claim was time-barred: it said that time for bringing proceedings for a substituted decision for that in the Adjudication ran from the time of its alleged negligence in 2004.  Therefore, to succeed, it would have had to bring proceedings for a declaration that it had not been negligent by 2010. 

At first instance, Higgins succeeded.  However, the Judgment was overturned by the Court of Appeal.  It was held that the Scheme for Construction Contracts, which applied and was , therefore, incorporated into the Contract, provided that “the decision of the adjudicator shall be binding until the dispute is finally determined by legal proceedings, by arbitration……or by agreement between the parties”.  Thus the Contract  contemplated that there could be a final decision different from the adjudicator’s, and there was an implied term that, in those circumstances, monies awarded in the adjudication might have to be repaid.  Therefore, time could not start to run against the disaffected party until after the adjudicator’s Decision.  Accordingly, the limitation period was six years from the date of payment on the Decision. 

In so deciding, the Court of Appeal rejected the analysis of the Judge at first instance, and re-affirmed the decision of Jim Ennis Construction Ltd v Premier Asphalt Ltd [2009] EWHC 1906 which held that an adjudicator’s decision gave rise to a new cause of action (with a fresh limitation period for challenge commencing at that point).  A different view was expressed, obiter, by the Court of Appeal in Walker Construction (UK) Ltd v Quayside Homes Ltd [2014] EWCA Civ 93, but that case seems not to have been cited in Asphalt and it differs from the view taken by the Courts for many years in the analogous process of arbitration. 

Thameside Construction Co Ltd v Stevens and Stevens
CILL (August/September 2013) 3392 TCC
Set-off against adjudicator’s decision

The Stevenses engaged Thameside to carry out works to their home.  The Contract incorporated the JCT Intermediate Form of Building Contract with Contractor’s Design, 2009.  It contained an adjudication clause (the works concerning domestic premises, the 1996 Act would not apply automatically). 

Thameside submitted an interim valuation which was, in effect, an application for the final account on assessment.  Mrs Stevens, as Contract Administrator, valued the works below the sum applied for and deducted contra charges.  Thameside adjudicated, seeking payment of £190,102.89 “without set-off”.  The Stevenses defended and counterclaimed for £89,891.40 and £60,000 liquidated damages.  Allowing something for defects, but nothing for liquidated damages (which he considered should be “left over for another day”, he found that £106,327.51 was due to Thameside and to be paid within 14 days.  Mrs Stevens, as Contract Administrator, then issued a withholding notice relating to liquidated damages for £40,000, and paid Thameside £66,327.46.

Thameside issued proceedings claiming that the Stevenses were not entitled to set off the £40,000.  The Stevenses argued that the Decision was, in effect, the equivalent of an interim certificate and, in that context, they were entitled to set off or withhold. 

It was held that no such set-off or withholding was available.  Although the Adjudicator had treated the exercise as being referable to an interim certificate, he had not actually directed that an interim certificate should be issued, or merely declared what the net sum outstanding was.  On the contrary, he had directed payment of a particular sum. 

The Judge held that, generally, there is no entitlement to set off against adjudicators’ decisions.  For a set-off to be permissible, there would need to be a specific contractual right for one which did not contravene the statutory scheme, or the adjudicator would have to be giving declaratory relief (rather than expressly directing payment) or permitting a set-off in the decision itself.

Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd
CILL (October 2013) 3413 TCC
Collateral warranties as Construction Contracts

Laing contracted with Orion Land and Leisure to design and build a swimming pool and leisure facility in Cardiff.  Parkwood took a Sub-lease of the development.  Laing gave Parkwood a Collateral Warranty warranting that it had and would carry out the works in accordance with its Main Contract.  Claims arose, and Parkwood issued High Court proceedings to determine whether the Collateral Warranty constituted a construction contract for the purposes of the Housing Grants Construction and Regeneration Act 1996 (which would enable it to adjudicate.)

It was held that the warranty was a construction contract.  It was significant that it applied to workmanship and design that was still to be carried out: it imported an undertaking that the works would be completed to the standard, quality, state and completeness required by the Main Contract.  The Judge said:

“It does not follow… that all collateral warranties given in connection with all construction developments will be construction contracts under the Act.  One needs primarily to determine in the light of the wording and the relevant factual background of each such warranty to see whether, properly construed, it is such a construction contract for the carrying out of construction operations. A very strong pointer to that end will be whether or not the relevant contractor is undertaking to the beneficiary of the warranty to carry out such operations.  A pointer against may be that all the works are completed and that the contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard”.

It was noteworthy, in this case, that the Collateral Warranty was entered into before practical completion, so went beyond guaranteeing an existing state of affairs.

Adjudication, Litigation, and Arbitration

When a construction dispute arises, the appropriate forum must be selected.  Before the HGCRA 1996, the main possibilities for a determinative decision (as opposed to settlement by negotiation or mediation) were litigation or arbitration.  The advent of the non-excludable entitlement to adjudicate has widely been considered to have reduced the popularity of construction arbitration (except in international disputes).  Adjudication has been viewed as fulfilling the role many considered to be the traditional province of arbitration, ie the resolution of disputes more quickly than by litigation in the Courts by a person with expert knowledge.  However, following changes to civil procedure with the Woolf and Jackson reforms, the tide may be changing.  Thus, a major obstacle to commencing litigation can be the requirement to satisfy the Pre-Action Protocol for Construction and Energy Disputes, which requires the parties to articulate their cases in correspondence and by meeting before a claim form may be issued, on pain of an adverse costs order.  And of particular recent significance has been the more rigorous approach of the Courts to even relatively minor procedural failures.  Thus, in Andrew Mitchell MP v News Group Newspapers [2013] EWCA Civ 1537, a party was denied most of its entitlement to recover costs (whichever party ultimately succeeded) for failing to lodge its costs budget on time. 

Although the harshness of that decision may have been somewhat reduced by the recent Court of Appeal cases of Denton v TH White Ltd, Decadent Vapours Ltd v Bevan, and Utilise Ltd v Davies, but there has, nevertheless, been a change in the Courts’ approach to litigation which has had the potential to make it more expensive and aggressive than before.  Therefore, parties may be more inclined to adjudicate and, if disaffected, arbitrate – which, of course, requires an arbitration clause to be agreed either in the underlying contract or at the time a dispute arises.

17 September 2014 


For advice in this area and in the event that you do not have a usual contact at Payne Hicks Beach, please contact the author Dr Julian Critchlow  (mailto:jcritchlow@phb.co.uk)


 

 

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This publication is not intended to provide a comprehensive statement of the law and does not constitute legal advice and should not be considered as such. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken in order to take account of individual circumstances and no person reading this article is regarded as a client of this firm in respect of any of its contents.

The firm is authorised and regulated by the Solicitors Regulation Authority: SRA Number 00059098

© 2014 Payne Hicks Beach 

10 New Square, Lincoln's Inn, London WC2A 3QG

DX 40 London/Chancery Lane
Tel: 020 7465 4300 Fax: 020 7465 4400 www.phb.co.uk

This publication is not intended to provide a comprehensive statement of the law and does not constitute legal advice and should not be considered as such. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken in order to take account of individual circumstances and no person reading this article is regarded as a client of this firm in respect of any of its contents.

The firm is authorised and regulated by the Solicitors Regulation Authority: SRA Number 00059098

© 2017 Payne Hicks Beach

 

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