Construction Matters

Concurrent delay and the prevention principle: the case of North Midland Building Limited and Cyden Homes Limited
11 October, 2017

The recent judgment in the case of North Midland Building Limited and Cyden Homes Limited is a useful one in clarifying whether parties can allocate the risk of concurrent delay.

 

Whilst such clauses are sometimes agreed, this is a complex area of the law and, to date, there has been a reluctance to suggest wording that risked rejection by a court, arbitrator or adjudicator in the event of a dispute. This judgment will now encourage parties to address the issue in contract negotiations and also provide them with a form of words that has been judicially approved.

 

The court’s comments on Adyard and Jerram Falkus are equally important to those involved in disputes involving concurrent delay. Its statement that the prevention principle does not apply in cases of concurrent delay provides a strong weapon for combatting such claims.

 

The facts were that Cyden Homes Ltd (the employer) engaged North Midland Building Ltd (the contractor) to design and build a substantial residential property under a JCT Design and Build Contract, 2005 edition (DB 2005), with bespoke amendments (the building contract).

 

The bespoke amendments included changes to the extension of time provisions, so that clause 2.25.1 was amended to provide that:

 

”2.25.1 If on receiving a notice and particulars under clause 2.24:

 

.1 any of the events which are stated to be a cause of delay is a Relevant Event; and

 

.2 completion of the Works or of any Section has been or is likely to be delayed thereby beyond the relevant Completion Date,

 

.3 and provided that

 

(a) the Contractor has made reasonable and proper efforts to mitigate such delay; and

 

(b) any delay caused by a Relevant Event which is concurrent with another delay for which the Contractor is responsible shall not be taken into account

 

then, save where these Conditions expressly provide otherwise, the Employer shall give an extension of time by fixing such later date as the Completion Date for the Works or Section as he then estimates to be fair and reasonable.”

 

The works were delayed and the contractor was allowed a partial extension of time. However, other elements of the contractor’s claim were rejected, citing clause 2.25.1.3(b), on the basis that those delays were caused by Relevant Events that were concurrent with delays for which the contractor was responsible.

 

The contractor sought declarations that clause 2.25.1.3(b) offended the prevention principle, rendering time at large and any LDs provision void, arguing that the above clause offended the prevention principle as described by Jackson J in Multiplex, in that any interpretation of the clause that offended the prevention principle was “not permitted”. Alternatively, that, regardless of the correct interpretation of the clause 2.25.1.3(b), the prevention principle still operated in relation to the contractual LDs provision, so that his liability to pay LDs fell away.

 

The TCC refused to grant any declarations, finding that the contract wording was “crystal clear”, so no point of interpretation arose. The court found no support in Multiplex for the proposition that this type of clause was not permitted. In cases of client delay, the prevention principle is not triggered.

 

In addition, the court noted that the contractual definition of “Relevant Event” in clause 2.26.5 included “any impediment, prevention or default, whether by act of omission …” and this was consistent with the parties having set out a clear regime that dealt with extensions of time, including situations involving an employer’s act of prevention. This also sat squarely within the second of Jackson J’s propositions in Multiplex, which stated that “acts of prevention by an employer do not set time at large, if the contract provides for extension of time in respect of those events.”

 

The court also rejected the contractor’s alternative argument that the LD’s provision was void regardless of how the clause was construed. The court pointed to the absence of any authority for that argument (rejecting the contractor’s suggestion that it was supported by Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970) 1 BLR 111). In addition, the court saw nothing in the contractual regime that justified such a conclusion, especially as the parties had made widespread amendments to the building contract, but no significant change to its LDs provisions.

 

Of wider significance, while not strictly necessary in order to decide the issues before it, the court commented on the judgments in Adyard and Jerram Falkus to avoid similar misunderstandings occurring in future cases and emphasised that the parties considering those authorities should conclude that their findings on concurrent delay are correct expressions of the law, rather than relying on legal commentaries that suggest otherwise.


A cautionary tale: Adjudications, Project Manager, Repudiation, Expert Evidence and Costs
28 September, 2017

On 12 July, the High Court issued its judgment on liability in the case of Imperial Chemical Industries Limited v Merit Merrell Technology Limited.  ICI was suing Merit for breach of contract and return of monies they claim were overpaid.

 

In late 2012, Merit contracted with ICI to carry out steelwork as part of the construction of a new paint factory in Northumberland.  The instructed work increased substantially and involved great quantities of welding.  The total sums paid to Merit exceeded £20m.

 

AkzoNobel, the owners of ICI, had imposed an internal limit on what they wished to spend on the factory and they became very concerned about increasing costs.  Members of the UK ICI team were replaced by personnel from AkzoNobel from late summer 2014.  From October 2014, no more payments were made by ICI to Merit and Merit (except pursuant to adjudications) and Merit were instructed to cease welding but were instructed to start limited work again in January 2015.

 

Also in October 2014, a representative of AkzoNobel emailed the Project Manager under the NEC3 contract, to instruct him not to issue any Project Manager instructions without approval by named AkzoNobel people.  The Project Manager understandably considered that this instruction removed their power of independent certification and therefore resigned.  AkzoNobel then purported to appoint one of their own staff as Project Manager.

 

There were four adjudications.  In the first, in January 2015, ICI was ordered to pay Merit £7m, being the amount of Merit’s interim application for payment of November 2014.  Merit did not get the money until Spring 2015.  On the very day that the sum was received from ICI, Merit’s bank, having by then lost confidence, withdrew its lending facilities.

 

On 17 February 2015, ICI wrote to Merit alleging various breaches of contract and claimed these amounted to repudiation of the contract by Merit.  Merit denied the breaches but left the site, as instructed.

 

In early 2017, Merit went into creditors’ voluntary liquidation but the liquidator decided to fight ICI’s proceedings.

 

In court, ICI claimed that the welding was seriously defective in many cases.  The welds were tested using a dye penetration technique.  However, ICI were adamant that the contract required radiographic testing which, when used, revealed more defects.  ICI accepted at the trial that the contract only required dye testing.  The court therefore decided that only those found defective by the dye testing, approximately 5% of the welds, should be considered defective.  The experts agreed that was a fairly normal percentage of defects.

 

ICI instructed two expert witnesses in relation to the welding and Merit one.  The judge said that on all matters where they held different views, he preferred Merit’s expert, whose advice he found to be “wholly impartial and his independence to be uncompromised.  His conclusions were sensible and did not seek to advance the case of the party instructing him.”  The judge felt he could not say the same for ICI’s experts.  This is yet another case emphasising that the courts expect expert witnesses, even though appointed by one party, to give impartial evidence to help the court.

 

The court held that the purported appointment as Project Manager under the NEC3 contract of an AkzoNobel employee failed – he was not independent.

 

The judge also found that it was, in fact, ICI that had repudiated the contract by its letter of 17 February 2015.  This did not mean that Merit was entitled to be paid as though all the welds it carried out were free of defects but of course did mean that Merit is not liable for the costs incurred by ICI in completing the outstanding works to reach practical completion.  ICI is entitled to recover the amount it would have cost Merit to repair defects to the 5% of welds which the Judge held to be defective. 

 

ICI is also entitled to pursue its argument, in the coming quantum trial, that it paid far too much to Merit by way of interim payments for the work it did.  Of course, the sums awarded to Merit at two adjudications are not finally binding – they are open to timely appeal to the court.

 

In a separate judgment of 26 July, the same judge awarded Merit the higher, indemnity, level of costs against ICI in relation to the liability trial, but in respect of only 95% of its costs.  The judge made the 5% deduction because ICI won its argument that it is still entitled to argue for recovery of any overpayments made to Merit.

 

The judge then gave some instructions in relation to the next trial, which is to assess quantum – who owes how much to the other.  Merit asked that the judge at the quantum hearing should hear Merit’s claim for various losses caused by ICI’s actions, as well as ICI’s claims, which include for the return of any overpayments and the cost of remedying defects.  The judge cut down the heads of losses that Merit can argue for on the basis that some should have been raised in the liability trial but has ordered that others should be considered at the next trial.

 

The case emphasises some important legal and practical points.

 

A party wishing to claim that the other party has effectively repudiated the contract must have very sound grounds for doing so; otherwise its own purported acceptance of that “repudiation” may itself be a repudiation and could lead to severe consequences.  However, even though it was ICI that repudiated the contract, it is still entitled to the return of any sums the court might hold in the quantum trial to have been overpaid to Merit during the course of the contract and to a sum equivalent to the amount it would have cost Merit to repair the 5% defective welds, had it been permitted to do so.

 

It will not normally be appropriate to appoint an employee of the Employer as Project Manager under an NEC contract, because of the lack of independence.  The same will apply to many other forms of building contract.

 

Experts must act impartially or risk the whole of their evidence being undermined in the opinion of the court.

 

Adjudication, although quick, does not mean that payment will quickly follow the adjudicator’s award.  Rapid enforcement through the courts might be required otherwise the “winning” party could find itself with severe cash flow problems.  Decisions of adjudicators are also, of course, open to appeal.


Fitness for Purpose
22 September, 2017

Three words that are likely to strike terror in the minds of contractors and their professional indemnity insurers – fitness for purpose.

 

Is a design and build contractor liable to use the same degree of skill and care as a professional designer in designing the works; or is it warranting that the design will work irrespective of whether the contractor has been negligent? The answer, of course, depends on what the contract actually says.

The Supreme Court had to decide the issue recently. In this case , the contractor would be liable for some 26.25 million euros of remedial works if it were found to have taken on a fitness for purpose obligation. The works related to the design and construction of a wind farm in the Solway Firth. The remedial costs were incurred in correcting a defect in the grouted connections between the monopile foundations and the transition pieces.

The contract documents, as you would expect, were voluminous and contained many technical documents. The employer, E.ON, relied on a provision in a document entitled ‘Technical Requirements’, incorporated in the contract, that required the foundations to have a lifetime of twenty years. That obligation, said the contractor, was inconsistent with other requirements imposed on the contractor elsewhere in the contract which required the exercise of skill and care. Secondly, it was ‘too slender a thread’ on which to hang such an onerous liability. Surely such a significant obligation, if intended, would have had prominence in the key operative parts of the contract?

Lord Neuberger, giving the judgment of the court, found that the contractor had warranted that the foundations would have a lifetime of twenty years and that the contractor was therefore liable for the remedial costs. It was recognised that the contract was long, diffuse and multi-authored. It contained much detailed description and ‘belt and braces’ provisions. The court had to interpret the contract by reference to normal principles. Inelegant and clumsy drafting was not in itself a reason to depart from ordinary principles of contractual interpretation. In this case the court felt the particular provision was clear in its terms and did not give rise to an improbable or unbusinesslike interpretation. It ascribed their natural meaning to the words used and concluded that they imposed, effectively, a ‘fitness for purpose’ obligation on the contractor.


Recovery of Adjudication Costs
14 September, 2017

The recovery of adjudication costs is an often talked about topic and given the complexity and detail often required in presenting a case to an adjudicator those legal costs can add up and so even a small change in the wind regarding the court’s view on recoverability of costs is important news.

We have in previous blogs discussed whether the Civil Procedure Rules (in particular CPR 36) or the Late Payment of Commercial Debts Act may assist a party to recover adjudication costs.

 

Construction Act 1996

Under the amended Construction Act 1996 parties are generally considered to only able to agree who pays legal costs if they do so in writing after service of the notice of adjudication on the responding party.  Without such an agreement the adjudicator cannot award one party’s costs should be paid by the other.

Late Payment of Commercial Debts Act 1998

The wording in the Construction Act 1996 does not sit happily with a recent amendment to the Late Payment of Commercial Debts Act, which allows a supplier to recover the reasonable costs incurred in recovering a debt if those costs are not met by the fixed compensation regime.

The Court has previously upheld an adjudicator’s decision to award a party their legal costs as part of “debt recovery costs”. That may not have changed the overall assumption that legal costs are not recoverable but it did bring an element of uncertainty. The TCC has since, in a different decision (Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd (unreported, 16 August 2017)), held that an adjudicator did not have jurisdiction to award the unpaid party its “debt recovery costs” without a written agreement to allow such a power.

The reasoning behind the TCC’s recent decision appears to be that although the Late Payment of Commerical debts Act does in certain situations allow for a party to be paid the costs of recovering a debt, the Construction Act requires that in relation to adjudications any such agreement must be in writing. As such, if there is no written agreement, any potential implied term allowing a party to be paid the costs of recovering a debt would not be effective as it would not meet the stipulations in the Construction Act.

The decision is unreported and it may be that the argument for recovery of adjudication costs based on the Late Payment of Commercial Debts Act has not been fully closed off but for now it seems arguments like these have become weaker given the TCC’s recent judgment.

 


Delay damages in sub-contracts: upholding the contract
6 September, 2017

In the latest in a series of disputes between the parties over development work carried out at Gatwick Airport, the TCC has overturned an adjudicator’s decision and found in favour of Vinci Construction UK Limited, holding that on a proper construction of the sub-contract, the works in question were “sufficiently identifiable and certain” and that consequently the damages provisions were enforceable against Beumer Group UK Ltd.

 

In 2011/2012 the claimant, Vinci Construction UK Limited, entered into a contract with Gatwick Airport Limited to carry out various development works at Gatwick Airport’s South Terminal, including the addition of a new baggage handling system and associated airside infrastructure.

 

Vinci sub-contracted with the defendant, Beumer Group UK Ltd, in respect of the baggage handling works.  The sub-contract was based on the NEC Engineering and Construction Subcontract, Third Edition, subject to bespoke amendments, and provided for sectional access to and completion of the sub-contract works, with different access and completion dates for each section, and liquidated delay damages being payable by Beumer where the sectional completion dates were not achieved.

 

The ‘Baggage Works’, at Section 5 of the sub-contract, had a completion date of 12 May 2015 and the ‘Remaining Works’, at Section 6 of the sub-contract, had a completion date of 27 May 2015.  The terms ‘Baggage Works’ and ‘Remaining Works’ were not defined in the sub-contract.

 

In 2014 the works were delayed and on 30 October 2014, by a settlement agreement, the parties agreed to extend the access dates and sectional completion dates, the completion date for the ‘Baggage Works’ being pushed back to 17 November 2015 and the completion date for the ‘Remaining Works’ being pushed back to 14 December 2015.

 

In 2016 a dispute arose between the parties as to the operation of the sectional completion dates and the delay damages provisions, which was referred to adjudication.

 

Although it was common ground that part of the sub-contract works included the disconnection of the redundant baggage equipment, the parties disagreed as to whether these works would fall into Section 5 or 6 and therefore which completion date applied.  Vinci argued that disconnection of the existing equipment fell within Section 6, the ‘Remaining Works’, and that the works falling within Sections 5 and 6 were sufficiently identifiable and certain to render the completion and delay damages provisions operable and enforceable.  Beumer took the view that it was not sufficiently clear or ascertainable whether disconnection of the redundant baggage equipment fell within Section 5 or 6, and that as such the provisions imposing liability on Beumer to pay delay damages on failure to meet the sectional completion dates were too uncertain to be enforceable.

 

On 9 May 2016 the adjudicator, Dr Cyril Chern, found in Beumer’s favour and held that the provisions for delay damages were “uncertain, inoperable and unenforceable”.

 

Vinci applied to the court for declaratory relief as to the proper construction of the sub-contract.  The application was heard by Mrs Justice O’Farrell sitting in the Technology and Construction Court, who held that the works falling within Sections 5 and 6 were sufficiently identifiable and certain, and that consequently the sectional completion and delay damages provisions were operable and enforceable.

 

In reaching this decision, Mrs Justice O’Farrell considered the established principles applying to the interpretation of contracts as set out in Arnold v Britton [2015] UKSC 36 and Wood v Capita Insurance Services Ltd [2017] UKSC 24.  She emphasised the reluctance of courts to hold a provision in a contract void for uncertainty, particularly where the contract has been performed and made reference to the tendency of the courts as expressed in GLC v Connolly [1970] 2 QB 100 and Scammell v Dicker [2005] to find an interpretation that will give effect to the parties’ intentions.

 

She then considered in detail the provisions of the sub-contract.  Although the terms ‘Baggage Works’ and ‘Remaining Works’ were undefined, Schedule 12 of the sub-contract contained descriptions of the sub-contract works and it was possible from an objective reading of Schedule 12 to ascertain that disconnection of the redundant baggage equipment fell within Section 6.  She referred to the fact that the parties had negotiated separate rates of delay damages that would become payable in respect of failure to achieve the Section 5 and Section 6 completion dates showed as demonstrating, in her view, that the parties must have had some understanding of the works within each section.  Also relevant was the fact that Schedule 12 expressly provided for Beumer to disconnect the redundant equipment, which would have to take place after the works to make the baggage system operational are complete, otherwise there would be an interruption to the baggage handling facilities.

 

This is yet another example of courts seeking to uphold the contract between the parties and, although not binding on lower courts, the decision will undoubtedly be welcomed by those seeking to rely on the damages provisions of a contract.

 

Vinci Construction UK Ltd v Beumer Group UK Ltd [2017] EWHC 2196 (TCC)


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