Construction update: report and review of recent cases

No concluded contract

If you fail to execute your contract then there is a risk that there is no contract at all.

In this case, Haden Young v Laing O'Rourke Midlands Limited, the judge looked in detail at the discussions between the parties and concluded that they had agreed that there would be no binding contract unless and until there was a formal signed and executed contract and certain essential terms had been agreed. One of the terms that the parties agreed was essential was the limit of liability under the warranties or the subcontract. As the limit had not been agreed and the contract had not been executed there was no contract. The subcontractor was entitled to be paid a reasonable remuneration for works completed on a quantum meruit basis.

Things to consider

The general principles of contract mean that parties are free to negotiate and agree the terms of the contract by which they are to be bound. If the parties agree that there will be no contract unless and until a specified term is agreed or (as here) the contract is executed, then if that term is not agreed (or the contract not signed) then there will be no contract. Additionally, if the parties do not reach agreement on all the terms which they regarded as essential for a contract to come into existence between them, then no contract exists.

Haden Young v Laing O'Rourke Midlands Limited [2008] EWHC 1016 (TCC)

No stay of proceedings so you can adjudicate

In the absence of express provisions, parties to a contract are not entitled to an injunction or a stay of court or arbitration proceedings so that they can pursue adjudication.

The sub contract was JCT DOM/1 which stated "if any dispute or difference arises under the sub-contract either party may refer it to adjudication ….". There was no wording suggesting that the parties were compelled to proceed to adjudication. The court confirmed that as adjudication was not a pre-condition to the instigation of the final dispute resolution process (which under this contract was arbitration), there was no obligation to adjudicate and there should be no stay of arbitration proceedings in the meantime. There was simply a right to adjudicate at any time if a party so wished. As the dispute resolution process was arbitration it was for the arbitrator to decide if a stay should be granted and not a decision for the court.

Things to consider

It would be rare for a party to be compelled to adjudicate before seeking a remedy through litigation or arbitration. However, parties are free to include such an obligation in their contract if they wish. Any obligation will have to be clearly worded to create a binding agreement to adjudicate first.

Cubitt Building and Interiors Limited v Richardson Roofing (Industrial) Limited [2008] EWHC 1020 (TCC)

Joint names insurance: can you sue a co-insured?

There is no principle of law or construction that prevents a co-insured suing another co-insured.

The contractor was arguing that a clause in a construction contract providing for joint names insurance prevented the employer claiming an indemnity for liability for negligence against it under the terms of another clause in the contract. The circumstances were unusual as the employer had failed to take out the insurance. The contractor was arguing that the insurance clause took precedence and/or there was a principle preventing recovery from a co-insured. The Court of Appeal decided that the definition of "contractors" for the purpose of the joint names insurance did not included the contractor so it was not covered under the terms of the insurance in any event. In looking at the issue, the court rejected the suggestion that there was a principle that co-insureds could not recover from one another. The court stated it would always depend upon the wording of the contract. Recovery from a co-insured was permissible unless there was an express term to the contrary.

Things to consider

When including provisions for joint names insurance ensure that the provisions are compatible with any clause stipulating liability for negligence by the contractor. It is advisable to expressly state whether liability of the contractor continues if the loss is covered by the insurance. If you wish to prevent recovery by a co-insured against another co-insured you must state this clearly in the contract.

Tyco Fire & Integrated Solutions (UK) Limited v Rolls Royce Motor Cars Limited [2008] EWCA 286

Can you set off LADs against an adjudication award?

You cannot deduct liquidated and ascertained damages (LADs) from an adjudicator's award except in limited circumstances.

The defendant tried to argue that it was not bound to pay the amount awarded by the adjudicator because it was entitled to set off LADs against the sum awarded. The court confirmed the circumstances it which you could set off against an adjudicator's award were limited to those set out in the previous decision of Balfour Beatty Construction Ltd v Serco Ltd [2004], that is:

• where it follows logically from an adjudicator's decision that the employer is entitled to recover a specific sum by way of liquidated damages; or
• in other cases, only if the contract and the circumstances of the case permit.

In this case, Avoncroft Construction Limited v Sharba Homes (CN) Limited, the adjudicator had not determined the issue of entitlement to LADs. There were no express provisions in the contract entitling the defendant to deduct LADs or to set off sums owing from an adjudicator's award. The contract stated that parties had to comply with an adjudicator's decision. In the circumstances the court confirmed there was no right of set off.

Although it was unnecessary to do so, the court went on to comment on the suggestion that the employer had served a valid withholding notice in relation to the adjudicator's decision (thus entitling the employer to withhold the amount of the LADs alleged to be owing to it). The judge confirmed that the adjudicator's decision as to the amount due to the contractor is a "sum due under the contract". As such, the Construction Act provides that a construction contract must include provisions for a withholding notice to be served in respect of it. In this case the contract failed to do so. In such circumstances, the Construction Act implies such a right into the contract and by reference to the Scheme for Construction Contracts prescribes a period for service of a withholding notice of "no later than seven days before the final date for payment". As the adjudicator had made a peremptory order giving the paying party seven days to make payment, it was not possible for the paying party to serve a valid withholding notice in time. The judge stressed the importance of strict compliance with the time limits provided by the Construction Act and refused to make any allowance for this impossibility. In the circumstances, the withholding notice was served out of time and the judge ordered enforcement of the adjudicator's award.

Things to consider

The circumstances in which a paying party can avoid compliance with an adjudicator's award are limited. There is no general right of set off from a decision of an adjudicator, as to do so would defeat the purpose of the adjudication provisions. For the same reason, the court will be reluctant to find that contract conditions permit set off against an adjudicator's decision (Levolux AT Limited v Ferson Contractors Ltd [2003]). There is however no ruling as yet on whether drafting that specifically allows the losing party to set off against a decision would be successful.

Avoncroft Construction Limited v Sharba Homes (CN) Limited [2008] EWHC 933 (TCC).