January 17, 2017

Projects & Construction Law Update

Please find below Clyde & Co's latest projects and construction law update - a regular review of up-to-date information and case law for those in the construction and infrastructure industry

Case Law Update

Dacy Building Services Ltd v IDM Properties LLP [2016] EWHC 3007 (TCC)

This case shows that a party may still be successful in challenging an adjudicator’s jurisdiction even if it agreed to the appointment of the particular adjudicator in question. Whilst in some situations, the fact a party accepts a particular adjudicator will help to show it has submitted to his jurisdiction, this will not automatically be the result. In this case, it was held IDM had not submitted to an adjudicator's jurisdiction despite agreeing to his appointment.

Facts

The project involved a mixed use development. The main contract was between O'Loughlin Leisure (Jersey) Limited and HOC (UK) Limited. O'Loughlin was, in fact, in a joint venture with Fastmild Ltd, a subsidiary of IDM Properties. However, Fastmild was not party to the contract.  Instead, a Mr Walder from IDM was listed as the employer's agent. Dacy were brought in as sub-contractors for joinery and general building services, however, no written contract was entered into.

A dispute arose as to who Dacy had made its contract with.  Dacy contended it had contracted with IDM and that it would not have knowingly contracted with HOC because it had previously struggled to obtain payment from HOC on other projects. Dacy sought to rely on additional (although disputed) evidence from a meeting between the relevant parties to show it had thought it was contracting with IDM.  This included subsequent communications between the parties in the form of emails and text messages. Dacy completed its works but only received payment on three of its six invoices.

Dacy referred the dispute to adjudication. It obtained the appointment of 'B', as adjudicator. However, the referral was not served in time and a fresh notice of intention to refer had to be served. Dacy's solicitors asked IDM Properties' claims consultant whether it would agree to B's appointment. IDM's claims consultant confirmed its agreement and acceptance of the adjudicator. Dacy again issued a notice of intention to refer the matter to adjudication and, as agreed, B was nominated as the adjudicator. Almost immediately after this, IDM objected to the adjudicator’s jurisdiction.  The parties provided submissions on the jurisdiction point. 

B subsequently decided that there had been an oral contract between the parties and that he had jurisdiction. He concluded that IDM Properties was liable to pay Dacy the sum of £247,250 plus interest. Dacy sought to enforce this award. IDM resisted enforcement arguing the adjudicator did not have jurisdiction to decide the matter.        

Arguments and findings

Dacy argued that IDM Properties had agreed to, or submitted to, B's jurisdiction as adjudicator and that IDM Properties had no realistic prospect of establishing that there was no contract between the parties. Dacy further submitted that the adjudicator had jurisdiction to determine his own jurisdiction.

IDM argued that there was no contract between it and Dacy and therefore there was no jurisdiction for an adjudicator under s108(1) of Housing Grants, Construction and Regeneration Act 1996. It was common ground between the parties that if there was no contract, the adjudicator would not have jurisdiction. The key question in relation to this was whether IDM had a realistic chance of success in its argument that there was no contract between the parties.

Jefford J held that IDM did not submit to the adjudicator’s jurisdiction. Jefford J shortened Dacy's argument on the jurisdiction issue to one point: that if a party agrees the nomination of a particular adjudicator it cannot then object to his jurisdiction. Although it was suggested there may well be circumstances in which that was the case, Jefford J held that the mere agreement to the nomination of an adjudicator cannot have that effect.  Parties may want to agree the identity of an adjudicator, however, something more would be required for that to amount to agreement to the adjudicator’s jurisdiction over a particular dispute.

In regard to the issue of who Dacy had contracted with, there was a direct conflict of evidence both as to the background, and circumstances of, the meeting in question and what had happened on that occasion. The subsequent conduct of those involved did not clarify the position. After considering the evidence in some detail, Jefford J held that the dispute was not the kind which could be resolved on a summary basis and thus Dacy's application was rejected.

Practical implications

This case shows the importance of ensuring a clear contract is in place before work is commenced and that proper due diligence is undertaken. In addition, a referring party should not assume it is safe from jurisdictional challenge just because the other party has agreed the appointment of a particular adjudicator. Some may also query whether this case is one of a few from the past 12 months which may evidence a change in the TCC’s previously robust approach to the granting of summary judgements for enforcement of adjudication awards – this is something worth monitoring. Click here to read more.

MUR Joint Ventures BV v Compagnie Monegasque de Banque [2016] EWHC 3107 (Comm)

The process a beneficiary must follow in making a demand on a demand guarantee / performance bond will depend on the construction of the clauses contained in the instrument itself. Caution must be taken when drafting provisions to ensure they clearly state what is required of the beneficiary when making a demand. The doctrine of strict compliance does not automatically apply to demand guarantees or performance bonds and the degree of compliance will ultimately depend on the wording of the instrument. 

Facts

These proceedings concerned a claim by a joint venture scheme for payment under a demand guarantee (commonly referred to in the construction industry as a performance bond).[1] The defendant, Compagnie Monegasque de Banque (COB), had issued a demand guarantee for a joint operations agreement between the claimant (MUR Joint Ventures), and another party (Seatrade), for the chartering and operations of a bulk carrier.

MUR alleged that sums fell due under the joint operations agreement, which were not paid by Seatrade. Accordingly, it made demands under the guarantee. The first demand, which was signed by one of MUR's directors, was made on 18 August 2015. That demand and its attachment had been sent, by a variety of means, including couriering. The second demand was made on 14 September 2015. The bank did not pay out and denied liability. The issue was whether MUR was actually entitled to payment under the guarantee.     

Arguments and findings

COB argued that the demands did not meet the requirements of the guarantee, in that they had not included the requisite authority or authorisation of the power of the person who had signed them on behalf of MUR. Further, COB submitted that the first demand failed because it had not been sent by registered post as required by the guarantee.

Consideration was given to the doctrine of strict compliance (usually applied in the context of letters of credit) and its application to demand guarantees. However, it was accepted that the doctrine does not automatically apply to demand guarantees and, generally speaking, demand guarantees were conditional on the presentation of documents rather than upon the actual existence of the facts those documents asserted (as bankers are able to check documents but do not have the means or inclination to check facts).  The degree of compliance required is a question of construction of the guarantee itself. 

Cranston J held that, as a general principle, the terms of a demand guarantee should be clear and precise. So, if the bank required the beneficiary to produce certain documents on making a demand, the guarantee should make that clear. 

It was held that the bank's first argument as to a lack of authorisation had no traction, as the clause in question did not expressly require such authorisation and thus the court could not adopt a strained interpretation of the clause to require it to need one. In addition, the bank conceded that the director in question had the necessary authority and neither party had raised any issue in regard to authority at the time the guarantee was entered into.

In respect of the bank's second submission, it was held that the requirement to send the demand by registered mail was directory, not mandatory. The guiding principle was one of effective presentation of a demand. The first demand and all its attachments had been sent by a variety of means, including couriering. The importance of registered mail was that the communication in question was signed for by the recipient and signature precludes any suggestion that it was not received. In the present case, there was no question that the demand and its attachments had been received by the bank. Thus, it followed that presentation of the first demand had been effective.  

Practical implications

It is important to carefully read the provisions of demand guarantees / performance bonds if seeking to rely on them and, equally, caution must be taken when drafting demand guarantees / performance bonds to ensure the prescribed procedure between the parties is sufficiently clear.  The degree of compliance required (whether strict or not so strict) will depend on the straightforward exercise of construction, or interpretation, of the guarantee to determine the parties’ intention. Click here to read more.

Octoesse LLP v Trak Special Projects Ltd [2016] EWHC 3180 (TCC)

This case clarified the position regarding recovery of consultant's costs in enforcement proceedings. It was held that the nature of adjudication and enforcement procedures meant that it was entirely fair to allow consultants' costs to be recoverable in circumstances where they had been involved at the adjudication stage and had to advise subsequent solicitors at the enforcement stage.

Facts

The proceedings were concerned with the issue of costs, which had been incurred during Part 8 proceedings where an adjudicator's decision was upheld despite a challenge against its validity. 

For the adjudication, Trak had engaged Wellesley Construction Services Ltd (Wellesley) as its construction claims consultants. They also had a minor advisory role in the enforcement proceedings, which were run by separate solicitors engaged by Trak.

Trak was successful in the proceedings and Octoesse was ordered to pay Trak £59,991.83 plus its costs of the enforcement.

Arguments and findings

Trak claimed recovery of Wellesley's fees for its advisory role in the enforcement proceedings. Octoesse contended that Wellesley's costs were not recoverable as they were consultants for a litigant in person. They relied on the case of Agassi v Robinson (Inspector of Taxes) (No.2) [2005] EWCA Civ 1507, which established the principle that consultants costs are generally not recoverable as their costs are neither (i) covered by work done by the litigant in person; nor (ii) disbursements which would have been allowed if made by a legal representative.

However, Jefford J stated that he did not think that Agassi established that consultants' costs were never recoverable but rather that they only would be so if the consultant's costs are recoverable as a disbursement: "That question is answered by posing and answering the question whether those costs would have been recoverable as a disbursement if it had been made by a solicitor. Costs would be recoverable as a disbursement by solicitors if the work is such as would not normally be done by solicitors. But there nonetheless may be specialist assistance the cost of which would be recoverable." (emphasis added)

In particular, the final element of specialist assistance was focused on. Jefford J applied Dyson LJ's definition of "work not normally done by the solicitor instructed" as that including instructing counsel. However, he went on to clarify this included tasks where a solicitor would involve a specialist, even though the task would broadly be referred to as that of a solicitor. It was noted that often claimants in adjudication proceedings are represented by claims consultants and then, even if a solicitor becomes involved for the enforcement proceedings, they will have to liaise with the consultant as to the events of the adjudication. This would then come within the ambit of the principles established in Agassi as to the costs of specialists being recoverable.

Thus, Jefford J found that the consultant's costs were recoverable and went on to suggest that he would think they would normally be recoverable in such proceedings. In this case, the enforcement proceedings went to the substance of the dispute of the adjudication, but it was felt the recoverability of these costs would not change if they were incurred in relation to a summary application. The nature of adjudication and enforcement proceedings helped the judge arrive at this reasoning. The tight deadlines associated with the procedure meant it would be required and expected for a solicitor who became involved at the enforcement proceedings stage to seek information from a consultant involved earlier in the matter.                                                                                                                                                                                              

Practical implications

It is important to be aware that consultant's costs incurred during enforcement proceedings following adjudication are likely to be recoverable. This clearly creates risk for parties entering adjudications, as additional costs beyond the immediate legal costs ordinarily anticipated may become payable. Click here to read more.

Sector News

Proposed infrastructure banks in Canada and the US

Justin Trudeau has increased his investment target for Canadian infrastructure and one of the centre points to achieve this plan is through an infrastructure investment bank. It is planned to be responsible for CN$35bn of cash investment to major projects. This is seen as an important feature going forward to help deliver the infrastructure plan and it is expected to be codified in statute in 2017.

There have been proposals for similar banks in the US also to help run similar strategies and it follows last month's announcements by Phillip Hammond that he is considering infrastructure bonds in the UK. It shows the commitment of governments to attract investment to the sector.

Network Rail to lose monopoly over repairs and maintenance of tracks

It was announced that Network Rail will lose its sole control of the repair and maintenance of train tracks, with power instead being shared with private operators. The current line operators will now be required to involve themselves in these tasks. The plans detail that there will be joint management teams comprising of representatives from Network Rail and the line operators. 

This is part of the Transport Secretary, Chris Grayling MP's, policy of trying to improve efficiency and ticket prices, through speeding up the repair and maintenance across the lines. Grayling has termed the policy as "reuniting track and train". It is hoped this will improve the efficiency of the repair process.

FIDIC Consultation Yellow Book

A new consultation Yellow Book was released at the London FIDIC conference in December. This is the first in a series of amendments likely to result in changes across the entire Rainbow suite, which will inevitably lead to challenges for the industry.  Clyde & Co will be commenting on the proposed changes to the Yellow Book in due course.

FIDIC have also recently unveiled a new Dredging and Reclamation contract.

 

[1] We note the important distinction between 'guarantees' and 'bonds'.  A guarantee is a secondary obligation which requires proof of breach of the underlying primary obligation.  Accordingly, a guarantee in the true sense cannot be 'on demand' as a simple demand without such proof will not suffice.  This is to be contrasted to, for example, a performance bond which is a primary obligation to pay a sum on demand (without further proof of the entitlement).  In this case, the phrase 'on-demand guarantee' was used.  This term is not widely used in the construction industry but is essentially another term for a performance bond (which was what the instrument in this case was).  Despite this, for the purpose of this summary, we have adopted the term 'demand guarantee' as it was used in the judgment.