Construction Brief: latest decisions October 2021

This article was co-authored by Tegan Johnson, Solicitor Apprentice, Sheffield, and Bobby Cheung, Trainee Solicitor, London.

This update includes a roundup of recent court decisions dealing with the concepts of set off and severance in relation to adjudication decisions, a new definition of economic duress from the Supreme Court, and whether a collateral warranty falls under the definition of a construction contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996.

Adjudication enforcement and severance

CC Construction Limited v Mincione [15.09.21] and Downs Road Development LLP v Laxmanbhai Construction (UK) Limited [07.09.21]

Two cases within days of each other have considered the principle of severance, in the context of adjudication enforcement proceedings. The cases, while seeming to reach contrasting conclusions, highlight a clear distinction and guidance as to aspects of an adjudicator’s decision that can be severed in enforcement proceedings.

CC Construction Limited v Mincione [15.09.21]

CC Construction and Mincione were involved in a dispute surrounding final payment: the due date, the sum, and the validity of various documents. The dispute was considered in an adjudication, which was subject to both Part 7 and Part 8 proceedings.

The adjudicator had failed to consider a defence brought by the employer, Mincione, as to set off; thus omitting a potentially relevant aspect of the dispute and a defence that was properly open to be raised. HH Judge Eyre QC noted “in those circumstances there was a failure by the adjudicator to exercise his jurisdiction which amounted to a material breach of the rules of natural justice”.

However, neither party addressed the court on the scope for severance. The judgement notes the existing precedent relating to severance of whether there is a “core nucleus of the decision that can safely be enforced”. Whilst this suggests that severance might be possible in this case, the court has invited further submissions on the point. This tentative decision should be taken with a pinch of salt, given it is subject to change, but demonstrates that severance of issues is possible in adjudication enforcement proceedings.

Downs Road Development LLP v Laxmanbhai Construction (UK) Limited [07.09.21]

The same judge declined to sever in this earlier case, where Downs Road Development and Laxmanbhai Construction (UK) were in dispute over the value of an interim payment. The adjudication decision set out the sum due. Importantly, the adjudicator had declined to consider a defence brought by the employer regarding damages relating to defective works. The adjudicator stated that he had considered the dispute by viewing it as a “snapshot… at the relevant moment in time”. The court disagreed that this was the correct approach.

Not only was the adjudicator’s omission deemed a material breach of natural justice, but given that it was part of a singular chain of reasoning, it could not be severed from the rest of the decision. The adjudicator’s ultimate conclusion was so tainted by the lack of consideration of a potentially viable defence that it could not be severed – it was not an additional aspect or one question among multiple, but rather part of the logic integral to the overall decision.

That is the difference in the cases: whether a particular issue, deemed to be unjust by the court and therefore unenforceable, is an integral part of an adjudicator’s decision, or whether there is a separate core decision (a “core nucleus”), which can be enforced while the unjust issue is severed.

Contacts: Helen Johnson and Tegan Johnson

Economic (Lawful Act) duress

Pakistan International Airline Corporation v Times Travel (UK) Limited [18.08.21]

The Supreme Court has provided its first definition of economic (or lawful act) duress.

From 2008 to 2012, Times Travel (UK) Ltd (Times Travel) acted as a ticketing agent for Pakistan International Airline Corporation (PIAC). Times Travel agreed to a new contract in 2012, which included a waiver of its claims for unpaid commission under the previous agreement.

In 2014, Times Travel brought proceedings against PIAC to recover the unpaid commission under the previous contract and claimed that it had signed the new contract under economic duress.

The court held that three key elements are required to establish lawful act duress:

• A threat or pressure that is illegitimate
• The threat or pressure in question causes the party to enter into a contract and
• The party has no reasonable alternative but to give in to the threat or pressure.

In this case, the court agreed that no illegitimate pressure was exerted by PIAC because PIAC genuinely felt that the commission under the previous agreement was not payable. The court focussed on the nature of the demand made and whether it was justifiable, as opposed to the nature of the threat or pressure. While the parties cannot perform unlawful acts to exert illegitimate pressure, standard lawful acts where the party exerting the pressure genuinely believes that it is entitled to do so are acceptable forms of commercial pressure.

While the threat of a lawful act can amount to economic duress, the court stressed that economic duress must be narrowly defined and applied only rarely so as not to undermine English law’s reputation for contractual certainty. While this was not a construction-focused case, this judgment is important for any parties negotiating and operating under commercial contracts, and particularly where certain contractual parties may be perceived as having unequal bargaining power.

Contacts: Helen Johnson, Bobby Cheung and Tegan Johnson

Related item: Bank’s liability for enforcement of its security: intimidation/economic duress

Construction contract?

Toppan Holdings Limited & Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [27.07.21]

The Technology and Construction Court considered whether a collateral warranty fell under the definition of a “construction contract” for the purposes of Section 104 of the Housing Grants, Regeneration and Construction Act 1996.

Simply Construct (UK) LLP (Simply) completed the building of a care home in 2016. Toppan Holdings Limited (Toppan) was the freehold owner and Abbey Healthcare (Mill Hill) Limited (Abbey) was the tenant.

In August 2018, fire safety defects were discovered, and separate contractors were instructed to repair the defects. In October 2020, Simply signed a collateral warranty to Toppan and Abbey warranting that that it has performed and will continue to perform diligently its obligations under the original building contract.

Toppan and Abbey subsequently commenced adjudication proceedings against Simply to recover the losses incurred as a result of the repairs. Following the adjudication, Simply resisted enforcement on the basis that the adjudicator did not have jurisdiction to hear Abbey’s claim because the collateral warranty in favour of Abbey was not a "construction contract".

The judge found in favour of Simply and stated that “where the works have already been completed, and as in this case even latent defects have been remedied by other contractors, a construction contract is unlikely to arise and there will be no right to adjudicate.”

As for the wording of the collateral warranty itself, the Judge concluded that “by the time the Abbey Collateral Warranty was executed it was a warranty of a state of affairs past or future akin to a manufacturer's product warranty”.

This decision highlights the importance of both the timing of entering into a collateral warranty and the wording of the warranty itself. Parties should consider at the outset whether an express clause in respect of adjudication rights should be included when entering into a collateral warranty.

Contacts: Helen Johnson, Bobby Cheung and Tegan Johnson

Adjudication and set off

Davis Construction (South East) Limited v Sanzen Investments Limited [12.07.21]

Davis Construction (South East) Limited (Davis) was employed as contractor by Sanzen Investments Limited (Sanzen) on a project under a modified JCT form of contract. They fell into dispute over the final account, and the matter was referred to adjudication. The decision found in favour of Davis, with Sanzen required to pay a significant sum to Davis as well as the costs of the adjudication.

Davis brought proceedings to enforce the decision, which Sanzen countered with a defence and counterclaim for delay and damages which, they claimed, formed a contractual set off, or an equitable one.

Given the “pay now, argue later” aim of adjudication, the court noted that there are only a few available defences to enforcement, and only two cases where set off could be a defence warranting the court to decline to enforce: first, where the right to set off against an adjudication award is outlined in the contract, and second, where the right of set off arises out of the adjudication decision itself. Neither of these applied, as the set off clause in the contract was overridden by the applicability of the Scheme for Construction Contracts.

The court stated that there is “no scope for an equitable set off” given the nature of the contract and the operation of the scheme.

The judge also noted that the set off was not raised as a defence in the adjudication itself, damningly questioning “can the Defendant now resist summary judgment on the basis of a defence which it had been open to it to raise at least in part and which it did not raise…”?

The right to set off against an adjudication decision has always been difficult to establish, and it seems this is another clarification of that general principle – pay now, argue later.

Contacts: Helen Johnson and Tegan Johnson

Read other items in Construction and Engineering Brief - October 2021