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Roundup of the most important construction law developments in 2017

Contractual interpretation and adjudication dominated the headnotes in 2017.

We are still facing the questions left unanswered by Harding v Paice [2015] EWCA Civ 1231 as to when we can adjudicate for value following a ‘smash and grab’ adjudication. The Supreme Court overturned the Court of Appeal when it came to conflicting contractual terms as to performance, making us all look again at how detailed contracts are written and construed.

Design liability and contractual interpretation

The most important case this year was MT Højgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd [2017] UKSC 59. MTH were engaged to build offshore windfarms. Their foundations failed shortly after completion. The contract incorporated the internationally recognised standard for offshore structures, J101. A different term of the contract specified that MTH was to ‘ensure a lifetime of 20 years’, even though a J101-compliant structure could not achieve this because of an error in the standards themselves. The TCC held that MTH had contracted to design the foundations so that they would have a lifetime of 20 years, finding against them. The decision that was overturned by the Court of Appeal, finding that compliance with J101 was expected, but not guaranteed, to ensure a 20-year life and that the other terms did not create such a guarantee.

The Supreme Court reversed the decision again, holding MTH liable. Where a contract contained a term which required an item to be produced in accordance with a prescribed design, but also included a term that the item would comply with prescribed criteria, and literal conformity with the prescribed design would result in the product falling short of the prescribed criteria, it did not follow that the two terms were inconsistent. In many contracts, the proper analysis might well be that the contractor had to improve on the prescribed criteria. The Supreme Court gave effect to the requirement that the item produced complied with the prescribed criteria. Even if the customer or employer had specified or approved the design, it was the contractor who could be expected to take the risk if he had agreed to work to a design which would render the item incapable of meeting the criteria to which he had agreed.

Lord Neuberger cited Gillespie & Co v Howden & Co (1885) 12 R 800, where it was held that it was no defence to a shipbuilder who had contracted to build a ship of a certain design and of a certain carrying capacity to argue that it was impossible with the approved design to achieve the agreed capacity. Construction contracts frequently contain provisions as to approved designs or methods, and then (perhaps in a different contractual document) specify a required output or specification. Following this decision, it will be important for a contractor to ensure that the approved design is, in fact, capable of achieving the performance required.

If in 2017 we had to pay attention to performance, we also had to keep a hawk eye on the price. In Riva Properties Ltd v Foster + Partners Ltd [2017] EWHC 2574 (TCC), Fraser J made important remarks about the duty of a designer to design within a budget. It was held that Fosters, a famous firm of architects, had known that their client’s budget was £70m (later rising to £100m). At no time, however, did the firm advise their client that it was not possible to value engineer their design down to £100m. At [129]-[132], Fraser J held that while the firm did not have a free-standing obligation to provide detailed advice to the claimants on cost, given the contract that it had with its client, the costs implications of its design had to be taken into account when preparing it.

Adjudication

The TCC continues to nuance its approach to adjudication without losing sight of the overriding consideration that it is a rough and ready process. As was declared in Carillion Construction Ltd v Devonport Royal Dockyard Ltd [2005] EWCA Civ 1358 at [86] by Chadwick LJ, ‘The need to have the “right” answer has been subordinated to the need to have an answer quickly.’

This approach is most obviously illustrated by the TCC’s decisions as to whether the referring party can fetter an adjudicator’s jurisdiction. Is it generally possible to reduce the permissible scope of an adjudicator’s decision to a one-word answer through clever drafting of the notice of adjudication? No. That was the decision of the TCC in AECOM Design Build Limited v Staptina Engineering Services Limited [2017] EWHC 723 (TCC). An adjudicator is not always strictly bound only to answer a narrow question: as we have seen a number of times through the years, giving the wrong answer to a question is not outside his or her jurisdiction. At [31], Fraser J held that, ‘attempting to define a dispute by reference to there being only two permissible answers is one fraught with difficulty for conceptual reasons. It is fraught with even more difficulty when one considers that, almost uniquely in quasi-judicial resolution of disputes, adjudicators are entitled to be wrong in the answers that they give, both in fact and law. If there are only two answers available, yet an adjudicator were to choose (perhaps incorrectly) a third, that does not go to her acting outside her jurisdiction.’ This is consistent with Fraser J’s earlier decision in Amey Wye Valley Ltd v Herefordshire DC [2016] EWHC 2368 (TCC), where at [34]-[35] the TCC explained the relationship between adjudicators’ decisions: provided the adjudicator does not re-decide an earlier dispute, an adjudicator can still produce an enforceable decision that contains errors of fact or law.

Guidance on the appropriate use of the Part 8 procedure to resist enforcement of an adjudicator’s decision was given by Coulson J in Hutton Construction Ltd v Wilson Properties (London) Ltd [2017 EWHC 517 (TCC). In Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC), he had suggested that the Part 8 procedure could be used by resisting parties to have a simple issue, not requiring oral elaboration other than that which can be provided during a short hearing, decided by way of a declaration. That case has now been overtaken by the sheer volume of ‘smash and grab’ adjudications arising of the HGCRA payment regime. In some cases, the parties will consent to have a straightforward point dealt with by way of Part 8 proceedings. If, however, the parties could not agree, Coulson J set out the appropriate procedure at [14]-[22]:

  1. the defendant must ideally issue a Part 8 claim setting out the declarations it seeks or, otherwise, indicate in a detailed defence and counterclaim to the enforcement claim what it seeks by way of final declarations. Paragraph 9.4.3 of the TCC Guide, which provided for a more informal approach, has been superseded;
  2. the defendant must be able to demonstrate that (a) there is a short and self-contained issue which arose in the adjudication and which the defendant continues to contest; (b) that issue requires no oral evidence or any other elaboration beyond that which is capable of being provided during the interlocutory hearing set aside for the enforcement; (c) the issue is one which, on a summary judgment application, it would be unconscionable for the court to ignore;
  3. what that means in practice is, for example, that the adjudicator’s construction of a contract clause is beyond any rational justification or that the adjudicator's calculation of the relevant time periods is obviously wrong;
  4. because it is a potential abuse of the court process, a defendant who unsuccessfully raises this sort of challenge on enforcement will almost certainly have to pay the claimant's costs of the entire action on an indemnity basis.

The TCC is now showing considerable reluctance to allow the costs of an adjudication to be recovered through the backdoor. In Wes Futures Ltd v Allen Wilson Construction Ltd [2016] EWHC 2863 (TCC), the TCC refused to allow a Part 36 offer to be used to recover adjudication costs. Jonathan Acton-Davis QC, sitting as a Deputy Judge of the TCC, rejected a challenge to ‘debt recovery costs’ in Lulu Construction Ltd v Mulalley & Co Ltd [2016] EWHC 1852 (TCC), where a party used the argument that the Late Payment of Commercial Debts (Interest) Act 1998 did allow such costs to be recovered in certain circumstances. This decision has been outstripped by the result in Enviroflow Management Limited v Redhill Works (Nottingham) Limited [2017] EWHC 2159 (TCC), where O’Farrell J concluded that the adjudicator did not have jurisdiction to make an award for such costs where there was an oral contract, as section 108A of the HGCRA 1996 effectively trumped the implied terms imposed by the 1998 Act. There will, no doubt, be more gradual developments on this issue in the years to come.

Payment notices and ‘smash and grab’ adjudications

2017 has seen more decisions on ‘smash and grab’ adjudications following payment notices. Existing wisdom has been confirmed and sharpened by cases such as Kersfield Developments (Bridge Road) Ltd v Bray and Slaughter Ltd [2017] EWHC 15 (TCC). O’Farrell J had to consider what the basic requirements of an application for payment under the HGCRA 1996 consist of. An interim application must be obviously identifiable as such and it must set out, as a minimum, the sum claimed as due and the basis on which such sum is calculated. The Judge then drew a distinction between deficiencies that might allow an employer to reject a claim but which did not affect the application for payment’s validity under the payment notice regime, and those deficiencies that prevented the payment regime from being engaged at all. In the event that the contractor failed to provide adequate substantiation, the employer's remedy lay in issuing a payment notice or pay less notice.

This judgment can be paired with that in Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd [2017] EWHC 17 (TCC). There is a high threshold to be met by any contractor who seeks to take advantage of contractual provisions that make a sum automatically payable if a timely pay less notice is not served. The notice itself, however, must be read against both the contractual and factual setting in which it was issued. A document should not be read too harshly when deciding whether or not a party intended to issue it as a pay less notice that was responsive to the payment notice.

More lately, the content of a payment notice has been considered in the Scottish case of Muir Construction Ltd v Kapital Residential Limited [2017] CSOH 132. It was held at [90] that a pay less notice must ‘at least to set out the grounds for withholding and the sum applied to each of these grounds with at least an indication of how each of these sums were arrived at.’ Given how many adjudications right now turn on the contents of payment notices, these decisions provide some pause for thought for both referring and responding parties.

The courts remain uncomfortable, however, with the outcome of ‘smash and grab’ adjudications. In Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd (No 2) [2017] EWHC 1763 (TCC), the TCC grappled with the question of cross adjudication for the true value of the works following a ‘smash and grab’ adjudication. In ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) it was held that there was no right to refer a dispute regarding the value of the works to adjudication if the absence of a payment or pay less notice had determined the sum which had to be paid by way of interim payment. In Harding v Paice [2015] EWCA Civ 1231 the Court of Appeal confirmed that where the relevant payment was the final payment under a building contract (either because it was the last contractual payment or because the contract had been terminated) the employer could cross-adjudicate and seek to recover any overpayment. Although the Court of Appeal’s judgment made the reasoning in ISG v Seevic doubtful, it was not overruled. Fraser J in ICI held at [203] that it would be ‘difficult to reconcile the decision in ISG v Seevic with the ratio in Paice v Harding’, and with the reasoning in Brown v Complete Building Solutions Ltd [2016] EWCA Civ 1. Fraser J held at [204] that the ratio of both decisions ‘cast some real doubt on whether that case would be decided in the same way now.’ It remains to be seen, however, whether an adjudicator will accept an appointment in an adjudication that flies in the face if ISG v Seevic despite the reasoning in ICI.

Delay

The Society of Construction Law has published the second edition of its Delay and Disruption Protocol. It provides guidance on the assessment of time extensions, along with associated claims for compensation. It is not a contractual document; instead, it provides general guidance without reference to particular standard form contracts. The second edition has already been referred to in the Australian case of Santos Ltd v Fluor Australia Pty Ltd [2017] QSC 153, where Flanagan J held that the measured mile approach may be utilised to support a claim predicated on the existence of disruption, as opposed to critical delay.

The Court of Appeal gave its judgment in respect of the delays in the construction of the Rolls Building in Carillion Construction Ltd v Emcor Engineering Services Ltd [2017] EWCA Civ 65. The main contractor had contended that an extension of time in a standard JCT Dom/2 subcontract after the completion date did not have to commence on the previous due date for completion, but could instead be added non-contiguously for the actual period of delay incurred. The Court of Appeal rejected this, holding that an extension of time had to be contiguous: it had the natural meaning of making the time for the work longer, thereby confirming conventional wisdom.

Standard form contracts

2017 has seen the introduction of new editions of some of the most popular standard form contracts. Transactional lawyers are now, of course, being expected to work with the JCT 2016 suite of contracts. At the International Contract Users Conference in December 2016, FIDIC revealed its proposed revisions to the 1999 ‘Rainbow Suite’, with one of the principal aims being the enhancement of project management tools and mechanisms, as well as distinguishing between a ‘claim’ and a ‘dispute’. The new ‘Rainbow Suite’ was launched in early December 2017. NEC3 has evolved into NEC4, which was launched in June 2017, with new contracts in the suite (such as a Design Build Operate contract). Meanwhile, the FAC-1 framework alliance contract, launched in 2016, continues to develop momentum. It has been reported that in its first 12 months since publication, FAC-1 was adopted on procurements in the public and private sectors worth a total of over £9.5 billion.

Sad news

November 2017 saw the death of Sir Michael Latham, the influential figure and author of ‘Constructing the Team’ (better known as the ‘Latham Report’), who masterminded a number of the key features of UK construction law today, including the end of ‘pay when paid’ clauses, the introduction of adjudication and the championing of new forms of standard contracts, in particular the NEC forms.

Conclusion – what is there to look forward to in 2018?

What about 2018? It is likely that we shall see more developments in respect of the payment notice regime but without silencing all of the arguments that this part of the HGCRA 1996 creates. I suspect that we shall see challenges to adjudication decisions based on the underlying genuineness of the claim: there seems to be a lacuna that while a judgment of the court can be vitiated on the ground of fraud (Jonesco v Beard [1930] AC 298), so far there have been few attempts to resist enforcement of an adjudicator’s decision on the same basis, despite a line of caselaw, in particular the decision in Speymill Contracts Ltd v Baskind [2010] EWCA Civ 120, that it is possible to do so. It will also be interesting to see how the industry responds to the new editions of the standard forms of contract, and in particular, the new FIDIC suite.

David Sawtell / 14th Dec 2017


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