Construction Brief: latest decisions February 2019

This update includes a round-up of recent court decisions raising issues relating to payment, contractual interpretation, gratuitous advice, adjudication enforcement, the meaning of “practical completion” and a recent decision from the Constitutional Court in Portugal. 

Payment – appeal news

S&T (UK) Limited v Grove Developments Limited [07.11.2018]

In an appeal that had been eagerly awaited by the construction industry, the Court of Appeal has upheld the decision of the Technology and Construction Court (TCC) in relation to:

  • The requirements for payment notices; and
  • The entitlement to commence a “true value” adjudication after a “smash and grab” adjudication.

The court held that (a) Grove’s pay less notice was a valid notice in accordance with the contract, and (b) the absence of a valid payment or pay less notice does not mean that the “true value” of the application is deemed to be agreed (contrary to the earlier decision of ISG v Seevic [2014)). Grove is therefore entitled to commence a separate adjudication in relation to the true value of the application.

In relation to the second finding, the court also confirmed that in circumstances where the requisite payment notices have not been served, a “true value” adjudication can only be commenced after payment has been made. This appears superficially to contradict the right in s108 of the Housing Grants, Construction and Regeneration Act 1996 for parties to adjudicate “at any time”. This tension will no doubt be the subject of future disputes, and it remains to be seen how this will be resolved by the courts.

Contacts: Helen Birchall

Related item: Court of Appeal rules on ‘smash and grab’ adjudications

Contractual interpretation

Clancy Docwra Ltd v E.ON Energy Solutions Ltd [16.11.2018]

The TCC has found that, despite the existence of a contractual clause allocating the risk of ground conditions to a sub-contractor, the sub-contractor could escape liability by relying on exclusions contained in its scope of works.

Clancy was engaged by E.ON to install underground pipework at the Barts Square development in London. During construction, Clancy encountered underground walls and rubble, and a dispute arose as to who should cover the additional costs incurred in overcoming the obstructions.

The sub-contract was a JCT SBC Sub-Contract 2011 with amendments. Those amendments sought to pass the risk of ground conditions to Clancy. However, Clancy’s scope of works expressly referred to tender documents that had been appended to the sub-contract. Those documents showed that the tender was based on a clear route for the pipework, and did not include dealing with obstructions.

The sub-contract also included a priorities clause that gave the sub-contract clauses priority over the tender documentation. E.ON argued that the ground conditions clause therefore trumped the exclusions in the tender documents.

The court disagreed, finding that the ground conditions clause applied only to Clancy’s agreed scope of works - it did not extend that scope. The tender documents had defined the subject matter of the sub-contract, thus narrowing the application of the sub-contract clauses. The risk of the obstructions was E.ON’s.

It is worth noting that the court also rejected an alternative claim by Clancy for rectification of the contract based on common mistake. Although it was clear that Clancy had sought to exclude liability for ground conditions in its tender, E.ON believed that such risks had been allocated back to Clancy in the contract amendments. On this basis there was no common mistake and therefore no rectification was necessary.

Contacts: Helen Birchall

Update - gratuitous advice and duty of care

Burgess v Lejonvarn [26.11.2018]

Construction professionals will be pleased to learn that the TCC has dismissed a long-running action in which an architect giving free advice to (former) friends was sued by those friends for damages of £265,000.

The case involved Mrs Lejonvarn giving free project management services on her former neighbours’ garden redevelopment. A dispute arose after the development was delayed, costs escalated and remedial works became necessary.

In the initial preliminary issues hearing in 2016, it was found that while there was no contract between the parties, Mrs Lejonvarn did owe the Burgesses a duty of care in tort. On appeal, the Court of Appeal clarified that the duty was not a positive obligation to carry out services, but merely an obligation to carry out any services it does perform with reasonable skill and care.

In the latest instalment, the case returned to the TCC for the substantive hearing as to whether Mrs Lejonvarn had breached her duty of care. The court reiterated that “a professional providing gratuitous services was liable for what he or she does but not for what they fail to do”.  The court decided that on all counts, Mrs Lejonvarn had not acted in breach of duty, and the Burgess’ claims were dismissed in full.

This case does however serve as a useful reminder that even if advice is given on a free and informal basis, liability can arise if that advice is given negligently.

Contacts: Helen Birchall

Adjudication - stay of enforcement

Gosvenor London Limited v Aygun Aluminium UK Limited [03.12.2018]

The Court of Appeal has upheld the TCC’s decision to add risk of dissipation of assets as a further ground upon which parties can seek a stay of execution of an adjudicator’s decision.

Aygun appointed Gosvenor to undertake cladding works. Gosvenor commenced adjudication against Aygun for unpaid fees, successfully recovering circa £553,000. Aygun did not pay and Gosvenor applied for summary judgment. Aygun defended the proceedings on the basis that Gosvenor’s invoices had been fraudulent, and that Gosvenor would dissipate any sums paid before the hearing of Aygun’s substantive challenge could take place.  The TCC decided that allegations of fraud could not prevent summary judgment being granted, but could justify a stay of execution. The Judge added to the well-known list of grounds for a stay in Wimbledon Construction Co 2001 Ltd –v- Vago [2005], listing a new ground (g) as follows:

g) If the evidence demonstrates that there is a real risk that any judgment would go unsatisfied by reason of the claimant organising its financial affairs with the purpose of dissipating or disposing of the adjudication sum so that it would not be available to be repaid, then this would also justify the grant of a stay.

Gosvenor appealed against the stay, claiming that the Judge erred in allowing evidence of fraud that was not raised in the adjudication, to be adduced in support of a stay. The Court of Appeal disagreed, stating that the adjudication did not involve consideration of risk of dissipation of any award. The adjudication concerned the merits of the claim, and the risk of dissipation was a new issue for the court to determine. The appeal was dismissed.

This case gives parties to adjudication a useful additional ground upon which to seek a stay of execution. However, given that the evidential threshold for succeeding upon such a ground will be high, it remains to be seen how frequently it will be relied upon in practice.

Contacts: Helen Birchall

Meaning of “practical completion”

Mears Limited v Costplan Services (South East) Limited and Others [07.12.2018]

The TCC has considered the meaning of “practical completion” (PC) in the context of building projects - a term that is widely used but has no universally agreed definition.

Mears entered into an agreement for lease with a developer to take a 21 year lease of student accommodation to be constructed in Plymouth. The size of one of the constructed buildings was smaller than shown on the planning documents, breaching an express clause of the agreement for lease. Mears’ position was that this breach constituted a defect preventing the certification of PC. This would entitle Mears to terminate the agreement for lease, because PC would not have occurred by a longstop date specified in the agreement. PC was not defined in the agreement for lease or the building contract.

The TCC agreed that there had been a breach, but did not agree that the breach constituted a defect that prevented the certification of PC. In relation to the meaning of PC, the court concluded that it was highly fact-dependent, but adopted the definition given in Keating on Construction Contracts (ninth edition 2012, paras 20-120):

  • The Works can be practically complete notwithstanding that there are latent defects;
  • A PC Certificate may not be issued if there are patent defects – the defects liability period is provided to enable defects not apparent at PC to be remedied;
  • PC means completion of all the construction work that has to be done;
  • However the architect has a discretion to certify PC when there are very minor items of work left incomplete on “de minimis” principles

The judge added that the quality of the work done and the purpose of the building would be other relevant factors.

This case provides useful guidance on the meaning of PC, and a helpful analysis of the interaction between breaches of contract and the certification of PC.

Contacts: Helen Birchall

Case law update from Portugal – useful guidance for secured creditors

Judgment no. 616/2018 – published on 04.01.2019

This case involved personal insolvency proceedings in Portugal where the trustee apprehended the insolvent’s rightful share of a property that was also collateral in a banking loan. The bank (a secured creditor) claimed its debt in the insolvency proceedings and accepted that the trustee would sell the property for €6,668. Approximately two years later, the trustee accepted an offer of €1,000 without notifying the bank. After subsequent unsuccessful appeals from the bank and public prosecutor, the matter reached the Constitutional Court.

The Constitutional Court held that it is contrary to the Constitution to interpret articles 163 and 164 of the Insolvency and Company Recovery Code (CIRE), in such a way that denies a secured creditor (with collateral over the real estate property which is to be sold in the insolvency) the right to challenge the validity of the sale proceedings, where the trustee is in violation of the duty to inform the creditor of the base value for bidding or the sale price for any given buyer entity.

The decision means that any creditor secured by a right over property, may assert the invalidity of the adjudication proceeding of that secured property, if the trustee failed to inform the creditor of the base value when the sale occurs through an auction, or the sale price when there is an impending adjudication. This is important for any creditor who may retain its real estate collateral, in order for it to be sold later for a higher price.

Read other items in Construction and Engineering Brief - February 2019

Read other items in Commercial Brief - May 2019