UK: Projects And Construction Law Update - May 13, 2016

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 rare example of an adjudicator's decision being severed
  • winding-up petitions
  • consideration of the penalty rule following the recent case of Cavendish Square Holdings v Makdessi

Industry news

Government responds to NIC's reports

The government has published its official responses to the National Infrastructure Commission's (NIC) three reports:

  • High Speed North, which covered transport needs in the North of England, aiming to deliver improvements in east-west links, including across the Pennines (find the government response here)
  • Transport for a world city, which considered London's transport needs, in particular Crossrail 2 (find the government response here)
  • Smart Power, which aims to save consumers up to GBP 8 billion a year by 2030 and help the UK meet its 2050 carbon targets (find the government response here)

The government accepted the recommendations of the NIC reports in its 2016 Budget. These responses provide some information on how those recommendations will be implemented, although they do not appear to commit any additional funding beyond what has already been announced.

National BIM Report 2016

The National Building Specification (NBS) has published its National BIM Report 2016. The report is based on a survey of building information modelling (BIM) adoption in the UK. Findings include:

  • 54% of respondents were aware of BIM and using it in at least some of their projects, with a further 42% at least aware of BIM
  • 86% of respondents expected to be using BIM within a year and 97% expected to use it within five years
  • 65% of respondents believed that BIM is not yet sufficiently standardised

The report also highlights the launch of an EU BIM Task Group, which aims to "normalise the use and specification of BIM by European public clients and policy makers".

Building Regulations changes

Approved Document L (Conservation of Fuel and Power) has been updated to reflect the changes to the Building Regulations made by the Building Regulations &c. (Amendment) Regulations 2016 (SI 2016/285), which came into force on 6 April 2016.

The updated Approved Document reflects the fact that requirements relating to energy performance certificates for new and converted buildings are no longer part of the Building Regulations regime. (They were consolidated into the Energy Performance of Buildings (England and Wales) Regulations 2012 (SI 2012/3118) by the Energy Performance of Buildings (England and Wales) (Amendment) Regulations 2016 (SI 2016/284).)

The Building (Amendment) Regulations 2016 (SI 2016/490) have been laid before Parliament and come into force on 9 May 2016, amending the Building Regulations 2010 (SI 2010/2214).

The amendments:

  • Require new construction and major renovation works to provide in-building physical infrastructure (such as ducts and distribution services) to enable broadband services to be easily connected to the building
  • Introduce a new Approved Document, R1 (In-Building Physical Infrastructure)

The changes implement Article 8 of the EU Broadband Cost Reduction Directive (2014/61/EU), following a consultation exercise that began in November 2015. There are transitional provisions for works notified to a local authority before 1 January 2017.

Case law update

Stellite Construction Ltd v Vascroft Contractors Ltd [2016] EWHC 792 (TCC)

In this case, the court severed an adjudicator's decision where he decided an issue that went beyond his jurisdiction.  The dispute arose after the works, which were carried out under a JCT SBC 2011, were delayed and the employer Stellite claimed liquidated damages (LDs), referring its claim to adjudication when the contractor Vascroft failed to pay the LDs.

The adjudicator found that time was at large and no LDs were due, prompting Stellite to issue part 8 proceedings for a declaration that the decision was unenforceable because the adjudicator had breached the rules of natural justice.  Vascroft had argued that time was at large in its adjudication response, alleging that the contractual machinery had fallen down. Stellite contended that the adjudicator had not fairly canvassed the issue as to whether clause 2.29 permitted an EOT for the events that had caused delay (Issue 1), although he had decided that was the crucial question and formed the view that the delaying events fell outside the scope of clause 2.29.  This was considered a breach of natural justice by Stellite. Stellite further contended that the only dispute referred to the adjudicator was whether Vascroft was entitled to an EOT, and thus an additional finding by the adjudicator concerning what was a reasonable date for completion was a breach of natural justice (Issue 2).

Carr J found that Issue 1 was within the adjudicator's jurisdiction, and was canvassed fully by the parties.  However she found that the adjudicator had exceeded his jurisdiction in determining Issue 2.  It was a 'logical next step' once he had found time was at large to determine a reasonable completion date, and he had material before him to decide the issue, but not the jurisdiction.  The parties agreed that, if the judge were to find the adjudicator had exceeded his jurisdiction in deciding Issue 2, then that could be severed from the balance of the decision.  Accordingly the judge dismissed the claim for declaratory relief in relation to Issue 1, but granted it in relation to Issue 2. 

The decision therefore shows that, where it is practical and possible to do so, a party may be able to sever an adjudicator's decision, allowing the parts that were not controversially decided to stand.

To read more, please click here

COD Hyde Ltd v Space Change Management Ltd [2016] EWHC 820 (Ch)

Here the court refused to grant an injunction restraining contractor Space from presenting a winding up petition against the employer COD.  The employer had failed to pay 3 applications for payment (nos. 6, 7 and 8, submitted during October, November and December 2015), and had subsequently served invalid payment notices (served out of time) and no pay less notices.   The contract was a JCT D&B 2011.  On 29 January 2016, Space wrote to COD, citing clause 8.9.1 of the contract and confirming that COD's non-payment meant it was in default.  Space also confirmed its intention to suspend further performance of the contract unless payment was made within 7 days.  No reply was received nor payment made and on 9 February Space wrote again to confirm that it was suspending works and enclosing a statutory demand for GBP 680,000. 

Space had in fact left site at the end of 2015, and COD engaged another contractor to progress the works during the period of suspension. Space wrote again on 15 February to confirm that this course of action amounted to a repudiation of the contract, which was accepted.  In the alternative, Space relied on the operation of clause 8.9.3 which allows termination where a notified default has not been remedied. COD then purported to terminate the contract in subsequent correspondence.  It subsequently alleged that it had a large counterclaim which would extinguish Space's claim. 

The court found that Space had validly terminated the contract, and therefore that COD's attempt to terminate the contract was ineffective.  It also found no evidence that COD had a counterclaim of any substance.  The court therefore dismissed the application, leaving Space to present the winding up petition. 

Whilst this yet again shows the dangers for employers who fail to comply with payment notice requirements, it is unusual insofar as Space did not adopt the more straightforward, and speedy, route of adjudication.

To read more, please click here

Ro-Bal Steel Fabrications Ltd v G Jones Site Services Ltd [2016] EWHC 292 (Ch)

In another case involving a winding-up petition, the petition was dismissed, after the court found there was a dispute as to whether the statutory payment scheme applied to the contract.  The contractual arrangements between the parties were not formally documented, but there was a basic agreement as to the scope and price of the works, which arose out of a subcontract between Ro-Bal and main contractor McAlpines to provide fabrication and erection of steelworks at two sites.  At one site the works were completed and paid for, but at the other there was a dispute regarding payment. 

The parties were unable to agree whether the Housing Grants, Construction and Regeneration Act 1996 applied to their contract, with Ro-Bal contending that works fell outside the scope of s.109 of the Act, which imposes stage payment requirements for works extending beyond 45 days because (i) there was an agreed duration of less than 45 days and (ii) the contracts were lump sum contracts.

Jones' response was that s.110, which requires payment notices to be served, applies to every construction contract. As the dispute was heard in the Companies Court, the judge was reluctant to determine that issue.  Noting there was a substantial dispute between the parties, the judge dismissed the winding up petition.  He also noted that the dispute between the parties could have been swiftly resolved in the TCC. 

It is not clear whether the use of winding up petitions in this case and the case reported above was tactical, seeking to avoid the sometimes uncertain outcome of adjudication.  In this case it is clear that the parties would have been better served by proceeding in the specialist TCC, rather than the Companies court.

Hayfin Opal Luxco 3 SARL & another v Windermere VII CMBS plc and others [2016] EWHC 782 (Ch)

Here the court considered whether an interest provision was void as a penalty. The issues before the court arose from a commercial mortgage backed securitisation transaction, but the court took the opportunity to restate the principles which apply when interpreting or implying terms where something is missing from the express drafting.  The decision provides some useful additional commentary on the penalty doctrine following the recent case of Cavendish Square Holdings v Makdessi. To read more about this decision, please click here.

The dispute arose from use of complex financial instruments.  In addition to 'Regular Notes' issued to investors, which paid interest at a floating rate of three month EURIBOR, plus a margin, there were 'Class X Notes'.  These latter instruments were designed to pay out to the holder the excess interest, if any, which was expected to arise in the hands of the issuer from the underlying commercial mortgage loans in the relevant interest period, over and above the amounts that the issuer was obliged to pay in respect of certain fees and costs and the amount of interest payable on the Regular Notes.

Issues arose concerning the amount payable under the Class X Notes, and in particular the definitions of Junior Rate and Senior Rate used in the intercreditor agreement. The claimants contended that the definitions required correction by inserting some additional drafting. A further issue was whether any outstanding Class X payments accrued interest at the Class X interest rate (which at times exceeded 5,000% per quarter). The judge found that no additional wording was required, and in doing so noted that he did not consider that the absence of the proposed additional wording was the result of an oversight or mistake. Furthermore, the wording did not precisely address the alleged problem. This meant there had been no historic underpayment of Class X interest.

In view of the judge's conclusion that there had been no underpayment, the issue as to whether any unpaid interest amounts themselves accrued interest at the Class X interest rate did not arise for determination, but at the parties' request Snowden J expressed an obiter view on the point.  After referring to Makdessi, the judge acknowledged that in the present case, it was common ground as between the parties that any interpretation of the relevant term which provided for interest at the Class X rate in the event of an underpayment of Class X interest could be regarded as a breach of a secondary obligation, thus engaging the penalty doctrine. The judge did not think this was necessarily correct, but was inclined to accept the penalty argument; the imposition of the Class X interest rates for breach in failing to make payment of a sum due would be regarded as exorbitant (if not extortionate).

Whether a clause was a penalty cannot depend upon the ability of the particular contract-breaker to pay the specified amount, or the source from which he has to pay. An innocent party cannot save a clause from being a penalty by claiming that the contract-breaker is so rich he will not notice the disproportion.

Projects And Construction Law Update - May 13, 2016

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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