Construction Brief: latest decisions July 2020

This update includes a round-up of recent court decisions dealing with design obligations in supply contracts and a number of issues relevant to adjudication, including: insolvency, Part 8 declarations, the correction principle and the interplay between “true value” and “smash and grab”.

Adjudication and insolvency

Bresco Electrical Services Limited v Michael J Lonsdale (Electrical) Limited [17.06.20]

The Supreme Court has handed down judgment in a much anticipated decision relating to the compatibility of the adjudication and insolvency regimes. The Court confirmed that insolvent parties can bring adjudications, addressing two arguments previously addressed by the Court of Appeal, namely:

Jurisdiction – the Court of Appeal was right to find that the insolvency rules do not extinguish claims for the purposes of adjudication, and adjudicators do have jurisdiction to hear claims brought by insolvent parties.
Futility – the Court of Appeal incorrectly held that adjudication by insolvent parties was futile. Although the Supreme Court acknowledged that an adjudicator’s award in favour of an insolvent party may not be enforced, enforcement was a separate matter. The adjudication procedure was a useful dispute resolution method in itself and it would be inappropriate for the court to interfere with the statutory right to adjudicate by granting injunctive relief.

The Court of Appeal judgment was overturned and Bresco is now free to continue with its adjudication

Contacts: Helen Birchall and Katie Rider

Design obligations in “supply” contracts

DBE Energy Limited v Biogas Products Limited [18.05.20]

DBE entered into two contracts with Biogas for the supply of four tank heaters and two pasteuriser tanks for use in an anaerobic digestion facility. The tanks were installed but failed during testing. DBE brought proceedings, claiming the cause was Biogas’ breach of contract or negligence. The contracts themselves were not detailed, and the parties agreed that they were governed by DBE's standard terms and conditions. Biogas argued that their design obligations for the parts were limited to certain drawings – and not the overall system. The fact that the parts were not suited to the system as a whole was not their responsibility.

Contemporaneous evidence led the court to conclude that Biogas had agreed to design-type work, even if that was not set out explicitly in the contracts. The judge noted that the contracts “cannot be seen in isolation” and went on to state that, even if Biogas had not assumed that design role, it “needed to have regard to the system into which its components would be integrated” to comply with its contractual duties. The contracts included a design liability clause requiring “utmost skill, care and diligence”. There was also a fitness for purpose obligation implied by statute. It was found that Biogas failed to exercise the required care and skill under the contracts and that the tanks were not fit for purpose, which required not only their operation as components but also their integration into the system.

The court also found that Biogas had a concurrent tortious responsibility to ensure that the tanks were compatible with the system, as Biogas’ role was “analogous with that of a design and build contractor who can owe a duty of care in tort which is coterminous with its contractual duties”.

Contacts: Helen Birchall and Katie Rider

Adjudication and Part 8 Declarations

ISG Construction Limited v Platform Interior Solutions Limited [07.05.20]

Platform was ISG’s sub-contractor. An adjudication dealt with the calculation of sums due following the termination of Platform’s sub-contract. In a surprising decision for both parties, the adjudicator determined that ISG should make payment to Platform for the difference in price and savings they had achieved by terminating Platform’s sub-contract and having the works carried out by another party.

Platform issued Part 7 proceedings against ISG to enforce the decision and the court granted summary judgment. In a separate Part 8 action (ISG’s request that the two matters be heard together was refused), ISG sought declarations that would effectively prevent enforcement of the decision.

The court refused to make the declarations sought by ISG on the basis that neither fell within the principles previously established in Hutton Construction Limited v Wilson Properties (London) Limited. Following those principles, the court will usually only grant Part 8 declarations in relation to an adjudicator’s decision where the subject of the declarations was an admitted error, or the issue was a short, self-contained point which arose in the adjudication. That was not the case here.

Contacts: Helen Birchall and Katie Rider

Adjudication and the correction principle

J & B Hopkins Limited v Trant Engineering Limited [04.05.20]

Trant employed JBH under a sub-contract for mechanical & engineering works. JBH issued an interim application for payment of circa £815,000. Trant failed to issue a valid payment or pay less notice, and failed to pay. JBH commenced a smash and grab adjudication and the adjudicator found in favour of JBH. Trant still did not pay, so JBH issued enforcement proceedings.

Trant argued that as the payment cycles had since moved on, and the subsequent cycles had already corrected the sum payable, to enforce the adjudicator’s decision would be contrary to the “correction principle” (i.e. that interim payments can be corrected in the next interim payment cycle). However, the court granted summary judgment in favour of JBH, and refused to grant a stay.

The question of what, in law, was the notified sum, does not become incapable of adjudication simply because the payment cycle moves on. Trant, concerned about JBH’s ability to repay any sums paid, claimed a stay was necessary to prevent manifest injustice. This was rejected. The law clearly sets out what happens if parties fail to serve the requisite notices. The question is not one of fairness, but of complying with the statutory framework.

Contacts: Helen Birchall and Katie Rider

Adjudication and the true value of the final account

Broseley London Limited v Prime Asset Management Limited [21.04.20]

Broseley was employed by Prime to carry out refurbishment works. Broseley issued an interim payment application but Prime failed to issue a payment notice or timely pay less notice. Broseley obtained an adjudicator’s decision in respect of the sum due but Prime failed to pay. Broseley then obtained summary judgment to enforce.

In the meantime, Prime had obtained an adjudicator’s decision that it had lawfully terminated the contract with Broseley. Prime applied for a stay of execution of the enforcement proceedings in order to allow a “true value” adjudication of the final account to take place, contending that it would result in a substantial sum due to Prime.

While the court noted the genuine dispute as to the amount of the final account, it was critical of the time which had passed since the decision during which little had been done by Prime to seek to resolve the true state of accounts. It considered that failure to pursue a cross-claim with diligence may in itself be a bar to a successful application for a stay of execution, and held that Prime would not be able to challenge the interim valuation decision in another adjudication without first paying the amount due. The court was unconvinced by arguments that Broseley would be unable to repay the sum, or would dissipate it to avoid payment. As such, Prime’s application for a stay was refused.

Contacts: Helen Birchall and Katie Rider

Resisting adjudication enforcement and payment of fees

Platform Interior Solutions Limited v ISG Construction Limited [21.04.20]

In this earlier, separate set of proceedings dealing with the adjudication between Platform and ISG, Platform sought to enforce the adjudicator’s decision and ISG attempted to resist enforcement.

Platform argued that ISG had waived its entitlement to challenge the adjudicator’s decision because it had paid the adjudicator’s fees and sought to rely on previous case law to support its position. However, the Court noted that in each of those cases, ISG had taken some other action which also acted as a waiver of their entitlement to challenge the adjudicator’s decision. Payment of the fees was not the sole factor. Also, in the present case, payment of the fees was accompanied by a statement from ISG that payment did not constitute acceptance that the decision was valid and enforceable.

On the facts, the court did not consider that ISG had waived its right to challenge the adjudicator’s decision in this instance. Unfortunately for ISG, even though it had the right to make a challenge, the challenge itself was not successful, and summary judgment was granted in favour of Platform.

Contacts: Helen Birchall and Katie Rider

Read others items in Construction and Engineering Brief - July 2020