Construction matters

Shaping the Future
7 December, 2017

On 9 November 2017 we hosted our annual construction seminar for clients, contacts and those in the construction industry. This is the fourth year that Cripps have held an annual seminar and once again the seminar was supported by Keating Chambers. The title of the event was ‘Shaping the Future’ and appropriately was held in our new offices at Number 22, Mount Ephraim. The speakers included our own Claire Barwick and James Blyth who spoke about recent developments in the law relating to contractual interpretation and costs recovery in adjudication proceedings respectively. We were also delighted to welcome Tom Lazur of Keating Chambers who explained the effect of the recent Supreme Court decision in MT Hojgaard (an important decision on obligations as to quality of materials and work) and Gordon Young (Hazle McCormack Young) and Malcolm Clarke (Baxall Construction), who shared their experiences of the use of technology such as Building Information Modelling and collaborative working practices to reduce build time and costs on construction projects.

The event was once again well attended and we were delighted to receive positive feedback from our guests. The construction team would like to express our thanks to Tom, Gordon and Malcolm for their contributions and all our guests for their support in attending the event. We hope for an even more successful event in 2018 and look forward to seeing as many of our blog subscribers next year!


Pay Less Notices – The Importance of Following the Pay Less Regime
7 December, 2017

In a recent case1 a firm of architects claimed an entitlement to recover fees following termination of its appointment. The case turned on whether the pay less regime applies to payments due following termination of the contract.

The Facts

The facts of this case were that a property developer wanted to build homes on land at Loddon in Norfolk. It appointed an architect firm to complete the design work with a fee agreed of £156,275. The architect firm’s appointment was based on the standard conditions of appointment published by RIBA (“the Appointment”).

The developer later decided to proceed with another architect’s design and work ceased. An invoice was sent to the developer claiming £46,239 for work done up to that stage. The developer did not serve a Pay Less Notice or pay the architect any money.

The Legal Dispute

An adjudication was commenced by the architect and it was awarded the money that it claimed based on the non-provision of a Pay Less Notice. The developer issued a court claim for a declaration that the pay less regime did not apply to the invoice submitted, as it was submitted post termination of the Appointment.

The developer argued that the Appointment had come to an end and alternatively, if it was still in existence, the Appointment did not require the service of a Pay Less Notice in respect of the architect’s invoice because that was a final account in accordance with the RIBA terms of the Appointment, which took it outside of the pay less regime. The TCC found in favour of the developer.

The architect took the matter to the Court of Appeal, which looked at the wording of the Construction Act 1996 and the adjudication provisions. Those provisions, and in particular Sections 110 and 111 of the Construction Act 1996, were summarised as giving the contractor the right to refer issues concerning interim payments or the final account to adjudication, with the employer having to pay whatever the adjudicator orders and then having to claw back any overpayment later. Accordingly, the pay less provisions should apply to both interim and final applications for payment and so, if the developer in this case wished to resist paying the architect’s final account or termination account, then it should have served a pay less notice.

The provision of Pay Less Notices is clearly a key part of the project management of a construction project and employers and their advisers are generally getting better at avoiding the situation where contractors’ payment applications become due in full due to the failure to provide a Pay Less Notice. This case provides helpful guidance that shows that considering whether the pay less regime applies is key irrespective of whether interim payments or the final account are concerned.

1 Adam Architecture Limited v Halsbury Homes Limited [2017] EWCA Civ 1735


Have third party rights come of age?
27 November, 2017

For many years, construction projects have been burdened by the additional time and money involved in collecting in collateral warranties from contractors, consultants and subcontractors. The Contracts (Rights of Third Parties) Act 1999 (“the Act”) should have finally abolished this by allowing third parties to rely on contracts to which they were not a party but this has not been the case. However, the recent case of Chudley v Clydesdale Bank plc (t/a Yorkshire Bank) [2017] EWHC 2177 (Comm) offers hope that the Act will be more widely used.

Third Party Rights

Fundamentally, the Act will allow a third party to rely on a contract if:

(a) The contract expressly allows them to do so; and
(b) The clause they seek to rely on is a benefit (as opposed to a burden).

Practically, this can be done in two main ways:

1. An independent schedule of third party rights; or
2. A schedule which identifies which clauses on which a third party may rely.

The first option is the more common. It allows the drafting to be tailored to the particular circumstances and the interest of the beneficiary as tenant, funder or purchaser and so is more similar to a conventional collateral warranty.

What should you consider when using Third Party Rights?

Firstly, the contract must expressly state that a particular third party can rely on its terms. Whilst those undertaking and managing a construction project may have some idea as to the identity of potential recipients, it is not possible to provide for all eventualities.

Secondly, only the benefit such as the right to bring proceedings and not the burden (such as the obligation to make payment) can be passed on. This has been the main obstacle to the expansion of third party rights, especially to those providing finance.

Collateral warranties are often required by funders, who need to be able to realise their security should the borrower, the employer running the construction project, become insolvent, or no longer able to continue with the works. Collateral warranties achieve this by giving them “step in rights” which allow them to “step into” the employer’s place under the building contract and complete the works. Therefore, as well as benefits, the funders inherit burdens. For example, the responsibility for payment. Whilst this does not prevent third party rights being used, it means that the third party schedules must be carefully drafted.

So what are the risks?

The key risk has always been that third party rights have never been properly tested in court. So we are still on uncertain ground when it comes to what works and what doesn’t.

However, whilst the question of third party rights wasn’t a deciding factor in Chudley v Clydesdale Bank plc (t/a Yorkshire Bank) [2017] EWHC 2177 (Comm), the judge helpfully provided guidance on how they can work in practice.

In particular, the Chudley case usefully suggests express reference to a class of third parties, who can rely on the contract, meets the first requirement of expressly relying on them to do so.

This simplifies the drafting of third party rights schedules considerably, as types of people who may later need to rely on third party rights – for example, a funder, a property owner or purchaser or a tenant – can be more easily identified than named individual bodies.

The case also held that the same contractual term could both expressly identify the third party and the intention to confer a benefit upon that third party. Here, reference to a client account, and hence clients who paid into that account, would have identified the claimants as persons intended to benefit from the contract.

What does this mean?

Whilst there are still many uncertainties associated with the Act, the Chudley case suggests we are moving towards a world where construction projects can routinely and confidently rely on third party rights, rather than collateral warranties.


Architects’ professional negligence
22 November, 2017

Foster and Partners are world famous architects, they have been responsible for some spectacular designs. However, in a recent case what was most spectacular was the anticipated cost of a new building which amounted to some £195 million.

The claimant had wanted to develop a five star hotel near Heathrow Airport and engaged Foster and Partners to design it. According to the claimant, a Mr Dhanoa, his budget was £70 million. Fosters’ design came in at £195 million. Mr Dhanoa increased his budget to £100 million. He did that, he said, in reliance on Fosters telling him that the costs of the project could be pushed down to £100 million through ‘value engineering’.

Unfortunately, that proved not to be the case and Mr Dhanoa could not build the Fosters design. Mr Dhanoa had paid £4 million for the production of the design. His claim was for lost profits. The hotel had not been built when otherwise it would have been and he had significant wasted expenditure.

The potential damages claim was complicated by the fact that Mr Dhanoa had acquired the site at a time that would have been ripe to cash in on the London Olympics. Further, the global financial crisis intervened to restrict his ability to obtain credit.

One of the many issues in the case concerned whether architects owe a duty of care to a client which extends to advising on costs. Further, were Fosters under a duty to ascertain and take into account the claimant’s budget?

The court found that Fosters’ duty of care extended to advising Mr Dhanoa to take advice from a quantity surveyor but did not go so far as to require them to advise on costs. Their appointment, however, included an obligation to ‘confirm key requirements and constraints’.

The court found that Fosters were in breach of their duty in that they had failed to identify one of the key constraints, being the budget. There is support for this finding in the RIBA job book.

Fosters were further negligent in advising that the project could be ‘value engineered’ from £195 million to £100 million. This was negligent advice. Additionally, as Fosters knew Mr Dhanoa expected the cost reduction to be engineered out, they should have advised him that it could not be done.

There were various other issues in the case relating to causation and damages on which we are not commenting in this blog. The element we have reported on, however, shows that architects have a duty to consider and find out key constraints of a project including its budget. They should also inform the client if they know that the client has not understood how the budget might be achieved.


The interaction between adjudication and insolvency
30 October, 2017

Two recent cases have highlighted the interaction between adjudication and insolvency. In each case the party seeking to enforce the adjudicator’s decision was met with a threat by the paying party to invoke insolvency procedures to stymie enforcement.

Rossair Limited v Primus Build Limited

Primus was the main contractor in a project to construct a hotel. Rossair was a specialist sub-contractor. The adjudication concerned payments due to Rossair. The adjudicator awarded Rossair just over £350,000.

Bernhards Sports Surfaces Limited v Astrosoccer4u Limited

Bernhards were engaged to lay a sports pitch. Payment was not forthcoming and an adjudication seeking payment of just over £175,000 was commenced. Bernhards were awarded the sum claimed.

Insolvency protection

Insolvency legislation provides a number of ways by which a company in financial difficulty can receive an element of protection against financial claims. Rossair was a case concerning a voluntary arrangement. Bernhards concerned administration.

A voluntary arrangement (VA) is a statutory compromise between a debtor and its creditors. Under a VA a debtor makes a proposal to discharge liabilities either in full or at a reduced rate, typically to be paid by instalments at fixed points over a period of time. If approved by a majority of the creditors, the VA becomes binding on all. The rationale of a VA is that creditors may be willing to accept all or part of the money owing to them over a set period of time, rather than face the prospect of recovering nothing if the VA is not sanctioned.

Administration is a process under which a company in financial difficulty is protected against claims for a period of time. An effect of a company being moved to administration is to prevent new enforcement proceedings from being commenced or existing enforcement proceedings being continued without consent of the administrator or permission of the court. The purpose of the administration is to assess whether the company can be rescued and, if not, to commence an orderly disposal of assets for the benefit of the creditors of the company. The moratorium on new and existing court proceedings enables this assessment to be carried out properly and lasts for the duration of the administration.

In Rossair enforcement proceedings were commenced. In response Primus wrote to the court to advise that it was subject to a VA and as such any enforcement proceedings should be stayed.

In Bernhards, following the adjudicator’s decision, solicitors appointed for Astrosoccer4u advised that while the award might be due they should either mediate to reach agreement on the payment of a lesser sum or face the prospect of their client being moved to administration. Bernhards declined, at which point Astrosoccer4u and its solicitors engaged in what can only be described as an extraordinary course of conduct which included issuing a draft notice of intention to appoint administrators and taking steps to restructure the debtor in such a way as to frustrate Bernhards’ claim.

The outcomes

The outcome in Rossair was straightforward. While Primus advised the court that it was covered by a VA the evidence demonstrated that a VA had merely been proposed. While it is open to a company proposing a VA to seek a stay on new and existing court proceedings pending a conclusion of the VA process no such steps had been taken by Primus. Therefore Primus was not entitled as of right to stay on enforcement. Furthermore, while the court has its own jurisdiction to stay enforcement there was nothing in this case that would justify Rossair being kept out of its money.

In Bernhards the court was scathing about the conduct of both Astrosoccer4u and its solicitors (it is understood the solicitor’s conduct is the subject of review by the Solicitor’s Regulation Authority) describing it as a clear attempt to use company legislation as a means of avoiding having to pay a legitimate debt. While the commencement of the administration process would prevent the continuance of the enforcement proceedings the court had no hesitation in giving permission for the enforcement proceedings to continue notwithstanding the commencement of a formal insolvency process.

Conclusions

Insolvency protection, when used legitimately, is an important tool to aid companies in distress. Used properly they can result in businesses being saved, jobs retained and debtor losses minimised or extinguished. The moratorium on new and existing court processes is an important aspect of such protection. What these two cases illustrate however is that courts are alive to the risk of such processes being misused and that judges will seek to do what they can to ensure that such protections are not abused to the detriment of legitimate claims and innocent creditors.


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