UK: Projects And Construction Law Update - September 2015

Last Updated: 14 September 2015
Article by Robert Meakin and Rachel Chaplin

Please see below Clyde & Co's latest projects and construction law update - a regular review aimed at providing up-to-date information for those in the construction and infrastructure industry.

We look at industry news as well as recent court decisions concerning:

  • a valid termination of the contractor's engagement under the FIDIC Yellow Book
  • a judge's refusal to enforce an adjudicator's decision where the employer had failed to serve the requisite payment notices but where the contractor's application for payment was found to be invalid
  • the concept of good faith when awarding service points under a PFI contract
  • the relationship between CAR insurance and contractual liability
  • a successful challenge to a local authority procurement
  • termination under the FIDIC Red Book
  • consideration of employer's entitlement to deduct LDs under JCT SB/XQ

Industry news

CDM 2015: ACE Agreements 2009 amendments published

The Association for Consultancy and Engineering (ACE) has published an amendment sheet for its suite of professional appointments for engineers, the ACE Agreements, 2009 edition (ACE Agreements 2009) to incorporate CDM 2015. The amendment sheet is freely available to download as a PDF here.

SCL Delay and Disruption Protocol amendments published

The Society of Construction Law (SCL) has published amendments to its Delay and Disruption Protocol, following a consultation that concluded in April 2015. The amendments are contained in Rider 1. The preamble to Rider 1 explains that:

  • Changes to the Protocol were necessary because of developments in technology, construction law and industry practice since the Protocol was first published in 2002. Also, the Protocol is increasingly used overseas
  • Eight issues were considered as part of the consultation, including record keeping, global claims and concurrent delay
  • A second edition of the Protocol will be published in due course. In the meantime, Rider 1 provides guidance on "common issues that arise out of construction contracts" and provides a means by which parties can resolve those issues and avoid unnecessary disputes. If they cannot, the Protocol's "practical and principled guidance" can be used to help limit the costs of those disputes

Government withdraws Green Deal funding

On 23 July 2015, the Department of Energy and Climate Change (DECC) announced that it would no longer be providing finance to the Green Deal Finance Company (GDFC). The government is stopping the funding because:

  • There has been a low take up of Green Deal loans. Figures published on 23 July 2015 indicate only 10,000 properties with completed loans
  • DECC has concerns about the industry standards applied in the Green Deal field
  • DECC no longer believes that investment in the scheme offers good value for taxpayers' money

Government is considering application of reduced VAT rate for energy-saving materials

HMRC has published Revenue & Customs Brief 13/2015 on the reduced rate of VAT for supplies concerning energy-saving materials. It follows the ECJ's decision on 4 June 2015 that the UK's application of the reduced rate breaches EU law.

The Brief states that the government is currently considering the implications of the ECJ's decision and that no legislative changes will be made before the Finance Act 2016. It confirms that suppliers should continue to apply the reduced rate and that any changes will not have retrospective effect.

Case law update

Obrascon Huarte Lain SA v HM Attorney General for Gibraltar [2015] EWCA Civ 712

In this case, the Court of Appeal unanimously dismissed an appeal against Akenhead J's decision that the employer (AGG) was entitled to terminate the contractor's (OHL) engagement under a contract based on the FIDIC yellow book.  The appeal was based on three grounds:

  1. that the court had wrongly rejected OHL's claim for relief arising from unforeseeable physical conditions under clause 4.12
  2. the court had erred in failing to find that certain engineer's documents constituted variations under clause 13.1
  3. the court had erred in finding AGG had validly terminated the contract under clauses 15.2 (a), (b) and (c)(i)

In relation to ground (1) the Court of Appeal confirmed the approach required by clause 4.12, "The contractor must draw upon its own expertise and its experience of previous civil engineering projects. The contractor must make a reasonable assessment of the physical conditions which it may encounter. The contractor cannot simply accept someone else's interpretation of the data and say that is all that was foreseeable." In relation to ground (2) the Court noted that the first instance decision relied on a finding of fact following "heated discussion" during the trial and as such could not be re-opened.  Ground (3) arose out of AGG's termination of OHL's engagement on grounds that it failed to comply with a notice to correct, and abandoned or failed to proceed with the works. In considering OHL's failure to proceed the Court relied on the decision in Sabic v Punj Lloyd [2013], noting that there had been a serious breach of clause 8 (the obligation to proceed with the works with due expedition) which "is not directed to every task on the contractor's to-do list. It is principally directed to activities which are or may become critical".  OHL had no excuse for its failure to proceed with the tunnelling works.

To view the full text of the decision, please click here.

Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC)

Here Coulson J declined to enforce an adjudicator's decision where the employer had failed to serve the requisite payment notices but where the contractor's application for payment was found to be invalid.  The contractor had submitted 15 applications, one at the end of each month, during the project.  The 15th application was met with a payless notice from the employer, meaning very little was paid in response to it.  In the meantime, the parties commenced final account negotiations.  About a week after the valid payless notice was served, the contractor submitted further payment documents and requested that the payless notice be revised.  When the employer queried the status of the documents, the contractor confirmed they were "an update of the account" and no further payless notice was issued.  Subsequently the contractor initiated an adjudication asserting the documents constituted a 16th application for payment which was due in full as no payless notice had been served.

The adjudicator found for the contractor, on the basis that the further documents were an "early" 16th application, the consequence of which was that the employer had to pay GBP 1.5 million to the contractor.  When the case came before Coulson J for enforcement, he had "no hesitation" in rejecting the claim. He noted that the adjudicator had not considered the merits of the contractor's claim, and that one of the "baleful effects" of the amendments to the HGCRA had been to increase the number of claims from contractors relying on an automatic right to payment where the employer had failed to serve notices on time.  The judge commented that if contractors wished to benefit from the provisions they needed to submit applications with "proper clarity".

The decision provides some comfort to employers that contractors will not be able to engineer what the judge described as a "wholly undeserved windfall" in this way, and also reminds contractors of the importance of submitting payment applications in a clear and straightforward fashion.

For an indepth look at this case, please click here. To view the full text of the decision, please click here.

Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC)

In this case, the court found that there was no overriding obligation on the council (PCC) to act in good faith when awarding service points, but there was an implied term that PCC should act honestly, and not in a way that was arbitrary, irrational or capricious. The dispute arose out of a long term PFI contract which PCC entered into with Ensign for maintenance of its road network. The contract provided for the award of service points where Ensign was in breach of its obligations. The points to be awarded were contained in a schedule to the contract, which gave a "maximum event value" for each default event listed.  Within the 'best value' provisions of the contract there was a provision obliging the parties to act "fairly, in good faith and co-operation" with each other.

Following funding cuts from central government, PCC decided the contract was becoming unaffordable, and as well as seeking financial concessions from Ensign, started awarding the maximum amount of service points for every default. Ensign decided the deductions were contrary to the terms of the contract and referred the matter to expert determination, where the expert found that PCC had acted in bad faith, without mutual co-operation and unfairly.  PCC then sought declarations from the court concerning performance of its contractual obligations.

The court found that the service point values in the contract schedule were maximum values that could be awarded, and not a fixed tariff. There was no overriding obligation on PCC to act in good faith, but when awarding service points a term was to be implied that PCC was to act honestly, on proper grounds and not in a manner that was arbitrary, irrational or capricious.  In interpreting the contract, the court followed the "Rainy Sky" approach (where the Supreme Court decided that ambiguous drafting should be construed so that commercial purpose prevails over linguistic niceties) of adopting the interpretation which made the most commercial sense.  The case confirms the court's continued reluctance to interpret "good faith" obligations too widely.

To view the full text of the decision, please click here.

SSE Generation Ltd v Hochtief Solutions AG and another [2015] CSOH 92

Here the Outer House of the Scottish Court decided that liability under an NEC2 contract was not displaced by CAR insurance. The employer (SSE) had engaged the contractor (HSA) to design and build a hydro-electric scheme in Scotland. The form of contract was an NEC2 amended by some bespoke "Z" clauses. The contractual cross indemnity at clause 83.1 was modified by the operation of clause 83.2 (which reduces the indemnity where there has been contributory negligence) and a "Z" clause capping liability to the total tender price. HSA was obliged to take out a joint name policy to cover its own risk events.

After part of the works collapsed, remedial works were required which were provided by a third party, and SSE sought from HSA either the cost of the remedial works (GBP 130 million), or alternatively the difference between what it had paid the third party and what it would have paid HAS (GBP 102 million).  HAS counterclaimed GBP 10 million for profit it would have earned had it carried out the remedial works.  It also claimed that the CAR insurance took the place of liability between the parties, and SSE should therefore have claimed under the policy, and was barred from claiming from HAS for losses covered by the insurance.  It relied on the existence of an express waiver of subrogation rights, which it said demonstrated that the parties did not intend to claim from each other for the losses covered by the policy. SSE argued that the wording of the policy had no bearing on contractual liability.

The court agreed: "there is no irrebuttable presumption that they [the parties] have no liability to one another simply because a joint names policy is in place". It noted this is a difficult area of law, and that whilst the "thrust of the authorities" favours a joint names policy displacing contractual liability, "care must be taken not to merge the law of insurance with the law of contractual interpretation".  The primary focus must always be on the words used by the parties.  It went on to note that if HSA's approach were correct, there would be no need for clause 83.1. It should be noted that JCT forms expressly exclude liability for jointly insured risks.

To view the full text of the decision, please click here.

Woods Building Services v Milton Keynes Council [No.2: Remedy] [2015] EWHC 2172 (TCC)

In this case, having previously found that there were manifest errors in the council's tender evaluation in a successful challenge to the procurement procedure, the court set aside the council's original decision.  It found that the claimant's tender had been the most economically advantageous.  However, the court declined to issue a mandatory injunction forcing the council to award the contract to the claimant, noting that such a remedy would only be available in exceptional circumstances, and was not a remedy that the claimant had claimed in its pleaded case. Further, the court had found the whole tender process to be flawed, and therefore it would be inappropriate to award a contract arising out of a flawed process.  The court decided damages were an adequate remedy as it would be possible for the claimant to demonstrate both its wasted costs and loss of profit arising from the flawed tender process. It was appropriate to award the damages, as the Council had breached the procurement regulations, and if it hadn't, it was likely that the claimant would have been awarded the contract.

To view the full text of the decision, please click here.

NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd (Trinidad and Tobago) [2015] UKPC 37

Lord Neuberger, in this decision, held that a contractor had been entitled to terminate its engagement under a contract based on the FIDIC Red Book (1999). The contract related to the construction of a hospital in Trinidad and Tobago.  Disagreements arose between the parties, and the contractor (NHIC) suspended work.  It subsequently purported to terminate the agreement.  A number of issues were then referred to arbitration, leading to five arbitration awards, two of which were appealed on points of law.  Under clause 2.4 of FIDIC Red book the contractor is entitled to request evidence from the employer that it has made arrangements to pay the contract price.  NHIC made such a request of the employer (NIPD).  Unsatisfied with the letters sent in response, it initially suspended works and subsequently issued a notice of termination. NHIC disputed that the contract had been validly terminated.

The Arbitrator held that it had been, and in doing so concluded that the evidence required under clause 2.4 must go beyond merely showing that the employer is able to pay.  After this decision was reversed at the Court of Appeal, the Privy Council upheld the Arbitrator's finding that NHIC was entitled to terminate.  The second appeal related to clause 2.5, which gives the employer a right of set off. The Court of Appeal, agreeing with the Arbitrator, found that the clause prohibits the employer from setting off a sum against any amount certified, but does not prevent the employer from exercising its right of set off in another way. The Privy Council disagreed, noting that clause 2.5 makes it clear that any claim by the employer must be notified promptly and particularised, and that failure to comply with the notice requirement would invalidate the claim.

The case provides useful guidance for employers on what is required to comply with these clauses.

To view the full text of the decision, please click here.

Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC)

Here Akenhead J granted declaratory relief to an employer under a JCT Standard Building Contract (without quantities) where the contractor had issued an ineffective payment application.  The contractor Beck had previously (in April 2015) applied for GBP 2.9 million (against a gross value of GBP 6.5 million) which included a sizeable claim for preliminaries in respect of an extension of time (EOT) which had yet to be awarded.  The response to that application was interim payment certificate no. 18, giving a gross value of GBP 3.9 million and a sum payable of GBP 226,000.  In May 2015, no interim application was issued, however the contract administrator (CA) issued an interim payment certificate no. 19, giving a gross value of GBP 4 million and a sum payable of GBP 18,000. The employer, Henia, then issued a payless notice, stating that GBP 0 was due to Beck under certificates 18 and 19 because it had an entitlement to LDs for 40 weeks' delay, amounting to GBP 373,000. Beck referred the matter to adjudication, and the adjudicator issued a decision largely in Henia's favour.

In the meantime Henia issued its part 8 proceedings (used to determine claims where there is no substantial factual dispute and/or a declaration is required on construction of a contract or a question of law), seeking decisions

  1. on the effectiveness of Beck's April application as a payment notice for the May payment date;
  2. the validity of Henia's payless notice; and
  3. whether the failure by the CA to provide a decision on the EOT prevented Henia from claiming LDs.

Akenhead J decided that (i) it was not an effective application for May (ii) the payless notice was valid and (iii) Henia was entitled to claim LDs even where the CA had not decided an EOT. This part of the judgment was obiter (because the adjudicator had decided Beck had not made an application for an EOT) and so assumed an effective EOT claim had been submitted, and the CA had failed to reach a decision on it. The judge concluded that clause 2.32 was not drafted in such a way that the CA's proper operation of the EOT provisions was a condition precedent to the entitlement to deduct LDs, although he found that the non-completion certificate and employer's notice were conditions precedent.

To view the full text of the decision, please click here.

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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