December 19, 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.

Case Law Update

LXB RP (Crown Road) v Squibb Group [2016] EWHC 2669 (TCC)

The Court will not protect a party from enforcement of an adjudication determination simply because it is ‘worried’ about the other side’s solvency and its ability to claw back the money at a later stage. The Court must be satisfied that there is an actual risk of a future injustice that outweighs the interest in enforcing valid adjudication decisions and that there has been a material change to the party’s financial position since the time of contracting.

Facts

LXB brought proceedings to enforce an adjudication decision which required Squibb to pay them £294,303.50. Squibb did not dispute the determination, but sought to stay payment pending assessment of the final account. Squibb had concerns about LXB's liquidity and was worried it would not be able to repay the money at final account stage (Squibb expected the final account to show a surplus of about £540,000 in its favour). Squibb argued that LXB (i) lacked substance; and (ii) had threatened to wind up. The relevant factual considerations were as follows:

  • LXB was a SPV set up by a substantial Jersey based retail investment fund (though the Court noted that the fund’s liquidity was of no relevance as it was not the contracting party).
  • LXB had never defaulted on a payment during the contract or in the past.
  • Since the time of contracting in 2014, LXBs revenue, gross profit and net profit had increased (though the Court acknowledged that this was not definitive of an improvement in its financial position).
  • Despite the above, LXB’s cash position had decreased in the preceding accounting year and there had been an increase in creditors (though the Court accepted that a lack of explanation about this did not indicate a manipulation of funds to reduce LXB’s ability to meet its liabilities).
  • However, at the end of 2015, LXB’s directors had stated in a company report that it was inappropriate to assume the company would continue long term.

Arguments and Findings

In considering Squibb’s position, the Court applied the judgment of Coulson J in Wimbledon Construction Company 2000 v. Derek Vago [2005] BLR 374, where it stated that: "Even if the evidence of the claimant's present financial position suggested that it is probable that it would be unable to repay the judgment sum when it fell due, that would not usually justify the grant of a stay if: (i) the claimant's financial position is the same or similar to its financial position at the time that the relevant contract was made…”.

However, Stuart-Smith J made it clear that the decision to enforce or not was at the court's discretion and the court needed to balance the "well-known interest in enforcing valid adjudication decisions" against the “perceived or actual risk of a future injustice” (i.e. if the party receiving payment subsequently becomes unable to pay it back if required).

Applying the facts, it was held that LXB was not in a worse or more vulnerable financial position than at the time of contracting. Stuart-Smith J went on to state that "When all is said and done it was and is an SPV with limited assets. Whether Squibb appreciated that at the time of contracting is a moot point, but it is not remotely unusual for substantial construction projects to be carried out by SPVs in this way”. Stuart-Smith J exercised his discretion in favour of LXB and enforced the determination.

Practical Implications

This decision reminds us of the importance of undertaking (and refreshing) financial due diligence.  If a paying party has concerns about the other’s solvency and its ability to claw back money at a later stage, the Court is unlikely to protect that party by staying payment unless there is an actual risk of it being unable to repay the amount and there has been a material change to the other side’s financial position from the time of contracting.  Depending on the particular circumstances, parties may want to consider negotiating additional security at the time of the contract (e.g. such as a PCG) to protect them if a situation such as in the present case was to arise.

Graham Leslie v Farrar Construction Ltd [2016] EWCA Civ 1041

In this case the Court held that an Employer who was not concerned to investigate the accuracy of interim payments claimed during the course of a project, and who paid out on these claims, could not later claim back the overpayment (on the basis of mistake or otherwise) once the project was complete and the final accounting had been agreed.

Facts

The claimant (Mr Leslie) was a funder and developer who had overpaid his contractor (Farrar) because Farrer had rounded up all of its invoices. The parties had entered into an oral framework agreement, under which Mr Leslie was to acquire a number of development sites and Farrer would design and construct housing on the sites to an agreed scheme and budget.  Mr Leslie would pay Mr Farrer his ‘build costs’ and the resulting profit share from the development would be divided equally. The parties agreed a 'build costs' budget in advance and Mr Leslie made interim payments as the works progressed. Farrar submitted payment requests with round figures and failed to support them with any evidence. However, Mr Leslie paid these requests without conducting any further investigations or asking for any further breakdown.

At some point, the parties' relationship deteriorated and their collaboration came to an end.  At this stage, five projects had been completed and two were left incomplete. Mr Leslie brought a claim in the TCC for all sums he had overpaid Farrer in respect of all seven projects.

The judge at first instance found that the two parties had a different understanding of what the ‘build costs’ were supposed to mean.  He held that the phrase ‘build costs’ meant the direct cost of labour and materials, together with site-specific preliminaries.  This finding meant that Farrer had included impermissible items in the build costs which it charged and, as such, Mr Leslie had overpaid on all the projects.

However, he held that Mr Leslie could only claim repayment on the two incomplete projects and was not entitled to recover the overpayments on the completed projects. Essentially, this was because parties treated each project as a separate matter and as each was completed, they reached final agreement on the figures and “closed their books on that particular project”. Moreover, the sums paid on the completed projects were within budget and Mr Leslie had been content to pay them without any investigation.

Mr Leslie appealed on a number of grounds, including that the judge at first instance should have: (1) treated the completed projects in the same way as the incomplete ones; (2) allowed him to recover the overpayments on the completed projects as monies paid under a mistake; and (3) found that there had been a partial failure of consideration for the overpayments.

Arguments and Findings

Presiding over the appeal was Jackson LJ and McCombe LJ. The first ground of appeal was rejected as an impermissible attack on the judge at first instance's finding of fact. The judge correctly treated the complete and incomplete projects differently as the payments made under the incomplete projects were over budget and the incomplete projects had not reached the final accounting stage that the completed projects had gone through. There was no basis for going behind that finding.

The second ground of appeal was also rejected on the basis that Mr Leslie had run the risk of overpaying by not investigating further. He had not paid the construction company by mistake, but had intended them to have the amount he was willing to pay. Anyone with experience in property development would know that actual build costs would not be the same as the budget costs. The court applied the rule in Dextra Bank & Trust Co Ltd v Bank of Jamaica, which states that a party should not be “relieved of a risk knowingly run”. Mr Leslie took the risk of overpaying because he was satisfied with the overall profit he was making.  It was a classic case of one party voluntarily making a payment to the other, knowing that it might be more than he owed but choosing not to ascertain the correct amount.

In regard to the third point, it was held that there was no failure of consideration, as Mr Leslie had paid £3.5m and in return received constructions works. It was held that just because he had overpaid by approx. £300k that did not mean there had been a failure of consideration.

Practical implications

This case reminds us of the importance of reducing an agreement to writing, expressly specifying what costs are recoverable and what costs are excluded and requiring (and then properly considering) evidence substantiating a party’s claim for payment.  Depending on the circumstances, if a party elects to not investigate claims for payment at the appropriate time, it may well be considered too late to revisit the issue once the project is complete and final accounting has taken place.

Dawnus Sierra Leone Ltd v Timis Mining Corporation (SL) Limited [2016] EWCA Civ 1066

In determining whether to order a counterclaiming party to provide security for costs, the key issue is the nature of the counterclaim and whether it has its own ‘independent vitality’.  Relevant factors will include how substantive the counterclaim is, whether it does more than simply defend the original claim and whether it would have been brought despite the original claim. If a counterclaim has independent vitality then it may be susceptible to a security for costs order.

Facts

Dawnus Sierra Leone (DSL) had been carrying out construction work in Sierra Leone for Timis Mining (TM), when TM gave notice of termination. At that time, TM had made interim payments to DSL totalling $26 million. DSL maintained that it was entitled to a higher sum and its solicitors embarked on correspondence to allege its case.

Subsequently, TM, without warning, issued proceedings in Sierra Leone, claiming to be entitled to the recovery of the full sum paid less what DSL could demonstrate it was entitled to. DSL then issued proceedings in the UK, claiming to have been underpaid in the sum of about $15.5 million. Both sets of proceedings continued in parallel. TM filed a defence and counterclaim in the UK proceedings claiming to be entitled to the recovery of overpayments in the sum of about $17 million.

Both parties applied for security for costs under CPR Rule 25.13, the primary considerations at first instance being (i) whether there was reason to believe either party would be unable to pay the other’s costs if ordered to do so; and (ii) whether, having regard to all the circumstances, it was just to make the orders sought.

Both parties accepted that point (i) applied. This left the judge at first instance to consider point (ii).  The judge concluded that it was just to order DSL to provide security, but would not be just to order TM to provide security for DSL’s costs of the counterclaim, on the basis that the matters raised by TM in its counterclaim simply arose from its defence to DSL’s claim.  The judge sided with TM in viewing that it would never have brought its counterclaim as originating proceedings in England and Wales (as it had done in Sierra Leone).

Arguments and findings

The decision on appeal centred on whether TM's counterclaim had its own independent vitality or whether it was merely a defence raised in response to the claim by DSL.  DSL argued that regard should have been had to the substantive nature of the counterclaim rather than the degree of diffidence with which it was pursued in this jurisdiction.   It was held that the essential question was whether TM was doing more than merely defending itself and was launching a counterclaim with independent vitality of its own.  Hamblen LJ considered that TM’s counterclaim was more than a simple defence, due to its size and the fact it would have brought it regardless of DSL raising a claim. The real focus was not where a party was litigating, but the nature of its claim or counterclaim.

It was thus held the judge had erred in considering TM’s counterclaim did not have independent vitality.  Where a counterclaim did have independent vitality, the normal order would be for both parties to provide security, or neither.  It is important to note that changes in circumstances led to the counterclaim being dropped before the appeal.  This resulted in an order to set aside the security for costs order against DSL rather than an order for TM to provide security for costs as well.

Practical implications

Parties defending an action and bringing a counterclaim may find themselves susceptible to a security for costs order if their counterclaim is substantive enough in its own right.  This potential added cost at the commencement of proceedings may be relevant to certain parties when considering the costs of litigation and its impact on a party’s cash flow.

Wes Futures Ltd v Allen Wilson Construction Ltd [2016] EWHC 2863 (TCC)

This case reinforces the fact that a party is unable to recover its costs of adjudication in subsequent court proceedings, whether a valid part 36 settlement offer was made or not.  The Construction Act expressly states that a party cannot recover its costs of adjudication.  To allow a party to do so in subsequent court proceedings would offend the express provisions of the Construction Act and the wider rationale of adjudication as a swift and popular form of dispute resolution. 

Facts

The issue before the court in Wes Futures Ltd v Allen Wilson Construction Ltd [2016] EWHC 2863 (TCC) was whether an accepted offer, expressed as a part 36 offer, allowed a party to claim its costs from two adjudications. The parties were in dispute over £86,469.21 plus VAT in unpaid invoices. An adjudication had previously been commenced but was not concluded because the adjudicator resigned.

In February 2016, the claimant sent a "without prejudice part 36" settlement offer to the defendant for £65,000 plus VAT. The letter also detailed that if the offer was not accepted in 21 days, the defendant would be liable for all of the claimant's legal costs incurred in the case.

No sums were paid and in August 2016 the claimant began a second adjudication. The adjudicator upheld its claim for £86,469.21 plus VAT. The defendant refused to pay, so in October 2016 the claimant began adjudication enforcement proceedings in the instant court.

In November 2016, the defendant accepted the Part 36 offer made in February. The parties accepted that a binding compromise had been reached. The issue in dispute was about the costs consequences of the settlement.

Arguments and findings

The claimant argued it was entitled to all of its legal costs incurred in the case (which included its adjudication costs) because its offer was not a valid part 36 offer.  It submitted that its offer purported to exclude the court's power to determine liability for costs, in circumstances where the offer was accepted after the 21 days, and therefore precluded the court from deciding what was just in the particular circumstances of the case.

Coulson J viewed this as a rather artificial argument and noted that the offer fell a long way short of the established threshold for invalid part 36 offers. He held the offer was a valid Part 36 offer, which meant the costs of the present court proceedings could be claimed but not the costs of the adjudications. The letter had expressly referred to part 36, presupposing that there were or would be court proceedings which the offer was designed to function alongside.

Coulson J then reasoned that even if he was wrong about the letter being a valid part 36 offer, the result in regard to claiming costs of the adjudications would be no different. The wording used in the offer letter ("all our client's legal costs incurred in this case") did not extend beyond the Part 36 rule of the costs of the proceedings. The claimant’s submission that this should be construed wider to capture adjudication costs was not accepted.

There were also two principles which prevented the claimant's interpretation of the letter. The first was that, in an ordinary case, a party seeking to recover a sum awarded by an adjudicator was not entitled to the legal costs incurred in the adjudication itself. This was because, pursuant to the Construction Act, costs incurred in adjudications were not recoverable, as allowing the recovery of such costs would offend the wider rational of adjudications as a method of dispute resolution. So, if a successful party could not recover its costs in the adjudication itself, it could not recover them in enforcement proceedings either.

Moreover, "costs of proceedings" (which was the relevant wording, whether this was an offer actually made under Part 36 or simply one that referred to Part 36) included "recoverable pre-action costs". Such costs would not normally include the costs of separate, stand-alone alternative dispute resolution proceedings such as adjudication. Judgement was for the defendant.

Practical implication:

Parties that make settlement offers need to take care when drafting their offer if they want to exclude the Court’s power to determine liability for costs and recover the costs of previous adjudication proceedings. If an offer is accepted and its construction later disputed, the Court will (i) try to give effect to an offer as a Part 36 offer if it purports to be one; and (ii) not interpret a reference to recovery of ‘all legal costs incurred’ as including adjudication costs.  Alternative ways to attempt to recover such costs may be to include express words to that effect or to include an amount for the adjudication costs in the lump sum settlement offer.

Sector news

New pre-action protocol for Construction and Engineering disputes

The new Protocol came into effect on 14 November 2016 and is aimed at reducing parties’ costs at the pre-action stage. Some of the major changes include:

  • Parties can contract out of the Protocol provided all parties agree.
  • Parties can now agree to use a Protocol Referee Procedure to resolve disputes about the implementation of the Protocol.
  • The Court can only impose cost sanctions in exceptional circumstances, such as a flagrant disregard for the Protocol.
  • The application of the Protocol is intended to be quicker, shorter, and less expensive, with a greater emphasis on proportionately.

While these changes may help to stop the front loading of costs, it is feared that they may not serve to reduce costs overall. The loosening of required details in the letter of claim and tightening of timescales may result in fewer pre-action settlements and more litigation.

Chancellor's Autumn Statement

The post-Brexit uncertainty continued with an Autumn Statement that cut growth forecasts and promised increased borrowing to mitigate the forecasted impacts of the June vote. Importantly, for the construction industry, Phillip Hammond has decided to invest in infrastructure and innovation to try and provide stability during the challenging negotiations ahead.  To do this he has announced he will borrow £23bn over the next five years, which is going to be vital to the sector, considering the likely slowdown of private funding during that same period. The figure has been termed somewhat modest by commentators however.

In regard to a number of the infrastructure announcements in the Autumn Statement, Clyde & Co partner Liz Jenkins was quoted as saying "A pipeline of projects is just a pipe dream until construction takes place. The government needs to speed up decision-making if it is serious about driving forward the UK’s infrastructure" (to read that article please click here).

Britain's relationship with China remains 'Golden'

China's vice-premier visited the UK early in November, with Theresa May describing the relationship as being in a "golden era". It was confirmed the £1.7bn Royal Albert Dock project would go ahead, which is largely funded by Chinese banks. They confirmed it would proceed despite Brexit and described it as a mark of faith in the UK market.

The Chinese delegation did not visit Northern Britain but thirteen substantial Chinese backed projects were announced within the Northern Powerhouse portfolio.

HS2 route and first-phase contracts announced

The route for the second phase of HS2 has been announced. However, there was no further clarification on where the trains would stop in Sheffield. In total, three contracts have been announced totalling over £900m. The contracts have been procured to ensure work can start next year on the first phase line from London to Birmingham. Theresa May was an advocate of the project during her time as Home Secretary and it would appear that she has taken that support into her role as Prime Minister.