Construction Brief: latest decisions February 2021

This article was co-authored by Tegan Johnson, Solicitor Apprentice, Sheffield.

This update includes a roundup of recent court decisions dealing with payment provisions, settlements after adjudication, arguments of natural justice in adjudication, and clarifying the meaning of “reasonable endeavours”.

Payment provisions

JSM Construction Ltd v Western Power Distribution (West Midlands) plc [31.12.20]

This case considered what constitutes an “adequate payment mechanism” for the purposes of the Construction Act, in the context of a contract with no final account mechanism.

JSM Construction (JSM) was employed by Western Power Distribution (West Midlands) (Western) to carry out underground installations. The contract was light on detail regarding payment, setting out an entitlement to interim payments, but no final payment mechanism.

JSM’s final payment application included a re-measurement of the works, which was disputed by Western. JSM commenced proceedings. Western applied to strike out JSM’s claim on the basis that the contract did not provide for a final account-style re-measurement, and therefore JSM’s claim was bound to fail. JSM responded to the strike-out application by arguing that the lack of a final account clause rendered the contractual payment mechanism inadequate, such that a final account clause would be implied by the Scheme for Construction Contracts.

The court disagreed with JSM, holding that:

  • There is nothing in the Construction Act that requires a contract to contain a final account provision.
  • The payment mechanism should be viewed holistically, and it is a question of fact as to whether a mechanism is adequate for determining what payments become due under the contract and when.
  • The Scheme for Construction Contracts does not provide a “model” of what is required for an adequate payment mechanism. Parties should not rely on differences between the Scheme’s mechanism and the contractual mechanism to demonstrate that the contract is inadequate. That would “put the matter the wrong way around”.

However, since there were other factual and legal issues with the claim that it was not possible to address in a strike-out application, the judge could not say with any certainty that JSM’s claim was hopeless. The strike-out application was therefore dismissed.

This case serves as a useful reminder of the importance of clear drafting when it comes to contractual payment mechanisms, and that the Scheme for Construction Contracts should not be viewed as prescriptive.

Contacts: Helen Birchall and Tegan Johnson

Related item: Adequate payment mechanisms and implied payment terms under the Construction Act

Settlements overriding adjudication decisions

Aqua Leisure International Ltd v Benchmark Leisure Ltd [18.12.20]

Usually, a settlement agreement overrides an adjudicator’s decision – but when doesn’t it?

Aqua Leisure International (Aqua) were employed by Benchmark Leisure (Benchmark) to design and build leisure attractions. In June 2017, an adjudicator awarded sums to Aqua in respect of a payment dispute.

Subsequently, the parties exchanged emails settling all matters between them, which included an agreement different from the adjudicator’s decision. The emails stated that the agreement was “subject to contract”. The parties acted as if the agreement was binding, and Benchmark made payments pursuant to its terms. In December 2017, Aqua sent a deed of settlement to Benchmark, which was never signed. Aqua chased until May 2018, when Benchmark confirmed it could not comply with the agreement.

Aqua therefore commenced proceedings to enforce the adjudicator’s decision. Benchmark argued in its defence that the settlement agreement was binding, which overrides the adjudicator’s decision pursuant to s.108(3) of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act).

However, the court found that the “subject to contract” wording displayed a clear intention that the agreement would not be binding until a contract was signed. The court stated:

The parties set their own rules of engagement. They agreed that there would be no binding contract until the terms were reduced to writing and signed off. They clearly envisaged that an agreement would be reached but that it would not be enforceable until the formalities had been observed. The presence of an agreement that was acted on, is not therefore without more enough to indicate that the parties intended to be bound. It was obvious that the agreement would be acted upon before it became binding.”

As the settlement agreement was not binding, the adjudicator’s decision was valid and enforceable.

Contacts: Helen Birchall and Tegan Johnson

Adjudication – breaches of natural justice

Global Switch Estates 1 Ltd v Sudlows Ltd [03.12.20]

The court declined to enforce an adjudicator’s decision due to a breach of natural justice.

Global Switch Estates 1 Ltd (Global) employed Sudlows Ltd (Sudlows) to carry out fit out works under a JCT Design and Build contract. Sudlows submitted an interim application for payment for circa £8.8 million, including the value of work carried out and additional sums incurred due to delays. Global commenced an adjudication on the true value of the application, claiming almost £7 million from Sudlows. Global set out a list of “Excluded Matters” not to be considered in the adjudication, which included Sudlows’ entitlement to extensions of time and related loss and expense.

While Sudlows disputed that the jurisdiction of the adjudicator could be limited to exclude consideration of its potential defences, the adjudicator decided that it was permissible. He found in favour of Global and awarded Global over £5 million.

Sudlows did not pay, and Global issued an enforcement application. Sudlows raised in their defence the issue of the Excluded Matters, which it said limited their defence in the adjudication and amounted to a breach of natural justice.

The TCC found in favour of Sudlows, quoting from Lord Briggs JSC’s judgment in the recent case of Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd [2020]:

However narrowly the referring party chooses to confine the reference, a claim submitted to adjudication will nonetheless confer jurisdiction to determine everything which may be advanced against it by way of defence, and this will necessarily include every cross-claim which amounts to (or is pleaded as) a set-off.”

Because the Excluded Matters were relevant to the value of the interim application, failing to consider these “precluded any consideration of a very substantial part of the defence”, which was “a material breach of the rules of justice and renders the decision unenforceable”.

Contacts: Helen Birchall and Tegan Johnson

The meaning of reasonable endeavours

NIHL Ltd & Anor v Infinite Ltd [20.11.20]

While not a construction-specific case, this is a useful example of how the courts interpret the obligation to exercise “reasonable endeavours” in relation to settlement.

The parties reached a settlement in relation to a dispute over a loan. The settlement was recorded in a Tomlin order, which included the following terms:

  • The parties would use reasonable endeavours to reach full and final settlement by 26 May 2020.
  • If settlement was not reached, the claimants could enter final judgment against the defendants for £3.3 million in full and final settlement.

The parties did not reach settlement by the required date, despite negotiations. The claimants applied to enter judgment. The defendants argued that the claimants had not used reasonable endeavours to reach settlement, and as this was a condition precedent to entering judgment, the claimants were not permitted to do so.

The court found that, on the facts, the claimants had exercised “reasonable endeavours” to reach settlement. The court commented that:

  • A party must engage in negotiations in an attempt to reach a resolution, including giving genuine consideration to the opposing party’s proposals
  • A party does not have to exhaust multiple paths open to it
  • A party does not have to accept an offer it finds commercially unacceptable
  • A party does not have to continually go over the same ground in the hope of an offer being improved
  • A party’s silence, whether as a negotiating tactic or inadvertence, may be permissible (context-dependent).

The court went on to find that, based on the wording of the Tomlin Order, the first term was not a condition precedent to the second. Even if the claimants had not used reasonable endeavours to reach settlement, they would have been entitled to enter judgment.

Contacts: Helen Birchall and Tegan Johnson

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Read other items in Construction and Engineering Brief - February 2021