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Implications of nothing being implied

The recent decision in Leander Construction v Mulalley looked at a few interesting points that often crop up in sub-contracts and their administration, particularly where they are amended or are contractor’s own forms. I think the judgment means that contractors must take extra care in putting sub-contracts together and then administering the time provisions within them.

The issue was about an alleged breach of an implied term in the sub-contract to progress the works regularly and diligently. Based on this, the contractor moved to recover ‘losses’ resulting from the breach via a withholding notice. The sub-contractor wasn’t happy and, rather than adjudicating, went straight to litigation via Part 8 Proceedings.

Withholding Notice

As is often the case, the dispute is about monies held back from a payment under a (s111) withholding notice [of course, this may all be different under a post 1 October 2011 agreement although I expect that many contractors will be running with similar provisions].

Just as a reminder, the ‘old Act’ (HGCRA before the LDEDCA amendments made it the ‘new Act’) said that to be effective, a withholding notice must specify the ground (or grounds) and the amount (or amounts) being withheld.

This gave contractors (and for that matter clients) the opportunity to issue a notice in relatively broad terms. As long as a ground was specified, and an amount attributed, then money could be withheld.

And this has often been the method employed. Having issues a notice that complies on its face with these requirements, contractors (or clients) then hold the money back. This might be with little merit, and the costs of adjudicating, let alone the existence of a ‘Tolent’ clause, then might deter the sub-contractor from doing anything about it. A kind of ‘come and have a go if you think you’re hard enough’ approach.

CPR Part 8 proceedings

Leander decided not to bother with adjudication at all. Part 8 proceedings allow for ‘straightforward’ matters that do not require much testing of evidence to be brought before the court. This includes what we used to know as ‘summary judgment’. In this case Leander said that Mulalley’s withholding notice was invalid on the basis that the ground for withholding was without merit and this was something that could be dealt with by the judge merely by considering what the terms of the contract meant (there was no dispute about the existence of the contract and the wording of the terms).

This turned out to be a good move. In a short space of time the matter came before the judge and he made a decision.

These proceedings are to deal with ‘straightforward’ matters. I suspect their use in the TCC (Technology and Construction Court) will increase. With many payment matters under the ‘new’ Act relating to the existence (or otherwise) of a notice then it seems to me this will be a common approach and will be more favourable than adjudicating. For starters, if the case is strong then the party in the ‘right’ will recover its legal costs.

Each situation will have its own ‘fors’ and ‘againsts’ and the complexity of the issues will need to be considered in the tactical approach taken. I’d strongly suggest getting some help before doing anything. Contractors (particularly those trying to use Tolent clauses) may in future require that a dispute be adjudicated prior to litigation and this is something to be looked for in bespoke amendments or bespoke contract forms.

Tolent clauses

A reminder that these require one party to meet the costs of the other party irrespective of the outcome. They were approved in the case of Bridgway v Tolent (hence the name) although WW Gear v Yuanda has restricted their use. In this case, Mulalley’s sub-contract included such a clause. This meant that Leander faced its own costs, plus the fees of the adjudicator, plus Mulalley’s costs if it adjudicated. Leander was trying to get paid £131,000 odd, so realistically Leander was probably expecting to incur costs of between £15k to £20k to get ‘its’ cash. The judge briefly comments on Tolent clauses in passing and notes that they are outlawed now by the LDEDCA. The commentators on the new section 108 will wonder if it will be as clear cut as that!

The time obligations in the sub-contract

What the dispute in essence came down to was Mulalley’s sub-contract and its interpretation. As is common, there were a number of bits of the sub-contract that dealt with time.

Mulalley’s basis for withholding was that Leander hadn’t worked as quickly as Mulalley wanted. This meant (according to Mulalley) that it was incurring costs. Mulalley relied on the fact that the sub-contract required Leander to work ‘regularly and diligently’ and that Leander’s failure to do so was a basis for set-off. The bits that Mulalley relied on are summarised as follows:-

·         A general obligation requiring works to be done in accordance with the order and also with the terms in the main contract so that the sub-contractor complied with the main contractor’s requirements under the main contract and agreed to indemnify the contractor in case of breach;

·         A requirement to submit a programme after entering into the sub-contract;

·         A wide set-off provision relating to breaches of sub-contract;

·         A termination provision in the event of a failure to progress regularly and diligently;

·         Extension of sub-contract time provisions;

·         An activity schedule which had indicative start and end dates for each activity. These were said to be ‘indicative’ and ‘subject to change to suit the main contract programme’.

As common in sub-contracts for certain trades it had an initial period for the groundworks, a period ‘off site’ and then a revisit to complete external works. Mulalley’s withholding notice was issued before the sub-contract completion date and apparently related to that first phase of works.

Mulalley argued that there was an implied obligation to progress the works regularly and diligently. It relied on evidence that the indicative periods in the activity schedule weren’t achieved showed that this obligation was breached, and as a result the set-off provision applied. Leander denied this was the case and said that, unless/until it missed the sub-contract completion date, Mulalley was prevented from withholding on the basis that it had. Until there was a breach there could be no claim.

The judge said that courts should be slow to imply terms into contracts. Having reviewed all of the terms he decided that he would not do so in this case. That was the end of the matter for Mulalley – once the ‘obligation’ fell away then so did the basis for withholding meaning the notice wasn’t effective. This meant no money could be withheld based on s.111 – QED. Whether or not Leander was behind programme or not wasn’t relevant.

Co-ordinating the time obligations within its sub-contracts is a tricky area for main contractors. Getting an obligation with teeth into a sub-contract without opening up lots of potential areas for claims is tough. Just putting trade programmes in is absolutely not the answer! It seems to me it is now tougher still. I would certainly consider writing in how ‘possession’ of bits of the sub-contract works can be adjusted and then how long they should take. In essence, this means that ‘key dates’ can be identified and it will be easier to argue that missing a ‘key date’ along the way results in loss and expense for the contractor.

Contactors therefore need think very carefully and educate those putting its sub-contracts together about how they break down their main contract programmes and translate this into sub-contracts with teeth. This isn’t impossible – it takes some thought, some care and some planning. I’d suggest that all successful projects require this anyway. Some facilitated strategy planning at the start of a project would be a very good idea.

The case also shows what might happen under the new Act if the paperwork isn’t right. Part 8 procedings will it seems quickly right a technical wrong . . .

Mat Cowell – 27 January 2012

Deal or No Deal

I attended the Adjudication Society annual conference in November. The hot topic of course was the new Act and there were workshops in the afternoon where the delegates got a chance to discuss some of the changes with some big-hitting lawyers. Particularly of interest to everyone was oral evidence and how Adjudicators will have to deal with oral testimony to establish whether contracts are formed orally. Interestingly, Adjudicators aren’t too worried about it – they already do this to establish evidence within hearings anyway. And the judges regularly show how it should be done, as Wilcox J. did last month in Edmonds v Lawson which I’ll look at later. There have been a few adjudication enforcement decisions over the last couple of months but I won’t share those with you as they are less interesting!

First though, I thought I would have a quick look at a JCT QS/Estimating issue that has cropped up this month. I suspect it isn’t well understood, but is important.

JCT Standard Building Contract With Quantities – clause 2.14 to 2.16

We all understand how often CDP is now used in the standard forms. And that JCT With Quantities is a remeasurable contract. Right?

No. It is a lump sum contract, but with Bills of Quantities used to set out the price and the scope. Not convinced? Go to clause 4 and you won’t find anywhere that it says you adjust quantities in ascertaining the final contract sum.

Of course, as the Bills set price and scope it is right that the contractor has some protection and clause 2.12 allows errors in the Bills to be corrected, be treated as a Variation (which also means that it is potentially a Relevant Event). I’ve often wondered how big an ‘error’ must be before it becomes correctible. Would 2m3 out of 500m3 of an excavation be an ‘error’?

Anyhow, in respect of the CDP Analysis clause 2.15 says that the error is to be corrected but without addition to the Contract Sum (arguably that means reductions would be allowed but again this isn’t altogether clear). In correcting the error, it seems obvious to me that if the quantity is corrected then the rate must also be adjusted to come up with the same answer (and the corrected rate used to value variations if applicable).

So the lesson for the contractor is to check the CDP analysis. Are the quantities correct? Is the designed work even measured at all?

The further lesson to this then relates to how this is dealt with in the Sub-Contract. I often see that the option selected in the Sub-Contract is ‘remeasurable’ because the main contract is the ‘With Quantities’ edition. This is not such good news for the Contractor as the protection afforded to the Employer set out above might not be extended to the Contractor in the ‘remeasurable’ option. While there is a similar provision in clause 2.9.4, of course in terms of remeasurement effectively in calculating the Final Sub-Contract Sum you start at nil and then measure everything (clause 5.2.2, 5.7 and 5.10). It is then not clear exactly how the SCDP Analysis is dealt with inside that framework. It is highly arguable though that you assess the quantities and use the rates whether inside or outside of the SCDP Analysis. The safest option is, for the avoidance of any doubt, to place all JCT Standard Building Sub-Contracts under the Lump Sum option (and of course, for Sub-Contractors to negotiate the Remeasurable option if possible!)

 


 

Edmonds v Lawson

I doubt I’ll get much credit for the ingenuity of the title of this newsletter! Yes, it is that Mr Edmonds. This case involved a claim and a counterclaim between Noel Edmonds and his friend and business partner Mr Lawson. The judge had to establish what agreements were made, if any, based on the evidence adduced by the parties.

Basically, Mr Edmonds contended that he had entered into an arrangement with Mr Lawson to purchase and develop a stately home known as ‘Wood House’. While Edmonds was making the purchase, there was a 50:50 split ‘investment’ element to the purchase and Mr Lawson borrowed £300,000 for that and a second charge was made against the property so that he could secure the funds. When the venture failed and Mr Edmonds sold up, he paid £300,000 back to Mr Lawson in order to clear the second charge. Edmonds contended that his half of the £600,000 was to be repaid as a ’priority’ and so he believed he was entitled to reclaim the £300,000 from Lawson.

Separately, Edmonds had also purchased another property to live in and Mr Lawson arranged and managing the upgrading work. Mr Edmonds said that this was being carried out as a ‘favour’ and it had been agreed that he was only required to pay the direct cost of the work. Mr Lawson said this was not the case and he was expecting to recover prelims, overhead and profit. There was no written agreement. Mr Lawson claimed for these elements, and Mr Edmonds denied the claim and brought his counterclaim for the £300,000 lost on the stately home.

The decision handed down makes interesting reading. It is clear that the judge listened to the oral evidence brought before him, searched for corroboration and then lent weight to each piece of oral evidence based on that. For instance, Edmonds said that there was a meeting on a particular date and certain agreements were made. However, the judge then found it odd that he made no mention of it in a letter two days later. Unsurprisingly, not much store was placed on Mr Edmonds’ suggestions that he might have been mistaken about the date of the meeting!

The judge never says that Mr Edmonds is not correct, or is making a false statement. He merely says that, on the evidence in front of him, that on the ‘balance of probabilities’ that Edmonds’ assertion is unlikely. As we know, this is the evidential burden in civil proceedings. Indeed, this week we’ve seen an example of this with the Luis Suarez decision made by the Football Association. Liverpool’s complaints that the decision was made on the word of Patrice Evra alone is a weak one – the decision makers only had to decide whether, based on the balance of probabilities, Evra’s statement was true.

The requirement for accurate testimony was also apparent. Mr Edmonds’ personal assistant made a number of statements that turned out to be false. This meant that the judge gave very little weight to any of her evidence on the basis that it was clearly being given to support her boss, rather than to assist the court in arriving at the facts. This is a good lesson – better to make five accurate statements than five accurate statements and an inaccurate one. Sometimes it is better to say nothing, especially if the burden of proof rests with the other party. A mere “denied” places the burden squarely with the party making the assertion.

This is the approach that adjudicators will also take. Of course, they have to be careful about dismissing a person’s evidence too readily and risk the decision being unenforceable due to a breach of natural justice. However, as long as they are being fair then they can be suitably robust.

There are good lessons here for decision-makers but also for anyone involved in commerce. If you agree something verbally then it is a good idea to confirm it! A simple email or a reference to a meeting or conversation in a later piece of correspondence could be the difference between the agreement being evidenced or not. And if such a confirmation would be expected, and is missing, then a judge, arbitrator or adjudicator may find this a telling omission.

 

Mat Cowell – 22 December 2011

Fear, Loathing and the New Construction Act

The “fear” belongs to Contractors, and the “loathing” is for the Vogons. I’ll come to both later but start this month with my thoughts on some of the amendments to the standard forms now we’ve had some time to digest them. Remember that the amendments to the Act are about cashflow and certainty of payment.

ECC3 (NEC)

It seems to me that the amendments are ‘just enough’ to ensure that the conditions comply with the basic requirements of the Act. So it is a tweak here and there in terminology. What is clear is that the ECC3 doesn’t (and doesn’t want to) guide the parties through the payment process set out in the Act. Indeed, it appears to actively require the parties (and particularly the payer) to work it out for themselves. While I suppose this is part of the appeal of the ECC3 the payer must be extremely cautious that he or she has a process that fills in these gaps and trains its own people to implement it.

JCT2011

While the ECC3 approach is understated, JCT have published a new suite of contracts which include a payment process mapped out. While this will doubtless be tinkered with (more below!) it is clear how it works. I’m looking at the Design and Build Sub-Contract but the principles apply throughout. JCT have understandably followed the wording of section 110 and 111 fairly closely.

The payer has a choice about setting the process. The standard form still sets the first ‘due date’ and the subsequent due dates as before, and a requirement for the Contractor to issue a notice of what he is going to pay (the “Payment Notice”). There is however a choice for the Contractor at the outset in that there is a clause 4.9.2 that can be made ‘active’ and this says that until an application is received (the “Payment Application”) from the Sub-Contractor then the payment timetable doesn’t start. In the alternative, the Sub-Contractor can still issue a “Payment Application” but it won’t trigger the timetable. It can also be issued after the Contractor should have issued a Payment Notice if he doesn’t. This is what the Act refers to as a “default notice”.

There are some permutations but the essence is that the amount to be paid is the amount in the Payment Notice or, if there isn’t one, the Payment Application (in default of the Contractor’s notice). This is (necessarily) different from JCT05 which said that absent a Payment Notice then the amount to be paid was that properly calculated in accordance with the contract.

There is a chance to pay less than the sum in a Payment Notice or Payment Application by way of another notice (this new Act is supposed to make it easier!). The notice is called the “Pay Less Notice”. This appears to me to be a restating of what the Contractor considers to be the “amount due” at the “date of the Pay Less Notice” which mirrors section 111. I’ve still got nagging worries with this:

·         does the “amount due” necessarily include true set-off and withholding when the contract says “amount due” is “Contractor’s Gross Valuation” that is set in accordance with clause 4.13? I imagine that adjudicators and the courts will probably imply a term into the contract to overcome my narrow reading but this is not clear.

·         in assessing the amount due under a Pay Less Notice do you need to consider the further valuation of work in the period between the due date and the Pay Less Notice? It seems to me that you probably should based on the wording, but in practice I doubt anyone will. Again, it is possible that a further implied term will be needed.

The “Fear”

The contractor’s concern is pretty obvious. If their teams are not “on the ball” and do not issue a Payment Notice complying with s.110, and the sub-contractor then issues a “default notice”, then of course they are exposed to the liability to pay something that they don’t agree with – and actually might be completely wrong. Let’s say that the sub-contractor is entitled to £100k, and issues a “default notice” for £200k and no “pay less” notice is issued. It is clear that the contractor will be obliged to pay £200k and then maybe adjudicate/litigate to recover the overpayment.

It seems that the approach that will be taken by lawyers to contractor’s terms and conditions will be to use this opportunity for the application to be the trigger. Some were doing this previously anyway. The requirements for an application can be made pretty onerous – in the Hitchhiker’s Guide to the Galaxy it was said that a Vogon wouldn’t rescue its own grandmother without the orders being “signed in triplicate, sent in, sent back, queried, lost, found, subjected to public enquiry, lost again, and finally buried in soft peat for three months and recycled as firelighters”. I’m sure there will be some who say that this can’t possibly apply to a construction contract but there is case law which supports the proposition that a contractual notice requirement must be followed exactly. In the House of Lords judgment in Mannai v Eagle Star one of the law lords said that if a notice was required to be served on pink paper and it was served on blue paper it wouldn’t constitute a valid notice (though then took a view that the context of an invalid notice should be considered and allowed it anyway - but this was to do with a lease and probably was viewed differently to a commercial contract). So maybe being recycled as firelighters is a stretch, but you get the idea.

It is also clear that a contractor will seek to buy some time by stretching the period between the application and the due date. This serves to elongate the payment period and what looks like 28 days may in fact be more like 45.

It seems to me that some of these amendments are somewhat over the top – and what is more are based on the proposition that the contractor’s site QS can’t do his job. Why does that have to be so? Of course, the lawyer will only really see where it has gone wrong, rather than where it has gone right. For me, there is no issue at all with a contractor’s QS valuing his work under the main contract and at the same time independently valuing the work of all the sub-contractors. Indeed, I think the majority are already doing this.

Personally, I would favour an approach where the contractor retains absolute control of the timetable and doesn’t necessarily want an application at all. It does seem very sensible to make a “default notice” subject to strict notice provisions (ie recorded delivery, copy to Company Secretary or Commercial Director etc) and this should be enough to allay the fear of the “default notice”.

I have so far seen two sets of amendments to JCT2011 sub-contracts being used by main contractors. One says the process cannot start at all unless a valid application is submitted (like the JCT2011 option), both say a default notice can only be a valid application issued prior to the due date.

Neither relies on the contractor’s QS just getting on with it and flagging up a default notice (that meets all those tests or otherwise) setting off those internal alarms that might prompt someone to issue a “pay less” notice. One sets a payment timetable of 30 days from the date works are valued to until actual payment. The other sets 49 days. Arguably, subject to toughening up the notice provisions of a “default notice”, I also think JCT2011 does the job better than both of them. I reckon that contractors would invest their money better on training their QSs to get it right rather than extensive bespoke amendments to the payment provisions.

Mat Cowell

17 October 2011

Updated Standard Forms of Contract

I have decided to be brief this month as everyone is still catching up from their well earned holidays. Though I’m sure someone else will have been covering your work while you were away . . .

I’ll start this month with company news I am delighted to be able to say that I have successfully completed the RICS Diploma in Adjudication. The course included training for surveyors acting as a advocates within an adjudication and also on the production of an enforceable decision. Hopefully there will be an opportunity to join the RICS panel next year but we’ll wait and see. For ‘day-to-day’ work the course gave me an excellent insight into the mindset and approach taken by adjudicators and I am certain this will be of great benefit to my clients.

JCT and ECC3 (NEC) updates

The revisions to the JCT (JCT2011) and the ECC3 (NEC3 September 2011 amendments) have now been published. JCT were a bit ahead of the NEC, who beat the deadline with just two weeks to spare. I am sure enquiries have been sent out already for contracts that will be entered into on or around the 1st October 2011. We’ve only had two years to get ready as an industry, so I suppose we were a bit rushed! In all seriousness, I don’t understand why these weren’t ready some time ago.

In July I felt there was a potential problem related to withholding and I fear that the JCT and NEC reaction to the new ‘Act’ has only compounded this. JCT have made greater reforms to the payment provisions whereas the NEC have just changed the terminology! I am happy to review revised contract conditions, or any amendments to these standard forms to try and avoid the problem. I say I fear there is an issue as I do believe that a court may well open up and expand on the judgement in Urang v Century Investments but this cannot be certain (after all, the law is different so Urang won’t have set a binding precedent). In some ways I believe that the payer is in a better situation if payment is dealt with by the Scheme for Construction Contracts rather than either of the standard forms so this all needs to be thoroughly considered and appropriate training given to commercial staff.

TCC Update

The TCC has been quiet through the summer, though it Akenhead J. handed down two judgements.

Witney Town Council v Beam Construction involved the enforcement of an adjudication decision made by Tony Bingham. Witney protested that the dispute referred had involved ‘more than one dispute’ being claims relating to 1) a final account document, 2) revisions to that, 3) a claim for interest on late payment and 4) release of all interest due to a repudiatory breach. Witney said therefore there was no jurisdiction. Unsurprisingly this failed as ultimately all these ‘mini-disputes’ related to one overall dispute relating to Beam’s entitlement to payment by Witney. It seems that Witney’s chances of success in this case were remote at best, and Akenhead J. was bound to follow earlier judgements. Witney doubtless threw £25,000 after the £70,000 it was obliged to pay, but I daresay that the taxpayers will foot the bill!

As ever, there is something in the obiter of note, where he points out the waste of court time that the provision of four copies of the contract and seemingly three copies of everything else caused and that it would be useful for the legal teams to have conferred and agreed on one set. This isn’t unique to court action and producing large bundles which are just filled out with paper for paper’s sake clearly doesn’t impress judges, so neither should it impress adjudicators.

PHD Modular Access v Seele made me think about the commercial realities of being a main contractor. It was evident that Seele was in dispute with its client and also with PHD who were its supplier. Not uncommonly where a contractor is ‘caught in the middle’ it appears that Seele was making its claim upstream based on PHD’s position, and making its defence downstream based on its client’s. The judgement relates to PHD’s application for disclosure of documents relating to exchanges between Seele and its client. The Akenhead J. makes it clear that in certain circumstances it would be wholly correct to allow disclosure of such correspondence (ie correspondence identifying what the contractor says is a cause of delay). In a dispute situation therefore it seems to me that the contractor must be careful if he ‘runs with the fox and hunts with the hounds’ [I suppose that expression isn’t appropriate any more!] and may need to back a position or ensure that pertinent communications obtain privilege.

Mat Cowell

20 September 2011

Rate is a rate . . .

This month I thought that I would share a review of an old case I had cause to look at recently that reminded me of the dangers of priced bills of quantities and value engineering – which I think is very relevant as the market is a little more ‘traditional’ in these competitive times. I’ll also have a quick look at something that has occurred to me about threshold jurisdiction for adjudicators.

In company news I am delighted to be able to say that I have successfully completed the RICS approved training for expert witnesses. This means that I can be confident in offering my services to act in litigation (and potential litigation) as an expert under the ‘Part 35’ Civil Procedure Rules, and I would be confident to act as an expert on quantum or the commercial application of construction contract provisions. Plug over!

Deal or, er deal: Galliford (UK) v Aldi Stores Ltd (2000)

I came across this case recently when researching the ‘rate is a rate is a rate’ principle. Henry Boot v Alstom Combined Cycles (1999)  was more widely reported but I think there is more to learn from the Galliford case, and it might explode an urban myth or two!

Aldi wanted a new food store, and proposed IFC84 with bills of quantities prepared by their PQS. Galliford tendered for the construction of a new food store, but the tender was over budget and the notion of value engineering to reduce the eventual contract price was put forward. All sounds pretty familiar? Here is what a bit of the tender looked like:-

 

Disposal

 

 

 

 

Off site

1557

m3

8.50

£13,234.50

Off site; contaminated material

1583

m3

44.60

£70,601.80

 

There was contaminated ground on the site, which had been ‘measured’ in the Bills of Quantities. I can see why the consultants and the contractor thought this would be a good opportunity to shave some money off. Also common to many projects would be the idea of adjusting levels to retain all excavated material on site, and this was what the parties agreed would be attempted.

All OK so far. Then came the problem. This agreement was incorporated into the Bills of Quantities by replacing the submitted rates for both muck away items with £0.00 and confirming the payment to Galliford for presumably double handing/spreading arisings. So simply the BoQ now looked like this:-

 

Disposal

 

 

 

 

Off site

1557

m3

0.00

£0.00

Off site; contaminated material

1583

m3

0.00

£0.00

Deal on muck away

 

 

 

£3,020.00

 

Sure enough, there was a problem in achieving the reduced muck away quantities. In fact, all apart from 304m3 turned out to be contaminated. Galliford were able to ‘lose’ the original quantity on site but not all of the contaminated material and claimed that the Bills of Quantities needed to be corrected, and that they were entitled to be paid for this variation in accordance with the originally tendered rate of £44.60.

Aldi disagreed feeling that the £0.00 should apply and the case was put to an arbitrator. Clearly the arbitrator was troubled by the unfairness of applying the rate of £0.00 to the revised quantity and applied £36.10, being the difference between the original rates for clean and contaminated.

Aldi appealed successfully. The judge reviewed whether there was a justification in the contract for not applying the rate of £0.00 and could not find one. The revised quantities did not constitute a change in conditions. There was no limitation to the error insofar as the quantity in the Bills.

So how could the problem have been avoided? Clearly with the benefit of hindsight the answer was to amend the Bills to reflect what was actually being carried out and then any variance to that would have been easy to address. I think this is a relatively common problem for contractors, and I am often amazed at their ability to redesign, analyse and price a saving while salivating at the prospect of landing a new contract! The reality is that the design team will have spent months doing this and so it must be the case that the contractor is taking on significant additional risk when value engineering. I suppose it is unavoidable, but must be done with caution!

Mat Cowell

16 August 2011

New Construction Act

The New ‘Construction Act’

The wait is over. At last, we have Statutory Instrument 2011 No. 1582 (C.59). Its snappy title is the Local Democracy, Economic Development and Construction Act 2009 (Commencement No. 2) (England) Order 2011. This means that the changes to what we all know as the ‘Construction Act’ (the Housing Grants, Construction and Regeneration Act 1996) will come into force on construction contracts formed after the 1st October 2011. The relevant bits of the HGCRA have been amended by new bits in the Local Democracy, Economic Development and Construction Act 2009 and it is this legislation that the Commencement Order covers. This means that the payment and adjudication provisions in standard forms of contract are being rewritten (the JCT are apparently ready) and any ‘in-house’ contracts will also need to be redrafted. But what do the changes all mean?

The Adjudication Provisions

There is not much change in the wording, but some of the change is very significant. I’ll deal with the easy bits first.

There is a new provision [108 (3A) allowing adjudicators to correct accidental errors in their decisions. This only confirms the position established by the courts in cases such as Bloor v Bowmer and Kirkland and YCMS v Grabiner so this is nothing new.

There is also an attempt to ban ‘Tolent’ clauses – ie clauses that seek to impose all of the party costs of an adjudication onto a particular party – in the new 108A. This has sparked a lot of debate amongst commentators. The wording actually seems to expressly allow ‘Tolent’ clauses which wasn’t parliament’s intention. There is a view that the courts will deal with this when the chance arises! They have shown some appetite for this recently – the decision in WW Gear v Yuanda stated that certain types of Tolent clause would be struck out based on the HGCRA as it stands.

The big element is the striking out of section 107. This now means that the provisions relating to adjudication will cover all contracts whether in writing or otherwise. This has been a complex area in establishing ‘threshold’ jurisdiction for adjudicators in the past, with the courts taking a line that a contract in writing was only such if all of the essential terms were evidenced in writing. This meant that if there were any essential terms not in writing then there was no statutory right to adjudication.

This new section 107 may cause many difficulties for main contractors, particularly where production staff arrange for works at short notice without following any due process.

Elsewhere in section 108 there are some additional references to ‘in writing’ and it seems that these provisions exist to ensure that there can be no ‘verbal agreements’ as to the adjudication provisions in an oral contract. I believe this is for the avoidance of doubt, so if an oral agreement is made then the adjudication provisions will be covered by either the Scheme for Construction Contracts or some other form of published provisions.

The Payment Provisions

Just when we thought we had got the hang of this, the payment provisions have been ‘simplified’! Here are the key bits.

110 (1A) One contract can no longer rely on “pay when certified” which is where an event in another contract is used to trigger entitlement to payment. A typical example would be a sub-contract, which relies on Practical Completion under a main contract to trigger release of the first moiety of retention. This is no longer allowed. There will doubtless be ingenious ways to try and circumvent this - such as an additional type of certification to be made by the contractor when his own work is completed – but these will probably be ineffective. The eagle-eyed may look at 110 (1B) and think that as payment is excluded then that will come to the rescue of the (now) impoverished main contractor, but unfortunately section 113 still prohibits “pay when paid”. 110 (1C) seems to me to try and exclude ‘development agreements’ from this prohibition of “pay when certified”, and 110 (1D) is looking to prevent using a notice – such as an Architect’s Certificate – as the trigger to a payment mechanism.

110A gives a new procedure for the issue of a payment notice. There is now a choice, either a notice by the payer or his certifier (ie the party making the payment) or by the payee (expecting one). Either way, that notice needs only set out the amount that is due and the basis for its calculation. 110A (4) gives us useful clarification that a notice must be given even if it shows that there is nothing due so it will be essential to remember to keep issuing notices during the run-off period between works being complete and the final payment.

110B then tells us what happens if a notice isn’t given. This is a new bit – if the payer is the party required to give the 110A notice, but doesn’t, then the payee can issue their own ‘default notice’. The exception is if the contract allows (or requires) the payee to issue an application for payment, in which case the application is deemed to be the default notice. From the main contractor’s perspective, they may well decide that an application being a ‘condition precedent’ (this doesn’t seem to have been outlawed) is a good idea as it will prevent this idea of a ‘default notice’. On the other hand, if there is no application, no 110A notice and then no ‘default notice’ it will be the case that the Final Date for Payment is deferred. 110B(3) says that the final date for payment will be delayed by the number of days that pass between the ‘absent’ 110A notice and the ‘default notice’. Sub-contractors should in all events ensure that they know when the 110A notice should be received and issue their ‘default notice’ if they haven’t already provided an application.

111 gives us new rule about withholding notices. Remember that s.111 in the 1996 Act said:

“a party . . . may not withhold payment . . .  of a sum due under the contract . . . unless he has given an effective notice to withhold . . .”

In early cases such as SL Timber v Carillion the courts quickly established that the sum due under the contract would be the contractual entitlement and not what was applied for unless there was an express term (such as in the original JCT98 D&B form). This allowed the Responding Party’s arguments about ‘quantum’ and ‘abatement’ rather than ‘set-off’ if they found themselves on the wrong end of a referral to adjudication. Most practitioners agreed that in respect of true ‘set-off’ that a withholding notice was an absolute requirement to withhold, although the decision in Urang v Century Investments  casts some doubt on that absolute principle.

Anyhow, for contracts formed after 1 October 2011 that will be slightly academic. The new wording starts by confirming the amount due will be set out by the 110A or 110B notice. The ‘withholding notice’ is replaced by what will be known as a ‘pay less’ notice and this will allow a fresh assessment of the amount due. It is clear that in the absence of a ‘pay less’ notice then the amount in the 110A or 110B notice must be paid.

There seems to be little commentary on this new section and I have concerns about how in practice it will operate. It is clearly intended to be an opportunity for a combined notice allowing the payer to deal with overvalue, abatement, defective work and set-off. I think it remains to be seen how effective these provisions will be in relation to set-off and how much appetite the courts (particularly based on Edwards-Stuart J.’s ratio in Urang) will have for rejecting any claims for pure set-off in money claims. As claims for set-off may rely on matters outside of the contract – such as contractor’s claims for damage caused by the negligence of a trade contractor on site – it may be that counterclaims may be operable. The courts’ approach to this will be interesting.

There is some other good news in the new section 111 as there is now express provision that, if the payee becomes insolvent after the deadline for the “pay less” notice is made, then it no longer has to be automatically paid. This seems entirely sensible, although it expressly states that the provision only applies after the deadline, so if your payee goes bust beforehand you will still need (in my view) to make sure that the “pay less” notice is issued.

Other than that – there isn’t much else. I am interested in the amendment to s.112 which allows a party to suspend part only of their obligations if there is a default on payment. At first glance this isn’t very significant, but I believe that it could be used by a party in culpable delay to progress only their obligations in respect of their own delayed work, allowing them to catch up their default. This might be extremely useful in certain circumstances!

I hope you’ve stayed with me . . .

Mat Cowell – 22 July 2011

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