“Contract law must be as clear as possible and its rules acknowledged as defaults1.” In UK construction law, that goal appears to be widely accepted.2 In 2018, how far did we achieve that lofty aim? What I intend to do in this essay is to look at a selection of the key decisions and issues this year, not with the aim of presenting a kaleidoscope of case law, but to hold them up against this yardstick as a starting point for debate.
Adjudication
Despite another series of decisions on adjudication, the fundamental premise remains untouched: “It is trite law that, in accordance with the policy behind the Housing, Grants (Construction and Regeneration) Act 1996, the courts will endeavour to enforce the decisions of construction adjudicators.”3 In 2018, the Court of Appeal got to work on two important issues that have vexed adjudication enforcement since at least the changes made by the Local Democracy, Economic Development and Construction Act 2009 came into force: whether it was possible to adjudicate for the ‘true value’ of an interim application for payment following an adjudication on the payment notices (‘smash and grab’); and the scope of the High Court’s jurisdiction to stay judgments arising from summary judgment applications enforcing adjudication decisions.
The Court of Appeal confirmed the judgment of Coulson J (as he then was) in S&T(UK) Ltd v Grove Developments Ltd.4 It is now settled that a party can bring an adjudication on the ‘true value’ of an application, even if there has been an adjudication based on section 111(1) of the Housing Grants, Construction and Regeneration Act 1996 where a failure to serve an appropriate pay less notice has resulted in the ‘notified sum’ in the application becoming payable. If, however, the paying party wants an adjudication of the ‘true value’, it has to pay up first: “both the Act and the contract must be construed as prohibiting the employer from embarking upon an adjudication to obtain a re-valuation of the work before he has complied with his immediate payment obligation.”5 It is not obvious, however, what happens if the paying party does serve a notice of intent to appoint an adjudicator. Should the other party apply for an injunction? Does any adjudicator who is purportedly appointed lack jurisdiction? This, however, is probably a small wrinkle that can be ironed out in a further decision.
The binding, but non-permanent, nature of an adjudication decision is problematic if it appears that the receiving party will be unable to repay the adjudicated sum. The probable inability of a claimant to repay the sum ordered by the adjudicator may constitute a special circumstance which would render it inexpedient to enforce the resulting judgment (possibly subject to a requirement to pay the disputed sum into court) so that a stay may be granted under what is now CPR, r.83.7(4) in accordance with the principles set out in Wimbledon Construction Co Ltd v Vago.6
The principles in that case, however, are not “set in stone”, as Coulson J (as he then was) acknowledged in Equitix ESI CHP (Wrexham) Ltd v Bester Generacion UK Ltd.7 I was led by Dr. Tim Sampson when the dispute in Gosvenor London Ltd v Aygun Aluminium UK Ltd reached the Court of Appeal.8 In that case it was accepted that evidence of a “real risk that any judgment would go unsatisfied by reason of the claimant organising its financial affairs with the purpose of dissipating or disposing of the adjudication sum so that it would not be available to be repaid, then this would also justify the grant of a stay”. The test for risk of dissipation adopted by the Court of Appeal is the same as for a freezing injunction.9 The case is also important because it deals with the question of when adverse inferences can be drawn where a receiving party does not appropriately rebut evidence advanced by the paying party.10
I must, however, raise two points that are ripe for debate. Firstly, the fact that the courts are still dealing with these issues and the appellate courts are cutting through forests of first instance decisions is not necessarily a healthy sign: for every contested case there is a potentially unpaid party who ought to be remunerated, or on the other side, a participant in the construction industry who is on the receiving end of an unfair or unenforceable adjudicator’s decision. Secondly, I do not believe that we have arrived at the last word on the temporality conundrum that decisions are binding, but (at least in theory) non-permanent. For example, the 2017 FIDIC Rainbow Suite attempts to address this issue by providing that the DAAB may require a paying party to provide appropriate security for repayment if there are ‘reasonable grounds’ for the DAAB to believe that it will be unable to repay in the event that the decision is reversed11. This is one option, but it is unlikely that UK adjudicators will be given similar discretion. For now, however, adjudication remains a successful form of dispute resolution, but still with certain signs of relative immaturity.
Stays and insolvency
The relationship between insolvency law (which prizes the finality of unanswerable debts) and adjudication decisions (which, as noted above, can be re-opened in litigation or arbitration unless otherwise agreed) remain in a state of flux. The ability of a party to refer a ‘valuation’ dispute to adjudication was accepted to be a genuine cross claim that could defeat a winding-up petition based on a ‘payment notice’ decision even where the latter was now enforceable as a judgment debt in Victory House General Partner Ltd v RGB P&C Ltd [2018] EWHC 1143 (Ch), [2018] 3 WLR 1024. Notwithstanding the statutory wording in section 108(2)(a) that a construction contract must contain a provision allowing a party to refer a dispute to adjudication “at any time”, in Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (in liquidation) [2018] EWHC 2043 (TCC), Fraser J refused to allow a company in insolvent liquidation to do so. Lonsdale brought a Part 8 claim seeking declarations and an injunction to prevent Bresco, the insolvent party, from bringing a claim to adjudication. Fraser J held that any claims Bresco had under the contract ceased to be capable of separate enforcement upon the date of liquidation; upon the taking of an account required by rule 14.25(2) of the Insolvency Rules 2016 (dealing with mutual dealings and set off in a winding up), the dispute between the parties was replaced by a single debt. Fraser J commented at [34] that, “The range of claims and cross-claims between companies such as Lonsdale and Bresco are all merged into one single balance being due in one direction.” The result might be thought surprising: liquidators across the country regularly refer disputes to adjudication, either as part of the exercise of taking an account, or in making financial claims outside that exercise. The case has gone to the Court of Appeal, and a decision is expected soon.
What security, then, is an adjudication decision in the hands of a creditor? It has obviously passed out of the twilight of being a completely disputed debt12. It is not, however, obviously a final sum. At present, therefore, the law as to the interface between insolvency and adjudication comes up short against the yardstick set out at the outset.
Implied obligations and the prevention principle
The Court of Appeal has set down a clear view on the ‘prevention principle’, which has been the academic stalking horse in respect of delay claims. I have already discussed the two cases of North Midland Building Ltd v Cyden Homes Ltd13 and Clin v Walter Lilly14 elsewhere.15
In Clin v Walter Lilly, the Court of Appeal accepted that the prevention principle could form the basis for a limited implied obligation on an employer to use all due diligence to obtain in respect of the Works any permission, consent, approval or certificate as is required under, or in accordance with, the provisions of any statute or statutory instrument for the time being in force pertaining to town and country planning.16 This fell well short of what the contractor was seeking, and it is unclear how a claim could be easily framed if the local planning authority refused to grant such an application. For a contract law minimalist, however, the answer to this objection is simple: the point should have been dealt with in the express terms of the contract, and if it was not, the contractor entered into the agreement eyes wide open as to the risk that a planning refusal would lead to the project becoming unstuck.17
The Court of Appeal was even more forthright in North Midland Building Ltd: it was confirmed that “the prevention principle is not an overriding rule of public or legal policy”18. Parties can therefore draft it away. It is, however, still an important and arguable principle of law, that should not simply be forgotten: there is still plenty of case law that illustrates its efficacy.19 Whether or not the prevention principle can be squared away easily with test I set out at the outset of this piece is a question for another, longer, piece.
Conclusion – “as clear as possible”?
“[I]t could be thought relevant to consider first what actually are the needs of the commercial community. The first and paramount requirement is the achievement of certainty as far as that is possible…”20
I have not set out to write a comprehensive review of the year: this is self-confessedly a discussion piece. We have seen a number of very important decisions and the quietus has been put to some of the debates over ‘smash and grab’ adjudications. The Court of Appeal has also grappled with the question of the prevention principle, but without fully enunciating a twenty-first century analysis of its nature and scope. All of these developments are welcomed. What falls short of the test set out in the introduction is the uneasy relationship between the temporal lack of finality in adjudication and the public remedy of insolvency. We wait and see if the Court of Appeal will ease these concerns in the next few months.
David Sawtell – Construction team
1. J. Morgan, Contract Law Minimalism: A Formalist Restatement of Commercial Contract Law (Cambridge University Press, 2013).
2. See, for example, J. Uff, ‘Construction Law – The First 25 Years’ (2013) 7 Construction Law International 40; M. Bell, ‘Contract Theorists: What did they ever do for us in Construction Law?’, SCL Paper D189, May 2016.
3. Gosvenor London Ltd v Aygun Aluminium UK Ltd [2018] EWCA Civ 2695, per Coulson LJ at [2], citing the speech of Chadwick LJ in Carillion Construction Limited v Devonport Royal Dockyard Limited [2005] EWCA Civ 1358; [2006] BLR 15 at [85]-[86].
4. [2018] EWHC 123 (TCC), [2018] 2 All ER (Comm) 925, 177 ConLR 30 (first instance); [2018] EWCA Civ 2448 (Court of Appeal).
5. Ibid, [107] per Sir Rupert Jackson.
6. [2005] EWHC 1086 (TCC); [2005] BLR 374, per HHJ Coulson QC as he then was.
7. [2018] EWHC 177 (TCC).
8. [2018] EWHC 227 (TCC), [2018] Bus LR 1439 (Fraser J at first instance); [2018] EWCA Civ 2695 (Court of Appeal).
9. Ibid, [41]-[43].
10. Ibid, [44]-[48]. This part of the judgment addresses some of the concerns raised by J. Bowling in his article ‘Adjudication enforcement and insolvent companies – the unsatisfactory state of the law’ Const. L.J. 2016, 32(2), 167-185 at 180 that receiving companies had too easily rested on the burden of proof without any obligation to disclose the true state of their finances.
11. FIDIC 2017 Red Book, clause 21.4.3(ii). The Dispute Avoidance / Adjudication Board (‘DAAB’) is intended to fulfil a similar role to that of an adjudicator under section 108 of the Housing Grants, Construction and Regeneration Act 1996 in providing binding, but non-final, determinations of disputes.
12. South Coast Construction Ltd v Iverson Road Ltd [2017] EWHC 61 (TCC), [2017] 1 All ER (Comm) 653 at [27], per Coulson J as he then was.
13. [2018] EWCA Civ 1744, 180 ConLR 1.
14. Lilly [2018] EWCA Civ 490, 177 ConLR 1.
15. https://www.lambchambers.co.uk/news-and-resources/implied-obligations-on-employers-in-property-development-and-construction-projects-update.htm ; https://www.lambchambers.co.uk/news-and-resources/implied-obligations-on-employers-in-property-development-and-construction-projects-update.htm , both accessed on 14 December 2018.
16. Clin, [37], per Lindblom LJ.
17. See, for example, the reasoning at [50] in Clin.
18. North Midland Building Ltd at [30] per Coulson LJ.
19. See, for example, Akenhead J’s use of the principle to interpret clause 15 of the FIDIC Yellow Book 1999 form in Obrascon Huarte Lain SA v Attorney General for Gibraltar [2014] EWHC 1028 (TCC) at [324]. This was not disturbed on appeal to the Court of Appeal.
20. J. S. Hobhouse (writing extra-judicially), ‘International conventions and commercial law: The pursuit of uniformity’ (1990) 106 LQR 530, 532-3, cited in Morgan (2013) at 252.