Construction consultancy Sweett has won a legal dispute with a house-builder client after a contractor went into liquidation.

The court ruled that Cyril Sweet (now just Sweett), was not negligent as employer’s agent for Michael Wight Homes in failing to procure a performance bond for its client.

The dispute blew up after the contractor on a housing project, Diamond Property Construction, was liquidated.

The decision sets a precedent for future rulings and has major implications for the construction industry, according to Kim Teichmann from law firm Thomas Eggar. 

Sweett had to “prepare contract documentation and arrange for such documents to be executed” under the JCT 2005 Design and Build Revision 1 2007. It was an obligation of the firm's appointment but it failed to deliver.

When Diamond Property Construction went into liquidation, it left Michael Wight Homes without a performance bond.

According to Teichmann, “the employer’s agent persistently chased the contractor for the bond and kept the employer informed of this, as well as the consequences of not having it.

“The court had to decide whether all these actions were irrelevant because there was an absolute obligation to provide a bond, or whether the obligation to arrange for the execution of a bond was limited to the taking and exercise of reasonable care.

“Looking at the contract wording, the court found that the word 'arrange' did not mean 'ensure' so it was not an absolute obligation. The employer’s agent was not negligent.”

Also, the court did not think that the employer’s agent should have withheld payment to incentivise the contractor to provide the bond, said Teichmann. “However, this conclusion was made in the context of the fact that the contractor was being underpaid on the job, progressing the works well and had provided assurances that the bond would be provided.”

The employer’s agent’s appointment was terminated prior to the point where it may have become necessary, in the court’s view, to withhold money. The court commented that it thought it was perfectly legal under the JCT to withhold the entire amount of the performance bond under an interim payment.

“There are important lessons for employer’s agents, contract administrators, project managers, quantity surveyors and architects, all of whom administer projects and agree to provide documents and arrange for their execution,” Teichmann said.

These are:

• Make sure that you agree to “arrange” for the execution of documents; do not agree to “ensure” that documents are executed.
• Include the obligation to provide documents as a term of the building contract.
• Advise the client in writing of the risks of not obtaining a performance bond (or any other document such as a warranty), if it is not forthcoming.
• Chase the performance bond and do not give up.
• When considering whether to withhold monies to incentivise the provision of a performance bond, weigh up all the factors and apply common sense. There are a number of ways to put pressure on a contractor to provide documents; normally discussions with the contractor are the first course of action, which if unsuccessful can then lead to withholding payments.

A court has ruled that a subcontract did not contain an implied term requiring a subcontractor to proceed regularly and diligently. Its obligation was limited to completing on time.

The case, Leander Construction v Mulalley, is likely to have widespread application, according to Mark Clinton, a partner at law firm Thomas Eggar.

It was brought after Mulalley engaged Leander as subcontractor. The subcontract contained an activity schedule setting out various activities and dates for them to perform. They were stated to be subject to change and it was accepted that the subcontract did not require Leander to adhere to them.

Mulalley contended however that Leander were required to proceed regularly and diligently and that the activity schedule was the best tool to use to measure whether they were doing so. It also argued that the term was implied into the contract because it was necessary to make it work properly.

Mulalley said Leander was not keeping up with the schedule, and withheld money from payments because of it.

Court takes subcontractor's side

Leander disputed Mulalley's arguments, and the court agreed.

It said there was no implied term because it was not necessary in order to make the contract work. There were other terms in the contract which allowed Leander to exercise control over Mulalley’s performance and there was no need for anything further.

The court confirmed that, in the absence of express requirements it is up to the subcontractor how the completion date is met. A main contractor seeking to co-ordinate the work of several subcontractors will need to include appropriate express conditions in his subcontracts.

Problems for main contractors

“Drafting such clauses is a notoriously difficult exercise,” said Clinton. “Perhaps that is why so many contracts steer clear of doing so – look at the JCT forms and see how little reference is made to programmes.

“Simply making the programme a ‘subcontract document’ will not do. If the subcontractor is to be required to follow the programme, it will be necessary to have a mechanism for adjusting programme dates where delay is caused by the contractor – otherwise the obligations will not be enforced.

“Beefing up the contractor’s rights to dictate the pace of progress is one approach but not one likely to be popular with subcontractors.

“Including a general obligation to ‘proceed regularly and diligently’ is another option but the precise meaning of that expression is open to debate. An updated and fuller expression of the same idea would be preferable.”

The case may reignite the debate started 20 years ago by the NEC contract, Clinton feels – should building contracts concern themselves with project management or should they be limited to dealing with rights and liabilities? “Looking again to that form of contract for inspiration may pay dividends,” he says.

Tolent clauses

The Mulalley case is also notable as it is the first to comment on the amendments to the Construction Act since they came into force. Section 108A of the Act was intended to outlaw so called ‘Tolent clauses’, which require one party to pay the adjudication costs of the other regardless of who wins the adjudication.

“Many commentators consider that s108A does not work,” says Clinton. “In Leander, the court gave a clear indication that arguments to the effect that s108A does not prohibit Tolent clauses are likely to be given short shrift.”

The Construction Act changes last autumn has caused uncertainty over pay less notices. Laura Phoenix from Thomas Eggar explains the criteria for an effective pay less notice, and clarifies the wording of the new act.

Confusion about pay less notices has become common as the construction industry gets to grips with changes to the Construction Act, which came into force last Autumn.

It is crucial that a paying party grasps the statutory requirements for pay less notices.

An ineffective pay less notice leaves the payer (usually the client) with little alternative than to pay a sum notified no matter how strongly it disagrees with the figure in question. This must be taken all the more seriously now that payment notices can be issued by the payee (usually the contractor).

Amendments

The amended Construction Act allows the parties to negotiate and agree whether the client or the contractor issues payment notices.

Where in accordance with tradition, the client is obliged to issue payment notices under the contract, that obligation now has teeth: the contractor can issue a notice of default specifying the sum it considers due if the client misses a payment notice deadline.

The client then has one more ‘bite at the cherry’ which if missed or inadequately performed results in an obligation to pay the sum set out in the contractor’s notice. This ‘bite’ is the pay less notice.

Differences to witholding notices

Statutory requirements for a pay less notice differ from more familiar requirements for a withholding notice (to specify the amount(s) to be withheld and the ground(s) attributable to each amount). These still apply to construction contracts entered into before 1 October 2011.

The new Section 111 (3) of the Construction Act allows the client (or client’s specified person e.g. the contract administrator) to give the contractor notice of the client’s intention to pay less than the notified sum.

Section 111(3) requires a pay less notice to specify:

1. The sum that the payer / specified person writing the notice considers to be due on the date the notice is served (even if this is zero), and
2. The basis on which that sum is calculated (again, even if the sum is zero).

Effectiveness

To be effective, a pay less notice must be served before any contractual deadline.

If no deadline is expressly agreed, then the amended Scheme2 implies a strict timetable into the contract.

Provided you use an up to date standard form (e.g. JCT 2011), your contract will be compliant with the new Act. Check that your contract refers to pay less notices and generally complies with the 2011 legislation before entering into it. – A non-compliant contract will have unintended consequences.

Question over wording

The wording of new Subsection 111(3) (a) raises an interesting question: What does “the sum that the payer considers to be due on the date the notice is served” mean? The sum that was due at the due date? Or is a further valuation required to take account of work done between the due date and the date of the pay less notice?

The question has given rise to different opinions amongst legal advisors. The answer lies in the use of the word ‘due’. Payment for work done between the due date for a period of work and the deadline for a payless notice does not fall due until the next due date.

In our opinion, the pay less notice should therefore start by setting out the sum which the notice writer (the payer) considers was due at the payment due date even though the figure is determined at the date of service of the pay less notice. A pay less notice can then go on to take account of set-offs arising after the most recent due date but before the deadline for issuing a pay less notice.

For a sample pay less notice and guidance notes or to discuss any query relating to a construction contract, contact the author Laura Phoenix, an Associate in the construction team at Thomas Eggar.

Lacked jurisdiction because there was no contract in writing and because the adjudicator had been appointed by the Royal Institution of Chartered Surveyors (RICS) and not the Council itself. The judge found that there had been a contract based on a letter Sprunt had sent to the Council offering to reduce its fees by 5%. Both parties ' conduct after this had established that a contract was in place. The court also rejected the argument that  Camden  should be the Adjudication Nominating Body. It is a contravention of the Housing Grants, Construction and Regeneration Act 1996 for a contracting party to be an Adjudication Nominating Body as this would jeopardise the requirement that the adjudicator be impartial.

In 2001 Sprunt entered into a Framework Agreement with the Council for the provision of building consultancy services after being successful in the tender process. The contract was contained or evidenced by the Council’s “Tender Document for Building Consultancy Services 2001-2004/6”. 

Clause 25 of the framework provided for dispute resolution. The clause said that any disputes were to be referred to adjudication in accordance with the Scheme for Construction Contracts 1998 with the Council being the specified nominating body. Over the next few years, the Council awarded Sprunt 37 commissions.

In 2003, the Council invited Sprunt to tender for the provision of building consultancy services in a number of disciplines for two projects, the Ampthill Square Estate and the Godwin & Crowndale Estate. The Council accepted Sprunt’s tender for both projects by a letter dated 15 July 2003. This contract was not procured through the existing Framework Agreement, but the conditions of contract which applied were virtually identical. The Ampthill project was later divided into two phases. There were disputes between Sprunt and the Council on both phases over Sprunt’s fees. Sprunt wrote to the Council on 12 June 2006 offering to reduce their fees by 5.5%.

In the end, Sprunt issued a Notice of Adjudication and the RICS appointed an adjudicator. The Council said that he lacked jurisdiction because the Framework Agreement stated that the Council would be the nominating body. They also raised an argument that the parties’ agreement had not been in writing for the purposes of section 107 of the Housing Grants Construction and Regeneration Act 1996. The Council referred to the Framework Agreement and to the fact that under its terms there were to be commissions which were to be the subject of further agreements between the parties. The Council said that the only document which could be construed as a contract was the letter of 12 June 2006, but this did not contain all the terms of the commission; it simply referred to an agreement to provide the services for a fee of 5.5% which, contrary to the terms of that letter, was the fee set by the framework agreement for a building contract of this value.

CONTRACT IN WRITING

It was common ground that that there was a contract between the parties in relation to Phases A and B of what was originally the Ampthill Square Estate project. It was really only if the agreement as ultimately entered into was entirely made orally or partly orally and partly in writing that it would fall foul of the requirements for writing prescribed by section 107.

Sprunt argued that the parties had operated under the Framework Agreement until it sent its letter to the Council on 12 June 2006 which, in effect, the Council accepted by conduct. The judge agreed. This letter had effectively been established as an agreement by conduct since both parties proceeded as if it had been accepted. The Council accepted the Phase A claims and the early additional services; it also accepted the Phase B 5.5% fee claims and paid them. There was the clearest evidence that the incorporation of or reversion to the Framework Agreement in relation to Phase B was agreed and accepted by both parties. Consequently, the Phase B agreement was evidenced in writing or was to be treated as being in writing because of the letter of 12 June 2006 and because it could be said that the parties made an agreement in writing because they agreed "otherwise than in writing by reference to terms which [were] in writing" for the purposes of Section 107(3).

THE NOMINATING BODY

The Council argued that it, and not the RICS, was the correct adjudication nominating body. Clause 25.11 of the Framework Agreement contravened section 108(3) of the Act because it provided that that the adjudicator’s decision would not be binding until challenged in legal proceedings. Because of this, section 108(5) came into play and the adjudication provisions of the Scheme applied. The adjudication provisions in the parties’ agreement were, therefore, to be disregarded.

Paragraph 23 of the Scheme provides that neither a natural person nor a party to the dispute can fulfil the role of adjudication nominating body. In addition, it was contrary to the policy of the Act for the contract to specify that one side should nominate the adjudicator. Section 108(2)(e) imposes a duty on the adjudicator to act impartially and there was a danger that an adjudicator appointed by one of the parties would not be impartial. In the judge’s view, the reason why the Council wanted to retain the right to nominate the adjudicator was so that they could either nominate someone who was sympathetic to them, or someone who was very expensive compared with the amounts at issue so that Sprunt might be intimidated into not going to adjudication. The contractual provision permitting the Council to nominate its own adjudicator was also in contravention of the Act; consequently the RICS was a valid nominating body and the adjudicator had been validly appointed.

Sprunt Ltd. v London Borough of Camden [2011] EWHC 3191 (TCC)

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Walton was Illawarra’s contractor on a project to refurbish a hotel. Work under the contract was delayed almost from the beginning. Practical completion was not achieved until 9 July 2007 when practical completion should have been achieved on 5 August 2006. The parties disagreed as to the number of days of extensions of time to which Walton was entitled, the extent and value of variations to the works performed by Walton, and as to the amount to be allowed for provisional sums. Walton alleged that the Superintendent had not acted reasonably or fairly in granting it extensions of time as required by clause 35.5 of the contract, that she had not valued the variations using reasonable rates and/or prices in accordance with the requirements of clause 40.5(c), and that Illawarra was in breach of contract because of her actions. Illawarra counterclaimed for damages for delay. There were also issues as to the quantum of damages and Walton’s liability to pay damages for the rectification of defects in the works.

The Superintendent was required to act honestly, fairly and reasonably. Clause 23 of the contract provided guidance as to the way in which the parties expected the Superintendent to carry out her obligations. She was to act honestly and fairly; she was to act within any time prescribed, or otherwise within a reasonable time; and when required to do so, she was to arrive at a reasonable measure or value of work, quantities and time. There were other relevant contractual provisions e.g. in relation to the granting of extensions of time. Even if the Superintendent had acted honestly and reasonably, Walton could not be bound by her determination if that determination did not meet the description “a reasonable extension of time”. The court rejected Illawarra’s argument that it was not entitled to look at the Superintendent’s assessments for extensions of time and valuation of variations to determine whether or not they equated to the contractual standard of reasonableness, and to substitute its own determination of what should reasonably have been allowed if they did not.

The Superintendent had held the dual roles of Superintendent and project architect. Her primary loyalty had been to her client, Illawarra. In her capacity as architect, she had assisted Illawarra to answer at least one payment claim made by Walton under the Building and Construction Industry Security of Payment Act 1999 (NSW). In doing so, she had been required to support a determination of the amount due to Walton that she had made in her capacity as Superintendent. Given the dual nature of her role and the demands made upon her by Illawarra in her capacity as architect, there was a real possibility of conflict and the appearance of bias was a likely result.

Illawarra’s obligations under clause 23 of the contract included an obligation to ensure that, in the exercise of her functions under the contract, the Superintendent arrived at a reasonable measure or value of work, quantities and time. If the Superintendent failed to arrive at a reasonable measure or value of work, quantity or time in any respect, it followed Illawarra had breached that obligation. In respect of variations and provisional sum adjustments, Walton was entitled to damages for breach of clause 23 (c). The measure of those damages was the difference between the total of the amounts paid or allowed to Walton and the total of the amounts that the referee concluded should be allowed, to the extent that they had been adopted by the Court.

Walton v Illawarra, [2011] NSWC 1188

 

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The court set out the circumstances when a total failure of consideration could occur, commenting that it would be more difficult to apply the doctrine of total failure of consideration to a contract for the provision of services, and  that difficulty applied not so much as a matter of construction of the contract but as a matter of fact.

P. C. Harrington, PCH, was the main contractor on three projects. It engaged Tyroddy Construction Ltd. to undertake reinforcement works on these projects. The parties fell into dispute over the lack of a final account procedure and entitlement to the repayment of retentions. Tyroddy referred a number of these contracts to adjudication. Mr. Philip Doherty, who was employed by the claimant, Systech, was appointed as adjudicator by the RICS. He wrote to both parties enclosing his “Terms of Engagement of the Appointment as Adjudicator” which included his rate of £210.00 per hour plus expenses and disbursements. The Terms also stated that both parties would be jointly and severally liable for the payment of his charges. Both parties accepted these Terms and Conditions. Tyroddy accepted them by virtue of a letter from its claims consultant, and PCH by conduct. 

PCH challenged the adjudicator’s jurisdiction on the ground that there was no dispute between the parties because PCH alleged that there had been agreement on a fourth contract relating to “Crossharbour” between the parties that payments of all retentions due or becoming due to Tyroddy should be put on hold until the question of an alleged overpayment of £300,000 on the Crossharbour project was resolved. Tyroddy gave detailed reasons why the jurisdictional challenge was wrong. Mr. Doherty reviewed the parties’ submissions and decided that he had the jurisdiction to continue. Mr. Doherty made awards in Tyroddy’s favour. At the enforcement proceedings brought by Tyroddy, PCH alleged that Mr. Doherty’s decisions were not enforceable on the grounds of breach of natural justice. PCH alleged that he had failed to address the defence put forward in each adjudication that no retention could be due because Harrington had already overpaid Tyroddy on each of the three subcontract projects.

Alternatively, PCH said that the adjudicator had taken it upon himself to deal with the final account exclusion as a matter of jurisdiction without giving either of the parties the opportunity to be heard on that point. The court had agreed with PCH, and that the adjudicator had “unwittingly [fallen] below the standards which are required to enable the decision or decisions to be enforced”. The court decided that by ruling wrongly that issues relating to the final account were outside his jurisdiction, he had put himself in the position that he could not and would not deal with a defence, i.e. that no sums were due to Tyroddy because PCH had already paid more than was due to it. In addition, court found that the adjudicator had taken it upon himself to deal with the final account exclusion as a matter of jurisdiction without giving either of the parties the opportunity to be heard on that point. Consequently, Mr. Doherty’s decision should not be enforced.

In the present proceedings, Systech sought payment from PCH for Mr. Doherty’s fees. Two of these related to the Crossharbour project which the parties had in the meantime settled. The other three sets of proceedings, dealing with the Wembley, Mansfield and Liverpool adjudications respectively, were transferred to the TCC in the High Court where they were consolidated. PCH resisted payment alleging that there had been a total failure of consideration in respect of the adjudicator’s three contracts of engagement, and that the adjudicator had failed to issue “Decisions” in accordance with the Scheme. This was on the basis that he had produced decisions which were unenforceable because of his breaches of natural justice. At least part of this argument was based on there being an implied term of the contract of engagement that the adjudicator was obliged to conduct the adjudications in accordance with the principles of natural justice.

The court set out the circumstances when a total failure of consideration could occur, commenting that it would be more difficult to apply the doctrine of total failure of consideration to a contract for the provision of services, and that difficulty applied not so much as a matter of construction of the contract but as a matter of fact. If the contract, properly construed, involved the provision of services, it would be difficult to say that there has been a total failure of consideration where some of the services had been provided but not all of them. Depending on the terms of the contract and the contractual entitlements to payment for the services, the service provider might well not be entitled to payment for those services which it had not provided, but that had nothing to do with the doctrine of failure of consideration and more to do with straight contractual entitlement.

The first point to be considered was what was the bargained-for performance required from the adjudicator. This was to be taken from the adjudicator’s letter and his Terms of Engagement. In the judge’s view, the bargained-for performance was the provision of the role of adjudicator which covered not only the production of the decision but also the discharge of the remaining aspects of the role which involved the conduct of the adjudication in the period leading up to the decision. In the same way that it was not the function of a judge or arbitrator just to produce a judgement or an award but also to provide all the necessary and important ancillary and anterior functions, so it was, generally, with an adjudicator.

It could not be said that there had been a total failure of consideration. The adjudicator had spent a good deal of time dealing with PCH’s jurisdictional challenges which PCH had asked him to deal with. All of this had been a partial discharge of his role as adjudicator. There was not a “total” failure and the consideration or bargained-for because performance was not “whole and indivisible” and there had been in effect at the very least partial performance by the adjudicator.

Systech International Ltd. v P. C. Harrington Contractors Ltd., [2011] EWHC 2722 (TCC)
 

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The claimant was a contractor and the defendant the operator of a quarry which produced construction products for the industry. The claimant was awarded a contract for the construction of a number of houses by Dublin City Council and faxed the defendant with a Purchase Order, with an original sent by post, for the supply of aggregate. The Purchase Order Conditions" were printed on the reverse of the original Purchase Order sent by fax and received, at the latest, by the defendant, on 28 March, 2003. The defendant commenced supplying materials in 2003 and this continued until 2005. A delivery docket signed for each delivery on behalf of the defendant and on behalf of the claimant, either by a site employee or a haulier on its behalf. Each delivery docket stated, on its face, at the bottom:  

"This material is sold subject to the terms and conditions available on request".

In 2008, the defendant advised the claimant that the aggregate contained pyrite and should not be used as under floor infill in any building or within 500 millimetres of any concrete or steel structure. Dublin City Council notified the claimant of its intention to make a claim against it, and the claimant sought an indemnity, relying upon an indemnity clause in its Purchase Order Term and Conditions. The defendant denied that the claimant’s Ts &Cs applied to their contract. The defendant alleged that the applicable terms and conditions were those made on its delivery dockets and referred to in communications from the defendant to the claimant prior to March 2003. It maintained that these had been incorporated into the contract or contracts with the claimant.

On the evidence, the court found that the parties had reached an oral agreement about the supply of the aggregate. This agreement did not have to be in writing. There were also some implied terms the claimant's signed, written Purchase Order and the credit application completed by the claimant. There were also implied terms as to the manner in which the contract would be performed, including the ordering system by oral "call offs" placed by telephone by the site manager or other operative from the claimant's construction site at Finglas to the defendant's operative on the weighbridge at Baylane, and the recording of the aggregate supplied by the use of delivery dockets in accordance with a well established practice between the quarry and construction industries.

These delivery dockets were all post-contractual, unless they had the effect either of making a new and distinct contract, or of varying the existing contract. Any analysis must be based upon the facts of this case. The dockets were crucial as the written record of the amount and type of aggregate delivered and the time, date and place of delivery. They made no reference as to price. The defendant's evidence was that a signed delivery docket was essential to enable it to obtain and enforce payment for the loads supplied or delivered. Similarly, the claimant's evidence was that they were crucial for the purpose of checking its potential liability to pay the defendant. The delivery dockets were signed on behalf of the defendant by the weighbridge operator. He had not had the authority. The delivery dockets had a contractual purpose in the sense of being a document used in the execution of the contract which came into existence on 26 March, 2003. They did not have contractual effect in the sense of making or varying a contract. No reasonable man nor any haulier or site operative signing a delivery docket on behalf of the claimant would have understood that his signing of the delivery docket potentially varied the terms of the contract already agreed according to which the aggregate was being supplied.

The system in operation between the parties was that the contractual terms applicable to supply were agreed at senior management level. Once agreed, they were to last for the duration of the claimant's construction contract at the Finglas site.

Noreside Construction Ltd. v Irish Asphalt Ltd., [2011] IEHC 364

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1. The Local Democracy, Economic Development and Construction Act 2009 covers both Scotland and England, and amends the Housing Grants, Construction and Redevelopment Act 1996. It came into force in England on 1 October 2011 and will come into force in Scotland on 1 November 2011.

2. Construction contracts now no longer need to be in writing to be covered by the 1996 Act. However, certain provisions (such as those relevant to adjudication) will still need to be in writing if the parties don't want to be subject to default provisions that are set out in the law.

3. Adjudicators have been given additional powers by the 2009 Act. They will now have greater leeway to correct errors in their decisions, though this only applies to clerical or typographical mistakes – it is not a licence to re-decide adjudications with the benefit of hindsight.

4. Clauses which seek to apportion an adjudicator's costs before the matter has been referred to adjudication are to be ineffective. They can only be effective if agreed in writing after the giving of notice of intention to refer the dispute, or if they provide in writing that the adjudicator can make the allocation himself.

5. Construction contractors were previously able to suspend performance of their obligations but were not entitled to recover their costs in respect of this. Now the position has changed and reasonable costs can be recovered. In the case of JCT and SBCC form contracts, this is done by way of an increase to the contract sum.

6. The payment provisions are where most change has occurred in the amended version of the Act. The central plank of this is the tightening of the outlawing of "pay when paid" clauses. The current relevant section of the 1996 Act requires a contract to provide an adequate mechanism for determining what payments become due under the contract, or when. The revised version specifies that, with some limited exceptions, this is not satisfied when the mechanism refers to the payment to become due conditionally on the performance of obligations under another contract (this is to cover pay when paid clauses) or a decision by any person as to whether obligations under another contract have been performed.

7. Formerly, interim payments could be specified in construction contracts as being final and conclusive, which would take them outside the remit of statutory adjudication. The 2009 Act attempts to remove this approach. The drafting of this particular provision in the 2009 Act is unclear – it provides that while a construction contract requires to provide an adequate mechanism for determining when payments become due under the contract, it is not competent to seek in the contract to specify that the due date for payment is to be determined by reference to "the giving to the person to whom the payment is due of a notice which relates to what payments are due under the contract". There is therefore likely to be some debate as to the interpretation of this provision.

8. There are set timescales in the 2009 Act as to when payments are to be made. A notice must be given not less than 5 days after the payment due date stating the sum the payer considers to be due (or have been due at the payment due date) and how it is calculated, if coming from the payer, or the same for the serving party if the serving party is not the payer. The serving party can therefore be the payee. A notice always has to be served, even if the sum is zero.

9. In the event that the building contract provides that one party should be the one to issue payment notices, and he fails to do so, then the other party can step in and issue a payment notice to the first party instead, and the final date for payment is extended by the same period as the number of days following the payment due date that the notice was given.

10. The payment specified by the notice is to be paid before the final date for payment, unless a notice is given prior to the prescribed period before that date stating the amount which the other party believes to be due. The prescribed period can be agreed between the two parties in the contract. If the prescribed period has elapsed, and the payer becomes insolvent, then if the contract specifies such then the sum due will no longer be due. If there is a referral to adjudication regarding the amount due, and the adjudicator decides that more should be due, then the extra amount is payable by the later of the date falling seven days from the decision or the final date for payment.

Alistair Kennedy is a solicitor in the construction team at Tods Murray.

Section 13(2) of the Act states:

“A tribunal’s award is not subject to review or appeal in any legal proceedings except as provided for in Part 8 of the Scottish Arbitration Rules.”

Part 8 of the Rules is entitled “Challenging Awards”. It provides for three distinct types of challenge to an award:

(i) A “jurisdictional appeal” under Rule 67, on the ground that the tribunal did not have jurisdiction to make the award;

(ii) A “serious irregularity appeal” under Rule 68, on the ground of serious irregularity, generally, but not exclusively, in the conduct of the arbitration; and:

(iii) A “legal error appeal” under Rule 69, on the ground that the tribunal erred on a point of Scots law.

Rules 67 and 68 are “mandatory rules”, which cannot be modified or disapplied by the parties Rule 69, on the other hand, is a “default rule” which applies only in so far as the parties have not agreed to modify or disapply it. The parties in the present case had not agreed to modify or disapply it. The proposed appeal in this application was concerned with a legal error appeal under Rule 69.

The right to make a legal error appeal was constrained by Rule 70, and such an appeal can only be made with either the agreement of the parties or the leave of the Court. The Court drew a comparison with the English Arbitration Act 1996 sections 68 and 69, and continued to discuss the provisions and procedures of the new Scottish Act and the Scottish Arbitration Rules in some detail.

The present case concerned a building contract; the employer under the contract was the petitioner and the contractor the respondent. The arbitrator was asked to decided a number of issues, and found that the burden lay with the employer to show that the contractor had been overpaid. The employer maintained that this was at odds with the detailed payment provisions in the contract where the approval of the project manager was provisional and for the purpose of only assessing the amount of any interim payments, which were, in any event, themselves subject to subsequent correction.

The Court was satisfied that, under Rule 70(3), the appeal raised a point of law both generally and on the proper construction of the contract. The tribunal had been asked to decide the matter and its decision substantially affected the rights of both parties. Whilst the result of the decision could not presently be expressed in financial terms, placing the onus on one party rather than the other was likely to have a significant impact on the whole conduct of the arbitration and might well affect the final result. In addition, the point was one of general importance arising as it did under a standard form of building contract. In the judge’s view, the arbitrator’s decision was open to serious doubt. Not only was there a potential difficulty in squaring the arbitrator’s decision with the essentially provisional nature of the assessments made for the purposes of triggering interim payments, but there was also a possible mismatch with the burden being placed upon the contractor to justify its claims to additional sums.

The second issue concerned the arbitrator’s finding that the petitioner’s averments about a tender from another contractor was irrelevant. The judge did not consider that this raised a point of law. Pleadings in arbitration need not, and indeed normally should not, follow the form of pleadings in common use in the Court of Session. It was for the arbitrator to decide questions as to the admissibility, relevance, materiality and weight of any evidence. Even if the matter were a question of law, the judge was not persuaded that the arbitrator had been obviously wrong.

Opinion of Lord Glennie in Arbitration Application No. 3 of 2011, [2011] CSOH 164

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Brington was awarded a contract for the demolition and hoarding works on a site. It subcontracted these works to Cheerise. The value of the main contract was HK$11 million, and comprised the original tender sum of HK$11.485,07 less a cost saving of HK$485,075 based on an alternative design as described in a letter from Davis Langdon & Seah dated 17 August 2007. The subcontract sum for the hoarding and demolition works was in the amount of HK$5,347,700, which took into account a cost saving of HK$120,000 again based on this alternative design. The letter of award stated that:

“Cost saving based on Alternative Design as described in fax CLF/055 dated 21/08/07 (This is confirmed that this cost saving will not be refund in case of your mentioned Alternative Design is not to be approved by Building Department).”

The parties’ dispute concerned the extent of the coverage of this alternative design. The letter of award for the subcontract stated that it was to be a lump sum fixed price contract and back-to-back with the main contract. Brington maintained that Cheerise was responsible for the design as this was a back-to-back contract.

As it was a back-to-back contract if the consultant disallowed a claim made by Cheerise in the name of the main contractor, Cheerise would not be entitled to anything. Cheerise accepted that it was a back-to-back contract, but denied that the design obligation/responsibility had been passed on. Cheerise also argued that Brington had to consider its claim independently. Finally, Cheerise submitted that Brington was not entitled to claim contra charges and the settlement between them had been made on a without prejudice basis.

The parties differed on their interpretation of what was meant by a “back-to-back” contract. The scope of the work and the risks to be assumed by Cheerise was unclear. In order to construe the phrase “back-to-back”, the court turned to some of the “fundamental canons” of the construction of a contract. What the judge termed “this ambiguous phrase” had to be understood and construed in context.

Brington argued that because of the back-to-back provisions, it was not obliged to pay Cheerise any additional sums or grant an extension of time if its claim to the employer were not accepted by the consultant. The judge disagreed.

The back-to-back provision only referred to the principle of variation, addition or omission, and made no reference to grounds for granting extension of time or deduction of liquidated damages. In the absence of express wording incorporating the provisions in the main contract regarding extensions of time and liquidated damages, the judge did not accept that they had been incorporated by reason of the phrase back-to-back.

The only thing that could be said to be common to both contracts because of the back-to-back basis would be the way in which such claims for variations, additions or omissions were to be valued. There was nothing to indicate that the position of the consultant could be mechanically applied to the subcontractor’s claim or binding on the parties under the subcontract.

In addition, Cheerise was only responsible for one part of the main contract works, so that any delay caused by another subcontractor on the site would not, in the context of the main contract, entitle Brington to an extension of time. It would be grossly unfair if Cheerise could not seek compensation. Cheerise would be entitled to be paid for any variations ordered by the main contractor, irrespective of whether or not Brington had been paid under the main contract. The phrase back-to-back could only mean that the rights to make claim and the principle of valuation of variations had to be the same as those in the main contract. It could not possibly be said that this phrase back-to-back would effectively mean “pay when paid” or “pay if paid”.

If back-to-back were intended to mean that the subcontractor’s entitlement would be lost if Brington were not entitled to compensation under the main contract, clear words had to be used, because such an argument curtailed the subcontractor’s the rights of the subcontract to claim payment under the subcontract- not something to be lightly implied. It certainly could not be implied for the usual reasons such as giving subcontract business efficacy nor by operation of law.

Brington sought contra-charges against the subcontractor. A back-to-back provision must be two-way. If the main contractor’s contentions were correct, it could not claim against Cheerise for contra-charges for the simple reason that the employer did not charge Brington for such charges. That proposition could not be right. Brington should be entitled to claim against Cheerise if it had incurred costs as a result of the subcontractor’s failures or breaches irrespective of the position under the main contract.

As far as the subcontractor’s contractual entitlement was concerned, the judge did not accept that it was determined by the consultant’s decisions. Brington had an obligation to consider the claims made by Cheerise and to assess them accordingly.

In this case, Brington had passed on the subcontractor’s claims in full to the employer whose consultant rejected them. This alone was simply not a defence to the subcontractor’s claims. The consultant’s decision was relevant evidence but not conclusive in the context of the subcontract. Cheerise was still entitled to pursue the claims against Brington if they could be proved and established under the terms of the subcontract and substantiated by evidence. The claims under the subcontract had to be established independently, and neither party could rely on the passing on of the claims to the consultant nor on the decisions of the consultant.

Brington Engineering Ltd. v Cheerise Asia Ltd.; 18 August 2011, Construction and Arbitration Proceedings No. 2 of 2010

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The present action concerned the sale of a surplus site at Broomhouse by Bellway to Persimmon. Previously, Persimmon had sold a part of a site at Dalkeith to Bellway. 

The missives between the parties were implemented, and Bellway proceeded to develop the subjects sold. Prior to the conclusion of these Wester Cowden missives, discussions had taken place between representatives of the parties with a view to the transfer of a broadly similar area of land at Broomhouse by Bellway to Persimmon. Persimmon accepted the offer, and the present action concerned the missives in respect of that piece of land.

The Broomhouse land was sold for £4,160,000, but that was subject to a deduction of what were known as Abnormal Costs. Abnormal Costs were the subject of an elaborate definition in condition 1.1 of the missives. Consequently, the risk of abnormal ground conditions lay with Bellway. The Seller’s Works were defined as the installation of roads, footpaths and other services. Bellway was to complete these works by the Long Stop date, 15 December 2007. Clause 12 of the agreement provided that, if it were unable to complete the works by this date, it would be obliged to offer Persimmon another residential site in Central Scotland of a similar value. This clause was included because there were substantial and potentially costly constraints which might prevent the development of the Broomhouse site.

Bellway did find problems in completing the Seller’s works. The cost of completing the roads turned out to be very expensive, and Bellway failed to persuade the Council to amend the design to reduce costs. Bellway informed Persimmon, asking them to take formal instructions on an offer of an alternative site in Airdrie. This offer was renewed in December 2007, but both were rejected. Persimmon now claimed damages of £1,789,948, alleging that Bellway had been in breach of contract.

Bellway contended that actionable breach of contract giving an entitlement to damages would not result from their failure to comply with the obligation in condition 10 to complete the Seller’s Works by 15 December 2007. If they failed to comply with that, they became subject to the obligation in condition 12; that was the remedy expressly provided by the contract. The judge accepted Bellway’s argument. The important right to damages could only be taken away by an express contractual provision. In the present case, a breach of Bellway’s obligations gave rise to a further obligation under Condition 12 to offer an alternative site. Only if an adequate alternative site were not offered, would there be a breach of contract and an entitlement to damages. This construction of Condition 12 was fully supported by the commercial background to the contract.

The judge assessed expert evidence as to the value of the alternative site. Condition 12 required that the alternative offered should be broadly equivalent to the area of land at Broomhouse, both in its size and in its value as land for residential development. No time limit was specified; nor did the offer have to be in any particular form. No price had to be specified in the offer, and there was no mechanism for determination of the price. In addition, all that was required was an offer; it was not essential that the offer should be accepted. The valuations showed that the Airdrie site was worth £3.85m as opposed to the Broomhouse site which was valued at £4.5m- a 17% difference. Broomhouse was the better site, and the two sites were not of “comparable value” as required by Condition 12, and Bellway were in breach of contract on that account.

Persimmon Homes Ltd. v Bellway Homes Ltd., [2011] CSOH 149 

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The claim concerned a failed investment in a factory shopping outlet (FCO), which was to be developed at the Chatham Historic Dockyard, Medway in Kent. Capita was trustee of The Matrix Chatham Maritime Trust, which was an investment vehicle established to enable 480 individual investors to invest in Dockside. The claimants retained the defendant chartered surveyors and property consultants, Drivers Jonas, DJ, to advise them on the acquisition of the site. DJ gave the claimants positive advice about the commercial prospects for the development and valued Dockside in the sum of £62,850,000 (with the benefit of Enterprise Zone tax allowances) and £48,150,000 (without the benefit of Enterprise Zone tax allowances). The claimants alleged that, relying upon this when Capita acquired a long leasehold interest in Dockside. DJ received fees totalling in excess of £500,000 for their work on the project, of which nearly £400,000 was, according to the Defendants’ invoice, for “investment and valuation advice”. The claimants said that DJ substantially overstated the commercial prospects and overvalued the Dockside.

The claimants said that DJ’s failure to make a competent assessment of the likely level of turnover rents that Dockside might achieve led them to overstating substantially the rent, value and commercial prospects of Dockside. In addition, the claimants maintained that DJ made a series of failures relating to their assessment of the attractiveness of the location and design of Dockside and as to the competence and experience of the Developer to be able to operate Dockside successfully. According to the claimants, these failings demonstrated that DJ did not possess the necessary expertise to advise on Dockside and this lack of expertise led them to make fundamental errors in their approach to valuing and assessing the commercial prospects of Dockside which ultimately led to their advice to the claimants being woefully inadequate.

Capita claimed damages for breach of duty in relation to all of the losses they have suffered as a result of entering into the transaction. They calculated these on the basis of the difference between the price paid for Dockside (£62,850,000) together with interest at base rate plus 1% from 5 April 2001 to date and the expenses and losses incurred in operating Dockside to date, and any profits earned from Dockside to date and its current market value. They pleaded that this was no more than £9,650,000 and in fact most recently valued at £7,200,000. Alternatively, they claimed damages based on the difference between the price paid for Dockside and its true value as at April 2001 (either including or excluding the benefit of Enterprise Zone tax allowances). Matrix also claimed an indemnity in respect of potential claims by investors.

The starting point is to consider what terms both as to what DJ would do and as to the contractual relationship between Capita and DJ were expressly agreed between Mr. Randall, a director of Matrix, and Mr. Blake for DJ. Based on the evidence and content of the report provided by DJ, the judge found that all the pleaded terms of the retainer were established. DJ had referred to themselves as the “Trust’s Surveyor” in the report, and it was clear from the content that they were providing advice to the proposed purchaser. DJ described their services as including “acquisition advice”. Given that the Trust and not Matrix acquired Dockside this further indicated that the retainer was with Capita as well as Matrix. It was clearly agreed that Capita would be entitled to rely on DJ’s advice. So, for example, the Draft Short Form Valuation Report provided at paragraph 1.2 that it had been prepared by the Defendants “for the benefit of, [the Trust] (the Investor)”.What DJ did, or purported to do made plain what they were retained to do. The claimants were correct about the scope of the retainer and the scope of DJ’s duty.
The court concluded that DJ did owe the claimants a duty of care in tort. DJ had provided their advice to the claimants and not the investors. In providing that advice, DJ had made it clear that they would not accept responsibility to anyone else. DJ’s advice had provided in respect of the acquisition of Dockside and that acquisition was completed by Capita, and not by anyone else.

STANDARD OF CARE AND BREACH

It was common ground that the relevant duty was to exercise reasonable care and skill in all work carried out, but not every error would amount to a breach of duty. In order to succeed, the claimants had to show that the advice and/or valuations provided by the DJ were such that an ordinarily competent valuer and commercial investment adviser could not have provided them exercising reasonable skill and care. The standard of care expected was properly defined as: “that degree of skill and care which is ordinarily exercised by reasonably competent members of the profession”. That standard would not be relaxed for a valuer or adviser with limited experience of, for example, a certain type of property or a certain type of task. If a professional holds itself out as having a particular skill, it is to be judged by the standards of people holding that skill.

In the present case, DJ was a firm of chartered surveyors and property consultants offering a range of consultancy services including commercial property investment and valuation advice. As a minimum, by agreeing to act as they did, they held themselves out as being competent to perform the appraisal, assessment and valuation of an undeveloped FOC for EZPUT purposes. Thus, their work fell to be judged by reference to an ordinarily competent valuer and commercial investment adviser competent to advise on EZPUTs and FOCs (“ordinarily competent valuer and commercial investment adviser”).

CAUSATION

The claimants submitted that they had relied upon DJ’s advice, valuations, due diligence and/or negotiations, and that such reliance caused loss and damage. The judge accepted that the claimants need not show that DJ’s advice was the only matter relied on in determining to acquire Dockside; it would suffice if the advice played “a real and substantial, though not by itself a decisive part, in inducing” the claimants to act as they did: see JEB Fasteners v Mark Bloom, [1983] 1 All ER 582. DJ argued that Capita had no locus to bring the claim. The judge found that this argument relied upon a flawed construction of the relevant contractual arrangements and was rejected.

It was important to bear in mind that DJ had already provided their essential advice and valuation prior to delivery of their draft report on 4 April 2001; and that the claimants had plainly relied on that earlier advice. The Draft Report did not arrive out of the blue. It was in nature confirmatory of the advice that had already been given by them. The judge was satisfied that had Capita and Matrix received advice at any point prior to completion that the open market value of dockside was materially less than £48,150,000 and in particular was (as I have concluded) £34,375,000, then Capita and Matrix would not have proceeded with the transaction.

Capita Alternative Fund Services (Guernsey) Ltd. And Matrix Securities Ltd. V Drivers Jonas (A Firm)

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In January 2006, there was a fire at a hair salon and health spa operated by Obsession Hair and Day Spa Limited. It was common ground that the fire had originated in a submersible Jet W300 pump in a sump in the colour dispensary of the hairdressing salon. There had already been proceedings between Obsession and Hi-Lite, the electrical contractor who had installed the pump, in which Hi-Lite had been held liable in contract to Obsession for the losses it had incurred due to the fire. These were assessed at £847,171 plus interest. The judge had also found that if Hi-Lite had been liable in tort, the damages, would have been £2,578,123. Obsession was granted leave to appeal against the dismissal of its claim in negligence and the quantification of the claim.

Wolseley, which traded under the name "Pipe Center [sic]" had sold the pump to Hi-Lite. DAB Pumps, formerly Leader, was an Italian company which had manufactured the pump and had supplied it to Wolseley. Hi-Lite sought a declaration that Wolseley was liable for the fire and that Wolseley should indemnify it for any sums for which it was liable to Obsession. Wolseley denied liability and, in turn, sought to pass on any claim to Leader.

Whilst it was common ground that the fire started in the cable connecting the float switch to the Pump, there was a difference of opinion about the cause of the fire in that length of cable and this was the essential issue to be determined in this case. Hi-Lite's case was that the pump was not of satisfactory quality for the purposes of section 14(2) of the Sale of Goods Act 1979 because a pump should not catch fire within 9 weeks of installation. Wolseley and Leader contended that the fire was a result of damage to the float switch cable which had been caused either in installation or in service. Hi-Lite responded by saying that Wolseley and Leader had not established that such damage had occurred and that it was more likely that there was damage to the float switch cable in the manufacturing process when the float switch and strain relief was moulded onto that cable.

There was then an argument about the effect of Hi-Lite not fitting an RCD as part of the installation of the Pump. If the fire were caused by a defect in the float switch cable for which Wolseley and Leader were responsible, they contended that Hi-Lite should have fitted an RCD and that the fire developed in a manner which would have caused the RCD to trip and isolate the cable from the power supply before the cable ignited. Hi-Lite, on the other hand, argued that the fire developed in such a way which meant that the cable would have caught fire without the RCD tripping so that the RCD would not have prevented the fire.

Wolseley and Leader also submitted that, if the fire were caused by a defect in the float switch cable for which they were responsible, damages arising from a fire were too remote because damage by fire was not in the contemplation of the parties as the likely result of the cable being defective. Hi-Lite submitted that property damage is sufficient and that damages for fire were recoverable.

The judge concluded that the fire at the Obsession salon had been caused by a fatigue failure of the float switch cable which, on the balance of probabilities, had been damaged by Obsession's staff had used sharp tools to clean hair and other debris from the pump located in the sump. Consequently, Wolseley had no liability to Hi-Lite for that damage, or for the subsequent fire and, in turn, Leader also had no liability to Wolseley based on those facts.

Hi-Lite failed to carry out the installation properly because they had failed to provide an RCD when installing the pump. If they had fitted an RCD, on the balance of probabilities, the fire would not have started before the RCD had tripped because of leakage from the "go" or "return" conductors and the "earth" conductor.

If Wolseley had been liable as Hi-Lite had alleged for a manufacturing defect in the pump which caused the fire, its liability to Hi-Lite for damages would not be reduced or avoided by arguments based on the failure by Hi-Lite to install an RCD. The causative effect of Wolseley's breach of section 14(2) of the Sale of Goods Act 1979 would not have been affected by the failure to fit the RCD. Further, the judge did not consider that the fire or the damages which Hi-Lite had to pay Obsession would have been too remote. Any negligence by Hi-Lite would not give rise to any apportionment as between Wolseley and Hi-Lite.

Hi-Lite Electrical Ltd. v Wolseley UK Ltd. and DAB Pumps S.A., [2011] EWHC 2153 (TCC)

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The claimants, the Hill family, proposed a development on a nearby site. In order to facilitate the development of the Morningside site, SMG and Bett were to install a sewage system and connect it to the mains for their own development. The Hills were to be entitled to connect to this at no cost and it would also service the Hill development. A similar arrangement was made for the surface/ storm water system. The parties’ Minute of Agreement said that that SMG and Bett were to use all reasonable endeavours to ensure completion and commissioning of the system by the Longstop Date. The works were not completed in time, and the Hills tried to claim the £5,000 per month it was entitled to under the agreement until the systems were commissioned and completed. SMG and Bett said that this damages provision was a penalty and, as such, unenforceable. The court at first instance ruled that the clause was potentially unenforceable, but it had been for the Hills to show that it was a genuine pre-estimate of loss and/ or damage. As they had not been able to show that, but for the failure to complete the system by the Longstop Date, they would have been able to sell their site and realise the return contemplated, they could not succeed. The Hills appealed.

SMG and Bett argued that that the relevant obligation imposed by the Minute of Agreement was to “use all reasonable endeavours” to ensure completion and commissioning of the system by the Longstop Date and that this was a quite different obligation from one to ensure completion and commissioning by the Longstop Date. The Hills said that it was conceivable that SMG and Bett might not achieve completion by the relevant date and yet, because they had used all reasonable endeavours they would not be in breach of contract. Payment depended on the Longstop Date being reached without completion of the system irrespective of whether the defenders were in breach. They argued that there was no mention of breach of contract in the pleadings, and that this was more an action for payment based on the non-occurrence of a specified event. Since the obligation to pay did not depend on a breach of contract, taking into account the rules summarised by Lord Macfadyen in City Inn Ltd. v Shepherd Construction Ltd., [2010] CSIH 68, there could be no question of it being an unenforceable penalty.

SMG’s and Bett’s response was that properly construed, their obligation had been to complete by the Longstop Date and that failure to do so was a breach of those obligations. This obligation was qualified so that they had only been obliged to use reasonable endeavours.

The court disagreed with the Sheriff Principal that the present clause was indistinguishable from that discussed in City Inn. He had erred in approaching the matter on the basis that the question was whether the pursuers had made sufficient relevant and specific averments to enable them to lead evidence to demonstrate that the provision was a genuine pre-estimate of damage. Whilst it had been open to the Hills to attempt to do this by way of answering the SMG’s and Bett’s claims that the provision was an unenforceable penalty, that did not alter the fact that the onus lay on the contractors. Accordingly, the primary question was whether the SMG and Bett had made sufficient specific pleadings to support their argument. The court found that their pleadings were no more than an assertion that the provision constituted a penalty and, as such, was unenforceable. There was nothing else which would allow them to lead evidence to show why this might be the case.

In assessing whether a payment provision was exorbitant or unconscionable, the court should look at the position as at the date of the contract, and not the date of the breach, since at the conclusion of the contract, the parties had a wide discretion in fixing the amount of pre-estimated damages. The court should consider whether the sum to be levied was extravagant and unconscionable compared with the greatest loss which could follow from the breach. Stipulating for pre-estimated damages was recognised as a useful means of allowing the need for proof of a loss caused by breach and the party founding on such provision did not need to prove such loss. The Sheriff Principal had erred in not appreciating this. Having held that the Hills had averred sufficient to enable them to lead evidence as to the genuineness of their pre-estimate of loss in the event of breach, he went on to hold that their case was irrelevant because their pleadings revealed that the reason for the projected sale of the site was not because of the delay in completing the system but had been due to the decline in the housing market. He had not been entitled to do that.

It had been for SMG and Bett who were claiming that the clause was a penalty clause to give evidence to support their argument, and they had failed to do this. This was the critical question. From his judgment, it appeared that the Sheriff Principal had considered that it had been for the Hills not only to establish that the provision was a genuine pre-estimate of damages but that the supposed breach of contract had given rise to a loss of the sort that the pre-estimate had been intended to quantify. There had been no such requirement.

Hill v Stewart Milne Group and Gladedale (Northern) Ltd. (Formerly Bett Ltd.), [2011] CSIH 50

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Jerram Falkus' (JFC) works for Fenice were delayed by 86 days, and Fenice deducted liquidated damages. JFC alleged that Fenice and/ or their servants or agents had prevented completion and that, by reason of the deletions to the extension of time provisions, which meant that no extension of time could be granted in relation to such acts of prevention, time was set at large. The implication of this was that Fenice would not be entitled to deduct damages. In addition, JFC claimed loss and expense. There had already been three adjudications between the parties. Fenice claimed that the issues raised in the present action were the same as had been dealt with in the parties' third adjudication. Since JFC had not challenged the decision in the third adjudication, Fenice maintained that the adjudicator's decision was final and binding.

The issues before the present court were whether the adjudicator's decision dated 28 October 2010 was final and conclusive so that the arguments JFC sought to put before the court were not open to them. There was also an issue as to whether Fenice could challenge JFC's claim for loss and expense because JFC's Final Account and Final Statement were conclusive, and/ or, if JFC's Final Account and Final Statement were conclusive, were they also prevented from raising their own delay claims.

The court also had to decide whether JFC had been prevented from completing the works on time, and if there had been an agreement between the parties to vary the liquidated damages.

Clause 1.9.1 of the parties' contract provided that the Final Account and Final Statement were to be conclusive evidence for the purposes of any adjudication, arbitration or legal proceedings. Clause 1.9.14 provided:

"In the case of a dispute or difference on which an Adjudicator gives his decision on a date which is after the date of submission of the Final Account and Final Statement or the Employer's Final Account and Employer's Final Statement, as the case may be, if either Party wishes to have that dispute or difference determined by arbitration or legal proceedings, that Party may commence arbitration or legal proceedings within 28 days of the date on which the Adjudicator gives his decision."

Clause 2.26 set out the Relevant Events which might give JFC an entitlement to an extension of time. Two of the provisions had been deleted. These were any act or omission by the Employer and any default by a Statutory Undertaker. Clause 2.28 stated that the employer should issue a written non-completion notice identifying JFC's failure to complete the works by the due date.

DELAY

JFC claimed that they had been delayed by 53 days due to works by British Gas and EDF, and that there was an additional delay of 46 days caused by late instructions in respect of the levels of two houses. These delays were concurrent. JFC's case was these delays had been caused by Fenice's acts of prevention and they were not, therefore, entitled to deduct liquidated damages. Fenice denied that the works had been delayed by British Gas and EDF. It blamed the delays in respect of the levels on JFC. Fenice's alternative argument was that if there had been delays due to the statutory undertakers, since these had been concurrent with the delays because of the levels, for which JFC was responsible, they could not be liable under the prevention principle.

The documentation showed that JFC had been falling behind between the end of 2008 and the beginning of 2009. By 16 March 2009, their progress report showed that they were 10 weeks behind. This would have meant completion would have been in August 2009. This delay had, therefore, been noted long before any of the alleged delay events which JFC now sought to rely upon. The works were completed on 9 September 2009 i.e. events had occurred which had caused an additional delay of one month between March and September 2009.

DELAY CAUSED BY THE LEVELS

Sawyer and Fisher, Fenice’s agents, had written to JFC about the problems with the levels on 11 June 2009, pointing out that the design had been JFC's responsibility because they were the design and build contractor. JFC's case was that Fenice had delayed in approving the solution it came up with and that this had delayed completion. In the judge's view, Fenice had been entitled to consider the proposed solution carefully. They did not have to provide an automatic response to JFC's suggestion in order to help them out of the difficulty they had created. The evidence did not support JFC's contention that Fenice had been unacceptably slow in responding. Fenice could not be blamed for any of the delay caused by the problems with the levels in the houses.

DELAY CAUSED BY BRITISH GAS AND EDF

The British Gas works had been delayed, but this would not have delayed the works as a whole beyond the original completion date of 10 July. Even if there had been any evidence of delay by British Gas, it would have been JFC's responsibility because British Gas had come to site later than had been planned because JFC's scaffolding had been in the way, and prevented British Gas from carrying out the necessary trenching work.

EDF had been appointed as JFC's subcontractors. Any problems with their works were JFC's responsibility. In addition, there was no evidence to show that EDF's works had caused critical delay.

In conclusion, the judge expressed concern at the "hopeless nature" of JFC's case, and that they had incurred costs of £75,000 in re-running the same arguments. He said that he was troubled about the quality of the legal advice which JFC had received and commented that that side of the case would be explored in more depth when it came to the application for costs.

Jerram Falkus Construction Ltd. v Fenice Investments Inc. (No. 4), [2011] EWHC 1935 (TCC)

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In Ellis Building Contractors Ltd. v Vincent Goldstein, [2011] EWHC 269 (TCC), the defendant, Mr. Goldstein, send the claimant, Ellis, a letter of intent for some repair and refurbishment works, Mr. Goldstein explained that some of the design had to be finalised. In the meantime the contract sum was stated to be £429,270.28 with a 10% contingency. The letter of intent gave Ellis the authority to proceed with the pre-construction works so that the works could start as quickly as possible. The letter of intent also said that the contract would be the JCT 2005 Intermediate form. If the contract were not to proceed, Mr. Goldstein was to be liable to Ellis for the total pre-construction costs plus any reasonably incurred expenses. 

Ellis had commenced work in September 2009. . By April 2010, the architects, Farmiloe Architects, FA, were warning that there was going to be an overspend of £110,000. Ellis wrote to Mr. Goldstein, pointing out that the value of the works was nearly that stated in the letter of intent. If the promised contract had been entered into, this would not have been a problem, since the contract would contain the necessary mechanism for adjusting the contract sum. Ellis urged Mr. Goldstein to either issue a further letter of intent to deal with the increased the value of the works, or urgently issue the formal contract documents. After further discussions, a second letter of intent was issued. This increased Mr. Goldstein’s liability by a further £107,802.69, stating that the maximum liability was to be £580,000. Mr. Goldstein paid £100,000. Ellis wrote again on 3 June 2010, warning that the limit in the second letter of intent would soon be exceeded, and a further payment of £44,769.92 was needed. Mr. Goldstein refused to agree to another increase. Ellis sent another letter, hinting that work might have to stop if the financial limit in the second letter of intent were exceeded. 

Minutes of a meeting on 30 June 2010, showed that FA issued two copies of the contract document, one to be signed by Mr. Goldstein’s associate, Mr. Conway. FA asked Ellis to include the second letter of intent with the contract documents and return it to them. Before Ellis received these minutes, it had sent Mr. Goldstein the signed contract documents asking him to sign them. Ellis wrote that it had incorporated the additional documentation requested and as detailed in its letter to FA dated 1 July 2010. This letter made it clear that the Letters of Intent were not incorporated into the documents. 

A certificate of practical completion was issued. Ellis made claims for additional sums in respect of variations and prolongation amounting to £650,224.46. Ellis served a statutory demand on Mr. Goldstein. In his formal application dated 29 October 2010 to the Bankruptcy Court to set aside the statutory demand, Mr. Goldstein’s solicitor in effect said that there was a dispute about the alleged sum claimed but only argued that, although there was “an unsigned building contract” subsisting between the parties, that the contract was subject to an “express fixed sum provision”. There was no mention of the second letter of intent and its financial limit. Ellis served a notice of adjudication, which prompted a without prejudice letter to their solicitors. This set out Mr. Goldstein’s position that there had been a financial cap in the first letter of intent, but, again, no mention was made of the second letter of intent or the cap it contained. 

In his formal application dated 29 October 2010 to the Bankruptcy Court to set aside the statutory demand, Mr. Goldstein’s solicitor, presumably upon instructions, in effect said that there was a dispute about the alleged sum claimed but only argued that, although there was “an unsigned building contract” subsisting between the parties, that the contract was subject to an “express fixed sum provision”. From the referral, it was clear that Ellis was asserting that the Intermediate Contract was part of the contract. Mr. Goldstein’s view was that Ellis had not been entitled to exceed the limit of £580,000 in the second letter of intent. He did not address the valuation made by Ellis. In their reply, Ellis argued that the binding and limiting nature of the second letter of intent had only been raised by Mr. Goldstein for the first time in his Response. Ellis referred to the without prejudice letter, pointing out that even in that letter, Mr. Goldstein had not sought to rely upon the second letter of intent as a defence or at all. 

Between the service of the Reply and the decision of the adjudicator, neither Mr. Goldstein nor his solicitors objected to the reference to the “without prejudice” letter or made any request made to rebut any part of the Reply. 

The adjudicator decided that the parties had firstly contracted on the first letter of intent, the on the second letter of intent, and, finally, on the contract documents prepared by FA and given to Ellis on 30 June 2010 for completion. These contract documents had not contained any financial limits. He found that Ellis was entitled to the sums claimed. In the present proceedings, Ellis sought to enforce that award. Mr. Goldstein resisted the enforcement of the award, arguing that the adjudicator had decided the matter on a basis which had not been argued by either side i.e. that the contract had been the Intermediate form as prepared by FA, and that this was a breach of natural justice. In addition, Mr. Goldstein submitted that there had been apparent bias by the adjudicator by allowing in and not raising with the parties the “without prejudice” letter because it was unclear what, if any, weight had been given by the adjudicator to the arguments in relation to the Second Letter of Intent which had only been raised for the first time in the Response in the adjudication. 

THE USE OF WITHOUT PREJUDICE MATERIAL IN ADJUDICATION 

When “without prejudice” communications are presented in court, because judges are legally qualified, they can usually put them out of their mind. In adjudication, however, because most adjudicators are not legally qualified, there is a sense of “unease” that such material might influence the adjudicator. For this reason, without prejudice communications should not be put before an adjudicator, and lawyers who do so may face professional disciplinary action. 

If an adjudicator decides a case principally on the basis of without prejudice material, that decision may not be enforced. In enforcement proceedings, the Court should look at all the facts which may support, or otherwise, accusations of apparent bias whether those facts had been known to the adjudicator or not. 

The use of the without prejudice letter had been improper, and the material it contained was not admissible. There were three material considerations when deciding whether the adjudicator had been influenced by its content: 

Neither Mr. Goldstein nor his solicitors had made any objection between the service of the Reply and the issue of the decision, and three of those days had been working days. There was no evidence to suggest that they could not have challenged the introduction of the “without prejudice” letter within that time 

The adjudicator had expressly said at the end of his decision that he had “taken account of all submissions made whether or not specifically mentioned” in the decision. This type of statement was commonly used in adjudication decisions to show that the adjudicator has considered everything which has been put before him or her; 

It was also clear however that the adjudicator did not base his decision at least openly on the contents of, the fact of or inferences drawn from what was or was not in the “without prejudice” letter. 

On the face of his decision, it was clear that the adjudicator had analysed the case as presented in a simple way. On the material before the court, there was no reason to conclude that the adjudicator had not acted impartially. The very fact that the adjudicator did not mention the “without prejudice” communication suggested very strongly that it was not part of and clearly did not and did not need to influence his reasoning. 

Ellis was entitled to summary judgment.

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Fenice Investments and Jerram Falkus were involved in an adjudication which was conducted by Dr. Franco Mastandrea. Dr. Mastandrea had sent both parties’ solicitors a note of his hourly rate and had asked both parties to confirm his proposal. Fenice had done so, but Jerram Falkus had not. Dr. Mastandrea was employed by Hill International, and, whilst his appointment was a personal one, he told the parties that the invoices would be issued by Hill and it was them who should be paid. Dr. Mastandrea made an award in Fenice’s favour, and ordered that his fees of £19,775 plus VAT be paid by Jerram Falkus.

Jerram Falkus took the view that his fees were excessive, and initially refused to pay anything. Later it made a payment of £5,000, considering that Dr. Mastandrea was not entitled to any more. Fenice had accepted that the fees were reasonable, but said that since both parties were jointly and severally liable for them, Dr. Mastandrea should pursue Jerram Falkus for payment. However, later Fenice paid the balance of the fees plus Dr. Mastandrea’s own legal costs. In dealing with the matter, Fenice incurred its own legal costs of over £3,000 because Hill threatened legal action to recover payment. Fenice also claimed these from Jerram Falkus.

The parties’ adjudication agreement either expressly or impliedly incorporated the provisions of the Scheme for Construction Contracts; one of the terms of their agreement, therefore, was that if the adjudicator states which of the parties should be liable to pay the fees, that party (“the paying party”) agrees with the other that he will do so. This was independent of the fact that as against the adjudicator, they are both jointly and severally liable. It must follow that if the paying party refuses to pay the adjudicator, he is in breach of his agreement with the other party. There was also a separate agreement between the parties and the adjudicator. As far as fees were concerned, a party may make an express agreement, as Fenice had done here, in which case the adjudicator may claim under that express right. However, in the absence of an express agreement, a party will nonetheless be taken to have made an agreement by conduct if he participates in the adjudication, having requested the adjudicator to act. It would be an implied term of that agreement that the party concerned would pay the adjudicator’s reasonable fees.

As long as the hourly rate claimed by an adjudicator was not clearly outside an overall band of reasonableness, there would be no basis to interfere, even if it could be shown that a different adjudicator, especially an adjudicator with different qualifications, might have charged less or even significantly less. The seniority and experience of the adjudicator concerned was also a factor. The reasonableness of an hourly rate should not be determined in a vacuum by reference to some notional adjudicator. It was sensible for the adjudicator, when appointed, to indicate his hourly rate and invite express agreement, as had happened here. If a party simply fails to acknowledge the invitation at all, as Jerram Falkus had, any subsequent complaint that the rate was excessive would be unlikely to provoke much sympathy. Other factors to be taken into account were the short timescale involved in which the adjudicator had to produce his decision.

The court held that Jerram Falkus was liable both for the fees and the legal costs Fenice had incurred in taking legal advice when Hill threatened legal action.

Fenice Investments Inc. v Jerram Falkus Construction Ltd. [2011] EWHC 1678 (TCC)

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Morgan Utilities, MUL, alleged that it had entered into an oral agreement at meeting with Scottish Water Solutions (SWS) for the works which it was to undertake. The oral agreement was not minuted or committed to writing, apart from a manuscript note by MUL’s Mr. Tyson. Because of this the parties disputed the basis upon which MUL was to carry out the works for SWS. MUL claimed payment of £3,520,255.50, which it said was the difference between what it had been paid and what it should have been paid under the alleged agreement.

From 1999, MUL had worked for one of Scottish Water’s statutory predecessors, Scotland Water, in Lothian and the Borders. In 2001, MUL had entered into a similar contract with West of Scotland Water, another of Scottish Water’s statutory predecessors for similar work in Dumfries and Galloway. Scottish Water was a company established under section 20 of the Water Industry (Scotland) Act 2002, and its shareholders were a number of companies, including United Utilities Contract Solutions, and Morgan Est, an associated company of MUL.

In early 2003, the parties had begun negotiations to extend the two contracts. Because the rates it was charging for the Lothian and Borders work was unprofitable, MUL wanted an arrangement for a rate for both areas which in combination would be profitable for them. by the summer, the parties had negotiated an amalgamated contract which covered the work in both regions, with more favourable rates than MUL had enjoyed in Lothian and the Borders. There was also the prospect that the predominantly rural works in Dumfriesshire and Galloway would make up for the more expensive works in Lothian and Borders and thereby allow the amalgamated contract to be profitable. This amalgamated contract took effect from 1 July 2003, and was subject to an extension to 30 June 2004. Whilst there was no guarantee that Scottish Water would give MUL a set amount of work, the parties’ shared understanding was that MUL would earn not less than £5.5m in the two years to 30 June 2004. MUL also understood that that it would carry out any work which Scottish Water instructed in Lothian and Borders outside Edinburgh or in Dumfriesshire and Galloway.

The privatisation of Scottish Water, which was now a consortium of companies, led to some changes in their working practices. It proposed that its infrastructure works would be provided through its own SWS, Scottish Water Solutions Ltd., the current defenders. Scottish Water’s Mr. Carr became concerned about how MUL would fit into this new structure. MUL had not been involved in any of the discussions which had established SWS. There were discussions about rates. MUL was keen to keep working with SWS. In 2003, hose involved in the creation of SWS spent several months negotiating a Services Agreement which set out which projects which Scottish Water was going to keep and which were to be transferred to SWS. While it was envisaged that SWS would take over responsibility for all of Scottish Water's capital programme, there were projects which were in the course of execution and which Scottish Water was managing. Initially, it had been intended that Scottish Water and SWS would sign the Services Agreement in March 2003 but repeated delays in the completion of the negotiation forced them to operate under the Letter of Intent until the Services Agreement was signed on 9 September 2003. There were three categories of contract under the Services Agreement: allocated contracts, managed contracts and legacy contracts. Allocated contracts were contracts which SWS would place with a contractor which was a member of one of the consortia involved in SWS. Managed contracts were contracts which Scottish Water had already placed and for which SWS took over responsibility for administration. Scottish Water remained the employer of the contractor under such a contract and paid SWS a fee for its administration. Legacy contracts were contracts which Scottish Water had placed and for which it retained responsibility without any involvement on the part of SWS. MUL became concerned that these changes might mean that it lost the work, and sought clarification of the situation. There was some concern at SWS about the viability of MUL being paid on a cost plus basis. There were some meetings, and from the evidence the judge was satisfied that it had been agreed in principle that MUL would be an in-house delivery partner. However, there remained some uncertainty about the amalgamated contract and MUL’s costs.

MUL wrote to SWS referring to a meeting on 3 September with SWS’ Mr. Sloss. It stated:

"Outlined below is our confirmation of the agreements reached therein. With regards to all Works undertaken for Scottish Water since 1st of July 2003, it is our understanding that these will be undertaken in accordance with the generic self-delivery contract."

On 13 November 2003, MUL submitted to Scottish Water its statement of costs for works which it had undertaken in Lothian and Borders in the period from 1 July 2003 and 26 September 2003. The letter was stated to be for the attention of Mr. Steven Downie and was copied to Mr. Sumption and Mr. Sloss of SWS. In that letter Mr. Tyson again referred to the agreement with Mr. Sloss of SWS at the meeting of 3 September 2003 and to MUL's letters of 18 September and 29 October 2003.

SWS failed to reply to MUL’s repeated assertion that that an agreement had been reached on 3 September 2003. Neither SWS not Scottish Water explained that in their understanding there were different employers in relation to work in Dumfriesshire and Galloway on the one hand and work in Lothian and Borders on the other. As a result, MUL proceeded with the works in Lothian and Borders without having obtained the confirmation which it sought from SWS. MUL submitted claims to Scottish Water for the works which it carried out in Lothian and Borders and Scottish Water paid for them. MUL also submitted claims to SWS for those works based on its understanding of an agreement with SWS.

In an attempt to clarify what was going on, there was a meeting on 3 February 2004. There was no formal minute of what transpired. The only document was a manuscript note made by MUL’s Mr. Tyson. At the meeting, Mr. Tyson maintained that SWS should be paying MUL for the Lothian and Borders work. SWS seemed uncertain about the status of this contract.

In the months that followed, Scottish Water paid MUL certain sums for the Lothian and Borders works on the basis of the amalgamated contract but MUL's submissions to SWS on the basis of cost were not paid.

The court had to decide whether there had been an intention to contract on 3 September 2003, and whether there had been sufficient agreement for a contract to be reacted.

There were a number of factors which persuaded the judge that the parties had not intended to into a binding contract at the meeting on 3 or 4 September 2003. Firstly, the meeting had been informal. There had been no formal minutes. Mr. Sloss had no other officer with him, and his understanding had been that MUL’s Mr. Carr had come for a “chat”. Mr. Leach, the regional director of Morgan Est, had characterised the meeting as characterised the nature of the discussion as achieving an understanding rather than a contractual negotiation. Whilst there was scope for a contract to come into existence without detailed negotiation of its terms, the judge found Mr. Leach's characterisation telling. In addition, there was the relative complexity of the arrangement by which the contract works would be transferred from the amalgamated contract to the new SWS system of a generic self-delivery contract. There was no agreement of the scope of the works, or a target cost for those works. It was unclear as to how MUL’s cost plus arrangement would work, and there was no agreement about the start date of the new arrangement, or whether MUL would repay Scottish Water sums already paid under the amalgamated contract and obtain the full sum due for the works under the new arrangement from SWS.

The behaviour of Mr. Sloss and Mr. Steven Downie, the project manager who was responsible for administering those works, did not demonstrate the same understanding of the alleged contract as did MUL’s correspondence after the event. In addition, the judge was not persuaded that Mr. Sloss had the apparent authority to enter into a contract with MUL. His position and title did not contain a representation of the power to contract. Mr. Sumption and not he was responsible for commercial services, which included the negotiation of contracts.

Morgan Utilities Ltd. v Scottish Water Solutions Ltd., [2011] CSOH 112 

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Moylist applied for an injunction restraining the first defendant, the receiver of the development it was working on, from securing the site and preventing it from continuing with the works. The receiver was appointed by the Ulster Bank, which had demanded repayment of the €3.637m. mortgage taken out by the developer, Mr. O’Connor. Moylist alleged that the receiver and Deloitte & Touche had had unlawfully entered and secured the site, expelling it and causing it loss and damage, and that the bank had instructed or colluded in the trespass. Moylist also argued that the receivers and the bank had induced Mr. O’ Connor to breach the contract because he had unlawfully taken back the development. Moylist pleaded that its contractual licence to remain on site persisted as long as the contract was in place and the works were incomplete. The contract had not been determined. The parties’ contract was the standard Royal Institute of the Architects of Ireland (RIAI) form. Moylist argued that the bank had a duty of care to ensure that Mr. O’Connor complied with the terms and conditions of contract and had breached that duty. Moylist had suspended the works. The essence of its case was that, having invoked clause 34(a) and not having been paid by Mr. O’Connor, it could continue the suspension of the Works and remain on the development in accordance with its contractual licence indefinitely if it were not paid the sums due. Whilst the suspension continued, so did the licence to occupy the site, and it could not be determined by Mr. O’Connor under the contract.

Moylist relied upon the decision in the London Borough of Hounslow v Twickenham Garden Developments Ltd., (1970) 7 BLR 81, which the judge considered in some detail. The judge found the attempt to apply the decision in Hounslow was inappropriate as the situation was not analogous. If it were, then Mr. O’Connor would be seeking an injunction against Moylist on the basis that determination of the contractual licence had occurred. It was unreasonable to assume that Mr. O’Connor would sit back and do nothing leaving Moylist’s licence to continue indefinitely. What would happen would be that there would be a dispute between them about whether there had been a valid determination of the licence. In accordance with the terms of the contract, with Mr. O’Connor seeking to have the matter resolved either at arbitration or an interlocutory injunction. If that were to happen, the likelihood was that in accordance with the principles laid down in the American Cyanamid case [American Cyanamid Co. v Ethicon Ltd., [1975] 1 All ER 504] the Court would grant the injunction on the basis that the balance of convenience favoured that course of action. This was what had happened in Tara Civil Engineering Ltd. v. Moorfield Developments Ltd., (1989) 46 BLR 72.

If Moylist’s contractual licence did subsist so that Mr. O’Connor could not remove it from the site, then the receiver could have no greater rights against Moylist, irrespective of whether he was acting as agent for the third or fourth defendants. Moylist also maintained that the rights of the bank under the mortgage could not have priority over its own rights under the building contract even though the mortgage preceded the contract because the mortgage was not registered on the folio until after the building agreement came into existence. Moylist submitted that the issue to be tried was whether under the standard R.I.A.I. contract a receiver in the case of a charge created by a private individual, not a company, appointed as agent of the “funder” and the employer, had a right to terminate the contractual licence of the builder to remain on the site in the absence of an allegation of breach of contract against the builder.

The judge rejected the contention that the receiver was in no better position in relation to the implementation of the building agreement than Mr. O’Connor. The mortgaged property of which the receiver entered into possession as defined by the deed also included the property charged and assigned, i.e., all the undertaking and assets, machinery, book debts and goodwill. He also took over, by operation of law, the obligations of the Company under the alleged agreement.

The receiver’s position was well settled. The first defendant, as receiver, in exercise of his powers on foot of the mortgage was entitled to enter the development and take possession of it, notwithstanding whatever rights Moylist had against Mr. O’Connor under the building agreement. The bank was not in possession of the development, but, if it were, its entitlement to take and remain in possession to the exclusion of Moylist would be the same as that of the first defendant, as receiver. In the court’s view, damages would be an adequate remedy for Moylist if it were refused the injunction sought; its goal was payment of the €332,579.32 which it alleged Mr. O’Connor owed, plus retention. There would be no difficulty in quantifying any additional damages due from Mr. O’Connor.

Considering the question of the balance of convenience, the judge considered whether any useful purpose would be served if an injunction in the terms sought were granted. The only reasonable inference which could be drawn from the facts was that Moylist had no intention of carrying out any further works on the site because he had no prospect of being paid by Mr. O’Connor for any additional work performed. That being so, it was not unreasonable to infer that Moylist’s objective in seeking to exclude the receiver from possession of the development was to put pressure on the bank to do a deal with it in relation to the sums owed by Mr. O’Connor. On the other hand, if an interlocutory injunction were granted, it would mean that the receiver would be unable to fulfil his functions for the benefit of the persons to whom he owed a duty. The judge had no doubt that the balance of convenience lay in favour of refusing the injunction.

Moylist Construction Ltd. v Doheny, Deloitte & Touche, Ulster Bank Ltd. and Tom O'Carroll, [2010] IEHC 162
 

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Urang applied to enforce two adjudicator’s decisions made against the defendants, for whom Urang had undertaken conversion works under a JCT 2005 building contract. In the first action, the adjudicator had ordered Century Investments Ltd to pay Urang £47,663.37 and his fees. In the second, he had awarded Urang £22,720.35 against Eclipse. The issues against Century and Eclipse were identical.

Century engaged Urang to undertake conversion works at the Harlington Heathrow. On 19 January 2009 the quantity surveyor under the contract issued Interim Valuation No 10 on behalf of the employer in the sum of £21,537. The valuation showed that the retention was £12,675. The final date for payment of these sums was 14 days from the date of the certificate i.e. 3 February 2009. . Clause 4.13.4 of the Contract provided that the employer may give a written notice to the contractor not later than 5 days before the final date for payment specifying any amount that it proposed to withhold or deduct from the amount due. The withholding notice should, therefore, have been issued by 28 January 2009, but Century issued no such notice.

On 10 February 2009, however, the quantity surveyor sent Urang an e-mail notifying it that Century would be making certain adjustments to the balance due in the current valuation. Without giving any reasons, Century paid only £17,445.66 against Interim Valuation No 10, leaving £4,091.34 outstanding. Much of the work had been completed by June 2010, but the parties were in dispute about this outstanding amount and Urang’s claims for an extension of time and prolongation costs.

Urang referred the dispute to adjudication. In its Response, Century alleged that it was entitled to £19,890 in respect of remedial work to soil drainage, loss of revenue during repairs and liquidated and ascertained damages. It asserted also that there were other defects in the works although no further sums were claimed in respect of them. The adjudicator made an award in Urang’s favour.

Century challenged the adjudicator’s award on three grounds:

The adjudicator had failed to take into account an important part of the dispute referred to him, i.e. that Urang was not entitled to the sums claimed given the existence of its counterclaim. Accordingly, Century argued that the adjudicator had acted contrary to the principles of natural justice;

The adjudicator’s ruling on the absence of a withholding notice was not a ruling on the merits of the counterclaim, but an erroneous and unfair ruling that the counterclaim did not fall within the adjudicator’s remit because of the absence of a withholding notice;

Alternatively, the adjudicator had failed to take into account the fact that Century had served a material withholding notice and acted contrary to the principles of natural justice.

Century said that the counterclaim had been properly put before the adjudicator and his failure to deal with it had been a breach of natural justice.

THE WITHHOLDING NOTICE

In the judge’s view, the effect of clause 4.9 of the contract, the JCT 2005 Standard Building Contract, was that the amount stated in the certificate as due was a “sum due” under the contract and the employer must pay that sum on the date specified unless he has issued an appropriate withholding notice in time. In these circumstances, the contractor need do no more than prove the existence of a properly issued certificate. The contractor does not have to prove that the valuation in the certificate is correct, or that there are no other potential cross claims by the employer, such as, for example, a claim for defects. It might be that, if the certificate discloses an error on its face, or if it is shown that there is some other irregularity in relation to its issue, the contractor may not be able to rely on it without more, as establishing the sum due. This was not the situation in the present case.

The amount stated in Interim Valuation No 10 was a “sum due” under the contract and that, since Century did not issue a valid withholding notice in time, there could be no defence to a claim for that sum, or any unpaid balance of it.

From the terms of the contract, it was clear that the need to issue a withholding notice applied only to sums stated as due in interim valuations. There was no requirement to serve a withholding notice in relation to other claims made by a contractor, whether under a different provision in the contract or for damages. The requirement for a withholding notice was confined to the procedure in relation to interim valuations as required by sections 110 and 111 of the Housing Grants, Construction and Regeneration Act 1996. Therefore, the adjudicator had been wrong to decide that Century could not deploy its counterclaim as a defence to Urang’s claims in the adjudication, apart from the claim under the certificate, given the absence of a withholding notice.

Century attempted to rely upon an e-mail of 10 February 2009 as constituting a withholding notice. However, this had not been brought to the adjudicator’s attention before his decision. He could not have acted unfairly in respect of a point which had not been raised. Even if he had been aware of the e-mail, it had been issued out of time.

Accordingly, Urang was granted summary judgment against Century.

Urang Commercial Ltd. v Century Investments Ltd. and Eclipse Hotels (Luton) Ltd., [2011] EWHC 1561 (TCC)

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