Construction Law – End of Summer Roundup

The summer months saw a number of significant construction cases being published, covering topical issues such as the validity of notices served on closed offices during ‘lockdown’, to questions which have been around for longer, like the exploration of principles under the Construction Act.

This roundup looks at a handful of the key cases from the last few months, and highlights two recent pieces of guidance relevant to construction contracts.

Insolvency and adjudication

Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25

In a landmark judgment, the Supreme Court, overturning the judgement of the Court of Appeal, held that insolvency was no bar on commencing adjudication proceedings. The facts of the case concerned a dispute around claims and counter-claims for outstanding payments under a contract for which Bresco commenced an adjudication. Lonsdale successfully argued that Bresco could not commence an adjudication because it had since become insolvent and, in any event, its claim was cancelled out by Lonsdale’s counterclaim. The Court of Appeal agreed on the basis that any adjudication commenced by an insolvent party would be “futile” as any enforcement proceedings would run into conflict with an insolvency process.

This litigation had been a long-running affair and had provided an easy ‘get out’ for parties seeking to avoid adjudication from insolvent parties. Adjudication, in these circumstances could simply not happen.

The Supreme Court, however, held that whilst it remained possible that courts would not permit summary enforcement of an adjudicator’s decision because of an insolvency process, that did not automatically make the adjudication futile.  An adjudicator’s decision might provide a simple method for liquidators to determine the net balance due between parties; it was not incompatible with the insolvency process.

It was also stressed that a party should not be barred from exercising its right to adjudicate that had been conferred upon it by Parliament solely for the reason of being insolvent.

The litigation was also notable for the involvement of third-party funders behind Bresco, Pythagoras Capital. It will be interesting whether this development continues and drives further involvement of funding arrangements in adjudication.

The case will obviously provide comfort to insolvent parties considering adjudication and will force other parties to give more careful consideration to claims advanced by insolvent contractors or employers.

The Sharpe Pritchard case summary is available on our website.

Service of claim form during COVID-19 set aside  

Stanley v London Borough of Tower Hamlets [2020] EWHC 1622 (QB)

Service of documents, and acknowledgement of the same, can be crucial in litigation. Failure to correctly do either can be fatal to a claim or defence. Ordinarily often a straightforward matter of posting to the correct address, during ‘lockdown’ it was not so simple.

The claimant sent the defendant a letter before claim by post and email in January 2020 to which the defendant did not respond. Proceedings were posted on 25 March 2020. The date of deemed service was 27 March 2020. The acknowledgment of service, due by 9 April 2020, was not filed and default judgment was eventually granted for the claimant, i.e. the claim was successful.

The defendant applied for judgment to be set aside; it had not received the claim because its office had closed. It argued that the claimant knew the office was closed (because of COVID-19) and should have contacted them to ascertain how to effect service.

The court held that there was real prospect of a successful defence and there was a good reason to set aside judgment.  It was incumbent on the claimant’s solicitor to act responsibly and he should have known that it was not fair or reasonable to post proceedings on an office that he knew, or should have known, had closed.

While the defendant failure to acknowledge service was serious and significant, the interests of justice required the judgment to be set aside.

Contract void because of lack of capacity

School Facility Management Ltd and others v Governing Body of Christ the King College and another [2020] EWHC 1118 (Comm)

Who signs your contract can be just as important as its provisions. Contracts must be correctly signed by those with adequate authority to do so and failure to give due consideration can have adverse consequences for both parties.

The defendant entered a 15-year hire contract for the construction and hire of a modular building and associated equipment for sixth form education. The project completed in 2013. Under the contract, the building would be purchased by BOSHire (one of the claimants). It would be hired by the college during the contract term and returned to BOSHire on termination or contract end. BOSHire then assigned the lease to School Facility Management (SFM) and then GCP Asset Finance 1 Ltd (another claimant).

The college then entered financial difficulties and was unable to service installments under the contract and sought financial contributions from the local authority which was not forthcoming. SFM then held the college in breach of contract and demanded that the college cease occupation of the building as it was no longer in lawful possession.

The claimants’ debt claim failed on the basis that the college had acted ultra vires and the contract was therefore void. The court held that the contract amounted to a finance lease that amounted to ‘borrowing’ within the meaning of paragraph 4, Schedule 1 of the Education Act 2002. This meant the college required the consent of the Secretary of State to enter the contract. In absence of this, the college did not have appropriate capacity to enter the contract and it was therefore void and unenforceable.

Partial implication of Construction Act Payment Scheme

Rochford Construction Ltd v Kilhan Construction Ltd [2020] EWHC 941 (TCC)

Aside from introducing the statutory right to adjudicate, a significant feature of the amended Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”) was the introduction of a requirement for construction contracts to have adequate payment mechanisms that can identify what sums are due and when they are due for payment. Case law has established that failure by contracting parties to include such mechanisms will necessitate the courts implying the statutory payment scheme as set out in the Scheme for Construction Contracts (England and Wales) Regulations 1998.

In an adjudication, the defendant successfully claimed payment from the claimant on that basis that the parties’ contract did not contain a Construction Act compliant payment scheme and therefore the statutory scheme had to be implied. The claimant had failed to issue a pay-less notice in accordance with the scheme. The claimant argued that adjudicator was wrong in that the contract’s scheme was in fact compliant.

The court held that the contract’s payment scheme was flawed for several reasons including that it failed to provide a schedule for payment despite references to such a schedule in the contract.

The contract’s scheme was impractical and unworkable and therefore partial implication of the statutory scheme was necessary.

This was generally a straightforward application of now well-established case law, however, in obiter, the court made interesting comments with reference to the pegging of final dates:

“while a due date can be fixed by reference to, say, an invoice or a notice, the final date has to be pegged to the due date, and be a set period of time, and not an event or a mechanism”

It is relatively common practice for final dates to be pegged to the issuing of a valid VAT invoice but these comments would suggest that such mechanisms are not compliant with the Construction Act and therefore would be replaced by the statutory scheme.

Recent guidance on construction contracts

With Building Information Modelling (BIM) becoming widespread in the industry, NEC has now published guidance on incorporating BIM protocols into its suite of contracts, in particular through use of option clause X10.

The Construction Leadership Council has published guidance on future-proofing the JCT and NEC suites of contracts. It is recommended reading for employers and contractors considering how to protect themselves against a ‘second wave’.

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

Posted in Recent cases.