Our regular round up of the cases of most interest to construction comes from Andrew Croft and Ben Spannuth of Beale & Company Solicitors LLP, focusing on on one that highlights the importance of defining design life requirements within contracts; and a Supreme Court ruling that means insolvency practitioners can use adjudication to pursue claims.
Blackpool Borough Council v VolkerFitzpatrick Limited
 EWHC 1523; HHJ Davies
Blackpool Borough Council (BBC), the owner of the seaside Starr Gate Tram Depot in Blackpool (the Depot), engaged VolkerFitzpatrick Limited (VFL) to design and construct the Depot pursuant to a modified NEC3 Engineering and Construction Contract (the Contract).
The Contract included a Works Information and Functional Procurement Specification. The Works Information stated: (a) the maintenance requirements should not be 'unusually onerous'; (b) the material and design be suitable, durable, and appropriate for a seafront location; and (c) the Functional Procurement Specification should have a design life of at least 20 years.
Since completion in 2011, the Depot suffered from premature corrosion. BBC thus alleged that significant parts of the Depot would not meet the design life required under the Contract. Specifically, BBC alleged that a number of components were corroding at a much faster rate than allowed for under the Contract.
BBC claimed that the requirements of the Works Information were strict obligations, whereas VFL submitted that these obligations were reasonable care obligations only. A dispute also arose as to whether the cold formed steel components used as part of the framework of the Depot were required to have a design life of 50 years or 25 years (although this apparently straightforward choice masked a number of complex sub-issues, which are not considered below).
HHJ Davies held that VFL had failed to comply with the contractual design life obligation such that BBC was entitled to damages of c.£1.1m.
As design life was not defined in the Contract, HHJ Davies referred to two British Standards and concluded that design life is to be judged by reference to the performance requirements which the building element is intended to achieve, together with the ability of that element to meet those requirements with anticipated maintenance, but without major repair being necessary. HHJ Davies noted:
It cannot realistically be thought that a structure should be intended to be maintenance free for the whole of its design life, whereas it can reasonably be assumed that it ought not to need major repairs over that period.
HHJ Davies had regard to the decision in MT Hojgaard v E.ON  UKSC 59 in which the Supreme Court considered two alternative approaches to the meaning of design life:
- was it a contractual term that the design of the foundations was such that they would have a lifetime of 20 years?; or
- was it a contractual term that took effect as an absolute warranty that the foundations would last 20 years without replacement?
HHJ Davies favoured the Supreme Court's preferred view, namely that the obligation to achieve a design life was to provide a design for the cold formed components such that they would have a lifetime of 25 years rather than an absolute guarantee.
HHJ Davies further found that the design life obligation was a strict obligation – if the design failed to achieve the required design life, VFL would be in breach of contract, even if they had exercised all due care (and thus would not have been liable in negligence).
This decision highlights the importance of defining design life requirements within contracts as otherwise an obligation to achieve a design life could have wide and unintended consequences. It also confirms that an obligation to achieve a design life should not in itself amount to an absolute warranty.
This case is also a further important decision in respect of the relationship between: (i) an obligation to achieve a design life; and (ii) a duty of care. It underlines that clear wording should be included in a contract for a duty of care to limit or qualify an obligation to achieve a design life of a specified duration.
Bresco Electrical Services Limited v Michael J Lonsdale (Electrical) Limited
 UKSC 25; Lord Briggs
Bresco Electrical Services Limited (Bresco), a company in liquidation, referred a dispute with Michael J Lonsdale (Electrical) Limited (Lonsdale) to adjudication in June 2018. However, Lonsdale immediately claimed that the adjudicator appointed lacked jurisdiction due to Bresco's insolvency and asked him to resign. The Technology and Construction Court expeditiously dealt with Lonsdale's Part 8 application and Fraser J granted an injunction restraining Bresco's adjudication.
The matter was referred to the Court of Appeal who, in January 2019, disagreed with Fraser J's reasoning on the point of jurisdiction but continued the injunction on the basis that it considered an adjudication futile due to Bresco's insolvency.
The case was referred to the Supreme Court – Bresco sought to lift the injunction and Lonsdale appealed the Court of Appeal's findings as to jurisdiction. The issues for the Supreme Court to consider were as follows:
- Jurisdiction – Did the invocation of set-off pursuant to the Insolvency Rules deprive the adjudication of the dispute and mean that there was a lack of jurisdiction?
- Futility – Would an adjudicator's decision relating to a company in insolvency be capable of being enforced? If not, was the adjudication procedure futile and a waste of both the parties' costs and the court's resources?
Lord Briggs, Lord Reed, Lord Kitchin, Lord Hamblen, and Lord Leggatt lifted the injunction against Bresco.
The court differed with the Court of Appeal and held that it did not consider the construction regime to be incompatible with the insolvency regime, thereby confirming that there was no jurisdictional bar preventing an insolvent referring party from commencing and pursuing adjudication.
Notably, the contention that, in this scenario, the dispute under the construction contract and any cross-claim ceased to exist as they are replaced by an insolvency claim was held to be wrong. Such claims could not 'simply melt away so as to render them incapable of adjudication'. Therefore, in relation to the jurisdiction issue, the court found that adjudication was not in any way incompatible with the operation of insolvency and, in agreement with the Court of Appeal, dismissed Lonsdale's appeal on the grounds of jurisdiction.
In respect of the futility issue, the court found that, rather than adjudication being incompatible with the insolvency process, in circumstances it may be more appropriate, on the basis that adjudication would provide for the resolution of claims and set-offs by a professional construction expert likely more qualified for that task than a liquidator.
Further, the court appeared to acknowledge that enforceability of an adjudicator's decision where one party to the adjudication was in an insolvency process might still present a problem. However, the hardship a losing party might face to have an account over- or under-valued in adjudication is no different to what it might face as a result of a liquidator's assessment. This potential problem would not therefore be sufficient to prevent that process from proceeding.
The Supreme Court's clarification will be very welcome news for insolvency practitioners, particularly in the current circumstances when we are heading into a period of such economic uncertainty where insolvencies in the construction industry may sadly be inevitable. Preventing an insolvent company from using adjudication to quickly assess its accounts was seen to be an unfair prejudice and contrary to the aims of the Insolvency Rules.
The Supreme Court has not only dismissed the question of there being an incompatibility between the adjudication provisions and settlements under the Insolvency Rules, but has suggested that, in certain circumstances, adjudication might be a more appropriate method of resolving disputes and set-offs concerning insolvent construction companies.
Following this decision, it is likely that insolvency practitioners will now be more willing to commence adjudication in order to recover sums owed as part of the insolvency process. CL
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