Don't botch your final say

Systems Pipework Ltd v Rotary Building Services Ltd [2017] EWHC 3235 (TCC)

As the industry awaits the results of the latest consultation on the Housing Grants, Construction and Regeneration Act 1996 (Construction Act), the Technology and Construction Court (TCC) recently handed down a decision commenting on the 'draconian consequences' of failing to comply with strict requirements regarding payment notices, particularly in the context of the final account. In this case, the TCC was asked to determine whether Systems Pipework had lost its right to make its own final account claim because it had failed to challenge Rotary Building Services' assessment of that final account within 14 days.

Rotary Building Services (Rotary) engaged Systems Pipework (SPL) to supply and install certain systems at a creamery. For administrative convenience, the Works were divided up into sections referred to as DC1 and DC2, to be complete sequentially. The contract contained specific provisions about how the final account was to be submitted and finalised. In short:

SPL was to submit its proposed Final Account within 4 weeks of completing the Works;

Rotary was to assess the 'proper amount due for payment' in respect of SPL's Final Account and notify it within 13 weeks of receipt;

if SPL failed to submit its proposed Final Account, Rotary was entitled to value the 'proper amount due for payment' in respect of SPL's Final Account and notify it accordingly; and

in either case, if SPL failed to object to such notification within 14 days, the notified figure would be deemed agreed and would be binding on the parties.

Towards the end of the Works, in May 2016, SPL submitted a 'revised final account for DC1' to Rotary for its review and comments. Not long after it submitted an interim payment application in respect of the DC2 Works. This was not paid by Rotary. On 2 September 2016, Rotary issued a document described in the covering letter as 'our final account assessment for the works carried out on the above project by your company' (FA Letter). Within 14 days, SPL commenced an adjudication in respect of the DC2 Works (the DC1 Works were expressly carved out of the referral) and the adjudicator found in its favour. Shortly thereafter, Rotary commenced an adjudication seeking a declaration that SPL was bound by Rotary's FA Letter. The adjudicator agreed in part and SPL brought the matter before the TCC seeking declarations that the adjudicator was wrong.

The Court had to consider (i) what notification Rotary was obliged to give SPL in order for that notification to be binding; (ii) whether the FA Letter constituted the required notification; and (iii) if so, did SPL validly dissent to it?

Coulson J found that Rotary was required to notify SPL of the 'proper amount due for payment'. Reading the contract as a whole, the exercise consisted of two parts: (i) the valuation of the total amount payable; and (ii) less previous payments and any ongoing retention. Rotary's notification did not satisfy these requirements. It was at best a final account assessment, not a notification of an amount due (which were two manifestly different things). It simply compared figures put forward by the two sides and didn't make any allowance for retention or sums previously paid.

In respect of the second issue, Coulson J found that the principles that apply to interim payment applications apply equally to final accounts. That is, the need for the application to be in form, substance and intent an interim application, and free from ambiguity. He likened the situation of an employer being put at risk of paying the full amount claimed if it failed to serve a pay less notice in time to the situation where a contractor may risk losing its right to make its own final account claim where it failed to meet certain notice requirements for dissention.

He found that the FA Letter was, as a matter of form and substance, clearly a final account assessment, not a notification of an amount due. The FA Letter made no reference to the relevant clause under which Rotary argued it was issued. Coulson J held that 'if a notice under a certain clause has a draconian effect pursuant to the contract, the notice should make clear that it has been issued under that clause'. Furthermore, no reasonable recipient would have regarded the FA Letter as a notification of the sum due: 'for it to be that, the minimum that was required was the actual identification of the sum due and an express reference to' the relevant clause.

Despite finding in favour of SPL, Coulson J expressed concern that, in trying to protect sub-contractor's claims for payment 'the pendulum has swung too far the other way', with rigorous contractual terms now extending to cover not only interim payments (the primary aim of the Construction Act) but the permanent rights and obligations that arise out of dispute resolution procedures and the settlement of the final account. At least this decision provides relevant parties with clear guidance as to the strict approach courts are likely to take when it comes to payment notices issued at the final account stage.

Recourse to security following insolvency

Ziggurat (Claremont Place) LLP v HCC International Insurance Co PLC [2017] EWHC 3286 (TCC)

Insolvency issues have always been rife in the construction industry. Events of insolvency will almost always give rise to a termination right under a construction contract or a right to make a claim under a performance bond. In this helpful decision, the TCC provides a useful explanation of the JCT insolvency provisions and how the ABI performance bond works alongside these.

Ziggurat engaged County Contractors (UK) Ltd (County) under a building contract incorporating the JCT 2011 standard form. It attached the standard ABI Model Form performance bond which provided that, in the event of a breach of contract by County, the surety (HCC International Insurance Co) would discharge any losses sustained by Ziggurat. It also contained the following additional provision:

"(2) The damages payable under this Guarantee Bond shall include (without limitation) any debt or other sum payable to the Employer under the Contract following the insolvency (as defined in the Schedule) of the Contractor."

County suspended work during the project due to apparent financial difficulties. As a result, Ziggurat issued a notice of termination, stating other parties would be completing the work and it would be recovering such costs from County as a debt. County subsequently went insolvent.

Ziggurat claimed the maximum amount under the performance bond. County and its surety disputed the amount claimed and argued that the bond only applied in breach of contract scenarios and not as a demand instrument. It was submitted that Ziggurat (i) could not claim on the bond until it had proved breach of contract and proper costs had been ascertained; and (ii) could not rely on breach by insolvency as the termination notice had been issued before this meaning the contract had already come to an end.

In making his decision, Coulson J held that the purpose of the relevant provisions in the bond were to mirror the two main routes of termination under the JCT contract (i.e. default or insolvency). It would be contrary to common sense to say that the additional clause 2 did not operate on the occurrence of an insolvency event. In any event, Coulson J held that that County's failure to pay the relevant debt was a breach of contract. Per Gibson LJ in Perar BV v General Surety and Guarantee Co Limited (1994) 66 blr 72, '...The failure of the Contractor, following insolvency, to pay the sum due will be a breach of Contract which will be protected by the Bond'.

Moreover, where an insolvency event occurred, whether or not notice of termination had already been given was irrelevant. Under the terms of the JCT contract, insolvency automatically triggered a debt ascertainment process and Coulson J pointed to clear authority that such a process is intended to operate after the termination of the contract.

However, Coulson J did agree that the surety could challenge the quantum claimed. Ziggurat suggested all that was required was ascertainment of the figure in accordance with the contract, whilst the surety argued it could defend itself against any claim by advancing any arguments that would have been available to County. The JCT contract was silent on this point and as such Coulson J held that there was nothing to say that as soon as the figure was asserted it was payable without the opportunity to challenge, either by County or the surety.

This case provides useful guidance as to how the JCT insolvency provisions may work together with security instruments and is a reminder to parties of how important it is to understand what you are signing up to – both under the building contract and the related security instruments.

All change? When can costs be awarded against a non-party in procurement proceedings?

Bombardier Transportation UK Ltd v Merseytravel [2018] EWHC 41 (TCC)

The High Court has ruled that, in certain circumstances, a non-party to procurement litigation can be liable for some or all of the challenger's costs of bringing the claim. As the court recognised, the judgment has potentially far reaching implications for non-parties, who will often be, as in this case, a successful tenderer.

Bombardier Transportation UK Ltd ("Bombardier") had initially brought a challenge against Merseytravel's decision to award contracts worth circa £460m to a rival tenderer, Stadler Bussgang AG ("Stadler") as part of its rolling stock programme, including the replacement of 52 trains and improvement works to platforms and tracks. Stadler beat four bidders, including Bombardier, to the contract. Following a successful application by Bombardier to amend a consent order in April 2017, it fell to the court to award costs.

Despite being the named defendant in the claim, Merseytravel had adopted a neutral stance towards Bombardier's application throughout proceedings. Stadler had taken a more aggressive stance in opposing Bombardier's applications. The Court held that, in circumstances in which Merseytravel was in attendance only in its capacity as the contracting authority, it was inappropriate to award costs against it. Instead it was Stadler, the "real party" to the proceedings, whom the Court adjudged to be the appropriate subject of the order.

In awarding costs against Stadler, Coulson J drew heavily on Stadler's unreasonable conduct, and in particular that:

  • Stadler was prima facie responsible for the costs incurred by Bombardier (for instance, it ought to have conceded on the majority of points and raised what were vexatious allegations of fraud);
  • it was not necessary for Bombardier to demonstrate exceptional or unreasonable behaviour on the part of Stadler (this was not an established legal test); and
  • Stadler was the genuine party to the proceedings; whereas Merseytravel was "studiedly neutral" in the particular proceedings.

Whilst the Court was eager to qualify the decision that an order against a non-party will always turn on the facts, there is a costs risk to successful bidders (or any other non- party) where the contract award procedure is challenged and where that party's conduct is unreasonable.

Regulatory update

Private Members' Bill regarding cash retentions

Peter Aldous MP has introduced a Private Members' Bill in relation to cash retentions seeking to impose a mandatory deposit scheme.

In December 2017, Peter Aldous MP introduced a Private Members' Bill titled 'Construction (Retention Deposit Scheme) Bill'. This was formally introduced into parliament on 9 January 2018.

The proposed legislation's text is not yet public, although its title suggests it will look to impose a mandatory deposit scheme in relation to cash retentions. Although it must be noted Private Members' Bills rarely pass into law, this proposal is thought to be central to the government's current ongoing review of retentions.

Small Business Commissioner complaints scheme

Payment complaints procedure for small businesses launched.

The Enterprise Act 2016 introduced the Small Business Commissioner ('SBC') to help small businesses in their disputes with larger businesses. This included an in-house complaints procedure to allow a small business to seek a decision of the SBC in relation to a payment issue it may have with a larger supplier.

This procedure was launched on 1 December 2017, giving the SBC the ability to exercise these powers in respect of matters occurring after 6 April 2017. This means larger businesses need to be aware that small businesses now have an extra means of holding them to account regarding payment issues.

GDPR – Will you be prepared?

New data protection rules come into force on 25 May 2018 giving individuals greater control over their personal data.

Data protection rules are changing on 25 May 2018 when the GDPR comes into force. There will be new standards for protecting personal data and giving individuals control over this which will be significant for businesses as employers. Read about how we can help.

Projects & Construction Law Update

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