UK: Building Blocks: Case Law Update

Last Updated: 21 January 2013
Article by Stephen P. Rockhill

Introduction

The idea of sitting and reading a judgment in a case is not everyone's cup of tea. But case law shouldn't be overlooked. Amongst other things, cases set precedents, help us to understand and interpret legislation and wording used in agreements. It should be understood that the guidance given in judgments doesn't just help us when in the midst of a case to support or discredit an argument, but, arguably more importantly, help parties entering into a contract to understand what is meant by the particular terminology they want to use.

In this paper, I have explored the judgments handed down over the last year and sought to interpret them as guidance. I also dedicate some time to the Adjudication cases that have been referred to the TCC to examine the particular objections made to Adjudicator's decisions and the grounds that they have been made and the more creative arguments that have been used in order to delay enforcement of Adjudicator's decisions.

Commercial issues

Performance bonds

It is often the case that parties to a building contract will enter into side agreements in relation to settlement of payment or future payments. This issue was reviewed in the case of Hackney Empire Limited v Aviva Insurance UK Ltd [2011] EWHC 2378 whereby Hackney Empire engaged a contractor to refurbish the theatre. As part of the contract documents there was a performance bond executed between Hackney Empire and the contractor which secured the performance of the contractor's obligations under the building contract. During the course of the work the contractor made numerous claims and in December 2002, in an attempt to ensure that the works were completed as soon as possible, Hackney Empire agreed to advance the contractor £1m in 3 instalments as payment on account in respect of its claims. Hackney Empire paid 2 out of the 3 instalments. The contractor then went into administration and the final instalment was never paid. Under the JCT contract, Hackney Empire elected to determine the contractor's employment. Hackney Empire sought to call in the bond and to get repayment of the 2 payments made to the contractor as the claims had never been substantiated.

As was expected, the bondsman attempted to argue that the payments should not be made and that the advance payments were the result of agreements between the contractor and Hackney Empire made without its knowledge in circumstances that were prejudicial to it as a bondsman. The bond contained the usual "indulgence clause" stating that no alteration in the terms of the building contract or the extent of the works and no allowance of time would in any way release the surety from liability under the bond. The bondsman argued that a variation to a contract will discharge the guarantor's liability unless the guarantor consents to the variation or the variation is patently insubstantial or incapable of adversely effecting the guarantor.

The TCC found that the bond remained valid and was not affected by variations made by the side letter. Although the side letter did vary the building contract, it did so in only 2 minor ways. One variation in the side letter was that the amount of liquidated damages was to be reduced, a provision which was to the benefit of the surety. The second was that neither party would refer a dispute to adjudication for a period, something that was of minimal consequence to the surety. The court also found that conduct that does not actually vary the principal contract (eg entering into the side letter in this case) can only discharge a surety if it is prime facie prejudicial to the surety. Here, the making of payments under the side letter was not prejudicial conduct.

The importance of this case is to ensure that when entering into side agreements under building contracts you are fully aware of the provisions of any performance bonds that may have been provided under the contract. The drafting of the indulgence clause is extremely important. The drafting of the Charles Russell performance bond is very wide in this respect. Other standard bonds may not be so accommodating.

"Best endeavours" and "all reasonable endeavours"

The phrases "best endeavours" and "all reasonable endeavours" that feature in many contracts were recently considered in the Court of Appeal judgment of Jet2.com Ltd v. Blackpool Airport Limited [2012] EWCA Civ 417. This was not a construction case, but these words are often used in professional appointments, development agreements, agreements for lease etc.

This case concerned an agreement between the budget airline Jet2.com and Blackpool Airport. In the agreement between the 2 parties there was a clause which stated that Jet2 and Blackpool Airport would cooperate together and use their "best endeavours" to promote Jet2's low cost services from Blackpool Airport and that BAL would use all "reasonable endeavours" to provide a cost base that would facilitate Jet2's low cost pricing.

The parties agreed that best endeavours and all reasonable endeavours amounted to the same thing. All was well for the first 4 years but BAL were getting concerned as the number of flights that were being operated by Jet2 outside the airport's normal hours of 07:00 to 21:00. It got to the point that BAL told Jet2 that it would not accept departures or arrivals scheduled outside normal hours.

BAL argued that the agreement was silent about the hours under which it would accept aircraft movements and therefore it had no obligation to accept flights outside those hours. Further, BAL argued that it was entitled to take into account its own commercial interests when considering what steps to take in considering its best endeavours. The Court of Appeal held that the obligation to use best endeavours to promote Jet2's businesses obliged BAL to do all that it reasonably could to enable that business to succeed and grow. This extended to keeping the airport open to accommodate flights outside normal hours, subject to any right BAL might have to protect its own financial interests. The court went on to hold that the obligation to use best or all reasonable endeavours obliged BAL to act against its own commercial interests. Here the ability to schedule aircraft movements outside normal hours to essential to Jet2's business and was therefore fundamental to the agreement.

So what's this all got to do with construction?

Under the JCT standard forms of building contract, a contractor is entitled to an extension of time always provided the contractor "shall constantly use his best endeavours to prevent delay in the progress of the works, however caused, and to prevent the completion date from being delayed". Arguably you can't give or receive an extension of time if, when it comes to progress, the contractor has not constantly prevented delay to progress however caused. The critical issue arises where there are delay events in a JCT contract which permit an extension of time but don't carry money. How far should the contractor go under the best endeavours clause?

Settlements agreements

The whole point of settlement agreements, where there has been a dispute, is to close down matters between the parties. It is very important when entering into a settlement agreement that the parties are clear about the scope of the matters they intend to settle. We recently acted in the case of Point West Limited v Mivan Limited [2012] EWHC 1223 (TCC). In this matter Point West London Limited was the developer and landlord of a property in West London. Mivan Limited was employed as the contractor to carry out works under a JCT standard form of building contract with contractor's design (1988 edition). The contract sum was over £10m and included a provisional sum of £750,000 for the fit out works to the penthouse flat. PC for the works was issued in June 2001. No certificate of making good defects was issued. The contractor's final account for £12.5m was agreed in July 2002. It became clear at this time that there were problems with the curtain walling system and water ingress. Over 6 years the developer and the contractor investigated the defects. In October 2007 the developer and contractor entered into a settlement agreement. At that time both parties were aware that the defects in the curtain walling and the air conditioning system were of an unknown scope and extent and attempts to repair them had failed.

The settlement agreement provided for additional monies to be paid to the contractor in return for the contractor's assistance in the claim the landlord was making against the tenant of the penthouse. In October 2007 the contractor wrote:

"The agreement comprises a further payment of £50,000 (including VAT) representing the final assessment of monies due or to become due or to become due thus achieving full and final settlement in respect of the works, together with any and all outstanding matters ... this final agreement concludes Mivan's responsibilities and obligations in respect of their works at the above project."

The developer replied the same day stating:

"The contents of your letter accepted subject to you being prepared to assist me in the legal aspects of the case on the penthouse. This may involve some time on the part of Mivan along with the production of necessary documents but I am not looking to you to do any further remedial works."

Under a Part 8 application the developer sought a declaration that the October 2007 settlement agreement did not exclude the contractor from liability for:

  • To pay damages for breach of contract in respect of defects.
  • For latent damages that existed in October 2007.

The contractor rejected the developer's interpretation of the settlement agreement ie it was simply a financial settlement. The contractor argued that the settlement agreement extended to patent defects in October 2007. Ramsey J declined to grant the developer's declaration, instead making a declaration based on the contractor's position, namely that:

"The agreement between the Claimant and Defendant in October 2007 included s settlement of any liability of the contractor for and precluded the developer from seeking damages or specific performance in relation to defects which were patent as at 18 October 2007."

So what are the lessons from this?

Absolute clarity as to what the parties mean and wish to achieve in relation to settlement must be the priority.

The Courts will use the same rules as interpreting a contract when interpreting the meaning of words in the agreement. It is important not to try and use the courts to remedy any gaps or missing parts. You cannot improve a deal which the parties do not make for themselves. Generally speaking, a Defendant will want the release to be drafted as widely as possible, and the Claimant may look to narrow the release. The next question to ask is: What about latent defects?

Concurrent Claims against Contractors in Contract and Tort (January 2011)

When bringing a claim against, for example a contractor or a consultant, it is normal to consider what actions arise as a result of breaches of the express or implied terms of the contract and to consider whether there are any obligations owed under a duty of care in tort not to cause pure economic loss.

The question as to whether contractors owe such concurrent duties was recently considered in the case of Robinson v. P.E.Jones (Contractors) Ltd [2011] EWCA Civ 9. In this case the claimant agreed to buy a house being built by the defendant. The contract included a term requiring the defendant to build in an efficient and workmanlike manner, completing the work to the specification and in accordance with the drawings.

The parties entered into a NHBC agreement "on which alone [the defendant's] rights and remedies were founded". The contract was entered into in 1991 and was signed underhand. Following completion of the works in 2004, it was discovered that the gas flues had not been constructed in accordance with good building practice. The claimant's sought the cost of carrying out remedial works to the flues, a claim was issued in December 2006. As the NHBC agreement was signed underhand, the claimant could not bring a claim for breach of contract because the 6 years for bringing a claim had expired. However, the claim was brought within 3 years from the discovery of the defect.

The Court of Appeal found that the contractor did not owe a concurrent duty of care in tort not to cause pure economic loss. The contract was the primary source of the legal responsibilities and any obligations owed in tort were to be considered on the facts of the case.

Clearly the extent of a parties of obligations needs to be considered at the outset of formulating the contract. I don't think that this is an indication that Contractors will never again in the future owe concurrent duties in Contract and Tort, but if you want to achieve this being aware of the timeframes for bringing actions for breach of contract and in tort must be considered together with precise wording in the contract.

Adjudication cases in the TCC

Over the last year the TCC have heard some 12 cases concerning adjudication. I turn next to consider some of these cases below.

Hyder Consulting UK Ltd v. Carillion Construction Ltd [2011] EWHC 1810

The Defendant sought to resist enforcement of the Adjudicator's decision on the basis that the Adjudicator acted in breach of the rules of natural justice by failing to notify the parties of the methodology he intended to use in calculating the claim and the figures that he intended to use.

The question before the Adjudicator concerned the calculation of the fees due to Hyder, in particular the calculation of the Target Cost, both parties put forward submissions in this regard. There had been a meeting between the Adjudicator and the parties and he requested information about the calculation of the target cost, which both parties responded to. The Adjudicator looked to the contract for guidance as to the calculation of the target cost.

Edwards-Stuart J confessed to finding the question of whether there had been a breach of the rules of natural justice, a difficult one in this case. Both parties having put forward arguments of some merit. However, at the end of the day he recognised that adjudication was intended to be an interim forum for dispute resolution. He did not feel that the Adjudicator in this case "fundamentally disregarded" his role and held that there had not been a breach of the rules of natural justice.

Edwards- Stuart J found that "if a judge or Adjudicator has heard full argument on the construction of a particular clause or set off provisions in a contract and reaches a conclusion that is different from the submissions put forward by each of the parties, there is no obligation upon him or her to canvass that view with the parties before making his decision."

Witney Town Council v. Beam Construction (Cheltenham) Ltd [2011] EWHC 2332

Following the termination of the contract by the Employer, the Contractor brought a claim for sums due under the final account, asking for a determination as to the date of Practical Completion, the amount of retention to be released and a determination as to whether the contract was wrongly terminated. The adjudicator reached a finding on all matters, but at enforcement the Employer argued that the adjudicator didn't have jurisdiction because more than one matter had been referred to adjudication. The Contractor sought to enforce the adjudicator's decision.

Further to section 108(1) of the Construction Act, a party has the right to refer "a dispute" to adjudication not "disputes". The TCC found that although there appeared to be more than one matter in dispute, the adjudicator was clearly being asked to determine one issue – what was due to the Contractor? The TCC commented that:

"There were clear links between the final account and some of the other matters in issue. Thus, the disputed prolongation claims in the final account could not be resolved without deciding what if any extension of time was due to [the contractor] because it was only if and to the extent that there was an entitlement to extension that the prolongation entitlement could be established. Similarly, one could not determine the insurance claim, the level of retention to be maintained and the prolongation cost without determining when and if Practical Completion had occurred."

The decision was enforced.

Systech International Ltd v. PC Harrington Contractors Ltd [2011] EWHC 2722

An Adjudicator was appointed to determine a question between a sub-contractor and a sub-sub-contractor, namely, whether retention could be released down the chain. The Adjudicator found in favour of the sub sub-contractor. However, the sub-contractor challenged the decision at enforcement on the basis that part of its defence had not been considered by the Adjudicator and therefore there had been a breach of the rules of natural justice. The TCC found that there had been a breach of the rules of natural justice and found for the sub-contractor - the decision was not enforced.

However, the case before the TCC considered whether there due to the breach of the rules of natural justice there had been a total failure of consideration on the part of the Adjudicator so that he was not entitled to receive his fees.

The TCC found that an Adjudicator does not reach a decision, he has to engage in the process and therefore there cannot be said to be a total failure on his part.

Carillion Construction Ltd v. Stephen Andrew Smith [2011] EWHC 2910

The question before the TCC in this case was whether an Adjudicator had jurisdiction to determine a dispute that appeared to be the same or substantially the same as a previous adjudication.

In considering this case the TCC said that this was a question of fact and degree and that parties should ensure that they put forward their best possible case from the outset. A dispute arose between the a contractor and sub-contractor over a claim for extension of time and the valuation of the works. The parties adjudicated on the valuation of the works, but the question of extension of time was specifically excluded from the Adjudicator's jurisdiction. The parties then went through a second adjudication on the extension of time point and loss and expense claim. Where the Adjudicator found that the sub-contractor was entitled to time but not money. A third adjudication was subsequently brought to determine the extension of time and loss and expense claim. The jurisdiction of the third Adjudicator was challenged by the main contractor, this was defended by the sub-contractor on the basis that new material had come to light.

The TCC held that the third Adjudicator did not have jurisdiction because it was the same or substantially the same dispute that had already been heard (see further Quietfield Ltd v Vascroft Construction Ltd [2006] EWCA Civ 1737).

Partner Projects Ltd v. Corinthian Nominees Ltd [2011] EWHC 2989

Generally speaking an Adjudicator does not have the power to award interest on outstanding sums. However in this case the court was asked to consider whether the Adjudicator did have jurisdiction to make a finding on interest. The Employer argued that:

  • The Contractor did not refer to the Late Payment of Commercial Debts (Interest) Act 1998 in the Referral Notice; and
  • Pursuant to the contract, the right to claim interest only arose against certified sums and the amount awarded was not certified.

The TCC found that the Claim for interest was made in the Referral Notice and a claim under the Late Payment of Commercial Debts (Interest) Act 1998 was made in the reply. Therefore this argument failed.

Further, the Adjudicator found that the sum he considered due should have been certified and therefore it was considered to be certified and interest could be awarded pursuant to the contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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