Tag: JCT

Third Party Rights


Despite being regarded as a profession and an industry, construction can generally be extremely slow to react to innovation and new ways of thinking, often lagging years behind

The Contract (Right of Third Parties) Act 1999 significantly reformed the common law, Doctrine of Privity which covers the relationship between parties to a contract and other parties or agents. At its most basic level, the rule is that a contract can neither give rights to, nor impose obligations on, anyone who is not a party to the original agreement, i.e. a “third party”.

With the Royal Assent of the Contract (Right of Third Parties) Act 1999 on 11th November 1999 a long standing and universally disliked element of the doctrine was reformed. This reform being to the second rule; which previously had the effect that a third party could not enforce a contract for which they had not provided consideration.

At a basic level the changed law allows third parties to enforce contract terms that benefit them in some way or which the contract empowers them to enforce. At the same time the legislation grants these third parties access to a range of remedies if the terms are breached. Further the legislation limits the extent in which a contract can be changed without the permission of an involved third party, while at the same time providing protection for the promisor and promisee in dispute situations with the third party, and allows parties to a contract to specifically exclude the protection afforded by the Act if they want to limit the involvement of third parties.

Despite this legislation being over 15 years old there are still parts of the industry that do not trust and want to limit third party rights. The Judgement in Parkwood Leisure Limited v Laing O’Rouke Wales and West in 2013 however tend to suggest that the industry should have been more sceptical of Collateral Warranties than 3rd Party rights per say. The judgement in this case tends to suggest the industry understanding of Collateral Warranties has been fundamentally flawed.

Background

The Defendant, Laing O’Rourke (The Contractor) was engaged by Orion Land and Leisure (Cardiff) Limited (The Employer) to carry out and complete the design and construction of a swimming pool and leisure centre under a standard Joint Contract Tribunal (JCT) Design and Build Contract

The Employer had entered into a lease with Parkwood Leisure Limited (A Third Party Facilities Management Company) to operate the pool on behalf of Orion Land and Leisure (Cardiff) Limited.

A key clause in the contract was that Laing O’Rourke were required to provide Collateral Warranties to a number of third parties, including Parkwood Leisure Limited. Before the works were completed Laing O’Rourke executed as a deed Collateral Warranties in favour of Parkwood Leisure Limited.

After the opening of the facility a number of defects occurred, mainly with the air handling units. Parkwood Leisure Limited claimed were construction and commissioning defects. Some of the alleged defects were subject to a Settlement Agreement, however issues continued to occur in relation to the air handing units. Parkwood Leisure Limited therefore believed they had no other effective remedy other than to claim against Laing O’Rourke’s Collateral Warranty.

Parkwood Leisure Limited therefore commenced under Civil Proceedings Rules (CPR) Part 8 an action to determine whether:

  • The Collateral Warranty amounted to a Construction Contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996, as if this was the case it would enable them to Adjudicate their claim
  • The claim being brought was compromised by the Settlement Agreement

The Collateral Warranty

The Collateral Warranty contained the following clause:

“The Contractor warrants, acknowledges and undertakes that:-

  1. It has carried out and shall carry out and complete the Works in accordance with the Contract;
  2. In the design of Works the Contractor has exercised and will continue to exercise all reasonable skill and care to be expected of an architect;
  3. It has complied and will continue to comply with the terms of regularly and diligently carry out its obligations under the Contract.”

The presiding Judge, Justice Akenhead after reviewing the definitions of “construction contract” and “construction operations” under Sections 104 and 105 of the Housing Grants, Construction & Regeneration Act 1996 and determined a Collateral Warranty is a construction contract. This was as the definitions were widely construed and the Act applies to all contracts related to the carrying out of “construction operations. It was specifically notes that the Collateral Warranty had the wording “carried out and shall complete the works” which gave an obligation to complete the construction works. It was further found that the Collateral Warranty was a subsidiary to the Building Contract.

However not all Collateral Warranties would be construed as a ”Construction Contract” and would be evaluated based on the specific wording of the Warranty. It was Justice Akenhead’s view that Collateral Warranties related to future performance could be construed as “Construction Contracts” in accordance with the Act.; whereas those against could be where the Contractor completes the works and provides a warranty post completion.

Therefore Adjudication was possible by Parkwood Leisure Limited as the Collateral Warranty amounted to a Construction Contract.

The Settlement Agreement

In relation to the Settlement Agreement is was found that there was scope to bring claims for matters that did not exist at the time the agreement. In effect this could have been avoided with clear and careful drafting and avoiding ambiguities.

 Is the Parkwood judgement correct?

In effect it was decided that a Collateral Warranty is a Construction Contract where:

  • There is an undertaking by the contractor to continue to comply with the underlying construction contract.
  • The Collateral Warranty is delivered before Practical Completion

However at law we don’t pick and choose what provisions apply and this judgement may yet have some non-considered consequences.

In effect then Section 108 (Adjudication) and Section 109 (Payment) should also be incorporated into Collateral Warranties.

Section 109 in particular could have severe consequences, although one would hope a common sense approach would be taken by the courts. This section provides that a party to a Construction Contract is entitled to periodic payment if the works last longer than 45 days. While it is true the parties are free to agree the amount due, frequency and circumstances to trigger these payments, crucially in their absence the Scheme for Construction Contracts (England and Wales) Regulations will apply.

Collateral Warranties do not have Construction Act compliant payment provisions. This is primarily because the beneficiary of a Collateral Warranty is not expected to make payment, except where they have exercised their Step In rights. If the Collateral Warranty is a construction contract, then Section 109 will import The Scheme for Construction Contracts payment provisions which provides for the Contractor to be paid for the value of works done, less monies already paid. This could lead to the ludicrous situation where becomes directly liable to pay the Contractor.

Where does the Parkwood judgement leave 3rd Party Rights?

Beneficiary’s 3rd Party Rights derive directly from the Construction Contract and Sections 108 and 109 are applicable only to “a party to a construction contract”. A 3rd Party is not a party to the contract and therefore Section 108 and 109 of the 1996 Act cannot apply.

There is however no bar to 3rd parties right to Adjudicate should the parties wish. It can even be argued that sub-section 1(5) of the Third Party Rights Act 1999 extends the right to Adjudication to the beneficiary.

Where this judgement could sound the death knell of Collateral Warranties is where the contracting parties can exclude or extend the 3rd parties rights, the judgment appears to infer that all sections of the 1996 Act apply to Collateral Warranties, despite the potential absurdity as the Third Party Rights Act 1999 can only be used to confer rights, and not obligations.

Conclusion

The court’s decision was unexpected and resulted in greater scrutiny of Collateral Warranties with both Contractors and Consultants being loath to provide and even then that their application is limited to be retrospective only and limited. This has resulted in further complications for the negotiation and drafting of Collateral Warranties resulting in protracted and costly negotiations.

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Force Majeure

Force Majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or an event legally termed “Act of God” (Volcano eruption, Flood, Earthquake, Hurricane etc) prevents one or both parties from fulfilling their obligations under the contract.

In practice, most Force Majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the force majeure.

The objective of a Force Majeure clause is cover occurrences beyond the reasonable control of a party, and therefore would not cover such things as the following:

  • Any result of the negligence or malfeasance of a party, which has a materially adverse effect on the ability of that party to perform its obligations
  • Any result of the usual and natural consequences of external force

An outdoor event that is called off for ordinary predictable rain requiring it to be called off will probably not be Force Majeure as the rain was foreseeable based on empirical data, such as weather patterns and the fact the event is outdoors. However in the alternative if there was a flash flood that causes damage to the venue and does not allow the event to be safely run, thereby breaching the organiser’s statutory duty of care, this would be Force Majeure.

Purpose of a Force Majeure clause

Where a contract is time-critical and / or has other sensitive contracts included they may be drafted to limit the shield of a Force Majeure clause where a party does not take reasonable steps (or specific precautions) to prevent or limit the effects of the outside interference, either when they become likely or when they actually occur. This type of event may work to excuse all or part of the obligations of one or both parties. For example, a strike might prevent timely delivery of goods, but not timely payment for the portion delivered.

A force majeure may also be the overpowering force itself, which prevents the fulfilment of a contract.

The length in time element of the clause cannot be overstated as it relieves a party from an obligation under the contract (or suspends that obligation) during the Force Majeure event. Further what is and isn’t a Force Majeure event or circumstance can be the source of much controversy in the negotiation of a contract. A party should resist any attempt by the other party to include something that should, fundamentally, be at the risk of that other party. In effect the party that is obligated to perform should be held responsible for the event and not have risk transferred. But like most negotiations the outcome depends on the relative bargaining power of the parties and there will be cases where Force Majeure clauses can be used by a party effectively to escape liability for bad performance.

As different legal systems have different interpretations of Force Majeure it is common for contracts to include specific definitions of force majeure, particularly at the international level. Some systems limit Force Majeure to an Act of God, but exclude human or technical failures (such as terrorist activities, war, communication and / or electricity interruption, industrial disputes etc). It is therefore critical in ensuring that the distinction is made in drafting of contracts to make these distinctions.

Application of common law

English common law does not automatically apply Force Majeure principles into contracts and parties who wish to have Force Majeure clauses and relief must details the terms in the contract. Frustration of purpose is however recognized although this is a narrower concept that applies when the actual performance of the contract is radically different than what the parties intended.

English courts have however interpreted a broadly meaning than just “Act of God” as a Force majeure event and judges have agreed that strikes and breakdowns of machinery may be included in Force Majeure. However negligent lack of maintenance may negate claims of Force Majeure as maintenance or the lack of regular cyclical maintenance is within the control of the assets owner.

It has also been established that Force Majeure cannot be extended to cover bad weather, such as sports matches or funerals. In the case of Matsoukis v. Priestman & Co (1915) it was held that “these are the usual incidents interrupting work, and the defendants, in making their contract, no doubt took them into account”.

Force Majeure in construction contracts

As in often the case in construction constructs particularly in relation to delay events, there is always a duty to mitigate the delay as far as reasonably possible. In the event of a Force Majeure event taking place this would still be required, but of course to a different starting point as the event was unforeseen in the general operation of the contract. In particular the parties need to pay close attention to specific notice requirements and the duty to mitigate the impact of the Force Majeure event. This is as a failure to comply with these requirements could mean you are unable to benefit from Force Majeure provisions in some circumstances.

The various forms have slightly different requirements and terminology. If we take a Force Majeure event being a shortage of labour for whatever reason, the standard forms would expect the following:

 NEC3

The relevant clause refers to an event which “stops the Contractor completing the works by the date shown on the Accepted Programme” and which:

  • Neither party could prevent;
  • An experienced contractor would have judged to have such a small chance of occurring at the time the contract was entered into that it would have been unreasonable for him to have allowed for it.

While at face value also a clause and terms that are useful to Contractors and / or Sub-Contractors, the final words could prove troublesome in an application for an Extension of Time (EoT) in a contract signed now, particularly when pandemics etc occur with some regularity that it would be difficult to discount them as having “such a small chance” of occurring.

As the Accepted Programme is crucial under the NEC form how do you “allow for” the possibility of a pandemic predicted for a date in the future that has a material bearing on the contract? If for example you allow a month into your programme, what happens if there is no pandemic?

ICE Design and Construct Contract

 The relevant clause refers to “other special circumstances of any kind whatsoever which may occur”. At face value this is a helpful cause to Contractors and / or Sub Contractor’s although what “special circumstances” could entail would be the test to be passed. Again parameters of what could be regarded as “special” would be detailed in the narrative of an amended clause.

JCT 2009 Design and Build

The JCT lists relevant events for EoT claims as well as having a Force Majeure clause. In this instance the relevant clause would be where the contract refers to “the exercise… by the UK government of any statutory power which directly affects the execution of the Works.”

FIDIC White Book

The relevant clause refers to “unforeseeable shortages in the availability of personnel… caused by epidemic”. The word “unforeseeable” could be a bit difficult here as even where, for example a virus outbreak has peaked there is a high possibility that it will return. It would be sensible to delete “unforeseeable” to avoid this potential anomaly.

As can be seen, the typical standard forms treat Force Majeure differently and in an effort to replicate the type of contracting environment that they are most appropriate to. This does make the proportionate element of the clause proportional, but of course never all encompassing.

Force Majeure clauses in bespoke contracts

A Force Majeure clause that lists examples is better than an undefined clause, but at the same time it would be impossible to detail a list that covered every potential eventuality.

Therefore a sensible solution would be to define Force Majeure acts along the lines of acts and events beyond the control of the parties rather than listing specific examples. The parties then will debate if an event that is unforeseen takes place is a Force Majeure event when the event takes place. The difficulty could be where Force Majeure is not a legal term and is open to interpretation. The party who wishes to rely on the clause will have to convince the adjudicator or court that their circumstances fall within force majeure.

Despite the observation made in relation to wording a definition in a bespoke form above, it was always be remembered that Force Majeure will always be seen as beyond the control of the affected party. It is important to remember that this is not the same as unforeseeable as under some of the standard forms also considered above. The test to satisfy will be that even if you had done all that was to be reasonably expected you would still have been affected.

In an individual case the parties, court or arbitrator will look at whether something is or is not force majeure based on the facts as presented to them and where this is being used to enforce a right under the contract such as termination, it will always be worth evaluating other clause in the contract to affect the same remedy.

Anti-Force Majeure clauses

It would generally be expected that most Employers accept that the Contractor will be unable to perform its obligations in a “genuine” Force Majeure situation, such as an earthquake. Their concern is more around Force Majeure clauses being used in a situation that are commercial in nature or that could have been avoided by taking reasonable precautions.

While this is outside of the type of examples that we have considered as part of this post, there are situations where “genuine” Force Majeure will not be regarded as sufficient cause for failure to perform.

This is in relation to essential services such as emergency services, their facilities and suppliers (healthcare and caring professions) and essential industries such as water and sewage treatment, power supply, waste collection, telecommunications, parts of Government and the military. Where services fall into this category, the Force Majeure clauses tend to look very different and rather than looking to end a matter is based around the parties meeting promptly to rectify the issues where possible, as opposed to arguing about what can’ be done. This would also give opportunity to suspend certain procedures while they are rectified, such as when electricity lines are blown down or where the internet and telephone lines go down.

Is there a lesson here?

Can this significantly different approach to Force Majeure that has to be implemented by effective necessity by the emergency services be a good approach across the board?

In reality it’s a good place to start where a project is affected by a crisis that has been unforeseen. Rather than heading into a potential dispute situation it would be better for the parties to come together and see what can be done to resolve the issues, the timescales and even costs (even if Order of Magnitude)  rather than what cannot be done.

A typical Force Majeure clause

How would a Force Majeure clause be worded? In reality it would be to suit the type of contract being entered into. This is an example is of how force majeure might be described:.

  1. FORCE MAJEURE

A party is not liable for failure to perform its obligations if such failure is as a result of Acts of God (including fire, flood, earthquake, storm, hurricane or other natural disaster), war, invasion, act of foreign enemies, hostilities (regardless of whether war is declared), civil war, rebellion, revolution, insurrection, military or usurped power or confiscation, terrorist activities, nationalisation, government sanction, blockage, embargo, labour dispute, strike, lockout or interruption or failure of electricity or telephone service. No party is entitled to terminate this Agreement under Clause 38 (Termination) in such circumstances.

If a party asserts Force Majeure for the failure to perform the party’s obligation, then the non-performing party must prove that the party took reasonable steps to minimize delay or damages caused by the foreseeable events, that the party substantially fulfilled all non-excused obligations, and that the other party was timely notified of the likelihood or actual occurrence of an event described in Clause 40 (Force Majeure).

Enforcement of Adjudication decisions

Adjudication, as a form of Alternative Dispute Resolution (ADR) is a faster form of resolving a dispute between parties to a contract. However there is a golden rule when Adjudicating on the same dispute.

The current position is quite straightforward.

If a dispute referred to Adjudicator is the same or substantially the same as a previous Adjudication, an Adjudicator cannot decide on this second dispute. He will not have jurisdiction.

In a recent Court of Appeal case this was put to the test.

In Brown v Complete Buildings Solutions Ltd [2016],  the judge was required to rule on whether an Adjudicator had jurisdiction to decide on a dispute referred to him. As the matter of the dispute had been argued in a previous Adjudication, it was argued that the Adjudicator did not have jurisdiction.

Timeline of events

A Joint Contract Tribunal (JCT) Minor Works Building Contract (2011) was entered into between the parties to demolish a residential house in Ashtead, Surrey and build a new house. The Contract Sum was £496,578.

The Architect certified Practical Completion on 9th April 2013 and then issued a Certificate of Making Good Defects on 25th October 2013. On 31st October the Architect issued a Final Certificate for the sum of £115,450.50. This sum remained unpaid and on 20th December 2013 the Contractor sent a letter to the Employer stating this Final Payment of £115,450.50 was due.

The sum remained unpaid and a Notice of Adjudication (the First Adjudication Notice) was issued on 7th February 2014 in accordance with Clause 7.2 of the Contract.

Mr. C Calcroft was named as the Adjudicator by the Adjudication Nominating Body (ANB). In this Adjudication is was accepted that the Architect’s Final Certificate was in breach of contract as it was not issued in accordance with Clause 4.8.1 of the Contract, but rather relied on clause 4.8.4 which provided:

If the final certificate is not issued in accordance with clause 4.8.1,

4.8.4.1  the Contractor may give a payment notice to the Employer with a copy to the Architect/Contract Administrator stating what the Contractor considers to be the amount of the final payment due to him under this Contract and the basis on which the sum has been calculated and, subject to any notice under clause 4.8.4.3, the final payment shall be the final amount.

 4.8.1.3 If the Employer intends to pay less than the sum specified in the Contractor’s payment notice, he shall not later than 5 days before the final date for payment give the Contractor notice of that intention in accordance with 4.8.3 and the payment to be made on or before the final date for payment shall not be less than the amount stated as due in the Employer’s notice.

Further Clause 4.8.5 of the Contract established that where the Employer did not give a counter notice under clause 4.8.4.3 it was obliged to pay the Contractor the sum stated as due in the Contractor’s notice.

The Adjudicator, Mr. Calcroft issued his Decision on 1st April 2014 where he concluded that the Final Certificate (CBSL) issued on 30th October was ineffective and further found that CBSL’s letter of 20th December 2013 was not a valid Payment Notice in accordance with Clause 4.8.4.1 of the Contract on the following two grounds:

  1. It was based on the ‘Final Certificate’ being issued late, whereas it was in fact invalid
  2. The terms of the 20 December 2013 letter did not comply with clause 4.8.4.1 in view of the way it was expressed as it did not make clear that it was:
  • a notice
  • Issued pursuant to clause 4.8.4.1

The Adjudicator ruled that since no Payment Notice had been served, no sum was payable.

On the same day as Mr. Calcroft issued his Decision, 1st April 2014, CBSL sent a letter which was detailed as a “‘notice pursuant to Clause 4.8.4.1 of the Contract.” This was followed on 24 April 2014 with a further Notice of Adjudication (the Second Adjudication Notice).

The ANB appointed Mr. C Hough as Adjudicator on 29th April 2014. Brown disputed Mr. Hough’s jurisdiction on the basis that he was being asked to decide the same, or substantially the same, dispute as had been decided by Mr. Calcroft in the First Adjudication. They therefore declined to participate in the Adjudication and further did not serve a notice under Clause 4.8.4.3 of the Contract. In layman terms the Employer did not issue a Payless Notice.

Mr. Hough issued his Decision on 27th May 2014.

He ruled that the dispute he was being required to determine was not the same or substantially the same as the Adjudication determined by Mr. Calcroft. He further found that Mr. Calcroft had determined that no certificate had been issued in accordance with Clause 4.8.1 (Final Certificate) and this decision was binding on both the parties and him. However, he determined that the 1st April 2014 notice was an effective notice under Clause 4.8.4.1 (Payment Notice from the Contractor to the Employer) and Brown’s refusal to pay had created this dispute, which was not the same or substantially the same as the one previously dispute.

As Brown had not issued CBSL with a Payless Notice, the sum fell due for payment. Brown was required to pay:

  • £115,440.46 to CBSL within 7 days
  • Interest of £817.70 up to the payment date, increasing at a rate of £17.90 per day until paid
  • The Adjudicator’s fees of £1,944.

Brown did not pay and on 11th June 2014 CBSL initiated proceedings in the Technology and Construction Court (TCC) Manchester District Registry. They were granted permission to issue an application for Summary Judgment. Brown applied for an adjournment and an application to transfer the proceedings from Manchester to London. They did not however pay the required fee for the request to transfer.

Judge Raynor QC refused the application to Adjourn and ruled in CBSL’s favour on 10th July 2014. He found that the sum of £118,500 was due, with costs summarily assessed at £6,000. However he stayed execution of the judgment until 8th August 2014. Brown had to make application to set aside by 8th August 2014.

Brown applied on 31st July 2014 for the order to be set aside and have the hearing transferred to London. Judge Raynor QC dismissed the application in a fully reasoned judgment and Brown was further ordered to pay costs, summarily assessed at £5,750.

It is from this judgment Brown made an appeal to the Court of Appeal.

The issue and the argument

A number of case law precedents were cited by both parties. The applicable principles are summarised as follows:

  1. The parties are bound by the decision of an Adjudicator on a dispute or difference until it is finally determined by court or arbitration proceedings or by an agreement made subsequently by the parties.
  2. The parties cannot seek a further decision by an adjudicator on a dispute or difference if that dispute or difference has already been the subject of a decision by an adjudicator.
  3. The extent to which a decision or a dispute is binding will depend on an analysis of the terms, scope and extent of the dispute or difference referred to adjudication and the terms, scope and extent of the decision made by the adjudicator. In order to do this the approach has to be to ask whether the dispute or difference is the same or substantially the same as the relevant dispute or difference and whether the adjudicator has decided a dispute or difference which is the same or fundamentally the same as the relevant dispute or difference.
  4. The approach must involve not only the same but also substantially the same dispute or difference. This is because disputes or differences encompass a wide range of factual and legal issues. If there had to be complete identity of factual and legal issues then the ability to re-adjudicate what was in substance the same dispute or difference would deprive clause 9.2 of The Scheme for Construction Contracts (England and Wales) Regulations 1998 (The Scheme) of its intended purpose.
  5. Whether one dispute is substantially the same as another dispute is a question of fact and degree.

The reference above to “fact and degree” are interpreted from further case law precedent from a 2006 Court of Appeal case, Quietfield Limited v. Vascroft Construction Limited [2006] EWCA Civ 1737 where the matter of an Extension of Time (EoT) was referred to Adjudication and Determined. The matter was subsequently referred to Adjudication again, however the Adjudicator determined he did not have jurisdiction as this was the same dispute. At the Court of Appeal it was found:

  1. Clause 9.2 of The Scheme provides that an Adjudicator must resign where the dispute is the same or substantially the same as one which has previously been referred to Adjudication with a decision reached. It must that the parties may not refer a dispute to Adjudication in these circumstances.
  2. This mechanism being adopted to protect respondents from having to face the expense and trouble of successive Adjudications on the same or substantially the same dispute. There is an imperfect analogy here with the rules developed by the common law to prevent successive litigation over the same matter
  3. If the first Adjudication is substantially the same as the second Adjudication is a question of fact and degree. If the contractor identifies the same Relevant Event in successive applications for EoT, but gives different particulars to its expected effects, the differences may or may not be sufficient to lead to the conclusion that the two disputes are not substantially the same. Particularly if the particulars of expected effects are the same, but the evidence by which the contractor seeks to prove them is different.
  4. Where the only difference between disputes arising from the rejection of two successive applications for an extension of time is that the later application makes good shortcomings of the earlier application, an Adjudicator will usually have little difficulty in deciding that the two disputes are substantially the same.

The central claim made by Brown was that Mr. Hough was being asked to determine the same or substantially the same dispute as Mr. Calcroft had been asked to determine. This was further reinforced as it was for the same sum of money, with the only material difference being no valid Final Certificate in the first Adjudication

Decision

  1. A further case was quoted, this being Matthew Harding (trading as M J Harding Contractors) v. Paice and Springhall [2015] EWCA Civ 1281 where it was stated in the text of the Judgment:

It is quite clear from the authorities that one does not look at the dispute or dispute referred to the first adjudicator in isolation. One must look at what the first adjudicator actually decided. Ultimately it is what the first adjudicator decided which determines how much or how little remains for consideration by the second adjudicator.

It was found in a unanimous decision that in the second Adjudication, the Adjudicator was both entitled and correct to conclude that he was not considering the same or substantially the same dispute as the first Adjudication. Mr. Hough had recognised that both parties were bound by the Decision in the First Adjudication that the Final Certificate was ineffective and that the letter of 20th December 2013 was not a valid notice under the Contract. Mr. Hough was being asked to determine if a different notice served 4 months later had different consequences.

While both Adjudications relied on the ineffectiveness of the ‘Final Certificate’ and claimed the same sum, the Relevant Event was CBSL’s notice of 1st April 2013. Neither this notice nor the consequence of it (CBSL’s entitlement to be paid if no Payless Notice was issued served) gave rise to dispute referred in the first Adjudication. Crucially CBSL were not making good a shortcoming in the earlier letter by bring a new claim via a new and different route as it relied on a letter issued after the Decision of the first Adjudication and therefore raised a different dispute. This had been dealt with by Judge Raynor QC in his judgment, “what was decided in the First Adjudication was the ineffectiveness of the notice given in December 2013. That was not raised at all as an issue in the Second Adjudication.”

The appeal was therefore dismissed.

 

What is the lesson here?

It the same lesson as in Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC), follow the contract and stick to its strict timetables particularly around the Payment Mechanism

In this case Brown could have protected themselves by issuing a Payless Notice, but did not. There would still have been a dispute, that is clear, but as the second Adjudication was found to be a different dispute, so too would a second Adjudication where a valid Payless Notice was in place.

Henia Investments Inc v Beck Interiors Ltd

In the last post we looked at three basic documents that are a consequence of the Payment Mechanism, these being:

• The Interim Application for Payment (AfP)

• The Payment Notice

• The Payless Notice

How important these relatively straight forward contract requirements are has been highlighted in a court case that has recently been concluded in the Technology and Construction Court (TCC) between Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC). In particular it has given some legal position in relation to the three documents, but in particular the AfP and Payless Notice.

Background to the case

Henia Investments Incorporated (Henia) entered into a Joint Contract Tribunal (JCT) Standard Building Contract without Quantities 2011 (as amended) with Beck Interiors Limited (Beck) to undertake an extensive Fit Out to a property in Kensington, London.

The Payment Mechanism was intended to reflect The Housing Grants, Construction and Regeneration Act [1996], as amended by The Local Democracy, Economic Development and Construction Act [2009] where the interim AfP due date was the 29th of each month with interim AfP’s to be made no later than 7 days before the due date. Therefore Beck could apply between the 22nd and 29th of each month. The Contract Administrator was required to issue an Interim Payment Notice no later than 5 days after the due date, this being usually the 3rd or 4th of the following month, save February where it would be due on the 5th March. The final date for payment was 28 days after the due date and any Payless Notice were to be issued no later than 3 days before the final date, therefore on or before the 26th of the next month following the AfP.

What led to the Dispute

The dispute centred round AfP’s and if legally delivered and the consequence thereof. Although it should be noted that the presiding judge, Mr Justice Akenhead noted that the parties “have not followed with any precision the contractual requirements”. This is perhaps a masterpiece of understatement as this case could be a case study in how not to administer a Contract.

The dispute centres on Interim AfP Number 18, due on 29th April 2015 and AfP Number 19, which was due to be submitted on 29th May 2015.

Beck lodged their Interim AfP Number 18 for the sum of £2,943,098.95 six (6) days late. Crucially this was for works completed to 30th April 2015. On 6th May 2015 the Contract Administrator issued a Payment Notice to Beck detailing the sum a payable as £226,248,98. This payment Notice where it related to AfP number 18 was issued one (1) day late, although effectively the Contract Administrator could not issue a Payment Notice in time as the AfP was delivered after he was compelled contractually to provide his Payment Notice. Although the Contract Administator could have issed a Payment Notice in time, in all probability showing £0 due in period.

Beck failed to produce and lodge their Interim AfP Number 19 (due on or before 29th May 2015). Despite this the Contract Administrator issued a Payment Notice to Beck on 4th June 2015 at 00:03, therefore 3 minutes later than when it was due, although in reality one (1) late, detailing the sum a payable as £18,893,953.

Henia issued a Payless Notice within the agreed contractual timescale on 17 June 2015. This was based on Payment Notice Number 19, of which part of the computation was the deduction for Liquidated & Ascertained Damages (LAD’s) of £373,751.05. This Payless Notice stated that Becks entitlement in relation to AfP number 19 was £0.

It was Beck position that the AfP lodged six (6) days late was a valid Interim AfP relating to the next Valuation Date of 29th May 2015 and that as the Contract Administrators Payment Notice was late (effectively by 3 minutes) the sum claimed in this AfP was now due. Beck argued further that the Payless Notice issued by Heina on 17th June 2015 was invalid. Their challenge to its validity was on the grounds that in a Payless Notice, Henia could only apply cross-claims, such as LAD’s but otherwise not challenge the Contract Administrator’s valuation.

In Part 8 proceedings commenced by Heina (Part 8 – Alternative Procedures for Claims is explained in greater detail at this link: http://www.justice.gov.uk/courts/procedure-rules/civil/rules/part08 ) Judge Akenhead had three very clear and distinct arguments to consider. These being:

• Was Beck’s Interim AfP Number 18 valid

• Was Henia’s Payless Notice valid

• Would the failure by the Contract Administrator to make a Determination in respect of an Extension of Time (EoT) claim by Beck prevent Henia from claiming LAD’s

While these were the three primary points to be considered, the essential element was the timing of these documents in relation to the Payment Mechanism within the Contract.

Judgment

Beck’s Interim AfP’s

The Contract enabled Beck to lodge an AfP on or before the 29th of each month stating the sum it considered would become due for payment. The works would be valued from the 30th of the previous month to the 29th of the current month, under normal circumstances. Beck’s Interim AfP Number 18 stated the sums applied for were “Valued to 30/04/2015”. The Contract was clear and unambiguous that an AfP on a valuation of the works could only happen on either 29 April or 29 May. 30 April was therefore not an option.

Judge Akenhead therefore rules that Beck’s Interim AfP was invalid. However he was silent with regards the timing of Becks AfP being six (6) days late.

In effect on this issue four points can be made to summarise the position that was decided by Judge Akenhead, these being:

1. The relevant AfP date of 29th April 2015, which would have been the 18th relevant due date under the Contract.

2. Nothing in the AfP dated to 30th April 2015 suggested the works were valued to 29th May 2015. The AfP stated the works were valued up to 30th April 2015 meaning that if was a valuation to the 29th May 2015 AfP date, Beck were not anticipating doing any work of value during May 2015. This was not plausible.

3. There was no indication in the AfP dated 30th April 2015 to suggest the 29th April 2015 AfP date had been missed and this AfP related to the 29th May 2015.

4. The AfP dated 30th April 2015 in substance, form and intent not an Interim AfP relating to the 29th May 2015 AfP date.

Henia’s Payless Notice

Due to the finding in relation to the validity of Beck’s Interim AfP, the dispute over Henia’s Payless Notice was rendered irrelevant. As the Contract Payment Mechanism had not been followed, it meant that there was no valid Interim AfP or indeed Payment Notices and both had been issued late. As a consequence no interim payment became due to Beck.

Judge Akenhead did however go on to consider the parties’ arguments in relation to the Payless Notice.

If Beck’s Interim AfP Number 18 was valid then Henia would have been compelled by the Act to pay the sum applied for, as there was no valid Payment Notice, which was effectively the subject of Henia’s Payless Notice.

Beck argued that a Payless Notice only allowed Henia to pay less than the sum in the Payment Notice (or Interim AfP) on the basis of counter or cross claims, in this case LAD’s.

Henia countered this argument and claimed that in addition to any cross claims, it was also entitled to state its own valuation of the works in its Payless Notice. This valuation was based on the late Payment Notice Number 19, which contained their claim for LAD’s and this claim outweighed this, hence Henia’s view that no sums were due to Beck.

Judge Akenhead sided with Henia and held the contract compelled Henia to serve a Payless Notice if it intended to “pay less than the sums stated as due.” Further no explicit wording in the Contract implied this was restricted to cross-claims.

Contract Administrators failure to Determine the EoT

Judge Akenhead found that any failure by the Contract Administrator to Determine the EoT provisions would not give rise to a Condition Precedent debarring Henia from claiming LAD’s and any potential short term unfairness to Beck could be resolved through the Contracts dispute resolution mechanism. He stressed this finding was obiter where prior to judgment being handed down, in an Adjudication commenced by Beck, the Adjudicator had found that no valid application for an extension of time had been submitted.

The Judgement in Summary

The judgment in Henia vs Beck found that a “Pay Less Notice can not only raise deductions specifically permitted by the Contract and legitimate set-offs but also deploy the Employer’s own valuation of the Works.”

Employers will welcome this outcome as it has blurred the lines between a Payment Notice and a Payless Notice and at what stage each one could arguably serve as the other.

What is the general implication of this ruling?

This judgment confirms the principle that The Housing Grants, Construction and Regeneration Act [1996] and it’s amendments in The Local Democracy, Economic Development and Construction Act [2009] where the Employer is not barred from challenging an amount previously certified by the Contract Administrator and undertaking its own valuation. However this will obviously need to be specific to the terms of the Contract.

Further where a Contract has a clear and unambiguous date for the lodging of an Interim AfP doubt will arise if the sequence is not followed.

Payment Certificate & Payless Notice (Are they important?)

In a typical construction contract that last longer than 45 days in overall duration, in accordance with Section 109 of The Housing Grants, Construction and Regeneration Act [1996] there will be stage payments made.

The parties to the contract are free to agree the amounts of the payment and a mechanism to calculate this and the intervals or circumstances under which they become due. As a fallback position if the contract is silent on this mechanism then the supplementary provisions to the Act contained in The Scheme for Construction Contracts Regulations [1998] As Amended in 2011 will apply.

If we assume that the contract is between an Employer and a Contractor and is using an un-amended Joint Contract Tribunal (JCT) Standard Building Contract.

The Payment Mechanism under this contract will be:

  • An interim Application for Payment (AfP) Date will be determined. e.g. Final Friday of each calendar month, Final Day of Each month, Every Second Friday after the Base Date etc
  • The Due Date for payment is 14 days after agreed date for the submission of the AfP
  • Within 5 days of receipt of the AfP the Contract Administrator is to issue to the Contractor a Payment Certificate stating the sum that the Employers intends to pay to the Contractor
  • Where this sum was less than the sum applied for in the AfP, the Contract Administrator must issue a Payless Notice (Notice of Withholding) where it to set out the grounds for the withholding of sums that have been subject to the AfP. This Payless Notice must be issued no more than 5 days before the Final Date for Payment.
  • In the event no Payless Notice is issued then the Contractor can expect to receive the sum that has been certified in the Payment Certificate on or before the Due Date.
  • In the event payment is not made or the incorrect sum is paid, then the payment can be deemed late and interest and the penalty fee under the Late Payment of Commercial Debt Regulations [2002] As amended may be claimed

If we look briefly what the three main elements of this Payment Mechanism:

Interim Application for Payment

This is a document prepared by the Contractor setting out in such detail as required by the Employers Requirements or as agreed the sum being applied for and any supporting details.

For example if there is an item of equipment whose delivery to site for incorporation into the works is critical to the programme being able to be achieved, a Vesting Agreement may be entered into. Here the Employer will pay for the item of equipment even though it is not on site, but has been completed and is being stored off site. Of course this is the extreme case, whereas generally the interim AfP will be for works completed on a percentage basis and any materials that are on site but have not been incorporated into the works.

Where there is mutual trust and goodwill that exists between the parties this can even take the form where the Contractor and Contractors Representative meet on site on the date of the AfP or just before and effectively agree the sum that will be applied for. This will generally make the Payless Notice unnecessary as the Payment Certificate will be to the sum applied for..

Payment Certificate

Following receipt by the Contract Administrator of the Contractor’s AfP; if this has not been effectively agreed prior to the submission of the AfP; then the application will be assessed and a Payment Certificate issued of the sum that is intended to be paid.

Where the sum being certified is the same as the AfP, then in the event of no deductions being made there will be no further requirement, other than for the Employer to make payment of the sum due by the Final Date for Payment.

Payless Notice

Where the Contractor has made application for a sum and the Contract Administrator does not agree that the sum applied for is due, a Payless Notice will be prepared and issued. There are strict timeframes in the Contract for the issue of this Payless Notice.

The Payless Notice has to specify the amounts that are proposed to be withheld and / or deducted and the grounds attributable to each sum that is being withheld. It follows that each ground has to have a legal basis under the Contract. Where the sum withheld is as a result of progress on site, or lack of it as the case may be this can be quite subjective, unless pre agreed milestones have been agreed by the parties.

 

I suppose the thought now is, “Why write about some mundane, mechanical, well known elements of the contract and payment mechanism?

The reason is that recently at the Technology and Construction Court (TCC) a case has recently concluded where these three processes were not followed as required by the contract. It could be said the entire process should be a case study in how NOT to administer a contract.

In the next post will look at this case at the TCC and its implication for all the parties to a Contract.

 

Elements of a successful claim

In the previous post we examined the key components required to demonstrate an effective Extension of Time (EoT) claim from the perspective of the main headings that need to be addressed. It could be argued these headings form the basis of any claim event.

An integral element of this is the Delay Analysis employed.

There are effectively two major forms of Delay Analysis, these being:

• Impacted As Planned Delays Analysis

• Time Impact Analysis

We will investigate these in greater depth in the next posts.

However prior to this we need to evaluate the essential elements of a successful claim. This can be summed up as the 4 main requirements, these being:

Cause

Effect

Entitlement

Substantiation

We could ask the question, What is a claim? It can be defined as follows:

A claim is an assertion of a party’s rights under the terms of a contract or at law.

In the construction industry, a claim is usually in relation to additional time, additional payment or both additional time and payment. A significant driver of a claim will be variations to the contracted works which increase the scope and / or complexity of the works that have been contracted for. By way of example the following could lead to a claim for variation:

• Change to the quantity of works

• Change to the quality or characteristics of work

• Change to the sequence or timing of works

• Change to the levels, positions and / or dimensions

• Omission or addition of works

Some of these examples of variations to the contracted works may also lead to a claim for an EoT which may lead to additional payments being due as a consequence. However this can also prevent the deduction of “Liquidated and Ascertained Damages” (LAD’s) as the EoT (even if granted without costs) moves the date for the completion of the contract works.

Almost any claim, irrespective of form of contract will require the Contractor or Sub-Contractor to demonstrate that they have suffered a delay in some shape or form and here the programme is critical in demonstrating the delay. In effect the programme is both the Contractor or Sub-Contractors plan to complete the project works but also the yardstick to measure delays based on actual progress against the programme.

Most forms of contract require the Contractor or Sub-Contractor to submit a programme within a stipulated time frame, which then becomes the Contract (Baseline) or Approved Programme and updated accordingly periodically. A Joint Contract Tribunal (JCT) form of contract requires the programme to be submitted as soon as possible after the execution of the contract. However this will be to the start and completion dates that will be included within the contract data.

The programme update requirement should be stipulated in the contract, but for the protection of both parties should be at least within each Application for Payment (AfP) period. These updated programmes will be a record of progress made thus far and also be able to predict events that are yet to take place, based on the update. This is particularly relevant where an activity moves onto the critical path of the programme. In the event an EoT has been claimed and granted, this should be reflected on the next period updated programme and in particular showing where the contract-end date has moved to. This is particularly important where LAD’s could be levied.

In the event of a claim, it is good practice to produce an “As Build” programme at the start of any delay as this will provide a detailed record of actual progress that can be demonstrated at the time that the delay has crystallised.

It also needs to be borne in mind that not every delay will lead to a change in the completion date as the possibility exists that if the event is not on the critical path that the delay can be mitigated by moving the sequence of the programme around, however this could lead to disruption, which in itself could be subject to a financial claim. This could be on a number of grounds, although this list is not exhaustive, such as:

• Acceleration costs to catch up on the programme

• Non Productive costs • Additional staff costs

• Abortive costs

This leads to the question. What should the Contract or Approved Programme demonstrate?

• The intentions of the party at the time of contract

• The time and sequence of how the works are planned to be implemented

• A clear critical path

• Dates that require input from the Employer, particularly where it links to the critical path

• Dates that require input from key Stakeholders, particularly where it links to the critical path

• Identify “float” within the programme and who “owns” the float whether it is the Employer, Contractor or the project.

Who owns the float is particularly important as this will be utilised for any delays before the completion date can be affected by any delays. Where the project owns the float any initial delays by either Employer or the Contractor will utilise the float, whereas if the Contractor owns the float, then any Employer delays can immediately have an impact on the project end date.

You have had a delay event, its impacted on the end date of the contract and will attract a cost, what three things are critical to being able to demonstrate this delay successfully?

• Good records

• Good records

• Good records

And perhaps most important of all, a claims specialist to ensure that not only is the claim prepared in accordance with the contract requirements but in a way that is easy to follow and able to allow a third party to assess and determine liability in favour of the company bringing the claim.

Extension of Time

There are a number of claims that will be made under a contract, yet perhaps the one that is most often needed is an Extension of Time (EoT) to complete the works that have been contracted.

Amazingly despite these types of claims often being relatively straight forward they often fail because the party making the claim fails to adequately demonstrate their entitlement in the submission.

When drafting an EoT there are 8 key elements that need to be included, these being:

• The claim event

• Liability for the claim event

• Contractual compliance

• Contractual entitlement

• Statement of claim

• Substantiation

• Cause & Effect

• Delay analysis

We will now examine each of these main headings in a little detail

The claim event

This is exactly what the title says it is, state the event that has lead to the claim e.g. weather event and then provide the circumstances that lead to the event. This element should be short and concise and acts as an effective Executive Summary of what is to follow, where you detail the claim in greater detail.

Liability for the claim event

In outlining “The claim event” you are setting out what has caused the claim to be formulated and submitted. In this section you need to demonstrate liability lies with another or the other party to the contract and you want to determine liability for the event.

If the claim is by a Sub Contractor to a Main Contractor the possibility exists that the Main Contractor will have a similar right under the Main Contract with the Employer, particularly around weather events or force majeure. These types of events will usually entitle the party bringing the claim to an EoT, but this will obviously be dependent on the specific form of contract and its provisions.

In the Joint Contract Tribunal (JCT) Minor Works Contract grounds for an EoT are dealt with at Clause 2.7. In other forms such as the New Engineering Contract (NEC) often the claim will be dealt with as a Compensation Event.

Contractual compliance

Generally the Contractor or Sub Contractor will be required under the terms of the contract to submit notice(s) with detailed particulars, particularly in relation to an EoT. Where the time frame is silent in the contract then it will be within a reasonable time period.

Of course what is reasonable?

This is why it is better to define periods during the contract negotiation for the protection of all parties.

By way of an example in the International Federation of Consulting Engineers (FIDIC) form of contract at Clause 44.2 states:

44.2  Provided the engineer is not bound to make any determination unless the contractor has

(a) Within 28 days after such an event has arisen, notified the engineer with a copy to the  employer and 

(b) Within 28 days, or such reasonable time as may be agreed by the engineer after such notification submitted to the engineer detailed particulars of any extension of time to which he may consider himself entitled in order that such submission may be investigated at the time.

It may be the case that the submission of these notices is expressed as Condition Precedent and in the event the Contractor or Sub Contractor fails to comply with condition may result in the wavering of any entitlement.

It is therefore essential for the parties to understand their obligations and expressed provisions of the contract and as a consequence to comply with the provisions. A contract is an even handed document (or at least should be) and all parties should endeavour to comply with all provisions therein, particularly if they want to rely on provisions to establish entitlement.

Contractual entitlement

As a general rule the contract (particularly where a standard form) will contain specific provisions which may entitle the Contractor or Sub Contractor to an EoT for one or a series of events.

By way of an example under FIDIC, there are a number of different conditions:

Clause 6.4 – Late Drawings
Clause 12.2 – Adverse physical obstructions or conditions
Clause 27.1 – Discovery of fossils or antiquities
Clause 36.5 – Additional tests not provided for
Clause 40.2 – Suspension of the works
Clause 42.2 – Failure to give possession of site
Clause 44.1 (a) – Additional or extra work
Clause 44.1 (c) – Exceptionally adverse climatic conditions
Clause 44.1 (d) – any delay, impediment or prevention by the Employer
Clause 44.1 (e) – any special circumstances, other than through default by the Contractor
Clause 69.4 – Contractor’s suspension of the works

Statement of claim

As the claim is effectively in two parts, first you demonstrate entitlement (as demonstrated in “Liability for the claim event”, “Contractual compliance” and “Contractual entitlement”) and then the details of what has transpired to lead to the claim. Therefore it makes sense to again make a clear and succinct statement on what the Contractor or Sub Contractor is claiming.

Substantiation

This is where the claim will succeed or fail effectively as its one thing to prove a contractual entitlement it’s another to prove that you have that entitlement based on what has occurred.

This section needs to be robust and will have all the evidences that the Contractor or Sub Contractor seeks to rely upon as the documentary evidence. This documentary evidence will be made up of a number of different contract and non contract documents, which all drawn together in a single document support the assertions made in the overall claim document. These can include, but be limited to the following:

• Letters
• Site Instructions
• E-mail’s
• Method Statements
• Risk Assessments
• Progress Reports
• Record Photographs
• Minutes of Meetings
• Programme’s (Baseline and updated)
• Schedules
• Trackers
• Statements of Fact
• Expert Witness Statements

Cause & Effect

Being read and drafted together with the “Substantiation” will be the “Cause & Effect” which as the title suggests is where you demonstrate a cause; e.g. adverse weather for a prolonged period outside of the normal for that period; with the effect; which would in all likelihood be delay to works on site at the minimum and may result in works that are damaged and require to be re-done.

In order to be successful in a claim merely listing the events in chronological order should not be sufficient to demonstrate a full entitlement. The real art in putting together the claim is for the narrative to tell the person assessing the claim a story describing how the event has affected the works.

This should commence with what the planned works were and how they were affected, in particular making reference to planned sequences, durations and mythologies (Note how the list in the previous section becomes important here, the status of the works to the planned at the time of the claim event and detailing the changes that took place as a direct result of the claim event.

Delay analysis

Undertake a delay analysis which demonstrates the effect to the programme.

There are a number of internationally recognised delay analysis methods and the most appropriate method will effectively be determined by circumstances surrounding the claim event. This can include but not be limited to the following:

• Level and detail of records available
• The robustness of the Baseline Programme and effects of any periodic updates
• Available time (Particularly around contracts that time bar events after the passing of a period of time)

• Degree of accuracy

• Level of proof required under the contract.

We will review Delay Analysis Methods in greater detail later.
Of course every claim will be different and some may need very basic details under the defined headings detailed above, but likewise others can be extremely complex and may be to demonstrate more than one entitlement. Like any document it should be clear and concise to enable the person that has to make a Determination being able to do so based on the submission. If the claim submission is haphazard and difficult to follow, it could lead to the claim being rejected even though there was an entitlement.