Please find below Clyde & Co's latest projects and construction law update

CASES

Grove Developments Limited v S&T(UK) Limited [2018] EWHC 123 (TCC)

The end of the 'smash and grab' adjudication?

'Smash & grab' adjudications have been the bane of employers' existence for a number of years now, particularly since the case of ISG Construction Limited v Seevic College seemed to cement the practice in the industry. However, Coulson J, in his last TCC judgment before moving to the Court of Appeal, has re-opened the issue, going against prior decisions to hold that employers do have the right to adjudicate the 'true' value of an interim claim which was the subject of a smash & grab adjudication.

The 'smash & grab' adjudication was first really accepted as an option for contractors in the case of ISG Construction Limited v Seevic College [2014] EWHC 4007 (TCC). The term 'smash & grab' describes a scenario whereby the contractor makes a payment application for a specific sum and the employer fails to issue valid payment and pay less notices in respect of that application. As a result, the amount claimed by the contractor becomes the 'notified sum', which, by default, the employer is obliged to pay (and which the contractor may claim through adjudication) without the true value of the claim being assessed. The rationale behind this was stated by Justice Edwards-Stuart, who held that:

'...if the employer fails to serve the relevant notices...it must be deemed to have agreed the valuation stated in the relevant interim application, right or wrong.' (emphasis added)

This position was affirmed in the case of Galliford Try v Estura [2015] BLR 321, however, Justice Edwards-Stuart went on to clarify that, while

"This means...the employer cannot bring a second adjudication to determine that value of the work at the valuation date of the interim application in question...it does not mean any more. There is nothing to prevent the employer challenging the value of the work on the next application..." (emphasis added)

In the present case, the TCC was asked to determine whether, in principle, the claimant was entitled to commence an adjudication to assess the true value of the sum due to the defendant, in the context of a smash & grab scenario. Ultimately, Coulson J held that, provided the employer pays the contractor the sum stated as due in its interim application, the employer may then seek, in a second adjudication, to dispute that the sum paid was the 'true' value of the works.

Coulson J, going back to first principles, set out six separate reasons for this:

  1. Per Henry Boot Construction Limited v Alstom Combined Cycles Limited [2005] 1 WLR 3850, the court can decide the 'true' value of any certificate, notice or application and that, as part of that process, it has an inherent power to open up review and revise any existing certificates, notices or application – and an adjudicator has the same wide powers as the court;
  2. Similarly, the Housing Grants (Construction and Regeneration) Act 1996 (as amended) (the Act), imposes no limitation on the nature, scope and extent of the dispute which either side can refer to adjudication.
  3. The dispute the employer would seek to raise in the second adjudication is a different dispute to the first.The first dispute being to determine whether the relevant notices were deficient or out of time, entitling the contractor to payment of the sum claimed.The second being to determine the 'true' value of the amount paid.Such dispute must be capable of being referred to adjudication otherwise it would be an unwarranted restriction on an employer's ability to adjudicate 'at any time'.
  4. Weight must be given to the relevant words of the contract which, in this case, under the JCT standard form, expressly differentiate between 'the sum due' and 'the sum stated as due' in the contractor's application or the employer's payment / pay less notice.The 'sum due' results from the contractual mechanism to calculate the contractor's precise entitlement (the 'true' valuation).While the notice regime may give rise to the payment of the 'sum stated as due', this does not mean that it "has somehow magically been transformed into a Clause 4.7 valuation, and 'the sum due'".
  5. If an employer serves a payment or pay less notice that is lower than the sum claimed by the contractor, the contractor can refer the dispute about the 'true' value to adjudication. As this right is unquestionably afforded to contractors, there would need to be very clear words in the Act, or the Scheme or the particular contract in question which would prohibit the employer from being able to do the same: "There are no such words anywhere...there can be no justification for such radically different treatment".
  6. The oft relied on idea that 'it doesn't really matter' because the approach applies to interim payments only (and not final payments) is not justified.The relevant provisions of the Act clearly apply to both interim and final payments.Moreover, the relevant provisions of the JCT standard form maintain the same distinction between the 'the sum due' on the one hand and 'the sum stated as due' on the other.The fact that the final payment regime envisages one final payment makes no material difference.As the contract treats interim and final payments / applications the same way, so too should the parties, the adjudicators and the courts.

In considering the existing authorities on the issue, Coulson J, was unable to agree with the analysis from ISG v Seevic and Galliford Try v Estura, taking the view that cases supporting the smash & grab trend had been wrongly decided. He found that:

  1. There is usually no basis in fact for any alleged agreement as to the amount claimed in a payment application (particularly in the context of existing disputes that have been well ventilated between the parties).
  2. There is no basis for deeming such agreement either (there are no such words in the Act, the Scheme or the words of the JCT standard form to indicate such deemed agreement).Further, if such deeming was allowed without clear words, where would it stop?
  3. The concept of a deemed agreement "is not only unjustified, but it is also an unnecessary complication, given the clear distinction between 'the sum due', on the one hand, and 'the sum stated as due' on the other".

He went on to rely on the 2003 case of Rupert Morgan Building Services v Jervis [2003] EWCA Civ. 1563, which he viewed as early authority for the finding that an employer can raise the matter of interim overpayment by way of adjudication. He also relied on Harding v Paice [2015] EWCA Civ. 1231, acknowledging that it dealt with final payment but making the important point that nowhere in the decision did the Court of Appeal seek to differentiate between interim and final payments. Based on other authorities, he determined that what mattered was what the first adjudicator had actually decided – provided the second dispute was not the same or substantially the same as the first, the adjudication could be brought.

Ultimately, Coulson J considered that the decisions in ISG v Seevic and Galliford Try v Estura (and others like them) were contrary to first principles and adjudication authorities in the Court of Appeal: "They are a 'different line', as Jackson LJ described them, and in my view, should not be followed".

Coulson J took the view that his decision would not disadvantage the contractor. Its cash flow would be preserved as the employer would still be required to make the payment before commencing an adjudication to determine the 'true' value of the amount claimed and paid. The employer was simply afforded a quicker route to recover any overpayment – particularly in the context of the penultimate payment application, where an employer (under previous authorities) would be required to wait until the final account stage to rectify the overpayment.

This case will no doubt attract a great deal of attention within the industry and will likely lead to reduced cases of smash & grab adjudications. Importantly, Coulson J ended his analysis by stating that:

"...I do not consider that the conclusions I have reached strike at the heart of the adjudication system. On the contrary, I believe that it will strengthen the system, because it will reduce the number of 'smash & grab' claims which, in my view, have brought adjudication into a certain amount of disrepute."

To read the full judgment, click here.

The Construction Act power generation exemption – will it apply?

Equitix ESI CHP (Wrexham) LTD v Bester Generacion UK LTD [2018] EWHC 177 (TCC)

The question of whether or not a dispute can be adjudicated if it arises under a contract which includes works that do not come within the definition of "construction operations" is not always a simple question to answer. In this case, the TCC sheds some helpful light on when a dispute will or will not fall foul of the narrow exemptions contained within section 105(2) of the Housing Grants (Construction and Regeneration) Act 1996 (as amended) (the Act).

The Act applies generally to construction work carried out within the UK, provided that work falls within the definition of "construction operations". If a contract relates to construction operations and other matters then the Act applies only so far as it relates to construction operations (section 104(5) of the Act).

Section 105(1) of the Act defines construction operations and includes at section 105(1)(e) "operations which form an integral part of, or are preparatory to...such operations as are previously described in this sub-section, including site clearance, earth moving, excavation...".

Section 105(2) excludes certain operations from the definition of construction operations, including at section 105(2)(c) "assembly, installation or demolition of plant or machinery, or erection or demolition of steelwork for the purposes of supporting or providing access to plant or machinery, on a site where the primary activity is...(i)...power generation..."

This case involved a contract for the design and construction of a biomass fired energy generating plant. Disputes arose between the parties and these were referred to adjudication.

Perhaps unsurprisingly, the Contractor attempted to resist enforcement of one of these adjudication decisions on the basis that the contract contained work which fell under the power generation exemption and, therefore, the adjudicator had no jurisdiction to determine the relevant dispute. In addition, it was submitted that the preparation of bonds and a business plan (completion of which constituted one of the payment milestones in dispute) were also excluded operations. The rationale being that they were distinct from items of physical works, which 105(1)(e) contemplated.

In making its decision, the TCC held that the focus should not be on the scope of the overall contract. Instead, Coulson J stated that "what matters for the purposes of jurisdiction is whether or not some part of the dispute referred to the adjudicator related to or arose out of excluded operations, narrowly defined – if it did not, no jurisdiction issue can arise". So the real issue before the Court was whether the work done by the contractor (to which the disputed interim account related) amounted to excluded operations?

Considering the issue of the non-physical preparatory works, Coulson J held that it was wrong in principle to say that preparatory arrangements such as the preparation of bonds or a business plan are excluded operations and the fact that they are not physical site works is irrelevant. The examples of preparatory / ancillary items listed in section 105(1)(e) are just that and the list is expressed to be non-exhaustive. "It would make a nonsense of the Act if every preparatory / ancillary operation not expressly identified in s. 105(1) became an excluded operation".

More broadly, Coulson J held that the relevant dispute referred to adjudication could not have related to excluded operations because the excavation works had not even started and no plant was ever brought to site, let alone installed – therefore the section 105(2)(c) exclusion was not yet enlivened. The contractor had only completed certain preparatory works, which were not excluded operations.

This case provides useful guidance as to what the Court's focus will be when considering if a dispute falls foul of the excluded operations provisions of the Act. Importantly, the overall scope of the contract is not relevant – the Act expressly envisages contracts that are hybrid in nature. The key question is whether the specific dispute referred to adjudication contains elements that come within the concept of excluded operations. On a practical level, referring parties should ensure that they carve out from any dispute to be referred to adjudication, any components that do relate to or arise from excluded operations.

To read the full judgment, click here.

REGULATORY UPDATE

New amendments to the Late Payment of Commercial Debts Regulations

Amendments have been introduced to the Late Payment of Commercial Debts Regulations to extend the power of representative bodies to challenge unfair payment terms and practices.

In October 2015, the government proposed draft regulations which extended the power of representative bodies to challenge unfair payment terms and practices. Following a consultation, on 26 February 2018, the Late Payments of Commercial Debts (Amendment) Regulations 2018 (SI 2018/117) came into force.

These new regulations amend regulation 3 of the earlier Late Payment of Commercial Debts Regulations 2002 and clarify that representative bodies are able to challenge the use of certain grossly unfair contractual terms and practices in contracts to which the Late Payment of Commercial Debts (Interest) Act applies.

The main aim of the new regulations is to expand the existing ability for representative bodies to challenge contractual terms on behalf of small or medium enterprises. It is hoped this will address the imbalance of power between SMEs and larger firms entering into a contract by making it likely that unfair contracts will result in a challenge.

National Infrastructure Commission Annual Monitoring Report

The NIC releases its Annual Monitoring Report for 2018, noting slow decisive action by the government.

The National Infrastructure Commission (NIC) has published its Annual Monitoring Report 2018, which considers progress made on the six studies so far produced by the NIC and the 12 infrastructure priorities, identified in June 2017.

The report finds the government slow in taking decisive action to address several of the UK's major infrastructure needs and finds that further action is needed to improve mobile phone coverage and digital connectivity on the UK's roads and railways.

The report also raises concerns about the Government's failure to establish a firm timetable or funding plan for either Crossrail 2 or the Northern Powerhouse Rail programme.

Gender pay reporting: why bother?

The deadlines for the publishing of certain gender pay data are fast approaching. While many companies have published the required data already, many more have not. So, do you need to bother and what happens if you don't? Click here to find out.

CLYDE & CO 'IN THE NEWS'

David Hansom, head of Procurement, was interviewed by Construction News regarding the retendering of Carillion public contracts. To read his insights, click here.

Matthew Heywood, Partner in Dubai, featured in Construction Week, writing about the latest FIDIC updates and how these are likely to impact engineers and MidEast's project employers. To read his article, click here.

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