UK: Projects & Construction Law Update

Last Updated: 8 September 2017
Article by Robert Meakin and Rebecca Evans


How fit do your materials need to be?

125 OBS (Nominees1) & Anor v Lend Lease Construction (Europe) Ltd & Anor [2017] EWHC 25 (TCC)

This case involved a dispute about which obligations should take precedence out of general fitness for purpose obligations and more specific quality obligations contained in the technical specifications of a contract. The dispute centred on the spontaneous failure of a number of glass panels on the outside of a prestigious building with both liability and quantum in dispute. The TCC held that the multiple design obligations incorporated in the contract did not operate inconsistently but were separate and additional to each other. The outcome being that the contractor had to comply with all of them and could not minimise its obligations (and ultimately its liability) by trying to limit its compliance to one of the more technical requirements.

Lend Lease ('LL') were employed by the claimants to redevelop a building, but over a four year period following completion of the works, 17 external glass panes failed without warning. It was found that the failures were due to Nickel Sulphide ('NiS') inclusions.

There were a number of documents which made up the 'Contract Documents', with no express order of precedence. A number of different standards were prescribed within the Contract Documents: (i) the Conditions required the materials used to be "of good quality" and "appropriate for their purpose"; (ii) the Employer's Requirements required the glass to have a "service life" of no less than 30 years; and (ii) the Contractor's Proposals required the glass to have a "design life" of 30 years and required the panels to be heat soaked for a prescribed period to reduce the risk of NiS inclusions.

The key issue that emerged was whether LL's obligation in relation to quality was solely to heat soak the glass panels or whether they could still be liable for failures (even if the glass had been soaked) by virtue of the other more general obligations. In deciding the issue, Stuart-Smith J held that there was "no intrinsic inconsistency" between the contractual provisions and thus they were separate and additional obligations. As a result, even if the panels were heat soaked in accordance with the contract (which it was found they were not) LL would still be required to ensure compliance with the additional obligations agreed. The court noted: "The importance of frank inconsistency is that if two clauses dealing with the same area are mutually consistent, good reason will be required before the Court holds that one clause is effective to the exclusion of the other".

Moreover, the fact that there was still a residual risk of failure (albeit a reduced one) following heat soaking, did not justify the reading down of LL's other obligations. Rather, it supported the existence and operation of the general fitness for purpose and service life obligations.

This case provides useful guidance as to how the imposition of multiple quality obligations on a party will be interpreted by the courts. The decision suggests that usually these will operate separately and additionally to one another unless the terms are genuinely inconsistent.

Winds of change? – the potential for counter adjudications following a smash and grab

Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd [2017] EWHC 1763 (TCC)

Questions are being asked again about a party's ability to bring counter-adjudications following a 'smash and grab' scenario and we have the case of Imperial Chemical Industries Ltd v Merit Merrell Technology to thank for it. The case dealt with a number of issues, only two of which we will focus on here. The first related to ICI's right to reclaim overpayments from Merit Merrell (some of which had been paid following 'smash and grab' adjudications) post-repudiation, with the court's comments in this regard proving quite interesting. The second related to ICI's ability to appoint an employee of its parent company as project manager and whether this amounted to a breach of contract.

Merit Merrell Technology ('MMT') was employed by Imperial Chemical Industries ('ICI') to supply and install piping works for a new paint factory. A dispute arose as to the quality of MMT's work and the relationship between the parties began to break down. The independent project manager resigned and ICI replaced him with an employee of its parent company. MMT then obtained two adjudication decisions in its favour relating to interim payment applications to which ICI had not responded. ICI paid the determined amounts to MMT.

Whilst the first of these adjudications was being contested, ICI sent MMT a letter alleging repudiatory conduct, accepting MMT's repudiation and terminating the contract. However, it was later found at trial that ICI had wrongly terminated and was actually in repudiatory breach itself. ICI launched the proceedings to obtain a final assessment under the contract and claim back alleged overpayments made to MMT. MMT argued that the payments made were "deemed to be the value of the works" because of ICI's repudiation.

In considering the issue, Fraser J first rejected MMT's argument that following repudiation ICI's rights under the contract were extinguished. He considered it well established law that following repudiation, performance ceases, but the accrued rights and obligations under the contract remain, as at the time of the repudiation.

The added complexity in this case was that a substantial amount of the alleged overpayment had been made as a result of the adjudications. MMT argued that the adjudication determinations and outcome of the subsequent enforcement proceedings were final and binding on the parties as, until another payment certificate was due, ICI had no accrued rights to challenge the interim payment. Fraser J rejected this, finding that: (i) the amount to which a contractor is entitled as final payment for the works is not definitively decided as the figure in the most recent interim assessment; and (ii) the accrued rights which ICI had under the contract at the repudiation date included the right to recover any overpayments made. ICI's repudiation did not mean that MMT's entitlement was fixed to the amounts it had already been paid (or which had already been included in the most recent interim assessment) or that the parties were relieved of an analysis of the value of the works executed by MMT.

The judgement is clear that despite the repudiation of a contract, a party will retain the right to recover any overpayments made and, in doing so, have the true value of the work determined. Fraser J's comments in relation to the recovery of overpayments made as a result of adjudication decisions are interesting, however, as he cast doubt on whether the smash and grab case of ISG Construction Ltd v Seevic College would be decided the same way now, but stopped short of suggesting it was incorrect. Instead, he made the point that that case was solely about timing, and did not have relevance in deciding parties' substantive rights. It is possible to envisage that these comments may result in parties again 'testing the waters' by way of counter-adjudications following smash and grab scenarios, if the facts fit.

The case also dealt with the issue of ICI appointing an employee of its parent company as project manager. In considering this issue Fraser J held the appointment amounted to a breach of contract, as it fundamentally changed the situation from what the contractor had contracted and he further noted "It is contrary to the whole way in which the contractual mechanism is structured, and intended to work". This makes it clear that under an NEC form of contract, the project manager must be independent from the employer otherwise it will find itself in breach of the contract.

Do you have a good reason for being late? – extensions of time to procurement challenges

Perinatal Institute v Healthcare Quality Improvement Partnership [2017] EWHC 1867 (TCC)

Time limits to bring public procurement challenges under the Public Contracts Regulations 2015 ("Regulations") continue to create issues for the courts. This latest case saw the claimants bring an application to amend the particulars of claim in relation to a procurement challenge, which the defendants attempted to resist on the basis that the claim was time-barred and that there was no applicable remedy to the claim. In deciding the case, the Court considered the relevant legislation for granting an extension of time and how it should be dealt with if no applicable remedy exists for a claimant party.

Perinatal Institute ('PI') was an unsuccessful tenderer and had challenged Healthcare Quality Improvement Partnership ('HQIP') in relation to its contract for a software tool to collect and analyse mortality rates. HQIP successfully applied to have the automatic suspension of the contract lifted and, two months later, the contract was entered into by the winning tenderer and HQIP.

The nature of the tender required an application to be made for the processing of NHS patient's information. PI later discovered that there had been no such application from HQIP, whereas the invitation to tender required the application to be made within two months. From this, PI inferred that the project had been varied, which they asserted infringed the Regulations. PI applied to amend the existing particulars of claim rather than issue a new claim on the basis that pleading a new claim would result in significant duplication and incur unnecessary costs.

HQIP objected against the application, primarily on the basis that the claim was time-barred, as the Regulations state that any claim has to generally be brought within 30 days, although the courts have discretion to extend this to three months. PI argued the three month extension applied because the earliest date they discovered they had a potential new claim was later than the two month application period, as that is when the relevant minutes were published.

HQIP argued the courts had no power to allow an extension of time to make the amendment. However, the court held that the Regulations did give the court the power to extend the time and recognised that, despite the contention of HQIP otherwise, the grant of an extension was not a particularly onerous test, with any extension required merely to be for a "good reason". It was held that the minutes being released later was a reason to allow an extension to be granted and the amendments made.

HQIP then applied to have the original claim struck out on the basis that there was no applicable remedy. PI was a not for profit organisation and decided not to bring a claim for damages. HQIP contended that as the contract had already been entered into, there was no remedy available and it would be a waste of court resources to allow the matter to continue. The court agreed and noted that it was the correct course to strike out the sections of the original claim which were not relevant to the amendments applied for, as there was no applicable remedy for the original claim. It was noted this conclusion was "somewhat unsatisfactory" as it resulted in amendments being made to a particulars of claims, which would in part be struck out.

As well as showing the intricate complexities surrounding the Regulations, this case also provides important comment in relation to when the courts will grant an extension of time to a challenge to the procurement procedure. It is a shift away from some of the earlier cases which have looked at what could be a "good reason" and this case suggests that the test is not a particularly onerous one and providing the party can show it has a "good reason" for needing an extension, the courts may be more inclined to grant it.

For more information or advice please contact David Hansom, Partner or your usual contact at Clyde & Co.

Extension of time claims in adjudications

Mailbox (Birmingham) Ltd v Galliford Try Building Ltd [2017] EWHC 1405 (TCC)

It is established law that the party referring a dispute to adjudication can pick and choose which bits of a wider dispute it refers and, if necessary, refer other outstanding issues to subsequent adjudications. However, the same is not true for a responding party that may seek to run a limited defence.

Specifically, in the context of extension of time (EOT) claims, the court in this case held that a responding party cannot run a limited EOT defence to a liquidated damages claim in an earlier adjudication and then bring further claims for EOTs in a subsequent adjudication in order to re-assess the LDs awarded in the first proceedings. The rationale being that EOT claims in these circumstances act simply as a defence to an LDs claim and, where the matter of LDs has already been decided by a previous adjudicator, it cannot be reopened by a subsequent adjudication, so that a later claim for further EOTs is made redundant. However, this would not prevent a party from raising further EOTs to support its position in respect of other distinct claims in a subsequent adjudication, for example, to make out a claim for wrongful termination, where the termination had been on the basis that it had not been progressing the relevant works regularly or diligently.

The lesson to be learned from this case is for responding parties to think carefully about limiting any defences in an adjudication response, particularly when defending a claim for LDs. It also highlights the strategic benefit of being the referring party to an adjudication and being able to have more control over what issues are heard and when

Industry and regulatory update

Sentencing in Health & Safety cases – focus on construction

Clyde & Co's SSHE team has produced a report to assess the results of the health and safety enforcement guidelines that were brought in on 1 February 2016. The report focusses on construction, which was a major target for the new guidelines, as it makes up only 6% of the national workforce but accounts for over a third of work-related deaths.

The report notes the industry has seen a 26% increase in the Health and Safety Executive's inspection charges over the past year. Importantly, the size and number of fines has risen considerably, with £12,967,395.98 being the total collected in the first year of the new guidelines. This represents an 82% rise from the previous year. However, it is noted that in terms of percentage of turnover, small and medium sized construction businesses have been affected the most by these changes.

The full update can be read here.

The Technology and Construction Court ('TCC') issues guidance and pre-action protocol for procurement challenges

The TCC has issued a guidance and pre-action protocol document for procurement challenges. It came into effect on 17 July 2017 and forms the new Appendix H to the TCC Guide. It is not clear how the protocol will be adopted, particularly given the very short statutory timescales (generally 30 days from the date of knowledge) to issue a claim form in procurement, but those involved in procurement challenges should be aware of its impact and potential for costs sanctions.

Litigation in procurement is a rapidly growing area, due to a shortage of public sector contracts, and longer term contracts being put in place, and with fierce competition for these contracts from the supplier market.

Government responds to the Farmer Review

The government has issued its response to the findings of the Farmer Review and has supported nine out of the ten recommendations in his report. It was also noted how the report had already influenced policy and the Housing White Paper, released earlier this year. The only recommendation not endorsed was the call for a charge on construction companies to help skills and innovation funding, with the government fearing it would increase costs and decrease industry confidence.

The response itself was by no means radical from the government, but the industry can be encouraged by the clear support for innovative change.

Click here to read Clyde & Co's article published last year following the release of the Farmer Review.

Clyde & Co in the news

Clyde & Co's annual infrastructure event saw former Home Secretary and Shadow Chancellor Alan Johnson discuss a number of Brexit related issues. At the event he commented that Teresa May was "toast" and predicted that David Davis was the current favourite to succeed her.

The article discussing the former MP's comments at the event can be found here.

Rhian Greaves, a legal director in our Manchester office, was quoted discussing Clyde & Co's SSHE team's report in relation to the results of the new health and safety sentencing guidelines. In Construction News she commented "The floodgates are beginning to open and the new guideline is clearly having an impact. We have seen more fines exceeding £1m this year than in the previous 15 years combined."

She further commented "Companies should be concerned that fines are now routinely hitting the £1m mark, even in apparently less serious cases, meaning that all breaches of health and safety law are now a serious threat to a company's bottom line."

To read the full article 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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