Practical Law

The first half of 2010 has seen a number of important decisions affecting construction and engineering practitioners.

Notable decisions include:

• Geoffrey Osborne v Atkins Rail.
• Supershield v Siemens.
• BSkyB v HP (formerly EDS).
• William Hare v Shepherd Construction.
• Gold Group v BDW Trading.
• RTS Flexible Systems v Molkerei Alois Müller.
• Yuanda v WW Gear.
• Hall v Van der Heiden.
• Pilon v Breyer Group.
• Cleveland Bridge (UK) Ltd v Whessoe-Volker Stevin.
• Geldof Metaalconstructie NV v Simon Carves Ltd.

Geoffrey Osborne v Atkins Rail, which was the first reported decision of the Technology and Construction Court’s (TCC) latest recruit, Edwards-Stuart J.

For the first time in adjudication enforcement proceedings, the court severed an adjudicator’s decision, and enforced part only. It was a seminal moment, and one that, potentially, has far reaching implications for all adjudication enforcement proceedings.

Supershield v Siemens, where the Court of Appeal upheld the first instance judge’s findings on the proper construction of the contract between the parties, causation and remoteness of loss.

Practitioners will be interested in the application of the test for remoteness (set out in Hadley v Baxendale (1854) 9 Ex 341) to a situation where damage arises from the simultaneous failure of multiple protection measures. (Siemens was responsible for an overflowing water tank, but flood damage only occurred because drains designed to stop an overflow from spreading were accidentally blocked by an unknown party.)

BSkyB v HP (formerly EDS), where the TCC held that EDS (now part of HP) made fraudulent misrepresentations about its ability to deliver a project within the stipulated timescale when it pitched for the contract to build, design and implement a customer relationship management system for BSkyB. The TCC also held that the entire agreement clause included in the parties’ contract did not exclude liability for EDS’ negligent pre-contract misrepresentations. (It was subsequently reported that the parties had settled their dispute for £318 million.)

This judgment gives two clear warnings to the construction and engineering sector, namely that you should check the wording of entire agreement clauses and you must ensure tender procedures are followed.

William Hare v Shepherd Construction, where the Court of Appeal confirmed the lower court’s decision that the employer’s insolvency did not fall within the terms of a pay-when-paid clause in the sub-contract.

Following this decision, parties should look closely at the wording of any pay-when-paid clause dealing with upstream insolvency. They should also check carefully any bespoke amendments to a standard form contract, even if those amendments form part of a schedule of amendments used many times before. If a party seeks to relieve itself from legal liability (here to pay the sub-contractor if the employer became insolvent), clear words must be used.

Gold Group v BDW Trading, where the TCC confirmed that the existing principles of the law of frustration did not allow a party to treat a contract as frustrated when the projected selling prices of units on a commercial property development fell sharply.

The judgment confirms that changes in economic conditions alone do not frustrate a contract, particularly where the events that took place were unexpected, but not entirely unforeseen.

RTS Flexible Systems v Molkerei Alois Müller, where the Supreme Court found that, although the parties never signed a formal written agreement, an agreement that incorporated the MF/1 standard terms had come into effect notwithstanding that the agreement was expressed to be “subject to contract”. The Supreme Court reached a different conclusion from both the Court of Appeal and the High Court.

Practitioners should be aware that, as a consequence of this decision, a party may waive the protection offered by a “subject to contract” provision by beginning performance of its side of the bargain.

Yuanda v WW Gear, which was another Edwards-Stuart J decision that caused waves in the adjudication world. This time the court held that a Tolent clause in the parties’ contract conflicted with section 108 of the Construction Act 1996. As such, the contractual adjudication provisions were replaced by Part I of the Scheme for Construction Contracts 1998. Up to this point, Tolent clauses were thought to be Act-compliant and enforceable.

The judgment is relevant to more than just those who are involved with adjudication because it also considered the rate of interest due on late payments under construction contracts (under the Late Payment Act 1998), particularly if the parties use a JCT standard form of contract (the court noted 5% was a “fair rate of interest”), and what contracting on one party’s written standard terms of business under UCTA means.

Hall v Van der Heiden, where the TCC held that liquidated damages (LDs) for delay did not stop accruing when the employer terminated the building contractor’s employment under the building contract. The court awarded LDs up to the date when a replacement contractor completed the works. Not everyone agreed with this decision.

Pilon v Breyer Group, where the TCC held that an adjudicator’s decision to exclude aspects of the defence was erroneous and breached the rules of natural justice. As such, the application to enforce the adjudicator’s decision failed.

This case is a reminder that parties who want to refer a narrow issue to adjudication should consider carefully whether that is the correct tactical approach to adopt. Adjudicators should also take heed. Ruling evidence out may result in a breach of the rules of natural justice, rendering the whole of their decision unenforceable.

Cleveland Bridge (UK) Ltd v Whessoe-Volker Stevin, where the TCC held that part of the works arising out of the parties’ sub-contract fell within “construction operations” in section 105(1) of the Construction Act 1996 and part of the works fell within the exclusion in section 105(2)(c)(ii). As such, the adjudicator’s decision was made partly without jurisdiction, rendering the whole decision unenforceable. On the facts, the court did not sever that decision.

Given the court’s willingness to consider the detailed nature of the sub-contract works, this judgment may have opened up adjudication to parties who may not have thought they had a statutory right to refer their dispute to adjudication.

Geldof Metaalconstructie NV v Simon Carves Ltd, where the Court of Appeal held that a party could set-off its counterclaim under a separate contract between the two parties. It reached this conclusion  because the claimant’s own conduct had brought the two contracts into an “intimate relationship with one another”.

This case is a clear reminder that a party’s conduct may create a sufficiently close connection between two contracts for the doctrine of equitable set-off to apply (assuming the right to equitable set-off has not been contractually excluded).