Successfully challenging an adjudicator’s decision as a result of a breach of natural justice.

Sprunt Limited v London Borough of Camden

Bias in Adjudication is always a sensitive area; the recent case of Sprunt Limited v London Borough of Camden has provided guidance on cases where there is a possibility of bias on the part of the adjudicator.

The facts

Sprunt Limited (“Sprunt”) provided consultancy services to the London Borough of Camden (“Camden”) in relation to a development known as the Ampthill Square Estate project.

During the second phase of the Ampthill Square Estate project, a dispute arose regarding the level of Sprunt’s fees. Sprunt served a notice of adjudication on Camden and applied to the RICS for the appointment of an adjudicator.

Camden argued, amongst other things, that the adjudicator did not have the necessary jurisdiction to decide the dispute because the contract between the parties stated that Camden was to act as the adjudicator nominating body. The adjudicator disagreed with this argument and found in favour of Sprunt.

Camden refused to make payment in accordance with the adjudicator’s decision and Sprunt brought proceedings in the Technology and Construction Court to enforce the Adjudicator’s decision.

Camden argued that the adjudicator’s decision was unenforceable on the basis that he did not have jurisdiction because he was not nominated in accordance with the terms of the contract. Sprunt argued that the Scheme applied to any adjudication between the parties and therefore the Adjudicator had the necessary jurisdiction to decide the parties’ dispute.

Did the Scheme Apply?

A particular clause in the contract provided that an adjudicator’s decision would not be binding on the parties if the decision was challenged in Court.

Clearly, this clause was contrary to section 108(3) of the Construction Act, which provides that any adjudicator’s decision is binding on the parties unless and until the dispute is finally determined by legal proceedings.

As a result of this breach of the provisions of the Construction Act, the adjudication provisions of the Scheme applied to the contract in their entirety. Accordingly, all of the adjudication provisions in the contract, including the provision allowing Camden to nominate the adjudicator, were treated as having been deleted and replaced with the provisions of the Scheme.

Under the Scheme, Sprunt was entitled to apply to any adjudicator nominating body for the nomination of an adjudicator and its application to the RICS was valid. This meant that the adjudicator did have jurisdiction and his decision was enforceable.

Would Camden ever be entitled to nominate the adjudicator?

The Court found that even if the Scheme had not overridden the terms of the contract, Camden would never be allowed to act as the adjudicator nominating body because it is directly  contrary to the policy of the Construction Act to allow one party to the contract to choose an adjudicator.

The Court stated that although any adjudicator appointed by Camden would not automatically be biased, there would be a real possibility of bias, as there was nothing to stop Camden from appointing an adjudicator who was sympathetic to its position. Furthermore, there would be nothing to stop Camden from nominating an adjudicator who was entirely independent but whose fees were so high that it would deter Sprunt from continuing with the adjudication.

Accordingly, the Court held that a clause which allows one party to nominate an adjudicator is contrary to the Construction Act, and thus unenforceable.

Summary

This case will be of interest to contractors whose own bespoke terms and conditions allow them to nominate an adjudicator. Any contractor whose terms and conditions contain such a clause should seek to have them amended in light of this decision.

Highlands and Islands Airports Limited v Shetland Islands Council

Adjudicators are not required to have legal training to decide a construction dispute. As a result, some adjudicators may sometimes have to seek legal advice from a third party, such as a solicitor or barrister. In such cases the adjudicator should ask the parties for their comments on the legal point in question and ask for their approval to seek legal advice from the third party.

The Scottish case of Highlands and Islands Airports Limited (“HIAL”) v Shetland Islands Council (“SIC”) considers the validity of an adjudicator’s decision when he obtains legal advice without the parties’ knowledge, comment or consent.

The Facts

HIAL were engaged by SIC to design and construct an extension to the runway at Sumburgh Airport. After the extension works were completed, a dispute arose between the parties which HIAL referred to adjudication.

When examining the contract between the parties, the adjudicator had to consider clause 41.3 of the NEC3 Professional Services Contract (the “Clause”), which governed the assessment of future remedial costs where there was a defect in the works. The adjudicator had never dealt with or considered this Clause before and was uncertain of its interpretation.

Instead of asking the parties about their interpretation of the Clause, the adjudicator sought confirmation of his own interpretation of the clause from a barrister, who confirmed the adjudicator’s interpretation of the Clause. The adjudicator was never charged for the barrister’s advice; it was considered by both parties as a “freebie”.

The adjudicator issued a decision in favour of HIAL and ordered that SIC pay a sum in excess of £2 million for their breach of contract.

When seeking a subsequent legal opinion, SIC discovered that the adjudicator had received legal advice during the adjudication. SIC questioned the adjudicator on the legal advice he had obtained and the adjudicator responded that he had not obtained any formal legal advice, only a confirmation of a view that he had already formed.

When SIC did not make a payment in accordance with the adjudicator’s decision, HIAL commenced enforcement proceedings. SIC argued that the decision could not be enforced as the adjudicator had breached the rules of natural justice by seeking legal advice on the interpretation of the Clause without inviting the parties to comment on the meaning of the Clause or the advice received.

Was the Adjudicator’s decision unenforceable?

The Court held that the rules of natural justice are applied to adjudications to prevent the possibility of injustice.

The fact that the adjudicator had not paid for the legal advice was neither here nor there, it was still legal advice.

If the adjudicator had told the parties of  his conversations with the barrister, even after the event, and invited the parties’ opinions on the Clause, there would have been no breach of the rules of natural justice.

The Court stated that although there was no suggestion that the adjudicator had been unfair, or that his interpretation of the Clause was incorrect, there was an opportunity for injustice to be done, and that was all that was needed to make the adjudicator’s decision unenforceable.

Summary

As this is a decision by the Scottish Courts, English Courts are not bound to follow it. Nevertheless, it does give an indication of the position English Courts may take in similar circumstances.  The Court was clear that where there is possibility for injustice in an adjudication, the adjudicator’s decision will not stand.

As the number of construction companies becoming insolvent shows no sign of reducing, it has never been more important to ensure that you are protected against the risk of those in your supply chain becoming insolvent. An increasingly common method of protecting against insolvency is a performance bond.

A performance bond is a written guarantee from a third party (usually a bank or an insurance company) which ensures payment of a specified sum to the beneficiary of the bond (e.g. an employer) in the event that the party providing the bond (e.g. a contractor) defaults on its contractual obligations.

In this article, we look at some of the recent case law on the effectiveness of performance bonds as a means of security.

AES-3c Maritza v Credit Agricole Corporate & Investment Bank

AES engaged Alstom to build a power plant. Alstom provided a performance bond in AES’ favour, the terms of which required Credit Agricole (the “Bank”) to pay AES within 3 days of a demand being made, provided the demand was accompanied by copies of the notices or claims which AES had sent to Alstom in relation to the alleged breach of contract.

Alstom had failed to complete the first section of its works on time and it was clear that the second section of the works would also be delayed, although the second completion date had not yet passed. AES submitted a demand to the Bank for payment of €93m in late completion payments.

AES provided the Bank with copies of letters of demand which AES had sent to Alstom requesting payment. However, the letters of demand only showed that €27m was owed to AES. This was because much of the €93m being claimed did not become due under the contract until the date for completion of the second section of the works had passed. The Bank refused to honour the bond, arguing that AES had not complied with the terms of the bond because it had not provided evidence that AES was entitled to recover €93m from Alstom.

Shortly afterwards, when the date for completion of the second section of the works had passed, AES submitted a new demand for €96m. This time AES provided supporting evidence which showed that €96m was indeed due from Alstom. AES then issued legal proceedings to recover the money owed to it by the Bank.

The Court held that AES’ first demand had been invalid because AES had not complied with the requirement for its demand to be supported by evidence of the claim for payment it had made against Alstom. Although AES argued that the bond allowed it to claim costs that would inevitably become due in the future, the Court took the view that the parties to the bond would never have intended that AES would be able to submit a claim for sums payable by Alstom in the future, even if it was inevitable that those sums would eventually become due. It was necessary for AES to provide valid proof that the entire sum claimed was due so that the Bank could decide whether or not to pay.

However, AES’ second demand was enforced because AES had supplied the supporting documentation required under the terms of the bond.

Simon Carves v Ensus UK

Simon Carves was employed by Ensus to construct a bioethanol plant. Simon Carves provided a performance bond of £18.5m to Ensus. The contract between the parties provided that the bond would become void (save in respect of any previously notified claims) on the date Ensus issued an Acceptance Certificate confirming that the works were complete.

When Ensus began operating the plant in early 2010, foul emissions began escaping into the surrounding area. Ensus issued a Defect Notice under the contract and the parties got into dispute about the source of the problem. Despite this, Ensus issued the Acceptance Certificate in August 2010 along with a snagging list, which included the remedial works necessary to address the emissions problem.

In late August 2010, just before the bond was due to expire, Ensus requested that Simon Carves extend the bond. Simon Carves agreed to extend the bond until February 2011, but nevertheless made it clear to Ensus that they considered the bond to be void because the Acceptance Certificate had now been issued.

In February 2011, Ensus formally notified Simon Carves that it considered them liable for the defects and attempted to claim on the bond. Ensus argued that notwithstanding the terms of the contract, English law requires that performance bonds must always be honoured, unless there is clear evidence of fraud.

The Court found that Ensus was not entitled to claim on the bond (even though the bond had not expired) because the terms of the engineering contract meant that the bond was to be treated as void once Ensus had issued the Acceptance Certificate.

Ensus had never made any formal claim against Simon Carves before issuing the Acceptance Certificate (the issue of the Defect Notice was simply a contractual requirement, not a formal claim). Accordingly, Ensus had deprived itself of its ability to claim on the bond by issuing the Acceptance Certificate too early. Ensus should have formally notified Simon Carves of its intention to make a claim before issuing the Acceptance Certificate.

Hackney Empire v Aviva Insurance

Hackney Empire engaged a contractor to carry out extensive refurbishment works to the Hackney Empire Theatre. The contractor provided a performance bond via Aviva worth £1.1m. The works were significantly delayed and the contractor got into serious financial difficulty.

In order to try and ensure completion of the project, Hackney Empire entered into a side agreement with the contractor. The parties agreed that in return for an advance payment of £1m, the contractor would complete the works by a particular date. Unfortunately, the contractor went into administration before the works were complete. At this point Hackney Empire had made advance payments of £750,000 under the side agreement.

As a result of the contractor’s insolvency and the significant delays to the project, Hackney Empire suffered losses of around £3m, including substantial LADs. The only way for Hackney Empire to recover its losses was by claiming on the bond. However, Aviva argued that it was no longer liable under the bond because the parties’ decision to enter into the side agreement without notifying Aviva had severely disadvantaged Aviva in its role as the contractor’s surety.

Aviva also argued that even if it was still liable under the bond for the contractor’s breaches of the building contract, it was not required to reimburse Hackney Empire for the £750,000 paid under the side agreement which the contractor had also breached.

The Court held that Aviva’s position as surety was not prejudiced by the payment of £750,000 made by Hackney Empire to the contractor. Aviva was no worse off because Hackney Empire had attempted to keep the project on track by improving the contractor’s cashflow. Indeed, the advance payments to the contractor were actually intended to speed up completion of the project, thereby decreasing the contractor’s liability to Hackney Empire. This benefited Aviva as the surety. Accordingly, Aviva could not escape liability under the bond just because the parties had entered into the side agreement. Hackney Empire could therefore recover the losses it had suffered as a result of the contractor’s breaches of the building contract.

However, Aviva was not liable to reimburse Hackney Empire for the £750,000 paid under the side agreement. The Court decided that it was unfair and unreasonable to require Aviva to assume the additional risk of the contractor failing to comply with a side agreement which Aviva had no knowledge of. Hackney Empire was therefore left out of pocket because it had failed to take steps to ensure that the payments made under the side agreement were also covered by the bond.

Summary

Although performance bonds seem like a reliable form of security, these cases demonstrate that in reality there are a number of ways in which a claim under a bond can be defeated. Anyone who has provided or benefits from a performance bond should take note of the following lessons which can be learnt from these cases:

• When making a claim on a bond, it is essential to comply exactly with the terms of the bond. Failure to provide necessary documentation, such as evidence of your entitlement to payment, could prejudice your ability to make a claim.
• The beneficiaries of bonds should be aware of the effect of any clause in the underlying building contract which restricts their ability to rely on the bond and take steps to ensure that their position is not prejudiced by such a clause.
• Where a bond has been provided, the parties to the building contract should always consider whether it is necessary to inform the surety about events occurring under the contract. Failure to inform a surety about increased financial risk means the beneficiary of the bond may be deprived of its ability to make a claim.

Can a withholding notice be valid if the information it is based upon has no contractual effect?

Are cost clauses in adjudication enforceable following the new Construction Act?

The recent case of Leander Construction Limited v Mulalley & Company Limited has provided important guidance on a number of keys issues.

The Facts

Leander was appointed by Mulalley as a sub-contractor to provide groundworks at a development in Lewisham. The sub-contract, which was on Mulalley’s standard terms and conditions, contained a date for commencement and completion of the sub-contract works, but it contained no provisions to deal with the interim progress of the sub-contract works.

Mulalley valued the sub-contract works at £131,078.12, but served a withholding notice on Leander stating that it was withholding the outstanding amount due to Leander’s failure to proceed with the sub-contract works in accordance with an Activity Schedule it had provided.

Leander applied to the Court seeking a declaration that Mulalley’s withholding notice was invalid as the Activity Schedule had not been incorporated into the sub-contract.

Before the hearing, the parties agreed that the Activity Schedule had not been incorporated into the sub-contract. However, Mulalley argued that the withholding notice was still valid as Leander was under an implied obligation to proceed “regularly and diligently” with the sub-contract works and had failed to do so.

Leander argued that it was not under an implied obligation to proceed regularly and diligently with its works, and even if it was under such an obligation, the withholding notice was invalid as it relied upon an Activity Schedule which had not been incorporated into the sub-contract.

An Implied Obligation to Proceed “Regularly and Diligently”

The Court stated that it would only imply a term requiring Leander to proceed regularly and diligently with the sub-contract works if it met the following criteria for implying terms into contracts:

• the implied term must be reasonable and equitable;
• it must be necessary to give the contract “business efficacy”;
• the implied term must be so obvious “that it goes without saying”;
• it must be capable of clear expression; and
• it must not contradict any other clause of the contract.

The Court held that such an implied term was not needed in this case as the sub-contract “operates perfectly satisfactorily without the implied term”.

The Court’s reasons for its decision were threefold:-

• Leander had to complete the sub-contract works by the completion date. Implying additional interim progress requirements was unnecessary and unhelpful.
• The extension of time mechanism in the sub-contract only dealt with delays to the completion date, so if the Court had implied a term that would require completion of each “phase/activity” in the sub-contract works, it would also have to imply several additional terms into the extension of time provisions.
• A number of express contractual terms, such as the power to issue instructions, allowed Mulalley to control the works. It was unnecessary to imply any term to proceed regularly and diligently because Mulalley could have issued an instruction to increase the speed of the sub-contract works if it had wanted to do so.

The Court also held that a clause which allowed Mulalley to terminate the sub-contract if Leander failed to proceed regularly and diligently with the sub-contract works did not mean there was a separate implied term to proceed with the sub-contract works regularly and diligently. In fact, this termination clause showed that the parties had thought about the consequences of not proceeding regularly and diligently with the sub-contract works and had decided to allow for termination of the sub-contract, not damages.

Withholding Notices

Leander also argued that the withholding notice served by Mulalley was invalid because it relied on Leander’s failure to meet the dates set out in the Activity Schedule, which was not a contractual document.

The Court stated that if Leander had been obliged to proceed regularly and diligently, there would have been nothing wrong with Mulalley using the dates in the Activity Schedule as a way of measuring whether or not the sub-contract works were being performed regularly and diligently, even though the dates in the Activity Schedule were not contractually binding. The problem with the withholding notice was not its reliance on the Activity Schedule, rather that it was based on the incorrect assumption that Leander had to proceed regularly and diligently.

Are Costs Clauses In Adjudication Enforceable?

Although it was not part of the dispute between the parties, the Court noted that the sub-contract contained a clause which required the referring party in any adjudication to pay both parties’ costs and expenses. As costs clauses such as this go against the “spirit” of adjudication, Parliament sought to outlaw them when it drafted the amendments to the Act, which came into force on 1 October 2011.

The relevant amendment (section 108A of the Act) states that any contractual provision which deals with the allocation of costs and expenses between the parties to an adjudication will be ineffective unless that clause:

• is in writing;
• is contained in the construction contract; and
• allows the adjudicator to allocate his/her fees and expenses between the parties.

However, the wording of this section is ambiguous and there has been much debate about whether it would effectively ban adjudication cost clauses.

The position has been clarified somewhat by the Court in this case, as the Judge commented that adjudication costs clauses in contracts are now “automatically invalid” as a result of the amendments to the Act.

However, the Judge’s comments on this point are not binding as the matter was not part of the dispute between the parties. This means another Judge may come to a different conclusion with regard to costs clauses in a subsequent case. Nevertheless, it is helpful guidance as to how the Courts may proceed with costs clauses in light of the amendments to the Act.

Summary

The Court’s decision makes it clear that generally there is no implied obligation to proceed regularly and diligently. The Court held that it would only imply such a term where it was necessary for the contract to work. It is difficult to imagine a case where such a clause would be necessary.

This decision highlights that to be effective a withholding notice must be based upon a clear contractual term.

Although the comments of the Judge in this instance are not binding on the costs issue, they do provide welcome clarity on the validity of adjudication costs clauses in light of the amendments to the Act. Whether the Judge’s comments will be followed in other cases remains to be seen.

There were several key developments in construction law during 2011, the most significant of these being the amendments to the Construction Act, which has led to major changes in the way payment is made and resulted in almost every standard form construction contract being amended.

In our Annual Review, we have summarised some of the most important and interesting developments affecting the construction industry within the past year, including:

• The changes to the Construction Act – a comprehensive guide to the amendments to the Construction Act, the effect these changes have had on standard form construction contracts and how the amended Construction Act affects you.
• Can you choose who acts as adjudicator? A review of the Lanes -v- Galliford Try cases, including the recent Court of Appeal decision. 
• Can you ever avoid paying the adjudicator’s fees? We look at the cases of Systech -v- PC Harrington and Fenice Investments -v- Jerram Falkus Construction.
• Public procurement update – how has the time limit for bringing claims under the Public Contracts Regulations  changed and what effect will this have?

To download a copy of our Annual Review please click here.

How can you maximise your entitlement to additional time and cost?

It is almost inevitable that adverse weather conditions will affect the progress of construction projects during the winter. Whilst many contractors and sub-contractors will have a contractual right to an extension of time and/or to recover the extra costs they have incurred due to delay, the rights and remedies available will vary from contract to contract. It is essential for construction firms to understand the rights available to them and the contractual processes which must be followed before any extension of time or additional payment will be authorised.

In this article, we outline how adverse weather is dealt with in JCT and NEC contracts and provide practical tips on handling adverse weather claims.

JCT Contracts & Sub-Contracts

Under JCT contracts and sub-contracts, “exceptionally adverse weather conditions” are classed as a Relevant Event, potentially giving rise to an extension of time.

“Exceptionally adverse weather conditions” is not defined by the JCT and there is no universally accepted definition of what this term means. However, the JCT extension of time procedure operates in such a way that the meaning of “exceptionally adverse weather conditions” will ultimately be at the discretion of the party granting the extension of time. It will therefore be necessary to ensure that any extension of time claim you submit is comprehensive and will stand up to scrutiny.

In order to establish “exceptionally adverse weather”, it will be necessary to compare the current weather conditions to weather records from previous years. This can be done by taking or obtaining measurements of the current weather conditions and comparing these with previous weather reports from the weather station closest to the site.

JCT contracts require that notification of delay to the works must be given forthwith when the delay becomes reasonably apparent. When making a claim for an extension of time, it is a requirement that the Relevant Event is identified and details of its expected effects are provided. It will be necessary to establish what effect the weather conditions had/are having on the works. This might be done using photos of the disruption caused or by relying on records such as the site diary to document the works which were affected and the steps which were taken to mitigate this.

It is important to note that adverse weather conditions are not classed as a Relevant Matter under JCT contracts and sub-contracts. As a result, there is no entitlement to loss and expense and the financial risk of adverse weather lies with the contractor/sub-contractor.

NEC3 Contracts & Subcontracts

Under NEC3 contracts and subcontracts, adverse weather conditions can be classed as a compensation event, potentially giving rise to additional time and money for contractors and subcontractors. The NEC approach to analysing the effects of adverse weather is much more prescriptive and objective than the JCT approach.

Adverse weather will only constitute a compensation event if a weather measurement which is shown to occur on average less frequently than once in 10 years is recorded within a calendar month. It is important to remember that only the “extra” adverse weather (i.e. the difference between the weather measurement that has been recorded and the “usual” weather conditions recorded in the weather data) will be taken into account.

Details of the types of weather to be measured and the place where measurements are to be taken should be set out in the Contract Data. The default weather measurements are cumulative rainfall, the number of days with rainfall over 5mm, the number of days with minimum air temperature of less than 0°C and the number of days with snow lying on the ground at a pre-agreed time. The measurements can be supplied by a weather station (if there is one sufficiently close to the site) or recorded on the site. The weather data which is used for comparison can be obtained from an independent weather authority like the Met Office.

The contractor or subcontractor will bear the risk of any adverse weather which does not fall within the strict criteria for a compensation event. It may be sensible for the parties to agree other weather conditions which will be treated as a compensation event, such as high wind or ice, depending on the nature of the works and the location of the site.

It is important to bear in mind that adverse weather is only measured by reference to calendar months. If bad weather is spread across 2 calendar months, there is a possibility that the measurements in each individual month may not be adverse enough to be classed as a compensation event.

Contractors and subcontractors must ensure the compensation event procedure is followed correctly in order to secure their entitlement to additional time and/or money. Notification of the compensation event must be given within 8 weeks (7 weeks for subcontracts) of the contractor becoming aware of the event. This is a condition precedent and any entitlement to additional time and money will be lost if this deadline is not met.

The contractor or subcontractor’s subsequent quotation must contain details of the proposed changes to the Prices and the expected delay to the Completion Date and any Key Dates, along with a revised programme. It will be necessary to justify how the works have been affected by the adverse weather.

Practical Tips

• If you are engaged under a bespoke contract or sub-contract, or if there are bespoke amendments to a standard form contract, it will be necessary to review the terms of the contract to ascertain the available rights and remedies in the event of adverse weather.
• It is crucial to check for conditions precedent to an extension of time/additional payment. NEC3 contracts include a condition precedent as standard, but it is fairly common for JCT contracts to be amended to include a similar time limit.
• Ensure you are complying with the requirements of the contract when making a claim. You should check when the notice must be given, what information it must contain, how it must be served, who it must be addressed to and whether it needs to be followed up with further information.
• In order to demonstrate the impact of the weather conditions on the works, it is essential to keep full records, including (as appropriate) information about the weather conditions, the works which were affected, any additional costs which were incurred and details of any steps which were taken to mitigate delays and losses.
• Whilst you might have been informally assured that you will be granted an extension of time for adverse weather, always ensure that the contractual procedure for an extension of time is followed. This will protect your position if a dispute about your entitlement to additional time arises later on.

This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please do not hesitate to contact one of our specialist construction lawyers.

What has changed?

The traditional position in most Sub-Contracts entered into before 1 October 2011 was to release half of the retention after completion of the Sub-Contract Works and release the balance of retention after the Certificate of Making Good Defects (or similar) has been given under the Main Contract.

The changes to the Construction Act alter this position and ensure that any construction contract entered into after 1 October 2011 can no longer link the release of retention to an act or event occurring under an upstream contract. This means that retention must be triggered for release by an act or event occurring under that contract, for example, the expiry of defects liability period in the Sub-Contract or on a predetermined date which is specified in the Sub-Contract.

Any contracts entered into after 1 October 2011 that continue to link the release of retention to an upstream contract will not be compliant with the Act and the release of retention will be governed by the Scheme for Construction Contracts.

Although we have used the example of a Sub-Contract in this article, many of the points made are also applicable to Main Contracts.

JCT Sub-Contracts

To accommodate the changes made to the Construction Act, JCT have had to make significant changes to how retention is dealt with in the JCT Sub-Contracts.

Under the JCT Sub-Contracts the release of the first half of the retention, as before, is triggered by practical completion of the Sub-Contract Works. The second half of retention will now be triggered for release on the “Retention Release Date” which is specified in the Sub-Contract Particulars. Provided that there are no defects in the Sub-Contract Works at the Retention Release Date, the second half of retention will be paid to the Sub-Contractor on the next interim payment date (usually this will be the Final Payment).

JCT have also introduced the concept of a “Minimum Retention Amount”. This is an amount that is to be agreed by the parties and specified in the Sub-Contract Particulars. If the total amount of retention that would be deducted is less than the Minimum Retention Amount, then no retention can be deducted. Once the first half of retention is released, if the balance being withheld falls below the specified Minimum Retention Amount, the balance of retention must also be released to the Sub-Contractor. If a Minimum Retention Amount is not specified in the Sub-Contract Particulars, the default amount is £250.00.

Although these changes appear to be a step forward from the traditional position, there is no guarantee of change. The JCT Sub-Contracts contain nothing that stops the Contractor specifying that the Minimum Retention Amount is zero, ensuring that retention can be withheld irrespective of its amount. The Contractor is also free to specify a Retention Release Date that is so far into the future as to almost guarantee that the Contractor will not have to release retention under the Sub-Contract until retention has been released under the Main Contract.

NEC3 Sub-Contracts

The position under NEC3 Sub-Contracts remains unchanged. Retention is still an optional clause that must be selected by the parties to have any application. Under the NEC3 Sub-Contract there is a “Retention Free Amount” which ensures that retention cannot be deducted until the value of work done under the Sub-Contract reaches the Retention Free Amount.

The NEC3 Sub-Contract provides that the first half of retention is triggered for release on completion of the Sub-Contract Works with the balance of retention becoming due for release after the Defects Certificate is issued under the Sub-Contract.    

Bespoke Sub-Contract Amendments     

A large proportion of Contractors will also have their own bespoke amendments to the JCT and NEC3 Sub-Contracts. These should be carefully examined to establish how they amend the relevant JCT or NEC3 retention clause. Amendments may introduce conditions precedent to the release of retention or amend the wording of the standard form so that the first half of retention is released later than practical completion of the Sub-Contract Works.

Recovering Retention – Common Problems and How to Avoid Them

All the defects in my Sub-Contract Works have been completed, but the Contractor refuses to release retention. What can I do?

Sub-Contracts entered into before 1 October 2011 will usually provide that retention will be due for release when the defects in the Main Contract Works are completed. In such cases the decision in Pitchmastic v Birse demonstrates the current legal position. Here the Court held that the Sub-Contractor can only successfully overturn the terms of the Sub-Contract where it can show that the Contractor is preventing the release of retention. The test to be applied is whether the Contractor is proceeding with reasonable diligence to make good the defects in the Main Contract Works. If so, the Contractor cannot be said to be preventing the release of retention.

Proving that a Contractor is not proceeding with reasonable diligence is not easy. You should gather evidence to show what the defects are, what remedial works are required and when these are scheduled to take place. If remedial works have fallen behind schedule for no good reason, this may suggest a lack of reasonable diligence.

The terms of my Sub-Contract mean that the release of retention is effectively at the Contractor’s discretion. What can I do?

The recent case of AMW Plumbing & Heating Limited v Zoom Developments Limited provides some guidance in this instance. Although this is a Scottish case, it may be followed by the English Courts.

Here the Court held that a retention clause which effectively allowed the release of retention to be at the discretion of the Contractor was not an adequate payment mechanism under section 110(1) of the Construction Act and as such the Scheme for Construction Contracts applied.

It will be necessary to seek legal advice on the terms of your Sub-Contract to determine whether they provide an adequate payment mechanism.

My retention is rarely released on the time. What can I do?

Good credit control is essential. Have a diary system in place to remind you when retention is due to be released and apply for payment.

If retention is not paid on time you are entitled to interest. Calculating this interest and claiming it in addition to your retention can be a good way of convincing the Contractor to release your retention.

Struggling to recover your retention?

Hawkswell Kilvington’s specialist Retention Recovery Service provides fixed cost solutions to contractors and sub-contractors who are struggling to recover retention.

To find out more contact Jonathan Hawkswell at jhawkswell@thkp.co.uk

This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please do not hesitate to contact one of our specialist construction lawyers.

The seminars will focus on the key construction law developments of the last 12 months and will be essential for all everyone in the construction industry who wants to remain up to date.

Topics covered will include:

• The new Construction Act – 6 months on.
• Delay in construction projects.
• Public procurement.
• BIM - what are the legal implications?
• Construction Plant Hire – recent amendments to the CPA Model Conditions.
• Adjudication update.

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The amended Construction Act now applies to all new construction contracts entered into on or after 1 October 2011, whilst the original Construction Act 1996 continues to apply to all construction contracts entered into before that date.

As a result, we are currently in a transitional period where both the original 1996 Act and the amended Act apply. The vast majority of businesses in the construction sector will find that for months or even years to come, some of their contracts are governed by the original 1996 Act and some are governed by the amended Act.

Learning to apply the new provisions of the amended Act to some contracts whilst continuing to comply with the original 1996 Act in relation to other contracts is likely to cause a great deal of confusion. Construction firms will need to be prepared and well organised to avoid this.

Here, we outline some of the common pitfalls which may arise during the transitional period and how you can avoid them.

Get up to date

It is essential to update your standard terms and conditions to comply with the amended Act. If you fail to do so, the payment provisions in new contracts which you enter into will be replaced by the provisions of the amended Scheme for Construction Contracts. It is unlikely that the provisions of the Scheme will meet the needs of your business or protect your contractual position.  

When entering into standard form contracts, ensure you are entering into an up to date version. For example, if you enter into a JCT 2005 contract now, the payment provisions will not comply with the amended Act and the Scheme will apply instead. The only way to avoid this would be to draft bespoke amendments to the JCT payment provisions to bring them up to date. However, it would be easier to enter into a new JCT 2011 contract instead.

It also important to remember that that if you use standard schedules of bespoke amendments to standard form contracts, your bespoke amendments may also need updating. In particular, schedules of amendments designed for use with JCT 2005 contracts may no longer be suitable for JCT 2011 contracts.

Be aware of the problem areas

The existence of the two Acts is likely to be particularly problematic in a number of cases:

• Sub-Contracts entered into after 1 October under a Main Contract entered into before 1October 2011. This is likely to cause confusion for the Main Contractor, as its contract with the Employer will be subject to the original 1996 Act, but it must pay its Sub-Contractors in accordance with the amended Act.
• Novation agreements. There is case law which suggests that if a contract which is entered into before 1 October is novated after 1 October, the amended Act will apply to the novated contract. It remains to be seen whether this case law will be upheld if the issue arises in the TCC again.
• Contracts let under existing schemes like P21+. Even if the scheme itself was created before 1 October, the formation of a new contract under the scheme after 1 October means the amended Act will apply.
• Call-off contracts let after 1 October 2011 under framework agreements entered into before 1 October 2011. If each call-off contract is a separate new contract, call-off contracts let after 1 October will be subject to the amended Act.

If you are uncertain as to which Act applies to your contract, you should seek legal advice. It will be necessary to look at the contract documents to determine the date the contract was entered into. In cases of real uncertainty, it may potentially be appropriate to comply with both Acts, for example by issuing both a ‘withholding notice’ and a ‘pay less notice’ when deducting payment.

Mixing old and new

During the transitional period, companies must be very careful not to confuse the provisions of the two Acts. It will be essential to ensure all staff members who deal with payment receive proper training on the differences between the two Acts and procedures which apply under each.

The following table summarises some of the key differences between the two Acts.

This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please do not hesitate to contact one of our specialist construction lawyers.

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The issue of the ‘battle of the forms’ arises frequently in construction disputes. Typically, each party will have attempted to impose their own standard terms and conditions on the other party, with the end result that neither party can be sure what the terms of their contract are. When a dispute arises, the Courts have to analyse the situation to determine which set of standard terms and conditions applies. The recent case of Trebor Bassett v ADT Fire & Security demonstrates the Courts’ approach to deciding who has won the battle of the forms.

Background

In 2003, Trebor decided to move their popcorn production facility from Leeds to Pontefract. ADT, who had supplied fire protection systems to Trebor in the past, supplied and installed the factory’s CO² fire suppression system.

One evening in June 2005, a fire broke out in the popcorn factory. The Fire Brigade were called, but believed that Trebor staff had already extinguished the fire and did not immediately enter the building. However, the fire continued to burn and the building was quickly destroyed. Trebor alleged that ADT’s failure to design an adequate CO² suppression system had caused losses of £110 million.

The Court ultimately decided that insufficient thought had gone into the design of the suppression system, with the effect that the fire was able to burn for too long before the system was triggered. ADT had fallen below the standard to be expected of an ordinarily competent fire prevention sub-contractor by failing to design the suppression system with reasonable skill and care.

Battle of the Forms

One of the key issues in dispute was whether the parties had entered into a contract on Trebor’s or ADT’s standard terms and conditions. This was a very significant issue for both parties because although Trebor was claiming to have suffered losses of £110 million, ADT’s standard terms and conditions limited ADT’s liability for breach of contract to twenty times the yearly service charge fee payable by Trebor – this amounted to just £13,000 in total. By contrast, if Trebor’s standard terms were found to apply, ADT would be required to indemnify Trebor against all losses Trebor had suffered.

ADT had provided a quotation to Trebor in August 2003, offering to supply the suppression system for £9,000. ADT’s quotation stated that it was subject to ADT’s standard terms and conditions, although a copy of these was not supplied. In September 2003, Trebor issued a Purchase Order accepting ADT’s quotation. The Purchase Order stated that the contract was subject to Trebor’s standard terms and conditions which were “already supplied” and that additional copies were available “on request”. These terms and conditions were not included with the Purchase Order because Trebor assumed they had already been supplied to ADT in the past. However, the Court found no evidence that ADT had previously seen or agreed to Trebor’s terms and conditions.

Offer and Acceptance

The Court confirmed that the traditional offer and acceptance analysis must always be used to identify the winner of the battle of the forms, unless there is very clear evidence to show that the parties had agreed that other terms would prevail. The formation of a contract is grounded in the concepts of offer and acceptance, so applying this analysis to all battle of the forms cases provides clarity and certainty.

Using the offer and acceptance analysis, it was clear that:

• ADT’s quotation was an offer based on their standard terms and conditions;
• Trebor’s Purchase Order was a counter-offer based on Trebor’s standard terms and conditions; and
• by commencing work on the suppression system, ADT had accepted Trebor’s counter-offer.

A contract had therefore been formed on Trebor’s standard terms and conditions.

Is it always so straightforward?

ADT put forward a number of arguments as to why they considered Trebor had not won the battle of the forms.

ADT’s first argument was that Trebor’s Purchase Order was an acceptance, not a counter-offer. Trebor had issued the Purchase Order “as per the quotation” and in ADT’s view this meant Trebor had accepted ADT’s entire quotation, including ADT’s standard terms and conditions. The Court disagreed, noting that although the Purchase Order accepted the quotation, there was nothing within it which could be construed as an express acceptance of ADT’s terms and conditions, particularly since Trebor had not been given a copy of ADT’s standard terms and conditions.

ADT also argued that Trebor’s terms and conditions were not incorporated into the contract because they had never been supplied to ADT. The Court found that although Trebor had failed to supply a copy of their standard terms and conditions, this did not prevent them from being incorporated into the contract because:

• in the circumstances, the fact that the Purchase Order identified and referred to Trebor’s standard terms and conditions was sufficient to ensure they were incorporated into the contract.
• the reference in the Purchase Order to Trebor’s standard terms and conditions would have alerted ADT to the fact that they existed and that ADT may already have had a copy in their possession. It was then ADT’s responsibility to obtain a copy of Trebor’s standard terms and conditions.
• none of Trebor’s standard terms and conditions were so unfair or onerous that they should have been expressly drawn to ADT’s attention.

Analysis

This case confirms that the winner of the battle of the forms will generally be the last party who makes an offer before work is commenced. However, whilst this sounds like a simple principle, the battle of the forms is rarely straightforward in practice.

Contracting parties should seek to avoid becoming involved in a battle of the forms, as it creates unnecessary risk and uncertainty. This is particularly true for high value contracts or contracts where the financial consequences of a breach could be significant. A better (although possibly more expensive and time consuming) solution is to negotiate the individual terms that are in dispute.

As this case demonstrates, in some circumstances it is possible to win the battle of the forms by stating that the contract incorporates your standard terms and conditions, which are available on request.

However, companies who do become involved in battles of the forms should be aware that it may be risky not to include a copy of your standard terms and conditions when making an offer. This is particularly true if your standard terms and conditions contain onerous and/or unusual provisions such as exclusion clauses or clauses which purport to impose a liability on the other party which it would not otherwise have. If onerous terms are not drawn to the attention of the other party, a Court may consider that they have not been validly incorporated into the contract.

It is best practice for any company seeking to impose their own standard terms and conditions on a third party to attach a copy of those terms and conditions to all pre-contract documents, such as enquiry documents, purchase orders and letters of acceptance.  This creates certainty and prevents the other party from arguing that particular terms should have been drawn to their attention.

This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please do not hesitate to contact one of our specialist construction lawyers.