November 12, 2018

Projects & Construction Law Update - (Part 2) November 2018


Arguments against adjudication by insolvent companies

Michael J. Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (in Liquidation) [2018] EWHC 2043 (TCC)

Following a recent case in the TCC, entities responding to the initiation of adjudication proceedings by an insolvent company will have a strong argument to have proceedings withdrawn, or that the adjudicator lacks jurisdiction to hear the dispute, provided that it can be shown that the insolvent company also owed them money.

In Michael J. Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (in Liquidation) [2018] EWHC 2043 (TCC), the insolvent party initiated adjudication proceedings for unpaid sums owed for the carrying out of various electrical installation works.  In response, Lonsdale raised various counterclaims for sums it argued were due from Bresco.

Lonsdale brought injunctive proceedings to prevent Bresco pursuing the sums allegedly owed via adjudication.  It argued that the Insolvency Rules, rather than the Construction Act, governed the dispute.  The TCC agreed.

The specific rule in question was rule 4.90 (the equivalent of rule 14.25 in the new Insolvency Rules), which applies to situations where an account needs to be taken of all sums due between the parties with, only the balance of those sums either being provable in the liquidation or as an amount to be paid to the liquidator as part of the assets.

As there were claims and cross-claims between the parties, rule 4.90 applied and the resulting claim for the net balance under the Insolvency Rules meant that all other specific claims (e.g. under contract) either no longer existed or were no longer capable of separate enforcement.  The result was that the adjudicator simply did not have the jurisdiction to hear the case.

There was discussion as to whether or not it was correct to say that, in such circumstances, the Insolvency Rules operated to extinguish other claims (so that they ceased to exist) or just made them unenforceable.  However, Fraser J refrained from deciding the issue.  He was satisfied that, in either case, the dispute could not be determined by adjudication.

This decision illustrates how the right to bring adjudication under the Construction Act effectively falls away where one of the parties is insolvent and both parties claim the other owes them money.

Accordingly, if there are claims and counterclaims between the parties, respondents to an adjudication referred by an insolvent company can use this as a basis to challenge the adjudicator's jurisdiction.  Obviously, this will not make the underlying dispute go away, proceedings may still go ahead under the Insolvency Rules, but without the risk of an enforceable award that could be overturned at a later stage.

View the full judgment here.

Allegations of fraud and the adjudication process

Assesmont Ltd v Brookvex IMS Ltd [2018] EWHC 2629 (TCC)

In this case, a failure by the respondent to raise allegations of fraud based on fraudulent time sheets at adjudication meant that it could not subsequently raise such allegations as a basis on which to prevent enforcement of the adjudication award by summary judgement.

The applicant and the respondent had entered into a contract whereby the applicant had quoted £17,000 plus VAT to carry out steel works. The quote included a day rate and provisions for a higher rate for weekend work. Due to additional works carried out by the applicant, at the request of the respondent, the final account came to over £71,000. A dispute arose over the amount and the issue was referred to adjudication, where the adjudicator awarded the applicant the full value of its final account. The respondent did not raise any allegations of fraud at adjudication.

The applicant brought an application for summary judgment to enforce the adjudicator's award.  In its defence and counterclaim, the respondent alleged that the final account was fraudulent. It argued that certain time sheets stated that more men were working on site (or for more hours) than had been recorded in the site manager's diary, and that, on some of the time sheets, the site manager's signature had been forged.

The respondent argued that summary judgment should be refused or, if not, a stay of execution should be granted because the applicant had not shown that it would be able to repay the award if the respondent was successful in its counterclaim.

It was held that, as the fraudulent allegations could have been raised at adjudication, they could not subsequently be raised to prevent enforcement of the adjudicator's decision (and, in any event, the respondent had failed to show that there was clear and unambiguous evidence of fraud).

Despite the above, the TCC did find that fraud may still be relevant to an application for a stay of execution.  A primary consideration would be if the fraud allegations lead to a possibility that the receiving party may dissipate the adjudication sum. However, on this point, the Court was of the view that the respondent had failed to present sufficient evidence showing that the applicant could not repay the award if the respondent was successful in its counterclaim. Accordingly, summary judgment was granted and a stay of execution refused.

Following a line of previous authorities, this case highlights the importance of raising allegations of fraud at the adjudication stage.  Failure to do so will result in the Court viewing as irrelevant, to the issue of enforcement, allegations that should have been raised at adjudication.  However, the case does clarify that a respondent may still seek to rely on such allegations to support an application for a stay of execution. 

Regulatory update

NEC publishes guidance on off-site modular construction

On 25 September 2018, the NEC published guidance on using the NEC4 suite of contracts with offsite modular construction. The guide aims to help companies take advantage of the benefits of offsite modular construction, such as increased speed, reduced waste and improved quality.

Among other things, the guidance considers which NEC4 main payment options are appropriate, when title to goods passes and issues surrounding design and quality.

The note was prepared by Ian Heaphy and Peter Higgins and is free to download via the NEC website.

Readers can also view Clyde & Co's own Off-Site Manufacturing Report here.

CIOB Report: Construction and the Modern Slavery Act – Tackling Exploitation in the UK

The government has published a report by the Chartered Institute of Building (CIOB) on modern slavery within the building industry which is free to download here.  The report:

  • defines and explains the concept of modern slavery and how the construction business model is particularly vulnerable to permitting exploitation (focussing on both present and future risks);
  • outlines the Modern Slavery Act 2015 (MSA 2015) and its key reporting requirements, including section 54 of the MSA 2015, which requires all businesses with a turnover greater than £36 million to publish an annual transparency in supply chains (TISC) statement;
  • outlines new standards that encourage long term improvement, such as ISO 20400:2017 (Sustainable Procurement) and BRE's Ethical Labour Sourcing standard;
  • reports on recent case examples in the construction market which portray how the industry is responding to the MSA 2015;
  • puts forward proposals for changing the construction model in order to reduce the risk of exploitation; and
  • provides advice to those operating in the construction industry on where to receive support to enable them to detect and remedy exploitation.

Most importantly, the report highlights that the success of any initiative depends on the genuine commitment of senior management within the industry. 

RIBA, CIOB and RICS launch Quality Tracker 

The Royal Institute of British Architects (RIBA), Chartered Institute of Building (CIOB) and Royal Institution of Chartered Surveyors (RICS) launched a new digital tool to improve the quality of outcomes in the construction industry.

Part of the Building in Quality Initiative, the Quality Tracker is promoted by the Construction Industry Council (CIC) as having the following benefits for the construction industry:

  • Acting as a constant reminder of quality.
  • Improving, among other things, collaboration and transparency, by establishing a 'chain of custody for quality'.
  • Giving purchasers, tenants, investors and asset managers a record of the quality targets and development history for the building they are purchasing.
  • Enabling clients to differentiate themselves in the market by demonstrating their commitment to quality.
  • Incentivising better quality in buildings, which will improve human health, safety and wellbeing in the industry.

The Quality Tracker will be piloted on real construction projects over the next six months. Information on how to become involved in the pilot can be found here

Clyde & Co 'In the News' 

Liz Jenkins, Partner, was quoted in the Financial Times, commenting on the Budget and how it will impact the construction industry at large. Readers with a subscription can view the full article here.

David Hansom, Procurement Partner, was featured in Building, with his article on how to make your construction contracts Brexit-proof.  Readers can view the full article here.

Upcoming events

FIDIC International Contract Users' Conference 2018 

4-6 December | Hotel Novotel London West, Hammersmith International Ctre 1, Shortlands, London W6 8DR

Advanced Dispute Resolution Techniques Workshop by partners Robert Meakin and Anthony Albertini on December 6. Book your spot here