November 1, 2016

Projects & Construction Law Update

Please see below Clyde & Co's latest projects and construction law update - a regular review aimed at providing up-to-date information for those in the construction and infrastructure industry.

Sector News

'Modernise or Die'- Mark Farmer report into the construction industry

Mark Farmer's very frank and, perhaps rather honestly titled report was released this month. The report considers the skills crisis and lack of innovation within the construction industry. It adopts the approach of a medical diagnosis where 'symptoms' of the failure in the industry are considered before these are then set against the root causes and a recommended recovery plan. The conclusions drawn are very damming of in the industry. The report is available here.

Heathrow Airport Expansion

Heathrow has been chosen over Gatwick as the airport to be given an additional runway. The project is estimated, by Heathrow, to be worth £15.6bn. As expected, the decision has proved highly controversial, with a number of external observers very much doubting the budget associated with the project and reality of it getting underway. Clyde & Co partner Liz Jenkins was quoted recently saying that "there is likely to be a number of legal hurdles to overcome before any shovels can break ground". To read the article click here.

Already, issues have emerged as to how Heathrow will fund the project, with airlines demanding the promise that the airport will not increase its usage charges be kept. Airlines want shareholders to pay for the project and are of the view that any further increase to usage charges, which would have to be passed on to the consumer, would see the airport become uneconomic for many passengers.

Sanctions removal opens Iran civils market

With the lifting of sanctions on Iran, the country is opening its major infrastructure projects to companies from around the world. Although world energy prices are not in Iran's favour, it remains the second biggest economy in the Middle East with the World Bank predicting GDP growth of 4.3% this year.

There have been two large motorway projects announced and a rail project. There are also hopes for a new high speed rail project beginning next year. The UK has lagged behind other countries in gaining development projects in the country, but there are hopes this will change in the near future.

Chancellor announces NIC will be placed on a permanent footing

Phillip Hammond has announced the National Infrastructure Commission is going to be made into an executive agency. This means the body will be given its own budget, freedom and autonomy as set in a charter showing the government's commitment to its independence.

The commission will come into force on January 2017 and the chancellor is looking to kick start discussions to give key stakeholders a say in how to ensure Britain's infrastructure is fit for the future.

Health and Safety sentencing "New dawn"

Northampton Crown Court has recently imposed a £1.98m fine on Tata Steel after two employees suffered serious hand injuries. This shows that new guidelines brought in by the Sentencing Council have made courts more willing to impose substantial fines.

In addition to this, freedom of information request figures obtained by Clyde & Co show health and safety offences have tripled in the last year. Chris Morrison, Clyde & Co’s UK head of health and safety was quoted recently in the Financial Times saying “The data confirms what we have been seeing in practice with the HSE [Health and Safety Executive] displaying an increased zeal to prosecute the most senior individuals. By making senior management responsible for the health and safety failings of their business and their staff, the increased enforcement is a serious boardroom issue." Indeed these figures coupled with the new sentencing guidelines make it an ongoing concern from construction companies.  To read the article click here

 

Case law update

Amey Wye Valley Ltd v County of Hereford District Council [2016] EWHC 2368 (TCC)

The courts reaffirmed the position that adjudication decisions will be enforced regardless of errors of fact or law.  Errors in calculations performed within an adjudicator’s jurisdiction will not render the decision unenforceable.  Severance is not available where it would amount to the correction of a mistake of fact on the face of the decision to arrive at a different outcome.

Background

The case of Amey Wye Valley Ltd v County of Hereford District Council [2016] EWHC 2368 (TCC) involved both an application for the enforcement of an adjudication decision on one hand and, on the other, a number of declarations including that the decision was unenforceable or in the alternative that an aspect of the decision that was in error be severed. 

The contract was an NEC2 ECC for the repair and maintenance of highways and roads in Herefordshire. A dispute emerged about how inflation should impact on the payments across the contract life-cycle (which was over a 10 year period). The parties tried to settle the issue by agreeing a formula to deal with inflation.  Despite this, the parties still could not agree on the particular adjustment and what the words of the formula meant. Two adjudications followed. The first was to decide what the formula actually meant (without valuing the adjustment). The second was to put figures to the method established in the first and, in doing so, decide the dispute.  It was held that the first decision was final and binding on the parties (under the terms of the contract).  The case centred on the enforceability of the second decision in which the adjudicator (Mr Molloy) awarded an adjustment of £9.5 million in Hereford District Council’s (HDC) favour.  The issues largely related to the method of calculation employed by Mr Molloy and whether he had strayed from his jurisdiction.

Arguments and findings

Fraser J was clear in stating the law that adjudications will be enforced by the courts regardless of errors in law or fact – it is not the role of the courts in enforcement proceedings to assess whether an adjudicator came to the correct result after complex calculations, but rather to see if the adjudicator’s decision was made within jurisdiction and in accordance with the rules of natural justice.  There were no issues with natural justice in this case so the sole issue before the court was one of jurisdiction. 

Acting for Amey, Mr Stansfield QC advanced the interesting argument that, as the first decision was binding on the parties, Mr Molloy only had jurisdiction to act in accordance with that decision and, by making a mistake of fact in applying that decision (i.e. getting the calculations wrong), he would by reason of that mistake be acting outside his jurisdiction. This argument was rejected and, although Mr Molloy came to the wrong conclusion on the facts, it was held that he did not act beyond jurisdiction in doing so; he did not attempt to re-decide the issue before the first adjudicator but decided the dispute referred to him.

Despite the errors in Mr Molloy’s calculations, the decision was enforceable. Importantly, the calculations offered by both Amey and HDC were also incorrect, which perhaps led to more leniency in the judgement. Amey then submitted that the incorrect parts of the decision should be severed and the full amount not enforced. Fraser J rejected this, stating that it would be contrary to the law regarding enforcement of decisions by adjudicators and would amount to a correction of an error of fact on the face of the decision to arrive at a different outcome.

Practical implications

The case serves as a reminder to parties of the risks of adjudication, with the ‘right’ answer being secondary to the parties having a rapid answer, as well as the limited bases on which a party can challenge enforcement. Click here to read more.

Balfour Beatty Regional Construction Ltd v. Grove Developments Ltd [2016] EWCA Civ 990

The court held that parties have considerable latitude as to the system of interim payments they may agree under s. 109 of the Construction Act and the court would not intervene and imply words to save a party from what was a bad commercial bargain.

Background

The case of Balfour Beatty Regional Construction Ltd v. Grove Developments Ltd [2016] EWCA Civ 990 was heard by the Court of Appeal, following an earlier decision by the TCC in favour of Grove. The dispute involved a JCT Design and Build contract entered into in 2011 for the development of a hotel and serviced apartments on the Greenwich peninsula. The contract included an interim payment schedule listing 23 monthly instalments, ending in July 2015 (the planned month for completion) (Tumber schedule). There was no provision in the contract as to what would happen if the project overran beyond the 23rd instalment. The project overran and was not completed until July 2016.

In August 2015, Balfour Beatty (BB) issued an interim payment notice extrapolating from the payment schedule. Grove subsequently issued a payment notice and Pay Less notice (deducting £2 million) and paid the remaining amount.  However, BB took issue with Grove’s calculation of dates and argued the Pay Less notice was ineffective. 

After much dispute between the parties about how the interim payment process was to work post July 2015, Grove took the position that BB had no continuing entitlement to receive payments.  Grove took the matter to the TCC, who agreed, on the basis that: (i) the Tumber schedule was a specific amendment to the contract; (ii) it did not make any express provision for further interim payments; (iii) there was no implied term for interim payments after the 23rd instalment; (iv) the Tumber schedule satisfied the requirements of s. 109 and 110 of the Construction Act 1996 so the Scheme did not apply; and (v) no new agreement was ever reached between the parties as to the essential terms for further interim payments. The appeal to that decision was heard here with BB arguing such a construction of the contract that no further interim payments would be payable until the final payment date under the contract was "commercial nonsense".

Arguments and findings

Lord Justice Jackson disagreed with this and he stated it was clear the parties only agreed payments up to July 2015, meaning that was what they intended. Further, in his view, it was impossible to deduce what the payment amounts, dates or notices should be beyond expiry of the payment schedule.  Such matters were essential because if Grove served notices out of time the consequences would be Draconian.

Finally, he stated that it was a classic case of one party making a bad bargain and the court cannot “use the canons of construction to rescue one party from the consequences of what that party has clearly agreed…there is no ambiguity…which enables the court to reinterpret the parties’ contract in accordance with “commercial common sense”’.  Regarding compliance with s. 109 and 110 of the Construction Act, Justice Jackson LJ was of the view that s. 109(1) gave parties considerable latitude as to the system of interim payments which they may agree and that the regime of 23 interim payments up to the date specified for completion, though unusual, was sufficient.  The appeal was therefore dismissed.

However Lord Justice Vos offered a dissenting judgement and suggested that the contract was ambiguous and for it to have effect the word "etcetera" should be implied at the end of the payment schedule. In his view, too much weight had been placed on there being only 23 payments listed. However, for LJ Longmore, LJ Vos' decision was “merely a valiant attempt at filling in the imponderables”.  

Practical implications

Parties need to take extra care up-front when drafting payment regimes.  If the regime is not sufficient then there is a risk the Scheme will apply. If the regime is sufficient enough for the Act but does not assist practically or may otherwise not appear to make commercial sense, the injured party will not be able to rely on the Scheme as a saving grace and it will not be safe for it to assume that the Court will step in to save it from its ‘bad bargain’. Click here to read more.

Kilker Projects Ltd v Purton (trading as Richwood Interiors) [2016] EWHC 2616 (TCC)

The court has clarified the position in relation to adjudication of final accounts. If an adjudicator determines that, in respect of a final account, the ‘notified sum’ is payable (due to missed notices) and not the proper value, that amount must be paid.  However, the employer can bring a subsequent adjudication to determine the value of the final account and claw back any overpayment.

Background

Kilker Projects Ltd v Purton (trading as Richwood Interiors) [2016] EWHC 2616 (TCC) was the second hearing between the parties, with Kilker seeking enforcement of an adjudication decision. The parties had entered into an oral construction contract regarding works to the Dorchester hotel. However a dispute arose regarding the final account payment, with Purton arguing that it was entitled to full payment due to Kilker's failure to serve a valid payment or pay less notice as required under the Construction Act.

This resulted in a first adjudication, where the adjudicator agreed that full payment was due. Summary judgement was granted to enforce the decision and require payment of £147,223.00 plus costs. Kilker paid this amount before commencing a second adjudication seeking actual valuation of the final works and repayment of any overpayment. The second adjudicator decided that there had been an overpayment to the amount of £55,676.84 plus VAT. Kilker sought enforcement of the decision which Purton challenged.

Arguments and findings

The issue before the court was whether failure to serve a payment or pay less notice in accordance with the Construction Act prevented the paying party from challenging the payee's contractual entitlement to such payment so that the 'notified sum' in s.111 of the Act became final and conclusive as to the sum due under the contract. Purton submitted that the decision should not be enforced because the second adjudicator did not have jurisdiction to decide the matter, as it had already been decided by the first. This argument was rejected by the court and it held that the first adjudication had decided the notified sum payable in the final account application, but had not looked substantively at the value of the works. Thus it was held the second adjudicator was within his jurisdiction and did not reconsider the issues of the first.

Regarding the entitlement to challenge the final payment, it was held that the provisions of the Construction Act were concerned only with ensuring cash flow and they do not affect the ultimate value of the contract sum. Subject always to the express terms of the contract, where the 'notified sum' was in respect of an interim payment, usually there was no contractual basis on which the contractor's entitlement to that payment could be re-opened. Any errors can be corrected in subsequent interim or final valuations.

However, where the 'notified sum' determined in adjudication was in respect of a final payment, unless the contract provided that such payment was conclusive as to the sum due, either party was entitled to have the ultimate value of the contract sum determined in a subsequent adjudication. The second adjudication decision was thus enforced, with Kilker receiving repayment.

Practical implications

Paying parties can perhaps rest more easily now with confirmation that they can commence a separate adjudication to claw back overpayments paid by virtue of a ‘smash and grab’ adjudication for final accounts. Click here to read more.

Fluor Ltd v Shanghai Zhenhua Heavy Industries Ltd [2016] EWHC 2062 (TCC)

The court held that the defendant had breached its obligations under a purchase order agreement because items it had delivered had not been fit for purpose.  However, the claimant was estopped by convention from claiming the certain costs relating to the testing and repairs required, which it had promised to forego.

Background

Fluor Ltd v Shanghai Zhenhua Heavy Industries Ltd [2016] EWHC 2062 (TCC) the TCC was asked to consider whether Shanghai had breached its contract to supply pre-fabricated steel structures (MPs) and transition pieces (TPs) to a wind farm in the North Sea. Fluor was the contractor on the project and sub-contracted those aspects of the works to Shanghai. The contract between the parties was in the form of a purchase order, under which Shanghai was to deliver the MPs and TPs to Fluor.  Fluor was to establish a staging base where it would install the electrical equipment in the TPs, and store the MPs, before sending them on to the employer.

However, after the employer received its first delivery, it discovered several cracks in the welding and issued a non-compliance report (NCR) to Fluor. NCRs were also issued for the second and third shipments. The employer demanded extensive retesting to be undertaken by Fluor and for any cracks in the fabrications to be repaired. However, both Fluor and Shanghai felt the testing required was overly extensive for the contractual obligations in place between them and the employer. An agreement was supposedly reached where Shanghai would assign its costs to Fluor, who would pursue a claim against the employer, in effect, for both parties. This agreement was purportedly claimed in two letters. However, Fluor then brought a claim for breach of contract against Shanghai in the amount of £400m.

Arguments and findings

Fluor argued the MPs and TPs supplied by Shanghai were not fit for purpose and claimed their costs associated with them. Shanghai argued due to the agreement in place between the two parties, Fluor was estopped from claiming costs against them. Edwards-Stuart J noted the court had to decide two points: (i) Were the MPs and TPs unfit for purpose? (ii) If they were unfit, was Fluor now estopped from claiming the costs of repair and testing from Shanghai? It was held that the MPs and TPs were unfit for the purpose required of them. The welding had extensive cracks in it, which only worsened through testing.

Edwards-Stuart J stated it was well established that for an estoppel to arise, the promise or assumption had to be clear and unequivocal. It was held that there was a promise made by Fluor that costs for testing and repair would be assigned from Shanghai, but only in relation to the claim they were making against the employer. As this only related to the costs associated with the alleged overly-extensive testing, Fluor were not estopped from claiming costs from Shanghai for all the other testing and repair. The decision was thus held in favour of Fluor, with the quantum to be established at a later hearing.

Practical implications

This case shows how strictly a court will construe a promise for the purposes of estoppel. A party seeking to rely on a promise made by the other to mount an estoppel argument should consider very carefully the scope of the promise and what is likely to fall within its parameters. Click here to read more.