Practical Law

First things first, Happy New Year to you all.

The case I want to talk to you about this week is ISG Construction Ltd v English Architectural Glazing Ltd, which was handed-down by HHJ Stephen Davies in December 2019. Those of you already aware of the case will know that it concerns ISG’s Part 8 application following an adjudicator’s decision it was dissatisfied with. Although the Part 8 issues raised are interesting (and I will briefly touch on them) as the title suggests, I want to focus on a different part of the case, namely a particular aspect of ISG’s bespoke extension of time provisions.

 ISG Construction Ltd v English Architectural Glazing Ltd – the background

ISG Construction Ltd (ISG) was the main contractor on a project in Lombard Street, London, EC3, and it employed English Architectural Glazing Ltd (EAG) to undertake the design, supply and installation of the cladding on the project. The sub-contract incorporated ISG’s standard terms and clause 9 provided that EAG would be entitled to an extension of time provided it gave written notice within 14 days of the delaying event first occurring. Clause 9(8) went on to state:

“If the Sub-Contractor is in breach of any of the foregoing provisions of this clause 9 then the Sub-Contractor shall not have any entitlement to an extension of time in relation to any delay to which such breach or breaches relates and without prejudice to ISG’s other rights and remedies the Sub-Contractor shall without prejudice to and pending the final determination or agreement between the parties as to the amount of the loss or damage suffered or which may be suffered by ISG in consequence thereof forthwith pay or allow to ISG such sum (in which event ISG shall be entitled to deduct such sum from any amount otherwise payable to the Sub-Contractor as ISG shall bona fide estimate as the amount of such loss or damage such estimate to be binding and conclusive upon the Sub-Contractor until such final determination or agreement. Such estimate may include without limitation a sum in respect of liquidated and ascertained damages paid or to be paid by ISG under the Principal Contract where ISG reasonably considers that the Sub-Contractor has caused or contributed to delay to practical completion of ISG’s works under the Principal Contract.”

ISG did not permit EAG to start on site on the sub-contract commencement date of 20 March 2017. Instead, EAG started 25 weeks later on 11 September 2017. ISG awarded EAG a 25-week extension of time (EOT) to 6 March 2018, but a dispute arose as to whether that was sufficient given that the cladding work was now to be undertaken during the winter, rather than the summer. A dispute also arose regarding ISG’s entitlement to set-off against interim valuations for its alleged losses arising from a 20-week delay to the main contract for which ISG asserted EAG was responsible. By December 2018, ISG had deducted £3.183 million, which it contended was its bona fide estimate of damage pursuant to clause 9(8).

ISG v EAG – the adjudication

In January 2019, EAG started an adjudication and sought declarations that, among other things, it was entitled to an EOT to 21 December 2018, as well as that ISG had not proved that EAG had caused 20 weeks’ delay to the main contract works and, as such, EAG was not liable for the sum of £3.183 million.

The adjudicator said that, given the lack of useful programming analysis, he had “no choice but to form an impressionistic view of the delays” and, on this basis, he was satisfied that EAG had “excuses for their non-performance up to 22 October 2018”.

The adjudicator then went on to consider the parties’ submissions regarding ISG’s bona fide estimate of loss. He decided that he did have the power to open-up and review the estimate because the “final determination” referred to in clause 9(8) was not that of ISG, but the court, and thus, of an adjudicator as well. He also considered that the relevant breach consisted of the failure to give the correct notices as opposed to the underlying breach regarding the delayed performance of the works.

The adjudicator decided that ISG had failed to establish the causal link between EAG’s alleged failure to give notice and the delay to the main contract works, as well as the causal links between the delay to the sub-contract works and the 20-week delay to the main contract works. Therefore, he found that ISG had not provided a bona fide estimate of loss and that, as such, it was required to repay EAG the amount deducted.

ISG v EAG – the Part 8 proceedings

Not happy with the adjudicator’s decision, ISG sought various declarations in the TCC, the first three of which concerned EAG’s entitlement to an EOT. In particular, ISG asked the court to declare that EAG had not complied with the notice provisions in clause 9 and was therefore not entitled to an EOT beyond 6 March 2018 regardless of the merits of any underlying claim. The fourth and fifth declarations concerned ISG’s bona fide estimate and were as follows:

“(4) the adjudicator lacked jurisdiction to ‘set aside’ the claimant’s bona fide estimate;

(5) further or alternatively: whether or not he had jurisdiction to do so, the adjudicator was wrong to do so having regard to the terms of the parties’ subcontract and in particular their agreement that the bona fide estimate was binding and conclusive until final determination;”

The judge declined to grant declaratory relief in relation to the EOT issue because it involved mixed issues of fact and law “inherently unsuitable for determination in isolation under Part 8”, and ISG failed to make out its case. Given this finding there was strictly no reason why the judge needed to consider declarations (4) and (5). However, he was urged to do so by each party as they said that it would assist them going forward. The judge therefore said that he was:

“… prepared to at least embark on a consideration of the issue before deciding whether or not I am prepared to grant declaratory relief.”

The judge considered the parties’ submissions on clause 9(8) but he ultimately concluded that ISG was not entitled to declarations (4) and (5) because they were premised on an all or nothing position that “final determination” of the estimate referred to determination at final account stage and it could not be set-aside by the adjudicator. This was not the case, and ISG’s Part 8 application was therefore unsuccessful.

Opening-up, reviewing and revising

The judge also concluded that he should not embark on the process of determining the construction of clause 9(8). However, I think that it is nevertheless insightful to consider his comments regarding the interpretation of clause 9(8) because they certainly provide a strong indicator of his views. These are also likely to be of interest to parties to bespoke sub-contracts – I quite often see similar clauses attempting to bind a sub-contractor to an estimate or similar of the main contractor.

ISG argued that its bona fide estimate was binding and conclusive until determined at the final account stage of the sub-contract, and this was consistent with the Court of Appeal’s decision in Rosehaugh Stanhope plc v Redpath Dorman Long Ltd. ISG also relied on paragraph 20(a) of the Scheme for Construction Contracts 1998, which provides that an adjudicator may:

“… open up, revise and review any decision taken or any certificate given by any person referred to in the contract unless the contract states that the decision or certificate is final and conclusive.”

The judge said that there was clearly no difficulty about what is referred to by “final agreement”, and that “final determination” must mean final determination either as part of, or prior to, the final account process. He also said that it was significant that clause 9(8) distinguishes between the final determination process and the bona fide estimate process, and that the essential question is “what does the reference to being binding and conclusive pending final determination mean in this context?”.

The judge said that it means what it says, namely that it cannot be opened-up or reviewed, whether in court or in adjudication, in relation to matters in respect of which it is conclusive. The judge agreed with ISG that paragraph 20(a) of the Scheme applied and that, as such, it was not open to EAG to ask the court or an adjudicator to determine a dispute as to whether the amount of loss and damage stated in ISG’s bona fide estimate was right or wrong.

However, at paragraph 41 of his judgment the judge went on to set out those matters the bona fide estimate was not conclusive of. Importantly, he stated that:

“It is clearly not conclusive as to whether or not the defendant is entitled to any extension and, if so, what extension. It is also clearly not conclusive as to whether or not the claimant had acted bona fide (in good faith) in producing the estimate. It is also in my view clearly not conclusive as to whether or not the claimant had acted reasonably in his determination as to whether or not the defendant had caused or contributed to delay in practical completion of the claimant’s works under the main contract.”

The judge saw the force in ISG’s submission that the adjudicator was wrong to conclude that the loss and damage had to be the consequence of the defendant’s breach of the notice provisions of clause 9, rather than the underlying delay to which the breach related, but he did not think that it was necessary for him to finally determine this issue in the Part 8 proceedings. He also said that he had difficulty in accepting EAG’s contention that the issue of causation was not within the scope of loss or damage that ISG could bona fide estimate.

The judge also considered that the Rosehaugh case was not of any real assistance, but I think that it is worth a read by anybody considering the issue of conclusivity provisions.

My thoughts

I appreciate that this case turns on the wording of clause 9(8) and what the judge said about this clause is obiter, but the case is nevertheless a useful reminder to sub-contractors and others further down the supply chain that, where the Scheme for Construction Contracts 1998 applies, an adjudicator will not always be able to open-up, review and revise a contractor’s assessment. In particular, the judge made it clear that the words “unless the contract states that the decision or certificate is final and conclusive” in paragraph 20(a) of the Scheme mean what they say. Therefore, to answer the question posed in the title of this blog, it is in these circumstances that an adjudicator will not be able to open-up, revise and review.

The position in the Scheme for Construction Contracts 1998 is in contrast to option W2 of NEC, which simply provides that the adjudicator may “review and revise any action or inaction of the Project Manager or Supervisor related to the dispute”.

The case is also a useful reminder of the importance of accurate drafting. I would wager that ISG intended its bona fide estimate to be rock solid it terms of the extent of its conclusivity, but the judge made it clear that in his view it was not conclusive of a number of key matters. Drafters beware!