Construction Brief: latest decisions November 2019
This update includes a round-up of recent court decisions raising issues relating to payment provisions, enforceability of ADR clauses, the meaning of “construction contract”, approved inspector duties, contract amendments, and adjudication and insolvency.
Helpful guidance from the Court of Appeal on how to imply payment terms under the Scheme for Construction Contracts
Bennett (Construction) Limited v CIMC MBS Limited (Formerly Verbus Systems Limited) [30.08.19]
This Court of Appeal case provides helpful guidance on how to imply payment terms under the Scheme for Construction Contracts (the Scheme).
The court confirmed that:
- The Housing Grants, Construction & Regeneration Act 1996 “was not designed to delete an agreed workable payment regime which the parties had agreed, and replace it with an entirely different payment regime”, save in exceptional circumstances;
- Where the Scheme for Construction Contracts is implied, it should be implied in a way that does “the least violence to the agreement between the parties”; and
- Paragraph 2 of the Scheme deals specifically with stage payments based on value of works done. It does not envisage any other kind of stage payment. Any other type of stage payment would fall under paragraph 7.
Enforceability of ADR clauses
Ohpen Operations UK Limited v Invesco Fund Managers Limited [16.08.19]
This case confirms that contractual alternative dispute resolution (ADR) clauses can be enforceable as a precursor to litigation.
Invesco engaged Ohpen to develop and implement a digital online platform for the sale and purchase of investments. The contract contained an ADR clause requiring the parties to mediate prior to commencing proceedings. Delays occurred during the works and Invesco sought to terminate for breach. Ohpen disputed any breach as well as the validity of Invesco’s termination, and issued proceedings for wrongful termination.
Invesco subsequently issued an application seeking a stay of the proceedings to enforce compliance with the ADR clause. Ohpen resisted the stay on the basis that the provisions were not applicable outside certain timescales or following termination.
The court held that in this instance, the stay should be granted. Mrs Justice O’Farrell gave the following guidance as to what should be considered where a party seeks enforcement of ADR provisions by means of a stay:
"i. The agreement must create an enforceable obligation requiring the parties to engage in ADR.
ii. The obligation must be expressed clearly as a condition precedent to court proceedings or arbitration.
iii. The dispute resolution process to be followed does not have to be formal but must be sufficiently clear and certain by reference to objective criteria, including machinery to appoint a mediator or determine any other necessary step in the procedure without the requirement for any further agreement by the parties.
iv. The court has a discretion to stay proceedings commenced in breach of an enforceable dispute resolution agreement. In exercising its discretion, the court will have regard to the public policy interest in upholding the parties' commercial agreement and furthering the overriding objective in assisting the parties to resolve their disputes.”
Meaning of “construction contract”
Universal Sealants (UK) Limited (t/a USL Bridgecare) v Sanders Plant & Waste Management Limited [08.08.19]
This case is a useful reminder that the terms of the Housing Grants, Construction and Regeneration Act 1996 (the Act) only apply to “construction contracts”. Parties must take care to check they have a “construction contract” before relying on the Act.
USL engaged Sanders to supply concrete in relation to bridge works on the A1. USL alleged that Sanders had provided the wrong grade of concrete and it had to be replaced. Relying on the implied right to adjudicate in the Act, USL adjudicated and was awarded circa £52,000.
Sanders did not pay, and USL commenced enforcement proceedings. The court dismissed those proceedings on the basis that the adjudicator did not have jurisdiction, as the contract between the parties had been one for delivery of concrete to site. The Act states that a contract for delivery of materials is not a “construction contract”, unless that contract also provides for their installation.
USL argued that Sanders’ act of pouring the concrete directly into the works upon delivery constituted installation, and therefore satisfied the definition of “construction contract”. The judge disagreed, stating that the element of installation must be additional. In this case, delivery and installation were the same thing, and therefore there was no additional element of installation as required by the Act. Accordingly, the adjudicator’s decision was unenforceable.
This case serves as a stark reminder to parties that if you are seeking to rely on the provisions of the Act (e.g. implied payment terms or adjudication rights), you must check that you have a “construction contract” under the Act before taking action.
Approved inspector duty
The Lessees and Management Company of Herons Court v Heronslea Limited & Others [14.08.19]
The Lessees and Management Company of Herons Court attempted to bring a claim against an approved inspector under s.1(1) of the Defective Premises Act 1972. The claim was in relation to a residential development that was allegedly unfit for habitation as a result of Building Regulation breaches.
Given that s.1(1) applies to “a person taking on work for or in connection with the provision of a dwelling”, the court held that it could not apply to approved inspectors. Approved inspectors do not positively contribute to the creation of the dwelling. They do not have the statutory powers local authorities performing the same role have, and essentially ensure that any work does not contravene Building Regulations (whereas a local authority has enforcement powers). Given that previous case law suggested a local authority does not owe a duty under s.1(1), the court did not consider an approved inspector did either.
NHS Commissioning Board v Dr Manjul Vasant & others [16.07.19]
Although not a construction case, this case serves as a useful reminder about the principles of contract formation and amendment (and the importance of clearly recording the parties’ intentions).
The respondent dentists provided “general dental services” to the NHS under a “GDS Contract”. They also entered into a separate scheme to provide “intermediate oral surgery services” (the IMOS Contract). Subsequently, the parties agreed a Variation Agreement Form (VAF) which purported to bring the IMOS under the terms of the GDS Contract.
The IMOS Contract had contained a one-month notice period for termination. Sometime after the VAF was signed, the NHS sought to terminate the IMOS Contract. However, the GDS Contract did not allow for termination except in the case of default (both parties accepted the dentists were not in default). The dentists therefore argued that, because the VAF had brought the IMOS under the GDS Contract, the termination was invalid. The NHS argued that the VAF was insufficient and too uncertain to amount to a binding variation, and therefore its termination under the terms of the IMOS Contract was valid.
The court disagreed with the NHS, holding that the VAF had validly incorporated the IMOS Contract into the GDS Contract. The judge stated that it was clear from contemporaneous correspondence, oral evidence and conduct that the terms were certain and agreed, and the GDS Contract notice period applied.
Adjudication and insolvency
Indigo Projects London Limited v Razin and another [17.05.19]
In June’s Construction and Engineering Brief, we reported on the conjoined appeal cases of Bresco Electrical Services v Michael J Lonsdale and Cannon v Primus Build [24.01.19], where it was held that a party being in a Company Voluntary Arrangement (CVA) is not in itself a reason to refuse enforcement of an adjudicator’s decision.
In Indigo, the court took the opposite approach and refused enforcement on the basis that the contractor was in a CVA.
Razin engaged Indigo to construct a house. Razin was dissatisfied with the works, but failed to issue a pay less notice in response to Indigo’s interim application for payment. Indigo commenced adjudication for the sum in its application and was successful. Razin failed to pay, and Indigo issued an enforcement application. Shortly thereafter, Indigo entered into a CVA.
The court dismissed Indigo’s enforcement application on the basis that Razin had arguable counterclaims against Indigo, which had not been considered in the adjudication. If Razin was ordered to pay Indigo immediately, that money would be dissipated among Indigo’s CVA creditors, and Razin would be denied the opportunity to recover its counterclaims in full.
The main difference in approach between the Primus case and the Indigo case is the existence of undetermined counterclaims. The lesson here for any party in a CVA (or about to enter one) is that any adjudication should encompass all claims and counterclaims between the parties. If it does not, they take the risk that the adjudicator’s decision will be unenforceable.