Construction Brief: latest decisions July 2022

This article was authored by Tegan Johnson, Solicitor Apprentice, Sheffield, Miran Bahra, Trainee Solicitor, London and Lilia Gatenadze, Legal Assistant, London.

This update includes a round-up of recent court decisions dealing with the definition of a construction contract, enforcement of adjudication decisions by companies subject to a CVA, pay less notices, contract interpretation and co-insurance.

Collateral warranties – construction contracts or not?

Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [21.06.2022]

In July 2021, a first instance decision found that a collateral warranty related to a construction contract was not itself a construction contract; meaning it did not carry the same right to adjudicate (and the adjudication decision brought by virtue of the warranty could not be enforced).

That decision has now been reversed by the Court of Appeal. Abbey Healthcare (Mill Hill) Limited (Abbey), the beneficiary of the collateral warranty, had appealed the decision in a second attempt to enforce the adjudicator’s decision in their favour. Simply Construct (UK) LLP (Simply) resisted enforcement along the same lines as in the first judgment – the adjudicator had no jurisdiction to make the decision because the warranty in Abbey’s favour was not a construction contract.

In deciding the appeal, the court considered three questions:

• Can a collateral warranty ever be a construction contract?
• If yes, do the terms of the Abbey collateral warranty allow it to be considered a construction contract?
• If yes to both, did the date of the Abbey collateral warranty make a difference to its status?

As the Housing Grants (Construction & Regeneration) Act 1996 defines a construction contract widely (an agreement for the carrying out of construction operations), a collateral warranty was deemed able to fall within that.

The collateral warranty in question certainly did; it was not “akin to a product warranty” per the first instance judgment but future facing and a separately actionable agreement to the building contract.

Finally, the date of execution was deemed irrelevant, both because it was future facing, and retrospective. It was also noted that any other decision on this question would create real uncertainty in practice.

Permission was not granted to appeal the decision to the Supreme Court, so this will be the final bite of the cherry – and is the confirmed position.

While the first instance decision caused a quick redrafting of collateral warranty templates, this judgment restores certainty. The case does act as a reminder to always bear in mind the law (both the letter and spirit of) and to ensure contracts and contractual documents are considered and carefully drafted.

Contact: Tegan Johnson

Related item: Construction Brief: latest decisions October 2021

Adjudication enforcement with CVAs

FTH Limited v Varis Developments Limited [08.06.2022]

FTH Limited (FTH) sought to summarily enforce two adjudication decisions in its favour but was subject to a company voluntary arrangement (CVA). Varis Developments Limited (VDL), the entity who the adjudication decisions were made against, accepted the decisions were valid but wanted to resist summary judgment on the basis of the CVA, and that they had cross claims to be considered.

Helpfully, the judgment outlines a summary of the general position, being that “where a company in insolvent liquidation has obtained an adjudication decision in its favour, that decision will generally not be enforced by way of summary judgment”.

The position can be slightly different for a CVA, as (depending on the facts of the case) some judgments considered them a different affair - they can be intended to help a company to continue trading rather than a more absolute insolvency measure.

The judge considered whether there would be a risk that granting summary judgment would deprive VDL of security for its cross claim.

Many of VDL’s arguments were persuasive, including:

• The terms of the CVA did not include any reference to the cross-claims.
• The CVA was not going to help FTH trade its way out of trouble, only to recover creditors’ amounts (an estimated 56 pence in the pound).
• Since drafting the CVA, the initial estimates had been downgraded to even less than 56p.

Ultimately VTDL proved there would be a real risk that summary judgment would deprive them of security and the judge declined to grant it.

In view of the ever-evolving case law regarding adjudication enforcement in relation to insolvent parties, this case confirms the general rule that decisions will not be enforced where the outcome would be unfair.

Contact: Tegan Johnson

Pay less notices

Advance JV v Enisca Limited [16.05.2022]

In another helpful case clarifying the law around pay less notices, the court considered a notice purporting to cover two payment cycles.

Enisca Limited (Enisca) and Advance JV (Advance) came into dispute well into the duration of the project – the decision relates to payment cycles 24 and 25.

Enisca issued correct applications for payment for cycles 24 and 25. Advance issued a number of documents to the parties’ shared document system, including a payment certificate and pay less notice relating to cycle 25, one day before the deadline for providing a pay less notice in relation to cycle 24. No payment certificate or document expressly responding to cycle 24 was served.

An adjudicator was appointed in response to the non-payment of the amount claimed in payment cycle 24. They rejected Advance’s argument that the pay less notice uploaded on 25 November 2021 applied to payment cycle 24 and made their award in favour of Enisca.

Advance JV sought declaratory relief pursuant to a Part 8 claim in relation to the validity of the pay less notice. The adjudicator’s decision was upheld by the court and Advance’s Part 8 claim was dismissed.

The court notably stated the following:

• The pay less notice was not “in substance, form and intent” a pay less notice referrable to the payment cycle in question.
• Pursuant to Section 111(3) of the Housing Grants, Construction and Regeneration Act 1996, the payer may give the payee a notice of the payer’s intention to pay less than the notified sum. The judge therefore concluded that a pay less notice “…must be referable to the payment notice in which the notified sum is identified”.
• There was no support in the Housing Grants, Construction and Regeneration Act 1996 nor the parties’ contract that a pay less notice could apply to two payment cycles.

The case should act as a helpful reminder to all that notices must be clear, accurate and correctly timed. One simple missing notice can make a difference – and it is unlikely that a court would accept a different notice (for a different payment cycle, for example) in its stead.

Contacts: Miran Bahra, Tegan Johnson

Contract interpretation

Gama Aviation (UK) Limited & International Jet Club Limited v MWWMMWM Limited [04.05.2022]

An addendum to an earlier judgment, reconsidering the interpretation of a termination clause (which allowed termination by notice), the case recaps some useful case law.

The clause in question was “this agreement shall commence from the date of this agreement and shall subject to clause 9 continue until such time as either party gives the other not less than three months’ notice in writing of termination of this agreement”.

On first instance, the judge considered it to preclude other forms of termination on the ordinary reading of the words, deciding that it was an exclusive code for how the contract could be terminated.

However, the addendum adds that there are other principles to consider when interpreting a contract, and the judge revised his earlier interpretation to one which allows for unilateral termination at will but does not necessarily preclude any other form. It is noted that this interpretation is more in line with commercial common sense.

The revised interpretation does not change the earlier judgment (which ruled that novation did effectively terminate the contract) but serves as an additional point in favour of it.

A useful recap of the principles of interpretation, this case also serves as a reminder of how important careful contract drafting can be.

Contact: Tegan Johnson

JCT Option C insurance and co-insurance

The Rugby Football Union v Clark Smith Partnership Limited & F M Conway Limited [29.04.2022]

The Rugby Football Union (RFU) engaged contractors including F M Conway Limited (FMC) to carry out ductwork at Twickenham Stadium for the 2015 Rugby World Cup, under an amended JCT Standard Building Contract 2011.

When defects in their design and workmanship led to significant losses, these were indemnified by the project’s insurance policy, and the insurer brought a subrogated claim against FMC in the RFU’s name.

This trial of preliminary issues considered whether, as FMC sought to argue, FMC were co-insureds under the policy. If so, RFU could not claim against them (and, by extension, the insurer could not make a subrogated claim).

The insurance option chosen and pursued was Option C, a joint names policy for damage to existing structures from any of the specified perils.

The starting point was that, while two named parties to the same policy covered for the same loss (co-insureds) cannot act against each other, “a person does not become a party to an insurance contract simply by being named or identifiable as an insured and when a person becomes a party as a consequence of the actions of another person then the terms of the contract between the insured party and that other govern the extent of the insurance”.

FMC was deemed not to be a co-insured – while the policy covered both parties, it did not do so to the same extent. FMC’s cover was subject to the scope and extent of cover that the RFU was required to provide under the contract, which excludes cover for items including rectifying FMC’s own defective work.

As such, RFU’s claim was allowed to proceed.

Clearly it is important to understand both the terms of the policy and of your contract, and always to be aware that just because an insurance is “Joint Names” it does not guarantee that all parties are on equal footing.

Contact: Tegan Johnson

Exclusion clauses

Soteria Insurance Limited v IBM United Kingdom Limited [04.04.2022]

An exclusion clause in a contract of sale which excluded liability for loss of profit, revenue or savings did not preclude Soteria Insurance Limited (Soteria), the buyer, from recovering wasted expenditure which it had incurred in anticipation of the completion of the contract.

By a written contract IBM United Kingdom Limited (IBM) had agreed to provide Soteria with an IT system. After a series of delays, Soteria refused to pay a 'milestone' invoice. Relying on the non-payment, IBM terminated the contract, and the IT system was never delivered.

Soteria alleged that the supplier had wrongfully repudiated the contract and sought damages for wasted expenditure. IBM argued that it had been justified in terminating the contract.

In a first instance judgment, the High Court found that IBM had wrongfully repudiated the contract, but that Soteria’s right to claim for wasted expenditure was excluded by an exclusion clause. Soteria appealed and the Court of Appeal upheld their appeal.

The main points for consideration were twofold: the meaning of, and types of, losses; and the difference between wasted expenditure and loss of profits.

The Court of Appeal found that the contract defined ‘losses’ widely and carved out specific types of loss in respect of which liability was excluded: “loss of profit, revenue [or] savings”. However, within the natural and ordinary meaning of those words, the clause did not exclude a claim for expenditure wasted because of the other party’s repudiatory breach. The more valuable the right which one party sought to exclude, the clearer the language required to exclude it should be – so parties must beware and be very specific about the types of losses to be excluded.

Loss of profits, revenue or savings, and wasted expenditure, were deemed to be two different types of losses - calculating the former involved an element of speculation (and one would need to guess what the future losses might be), whereas the latter was easy to ascertain as it was already incurred. As wasted expenditure was different, it did not fall within the exclusion.

While not specifically a construction case, contractual interpretation is universal, and exclusion clauses are common in construction contracts. It will be important to be completely clear on what parties are looking to exclude, and to ensure that the drafting is tight enough to make that happen.

Contacts: Lilia Gatenadze, Tegan Johnson

Read other items in Construction Brief – July 2022