UK: Projects And Construction Law Update - November 16, 2015

Last Updated: 24 November 2015
Article by Robert Meakin

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:

  • two conjoined appeals that turned on the penalty rule
  • the reduction of a project monitor's liability where the funder was found to be contributorily negligent
  • an injunction restraining a contractor from presenting a winding-up petition
  • the relationship between a limitation of liability provision and the Civil Liability (Contribution) Act
  • a failed challenge to enforcement of an adjudicator's decision
  • a successful challenge to enforcement of an adjudicator's decision where some of the works fell within the "construction operations" exception
  • a decision awarding damages to a consultant for unpaid fees

Industry news

RICS launches new arbitration service for construction and engineering disputes

The Royal Institution of Chartered Surveyors (RICS) has launched a new arbitration service for construction and engineering disputes, offering a:

  • Fast track arbitration service for disputes under GBP 100,000, which caps the parties' recoverable costs and limits the amount arbitrators can charge. The award must be published within six months.
  • Select arbitration service, aimed at providing a "viable alternative" to the Technology and Construction Court (TCC) for high value, complex disputes. The award should be published within 12 months.

In announcing the new service, Martin Burns, Head of ADR Research and Development (RICS) explained that there is "growing demand for more comprehensive deliberation of issues" than is currently provided by statutory adjudication, which can lead to rough justice, especially in high value and complex disputes that are unsuitable for such a rapid process.

Infrastructure UK and Major Projects Authority to merge

Last week the government announced that Infrastructure UK (IUK) and the Major Projects Authority (MPA) are to merge, bringing the government's expertise, knowledge and skills at managing and delivering major economic projects under one roof for the first time.

The new organisation, which will be called the Infrastructure and Projects Authority, will bring together government expertise in the financing, delivery and assurance of these projects, which range from large scale infrastructure projects such as Crossrail and the Thames Tideway Tunnel to major transformation programmes such as Universal Credit.

It will come into formal existence on 1 January 2016, reporting jointly to the Chancellor and Minister for the Cabinet Office, and its Chief Executive will be Tony Meggs, who is the current Chief Executive of the MPA.

Inquiry launched into government decision to privatise the Green Investment Bank

The Environmental Audit Select Committee has invited comments on the government's proposed privatisation of the Green Investment Bank (GIB), and in particular whether it:

  • Will achieve the benefits claimed. The government announced the privatisation in June 2015, saying that it will allow the GIB access to larger pools of capital and enable it to act more freely.
  • Is consistent with the GIB's role in unlocking private investment and supporting projects that would not otherwise be funded.
  • Forms a coherent part of the government's broader strategy on renewables and the green sector, or presents any other risks or opportunities.

The committee will also hear oral evidence from the GIB, stakeholder organisations and the government. It has not yet scheduled a date for the hearing. The deadline for commenting is 15 November 2015.

Housing and Planning Bill 2015-16 introduced into Parliament

The Housing and Planning Bill 2015-16 was announced in the Queen's Speech as part of the government's legislative programme for the 2015-16 Parliamentary session. It had its first reading in the House of Commons on 13 October 2015.

Through the Bill, the government aims to progress proposals to build more affordable housing, thus giving more people the chance to own their own home and improve housing management. The Bill seeks to achieve this, in part, by implementing reforms ensuring that the planning system does not add any unnecessary obstacles to the delivery of new homes. The Bill applies to England only, with some exceptions.

Case law update

Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67

Liquidated damages, or "LDs" clauses have long been a feature of construction contracts. They provide for a pre-determined sum to be paid by way of compensation in the event of a breach of a stipulated contract term. LDs have been recognised as commercially desirable by the courts, always providing that they do not fall foul of the law on penalties. Now, for the first time in a century, the Supreme Court has considered the "penalty rule". Commenting that the rule is "an ancient, haphazardly constructed edifice which has not weathered well", the Supreme Court handed down its judgment in relation to two conjoined appeals that turned on the penalty rule.

To read further information about these decisions please click here.

Lloyds Bank plc v McBains Cooper Consulting Ltd [2015] EWHC 2372 (TCC)

In this case, a funder bank (Lloyds) sued its project monitor (McBains) for breach of its retainer. The case arose from the redevelopment of a former bingo hall in Willesden which was home to an Evangelical church and which was to be redeveloped to provide function rooms, a bookshop, a nursery, internet café and accommodation units. The church was run by a trust, which borrowed GBP 2.625 million from Lloyds to fund the development. Unfortunately this sum did not include any allowance for contingencies, and understated the professional fees. Further, a sum of approx. GBP 100,000 in interest fell to be deducted from it, meaning that there was a shortfall of at least GBP 200,000, more probably GBP 250,000 once proper allowance was made for professional fees.

Very late in the project, McBains advised that there were insufficient funds in the facility to complete the development, leading Lloyds to call in the loan. The borrower was unable to repay the money, and the property was sold, leading to losses of GBP 1.4 million for Lloyds which it sought to claim from McBains. The court held that McBains was in breach of its duty to the bank by failing to advise that there was not enough money in the facility to complete the works, and that some of the money was being used to carry out works on the third floor of the building, which did not form part of the agreed development. Although it held that McBains bore 'the lion's share of responsibility' for the losses suffered by the bank, the judge found that the insufficiency of the facility to cover the development was known by the relevant individual at Lloyds. Further, the bank had failed to share information with its project monitor or respond appropriately to reports. Accordingly, the bank's own failings meant it should bear a third of the losses itself.

The case provides a good example of the problems that can arise if a bank fails properly to manage its relationship with its project monitor, effectively removing the safety net the latter is supposed to provide.

To read more, please click here.

Wilson and Sharp Investments Ltd v Harbour View Developments Ltd [2015] EWCA Civ 1030

Here the Court of Appeal granted an injunction which restrained a building contractor (Harbour View) from presenting a winding-up petition, overturning the high court's decision at first instance. Harbour View had been engaged under two separate contracts based on a JCT Intermediate WCD (2011) to carry out works at two separate sites. The employer (Wilson) failed to pay against two interim certificates (August 2013 and September 2013), leaving a sum of over GBP 1.6 million owing. No effective payless notices were served, and although payment was made against one certificate some two months later, a total of GBP 1.2 million remained outstanding.

In January 2014, Harbour View's solicitors gave notice of the contractor's intention to terminate for non-payment. No formal notice was given, and Wilson's solicitors then purported to terminate for repudiatory breach. In the meantime, Wilson notified Harbour View of its cross-claims, based on a re-valuation of the works by a new contract administrator. Harbour View's response was to notify Wilson that it would present a winding up petition against it; Wilson applied for an injunction restraining the petition. Harbour View was in financial difficulty and had arranged a creditor's meeting for the day after the hearing, with a view to appointing a liquidator.

At first instance the court refused to grant the injunction sought, based on several factors, including that the employer's cross claims were not genuine. Wilson then appealed on 3 grounds:

  • that the petition debt was substantially disputed,
  • that TCC established practice was to refuse enforcement of interim payments to an insolvent contractor and
  • there were serious and genuine cross claims.

The Court of Appeal allowed the appeal, granting a permanent injunction. It accepted grounds (i) and (iii) of Wilson's appeal but did not accept that the TCC automatically refuses summary judgment or restrains a winding up petition where the contractor is insolvent.

Of interest is the interpretation of the relationship between the amended Construction Act and the JCT insolvency provisions, particularly that s.111(10) is not restricted to situations where the contract has already been terminated for insolvency, or is still capable of such termination. It also reinforced the need for careful examination of all the evidence given the magnitude of the remedy sought.

To read more, please click here.

Bloomberg LP v Malling Pre-Cast Ltd [2015] EWHC 2858 (TCC)

In this case, Fraser J considered a limitation of liability provision in a contractor's collateral warranty to a tenant, and its relationship with section 1(3) of the Civil Liability (Contribution) Act 1978. Bloomberg was tenant of a property for which cladding works were carried out by Malling on behalf of the freeholder. Malling provided a warranty to Bloomberg which contained the following provision at clause 6: "Notwithstanding the date hereof no proceedings shall be commenced against the Contractor after the expiry of twelve years from the date of issue of the last written statement by the Client that practical completion of the Project has been achieved under the Contract."

This was agreed to mean 12 years from practical completion, which was achieved in August 2000. In 2001, two cladding tiles fell off the exterior of the property; following investigation Malling returned to the property to carry out remedial works. In 2013, a further tile fell off the property. Bloomberg carried out temporary works, but the required remedial works were estimated to cost GBP 2 million.

Bloomberg commenced proceedings against Malling, and two engineering consultants who had also provided warranties, Sandberg and Buro Happold. The claim against Malling did not proceed, as it was able to rely on the limitation at clause 6. However, Sandberg issued Part 20 proceedings against Malling, relying on the 1978 Contribution Act. Malling applied for the Part 20 proceedings to be struck out, and a declaration that Sandberg had no prospect of recovering a contribution for any damage occurring after August 2012. Malling suggested the Act should not override agreed contractual periods on policy grounds.

The court held that Malling was not entitled to summary judgment, nor would it grant the declaration sought. The reasoning was that the contractual limitation was a procedural bar which prevented the tenant from enforcing its rights in any proceedings brought after the cut-off date, but it did not extinguish any underlying substantive rights. "No proceedings" meant no proceedings by the tenant after the cut-off date, but could not be interpreted more widely to include all proceedings. The judge drew a distinction between cases of 'no liability' and 'cessation of liability', and noted the case was a cessation of liability case, where the cessation barred the enforcement of the tenant's rights. He thus held that the cladding contractor fell within the definition of "any person liable" within section 1(1) of the Act, but could not rely on the proviso at section 1(3) (that liability had ceased). The judge went on to note that issues of limitation might arise in the Part 20 proceedings, but it was too early to tell.

To read more, please click here.

Science and Technology Facilities Council v MW High Tech Projects UK Ltd [2015] EWHC 2889 (TCC)

Here the court granted summary judgment of two adjudicator's decisions (one dealing with substantive issues, and one with costs), dismissing all the challenges brought by the defendant. Although it found that a general reservation of rights by the defendant was sufficient to enable it to maintain jurisdictional challenges in the enforcement proceedings, the court noted that a period of 11 months had elapsed since the adjudication proceedings, and that the defendant had issued a number of challenges on different bases.

Fraser J was critical of the "widespread and varied" attempts by the defendant to raise jurisdictional objections, characterising them as "scrabbling around" to find an excuse not to comply, and commenting that the way the defendant had conducted itself was not how adjudication was intended to operate. He went on to find that there was "nothing" in the points raised by the defendant, and that the decisions should be enforced. The case is a reminder that, whilst a general reservation of rights at the outset of an adjudication is a useful protective measure, unless there are substantive grounds for jurisdictional challenge it will not prevent enforcement.

To read more, please click here.

Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 2975 (TCC)

Stuart-Smith J has declined to enforce an adjudicator's decision in this case, after finding that some of the works which were the subject of the decision fell within the exception at s. 105(2)(c) of the Housing Grants, Construction and Regeneration Act, which includes the erection and demolition of steelwork for providing access where the primary activity is power generation. The parties entered into a contract on 13 August 2013 for the design, supply and erection of steel structures by Severfield for Duro in its project to build a combined cycle gas technology power station at Carrington in Manchester.

Severfield's application for payment which was the subject of the adjudication proceedings included sums for fabrication, delivery and erection of the steelwork. Duro raised the issue of jurisdiction, alleging that the referral included items that fell within the exception at s. 105 (2)(c). The adjudicator proceeded with the adjudication, with Duro reserving its position in relation to jurisdiction. The adjudicator awarded sums to Severfield which Duro did not pay.

On enforcement, the judge had to decide whether Duro had a reasonable prospect of showing that some of the steelwork for which Severfield had claimed fell within the exception, adopting the approach of Ramsey J in Cleveland Bridge (UK) Ltd v Whessoe-Vokler Stevin & Ors, namely that it was not open to the court to adjust the award so as to sever that part which should not have been awarded. Acknowledging that this approach may mean the raising of unmeritorious technical defences which deprive the industry of the cashflow which is its lifeblood, he nonetheless considered that was not justification for bending application of the relevant principles, and accordingly gave Duro leave to defend.

William Clark Partnership Ltd v Dock St PCT Ltd [2015] EWHC 2923 (TCC)

In this case, HHJ Stephen Davies in the Manchester District Registry considered claims and counterclaims arising out of consultants' appointments, including the application of abatement. The claimant, Clark, provided QS and PM services to the defendant Dock St for its project involving construction of a new primary healthcare centre. Clark issued a claim for GBP 174,500 of outstanding fees, but Dock St alleged that Clark had failed to provide services as agreed and was responsible for cost overruns on the project. It counterclaimed for repayment of GBP 195,000 already paid to Clark, and further sums in damages for breach of contract / negligence and reimbursement of part of the overspend resulting from unnecessary variations.

The judge did not accept that Dock St had suffered any loss or damage as a result of any breach by Clark. He also confirmed that abatement is not available against a claim for payment of professional fees, following the decision of Jackson J in Multiplex v Cleveland Bridge, but acknowledged a deduction could be made if the services were not performed, or were performed so poorly as to be worthless. Although he found that Clark was entitled to a further GBP 162,000 in fees, he went on to find that Dock St was entitled to a substantial deduction in relation to a failure by Clark to perform certain services.

To read more, 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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