‘Smash and grab’ adjudications, is the picture any clearer? – M Davenport Builders Limited v Greer and another [2019] EWHC 318 (TCC)

Background

The claimant, M Davenport Builders Limited, and the defendants Colin and Julia Greer had entered into a construction contract to which the Scheme for Construction Contracts applied, under the 1996 Construction Act, as amended (the “Amended Act”). The claim was brought against the defendants for summary judgement to enforce an adjudication decision awarding the claimant £106,160.84 plus interest.

The claimant had made a payment application, with no payment notice or pay less notice having been issued by the defendants within the requisite timescales. As such, the claimant then issued a payee’s notice in default in accordance with s.110B of the Amended Act. The claimant then commenced a ‘smash and grab’ adjudication to require payment in full, of the amount set out in the claimant’s payee’s notice. The claimant was successful in this adjudication being awarded the sum demanded on its final account plus interest; the defendant refused to pay. Instead, the defendant commenced a second, ‘true value’ adjudication to establish the correct value of the final account. This was with the intention of relying on the ‘true value’ adjudication decision by way of a counterclaim or set-off. This second ‘true value’ adjudication found that no sum was payable by the defendants to the claimant.

With the Court of Appeal having confirmed in S&T(UK) Limited v Grove Developments Limited [2018] EWCA Civ 2448 (“Grove”) that ‘true value’ adjudications following ‘smash and grab’ adjudications are permitted (see our previous case report here), the question in the present case was whether a ‘true value’ adjudication can be commenced and/or relied upon without immediate payment having been made in respect of a prior ‘smash and grab’ adjudication.

Decision

Given the clear (albeit technically obiter) judgement of Sir Rupert Jackson in Grove stating that an employer must comply with its immediate payment obligation before “embarking upon an adjudication to obtain a re-valuation of the work”, it is unsurprising that Stuart-Smith J presiding over this case, felt compelled to concur. The court held that the defendants were obliged to pay the sum specified in the first adjudication award, despite the result of the second adjudication.

Stuart-Smith J reconfirmed the principle that before commencing a ‘true value’ adjudication “the employer must make payment in accordance with the contract or in accordance with section 111 of the Amended Act.” It was held that it should now be deemed established that an employer must discharge an order of an adjudicator for immediate payment, based upon its failure to serve either a payment notice or a pay less notice, before they will be able to rely upon a subsequent decision in a true value adjudication. Moreover, it was concluded that this principle clearly applied to both interim and final applications for payment.

Implications

This was the first reported decision to apply the decision in Grove, and will be a welcome judgement for employers confirming their right to launch a ‘true value’ adjudication following a ‘smash and grab adjudication. Furthermore, the decision helpfully clarifies that this right applies to both interim and final payment applications.

However, there remains confusion about the timing of the ‘true value’ adjudication. While reaffirming that Grove was “clear and unequivocal” that the employer must make payment before it can commence a ‘true value’ adjudication, by applying Harding v Paice [2015] EWCA Civ 1231, Stuart Smith J held “that does not mean that the court will always restrain the commencement or progress of a true value adjudication commenced before the employer has discharged his immediate obligation”. Unfortunately, it is by no means clear when and in what circumstances the court would restrain a subsequent ‘true value’ adjudication.

As such, the question still remains whether an adjudicator has jurisdiction to decide a ‘true value’ adjudication where payment from a previous ‘smash and grab’ adjudication has not been made. The decision leaves parties to a construction contract with a lack of clarity as to when the right to adjudicate to determine the true value of an interim or final account arises.

Practical Tips

  • Employers (or payers) should always prioritise issuing payment notices and pay less notices on time and ensure they are valid – check that the amounts are accurate, allocated to specific parts of the work done, and the grounds for any deductions are clearly explained and quantified. This will avoid the need for the payer to be at the mercy of a ‘true value’ adjudication, but more importantly will avoid the payer being obliged to pay an amount (even if subsequently adjusted) which it wholly contests.
  • Where immediate payment is required following a ‘smash and grab’ adjudication, employers (payers) are advised to make the payment promptly before launching their own ‘true value’ adjudication. Despite the decision in the present case, in order to avoid potential issues regarding the jurisdiction of the ‘true value’ adjudication, employers should err on the side of caution by paying first and adjudicating later.
  • Contractors (or payees) should also be encouraged to submit at the outset, accurate payment applications which they are confident would stand up to an adjudicator’s valuation, so as to avoid significant adjustments of payments due to them.

Justin Mendelle is a Partner and Head of Construction who along with Juli Lau, and others in Sharpe Pritchard’s Infrastructure and Construction Teams, advise on all aspects of construction adjudications. Allan Owen is a Trainee Solicitor, who has worked in both the Infrastructure and Construction Teams.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.


Background:

The University of Warwick (Warwick) contracted Balfour Beatty Group Ltd (Balfour Beatty) under an amended JCT 2011 D&B to design and construct the National Automotive Innovation Centre (the Centre). The works were split into 4 sections. Balfour Beatty took possession of each of these sections on the 20 April 2015. However, the dates for completion specified for each section varied – section 1-3 were to be completed by April 2017 but section 4 had a later completion date of July 2017. Warwick was entitled to recover liquidated and ascertained damages (LADs) in circumstances where Balfour Beatty did not achieve Practical Completion, with different rates of LADs applied per section.

The argument brought before the adjudicator in the first instance turned on what constituted Practical Completion. If sectional practical completion was possible, then the LADs clause for each section would be operative and Balfour Beatty would be liable to pay such damages. However, Balfour Beatty argued that only completion of the Works as a whole constituted Practical Completion under the amended JCT. This was because the parties amended the definition of “Practical Completion” to “a stage of completeness of the Works or a Section which allows the Property to be occupied or used”. Although this appears cut and dry, this definition was uncertain because “Property” itself was defined to mean “the property comprised of the completed Works”. These two definitions do not sit well together and therefore cast doubt on whether sectional completion was even possible. If there could be no sectional completion, then the LADs provision relating to each section was inoperable, because it was not possible to separately achieve Practical Completion of a section prior to Practical Completion of the whole of the Works.

Decision:

On 2 May 2018, the adjudicator found in Balfour Beatty’s favour, stating that Practical Completion could not be sectional because the only time that the Centre could be occupied and used was when all 4 sections had achieved Practical Completion. This was further supported by the ordinary and natural meaning of the words, namely the definition of Property referring to the Works alone suggesting that it was “not possible to achieve Practical Completion of any Section in isolation from the other Sections”.

The TCC has come to a different decision. In doing so, they have followed the principles of contract interpretation as set out in Chartbrook Ltd v Persimmon Homes Ltd[1] and confirmed by Lord Neuberger in Arnold v Britton[2]. The approach taken should be to “identify the intention of the parties” at the time that the contract was entered into. This should be done using commercial common sense, such that “a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”.

Implications:

Although the court has shown a willingness to depart from the literal meaning where ambiguous drafting caused uncertainty in this particular case, it remains bound by the maxim of contract interpretation that it must follow the plain and ordinary meaning of the contract, and that it will not rescue a party from a bad deal.

The published form of JCT Design and Build contract provides a simple definition of Practical Completion, whereas the parties in this case had agreed lengthy amendments to the definition. This case is a stark reminder that any amendments to a standard form contract must be made with care and a full understanding of their implications. It was highly relevant to the judge in reaching his judgment that the Contract Particulars contained completion dates that varied by section and LADs provisions which levied different quanta of damages for different sectional defaults. It appeared clear that the parties were trying to suggest that the whole of the Works need not be complete for an individual section to be considered complete and capable of occupation, otherwise such differences need not have been negotiated.

This particular analysis shows us how fact-sensitive the maxims of contract interpretation are and how strongly they are rooted in the factual matrix and contractual negotiations of each party.

Practical Tips

  • Ensure consistency between each of your amended definitions when bespoke drafting.
  • Ensure that priority between each documents is clearly set out in the conditions of contract section and that each schedule and the Contract Particulars are rigorously checked for inconsistencies, tautologies and uncertainty.
  • Don’t assume that an amendment which appears to be ‘common-sense’ or ‘obvious’ is either of those – check and double-check that it actually achieves your stated objective.

[1] [2009] UKHL 38

[2] [2015]AC 1619

We have extensive experience advising on the JCT suite, construction and commercial contracts and would be happy to advise you further. Justin Mendelle heads up the Construction team. Juli Lau is an Associate in the Commercial Contracts team at Sharpe Pritchard. Alexandra Bellis is a Trainee Solicitor at Sharpe Pritchard.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.


Background:

GPP Big Field LLP (“GPP”) was the Employer to 5 Engineering, Procurement and Construction contracts (“EPC contracts”) to build solar plants in the UK. The Contractor, Prosolia UK Ltd, is currently insolvent and therefore GPP sued its parent company, Solar EPC Solutions SL (“Solar”) as guarantor in order to recover both liquidated damages (“LDs”) and unliquidated damages for aspects of the Works which were late or non-completed.


Background:

AMEC BCS Ltd (“AMEC”) was a concrete sub-contractor on both the Wellcome Centre (“Project 1”) and Castlepoint car park (“Project 2”) construction projects. It engaged Arcadis Consulting (UK) Ltd (“Arcadis”) to carry out design work to both these projects. The parties first agreed terms in relation to Project 1 on 8 November 2001 (“the November Terms”). The plan was that both parties would enter into an overarching “Protocol Agreement” which would govern all works under both projects. However, prior to finalising the T&Cs of this Agreement, each project would have specific contracts but carried out to the same general T&Cs. AMEC received instructions from the Employer to start work on Project 2. AMEC instructed Arcadis through 2 letters from 6 March 2002 to commence work according to the terms “that we are currently working under”. Arcadis sent an acknowledgment on 8 March and stated certain terms still needed to be agreed in a letter of 22 March. The Protocol Agreement was never formally agreed between Arcadis and AMEC and it later transpired that works to Project 2 were defective. The cost of cure (demolition and reconstruction) was estimated to be c. £40 million. Arcadis brought a claim to the TCC, seeking a declaration that the T&Cs that AMEC had offered on 6 March 2002 were the November Terms, which stated that Arcadis’ liability would be limited to £610,515. AMEC argued that no limit of liability had been formally agreed.

Coulson J (as he was at the time), handing down his judgment in the TCC[i], found that in the absence of the Protocol Agreement, there was no limit of liability for Arcadis’ works. He accepted that under the legal principles derived from G Percy Trentham v Archital Luxfer Ltd [1993] 1 Lloyd’s Rep. 25, the courts should strive to find a contract where work has been performed and that a presumption stands towards such an outcome in order to avoid quantum meruit claims. In the absence of finalising the Protocol Agreement, he found a binding, “simple” contract between the parties, formed through a letter of intent, which Arcadis accepted through the conduct of commencing the works, and which did not incorporate the November Terms (including the limitation on liability).

The Court of Appeal have overturned this decision.

Decision:

Gloster LJ (with whom Holroyde and Underhill LJJ agreed) found that the parties had agreed terms to limit Arcadis’ liability to £610,515. She identified that the following issues were relevant:

    1. i) Whether the terms of the first 6 March Letter were accepted by Arcadis in their letters prior to commencing works
    2. ii) Whether Coulson J had erred in failing to distinguish between the interim contract (“the Contract”) and the Protocol Agreement which was never agreed
    3. iii) Whether Coulson J had erred in mistakenly construing relevant documents which evidenced the agreement

In relation to i) Gloster LJ found that Arcadis’ submissions on offer and acceptance made sense:

  • AMEC’s 6 March letters (including the second letter with the liability limitation in the schedule) constituted an offer from AMEC, and the best evidence of acceptance of this offer was the conduct of undertaking the works (although the letters of 8 and 22 March sent by Arcadis also point towards acceptance).
  • The legal relationship arose at the point of acceptance. The works were therefore started under a fully formed interim contract. It was not material that Arcadis had not expressly accepted the terms by identifying the specific clauses or schedules, as there were no express rejections or counter-offers to these terms.

Gloster LJ, in considering the distinction in ii), found that as well as the Protocol Agreement which both parties had intended to conclude, there was an interim contract with finalised terms in place when Arcadis commenced works on both projects.

  • The effect of this is that the parties did not have to reach certainty of T&Cs on the Protocol Agreement for them to have a binding agreement on the T&Cs of the interim contract.
  • New versions of T&Cs exchanged in subsequent negotiations for the Protocol Agreement did not supersede or undermine the interim contract T&Cs – “it would not have made commercial sense …unless the parties explicitly stated the same”. The terms would only supersede if the Protocol Agreement were finalised.

Turning to iii) she rejected Coulson J’s interpretation that the parties agreeing to “terms and conditions we are currently working under with yourselves”, as stated in the letter of intent, meant that there was still uncertainty of terms as they were under negotiation:

  • This was not the “natural and ordinary meaning” of “working under”, which should be contrasted with “working on”.

Implications:

The construction industry is a fast-paced sector where parties are regularly time-pressured to complete extensive projects to challenging deadlines. Although not ideal, often parties choose to commence works prior to finalising all T&Cs and executing a final contract. In such scenarios, the parties will have entered into preliminary negotiations and might choose to rely on a letter of intent.

This decision is fact-specific. However, it can give some comfort to contractors who have commenced works subject to agreeing a final contract. Interestingly, the November Terms themselves contained outstanding (although minor) matters to resolve, and Gloster LJ said the reasoning in British Steel Corp v Cleveland Bridge & Engineering Co Ltd [1984] 1 All E.R. 504 was another reason to decide differently. She suggested it was an “extraordinary result” to allow unlimited liability to be accepted by conduct where a contractor would never agree to such terms under a formal contract. Perhaps it might not be a step too far to suggest the court will view a party’s silence to terms when accepting by conduct as no greater acceptance of responsibility than they would have agreed in the negotiations that follow, especially where the other party is aware of any proposed caps at the time of instruction.

Practical Tips 

  • This case is a warning to all contractors (and Employers!) about the so-called ‘pre-contract’ stage. Contractors should not rely too heavily on agreeing a formal, detailed agreement in the future. Employers must be clear about their expectations.
  • If works are to begin prior to a formal final contract, agreeing major terms at this interim stage is a must, including the parties’ payment obligations, limits of liability and warranties and indemnities.
  • Parties should note that letters of intent and proceeding with works can be construed as offers and/or acceptance, leading to legally binding contracts being in place without any formal written agreement, and despite there being unresolved issues. Therefore parties need to carefully balance taking a pragmatic approach towards pre-contract works against the risks that are inherent in proceeding with works and issuing or responding to letters of intent.

[i] Arcadis Consulting (UK) Ltd (formerly Hyder Consulting (UK) Ltd) v AMEC (BCS) Ltd (formerly CV Buchan Ltd) Queen’s Bench Division (Technology & Construction Court) [2016] EWHC 2509 (TCC)

We have extensive experience advising on construction contracts and negotiations, and would be happy to advise further on strategies relating to interim works. Juli Lau is an Associate in the Infrastructure team at Sharpe Pritchard. Alexandra Bellis is a Trainee Solicitor at Sharpe Pritchard.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

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