CASE UPDATE
Adjudication costs not recoverable under the Late Payments Act
Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd (2017) (unreported)
It has previously been unclear whether an unpaid party in an adjudication dispute can be awarded its 'reasonable costs' of adjudication via section 5A of the Late Payment of Commercial Debts (Interest) Act 1998. Despite the murkiness of the waters, the last few years have seen an increase in parties making such a claim and adjudicators awarding it. However, the recent case of Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd (2017) (unreported) appears to have put the issue to bed...and unpaid parties are unlikely to be sleeping easy with the decision.
Section 108A of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) deals with the allocation of adjudication costs. Effectively, it states that any contractual provision which the parties may have agreed in relation to the allocation of adjudication costs between the parties is ineffective unless:
"(a) it is made in writing, is contained in the construction contract and confers power on the adjudicator to allocate his fees and expenses as between the parties; or
(b) it is made in writing after the giving of a notice of intention to refer the dispute to adjudication."
Accordingly, the general rule is that unless the parties comply with section 108(A)(b), they must bear their own legal costs of the adjudication, with the adjudicator limited to allocating his / her own fees and expenses between the parties (not the parties' legal expenses).
However, parties have sought to get around this by relying on section 5A of the Late Payment of Commercial Debts (Interest) Act 1998 (the Late Payments Act). Where a construction contract contains no adequate right to claim interest on a late payment, this section implies a term into the contract entitling a successful party to its 'reasonable costs' of recovering a debt.
In this case, an adjudicator awarded Enviroflow unpaid moneys of £81,000 plus interest, as well as its 'reasonable costs' of recovering the debt (£14,900). No payment was made and Enviroflow applied for summary judgment. A key issue in the proceedings was whether the adjudicator had the jurisdiction to award Enviroflow its costs of the adjudication.
O'Farrell J held that the adjudicator had no such jurisdiction. The judgment is unreported; however, her reasoning appears to be that, while there was an implied term entitling Enviroflow to seek its reasonable costs of recovering the debt, this term was caught by section 108A of the Construction Act and was therefore ineffective unless an agreement had been made in writing in accordance with sub-section (b). O'Farrell J severed the £14,900 and enforced the balance of the award.
It will be interesting to see what further reasoning may be provided by O'Farrell J once the judgment is reported. Regardless, the conflict between section 108A of the Construction Act and section 5A of the Late Payments Act appears to have been resolved, with the Construction Act winning out. In light of the decision, unpaid parties wishing to secure the award of their legal costs in an adjudication will need to ensure compliance with section 108A(b) of the Construction Act. This decision is unlikely to impact a party's ability to recover its reasonable costs of pursuing a debt outside the adjudication context.
Look away now contractors – the Supreme Court upholds fitness for purpose on a slender thread
MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another [2017] UKSC 59
The much awaited Supreme Court case MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another [2017] UKSC 59 provided a number of interesting comments in relation to fitness for purpose obligations in construction contracts, as well as providing a number of important practical lessons.
Background to the case
MT Højgaard ('MTH') was employed by E.On to design, fabricate and install the foundation structures for 60 offshore wind turbines. Shortly after completion, the foundation structures failed and the parties agreed that E.On would develop a scheme of remedial measures. They could not agree, however, as to who should bear the cost of such measures. This litigation was then launched.
The contract documents included a number of provisions as to quality including various reasonable skill and care provisions, "minimum" compliance with an internationally recognised standard (J101) and, within the technical specifications, the requirement for a design life of 20 years.
Compliance with the J101 standard was expected to ensure a service life of 20 years. What was not known at the time was that the standard had a fundamental error, which meant that compliance with the standard would never have resulted in a 20 year service life.
However, within the technical requirements section of the Employer's Requirements, there was the following more onerous fitness for purpose obligation: "the design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement". It was this specific obligation that E.On claimed had been breached.
The TCC agreed that MTH had breached the contract and was liable for the failures, because its design was not fit for purpose, putting emphasis on the 20 year service life obligation.
MTH appealed against this decision arguing that the more onerous 20 year requirement was inconsistent with the other design obligations. The Court of Appeal agreed, stating that one mention of the 20 year service life was "too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations" and that the provision was inconsistent with the other, less onerous design obligations in the contract.
The Supreme Court
The first issue the Supreme Court had to consider was whether the Employer's Requirements were properly incorporated into the contract documents. MTH alleged that they were not, but E.On argued that they were for the following three reasons "(i) clause 8.1(x) of the Contract required the Works to be fit for purpose, (ii) Part C of the Contract equated fitness for purpose with compliance with the Employer's Requirements, (iii) Part C also defined Employer's Requirements as including the contents of the TR [technical requirements]".
The Supreme Court agreed with E.On and held that the requirements were properly incorporated into the contract. As such, Lord Neuberger (who gave the unanimous judgement) noted there were two arguments open to MTH, the first being that the 20 year obligation was inconsistent with the other design obligations, in particular that of compliance with J101 and, second, that it was too slender a thread to hold such an important and onerous requirement.
In relation to the argument of inconsistency with the other terms, the Court rejected this. Emphasis was given to the point that J101 was the "minimum" required standard and as a result MTH could reasonably have been expected to decide where additional requirements to those in J101 were needed to meet the 20 year service life obligation. The Court held there was no inconsistency because of this, as one provision was simply a less onerous obligation on the contractor.
The argument in relation to the requirement being too slender a thread saw MTH suggest a number of reasons as to why that was the case. It was noted that the Employer's Requirements were unsatisfactory, in that they were ambiguous and inconsistently drafted, due to the fact that they were multi-authored. The Court agreed that this was the case, but held that this did not alter the rules of contractual interpretation and that the Court's role was to interpret the provisions based on normal principles and give effect to the natural meaning of the words, unless it created an improbable or unbusinesslike situation. It was held the requirement for a service life of 20 years was not improbable or unbusinesslike by nature, and as such the words should be given their natural meaning.
E.On's appeal was allowed, therefore, and the decision of the TCC restored.
Takeaways
This judgement provides a number of important takeaways for employers and contractors alike:
- The case makes clear how important fitness for purpose obligations in construction contracts are deemed to be by the courts.If they are properly incorporated they will be upheld, even if they are very difficult or impossible to achieve, as the principle is that the contractor takes the risk of compliance and should adapt to situations where it becomes a great deal more difficult to meet the obligations included in the contract.
- One of the practical lessons of this case is the need to ensure that it is clear and unambiguous which documents are intended to be contract documents and which are not.This can be done, for example, through clauses establishing an order of priority for the contract documents and their obligations.
- It is also vital to make absolutely clear what the required standard is and to seek (as far as possible) to remove any obligations which are in conflict with that standard.The required standard should be set out in the main contractual clauses and it should be made clear that they override any lesser standards mentioned in any other documents.
- Finally, this case reinforces the trend of courts refusing to go behind the express words of contract documents, provided that the words do not create a clearly uncommercial or improbable result for the parties.In this case, it was noted that, despite the documents containing "ambiguities and inconsistencies", the Court should not try to interpret the provisions in a different manner to the normal established rules.
Read the full judgment here.
REGULATORY UPDATE
Terms of reference announced on 30 August for the independent review of building regulations and fire safety
On 28 July 2017, the government announced an independent review of building regulations and fire safety. The review has come about following the Grenfell Tower tragedy, which brought into serious question the current standards and requirements regarding fire safety in high rise residential buildings.
Dame Judith Hackitt, Chair of EFF, the Manufacturers' Organisation, will lead the independent review and consult with the Building Regulations Advisory Committee (which advises the government on changes to building regulations), the construction industry, the fire sector, international experts, MPs and the public.
Pursuant to the terms of reference published on 30 August 2017 the two key purposes of the review are to make recommendations that will ensure we have a sufficiently robust regulatory system for the future and to provide further assurance to residents that the complete system is working to ensure the buildings they live in are safe and remain so.
The review will:
- map the current regulatory system as it applies to new and existing buildings through planning, design, construction, maintenance, refurbishment and change management;
- consider the competencies, duties and balance of responsibilities of key individuals within the system in ensuring that fire safety standards are adhered to;
- assess the theoretical coherence of the current regulatory system and how it operates in practice
- compare this with other international regulatory systems for buildings and regulatory systems in other sectors with similar safety risks; and
- make recommendations that ensure the regulatory system is fit for purpose with a particular focus on multi-occupancy high-rise residential buildings.
An interim report is expected in Autumn 2017 and the final report no later than spring 2018. The government is expected to act very quickly on any recommendations to come out of the review.
Release date of 2017 editions of the FIDIC Red, Yellow and Silver Books announced
FIDIC has finally confirmed the release dates of the 2017 editions of the Red, Yellow and Silver Books. The much anticipated new editions will be released at the FIDIC International Contract Users' Conference being held in London on 5 and 6 December 2017. It is anticipated that members of the FIDIC Contracts Committee will take the opportunity at the conference to discuss some of the changes, specifically in relation to design and amended claims and disputes provisions.
CLYDE & CO 'IN THE NEWS'
Clyde & Co's procurement and trade law specialist, partner David Hansom, was quoted in the CityA.M. on the topic of Brexit and the need for clarity on the transition. He stated that "The services sector, in particular financial services, is an even more important export market for the UK, and negotiations are likely to be more contentious in this area particularly around access to markets and professional recognitions".
Read the full article here.
Following on from last month's update, Clyde & Co's analysis of the impact that the Definitive Guideline to health and safety sentencing has had in its first year featured prominently in Building, with Mark Lefty calling it 'the most significant analysis of the guideline's impact yet'.
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