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Construction case law update: January 2013

Genesis Housing Association Ltd v Liberty Syndicate Management Ltd [2012] EWHC 3105 (TCC)

Keywords: Insurance, warranties, “basis of contract” clauses, incorrect completion of Proposal form

The Issue

Did a mistaken, but not fraudulent, completion of a Proposal form entitle an insurer to avoid the policy, where the Proposal was not expressly incorporated into the Policy?

The Facts

The Claimant provided affordable housing.  The Defendant underwrote policies known as “Premier Guarantee for Social Housing” which provided decennial cover against certain types of defects within the social housing to which it applied.   

The Claimant had engaged a company which was  a special purpose vehicle (“TT Bedford”) as the main contractor to design and carry out refurbishment works to a former office block, known as BT Towers.  TT Bedford owned the freehold of BT Towers, but had granted leases to the Claimant of various levels on either a social rent or shared ownership basis and also demised certain other levels. 

TT Bedford approached MD Insurance Services Limited (“MD”), a company who administered Premier Guarantee policies, to seek the Premier Guarantee cover.  The Proposal form was largely completed by MD, albeit signed by TT Bedford.  It is unlikely that the Claimants ever saw the Proposal form.  A quotation was provided, based on the answers given in the Proposal form, and the premium paid by TT Bedford.  It was confirmed between the Claimants and TT Bedford that the cover would include “contractor’s insolvency cover”.  Before the works were completed, administrators were appointed in respect of TT Bedford, who then sought to move from administration to dissolution. 

The Defendant refused to indemnify the Claimant on a number of grounds, one of which was breach of warranty, as it was alleged that certain answers to questions in the Proposal form were not accurate.  In particular, the “Builder” had been named as TT Construction and not TT Bedford.  Although there had been some debate as to who the builder would be, at the time the Proposal form was completed and the Quotation was provided by MD, it was known that the builder would be TT Bedford.  There was no allegation that the form had been completed dishonestly or fraudulently. 

The proposal form was not expressly stated to be incorporated into the Policy, but the Proposal Form itself did contain a statement that, if cover was provided, the statements made in the proposal form would form the basis of the contract with the insurer. 

Held

Edwards-Stewart J

After a review of the authorities on basis of contract clauses and referring to the Consumer Insurance (Disclosure and Representations) Act 2012 (not yet in force) the Judge set out the following propositions:

  1. “It is well established that in principle “basis of contract” clauses and warranties in relation to insurance are enforceable in law and not contrary to law or public policy at least yet. This will change in the case of consumer contracts of insurance when the new Act comes into force.
  2. The enforceability will generally come about either by such clauses or warranties being incorporated within the contract of insurance or as a stand-alone warranty by the insured given to the insurer through the proposal form or other document in which the “basis of contract” expression or declaration is given.
  3. If the insured has innocently or otherwise signed a document, usually the proposal, as the basis of the insurance contract entered or to be entered into, which confirms (either to the best of the insured's knowledge or belief or absolutely) as true the contents of that document, the insurance contract will be void or unenforceable if the contents are untrue.
  4. The contract of insurance, whether contained in the policy itself or any other documents such as the quotation or a certificate of insurance, may as a matter of construction modify, amend or even render of no or limited effect the “basis of contract” declaration or warranty. The ordinary principles of contractual interpretation apply to this exercise.
  5. Declarations said to be true or correct to the best knowledge or belief of the declarer will often be in the case of an individual person reviewable by reference to the honesty of that person in making the declaration. Thus Mr Zeller [in Zeller v British Cayman Insurance Co Ltd [2008] Lloyd's Rep IR 545] and Mr Economides [in Economides v Commercial Assurance Co Plc [1998] QB 587] in their respective cases honestly believed that what they were declaring was true in the sense it was to their best knowledge and belief. However, in determining particularly whether a corporate organisation making a declaration as to various statements being true to the best of its knowledge and belief is wrongful, the Court must determine what it corporately is likely to have known when it made the declaration. There does not have to be dishonesty as such on the part of the organisation but, if that organisation actually knows that something said to be true on the declaration is in fact wrong, then it is making a statement which is not true to the best of its knowledge or belief.”

The Judge rejected the Claimant’s assertion that a condition in the policy giving the Defendant the right to avoid the policy for misrepresentation, misdescription, error, omission or non-disclosure, made by the Claimant with intent to defraud had the effect of modifying the “basis of contract” warranty, so that only errors which were made with “intention to defraud” could be deployed to render the insurance contract enforceable.  The Judge stated that clear words would be needed in the contract of insurance to remove or cancel the basis of contract warranty made by the insured; such wording was not present in this case.  

The Judge held that either the insurance contract was void from the start, because the information in the Proposal form naming the builder as TT Construction and not TT Bedford was wrong, or, even if the insurance subsisted in some way, it only related to the insolvency of TT Construction and not to TT Bedford in any event. 

Vertase FLI Ltd v Squibb Group Ltd [2012] EWHC 3194 (TCC)

Keywords: Adjudication, multiple adjudications on same issue, adjudicator changed his mind

The Issue

An adjudicator was not entitled to change his view in a second adjudication on the same issue, whether or not the decision in the first adjudication was right. 

The Facts

Vertase employed Squibb as a subcontractor to provide plant, labour and temporary works resources for the removal of asbestos and demolition of structures at the former Leamington Foundry.  The works were not completed by the contract completion date and Squibb each party blamed the other for delays.  Squibb commenced an adjudication, seeking an extension of time for the full period of delay (“Adjudication 1”).  Vertase accepted that Squibb was entitled to an extension of time, but not for the full period and claimed liquidated damages for the period of Squibb’s culpable delay.  The Adjudicator found that Vertase had no entitlement to take liquidated damages from any amount found due to Squibb, but there was a dispute between the parties as to the basis of the Adjudicator’s decision.  It was argued by Vertase that the decision was solely based on the fact that Vertase had not issued a withholding notice, whereas Squibb argued it was both because of a failure to serve a withholding notice and also because Vertase had been unable to demonstrate any loss under the main contract. 

Vertase commenced Adjudication 2, seeking liquidated damages on the basis that it mattered not whether Vertase had suffered a loss under the main contract; Vertase had a right under the subcontract to be paid liquidated damages (“Adjudication 2”).  The same adjudicator was appointed.  The Adjudicator stated that he was sufficiently persuaded to “change the view he took” in Adjudication 1 and awarded Vertase liquidated damages.  Vertase sought to argue that this was not a change in position, because his previous decision had not taken into account the fact that Vertase had not suffered a loss under the main contract. 

Held

Edwards-Stewart J

The Court rejected Vertases’s position.  The terms of the decision in Adjudication 2 clearly showed that the adjudicator had changed his view about one of the reasons that would absolve Squibb from liability to pay liquidated damages.  The Judge found that since the decision in Adjudication 1 was final and binding on the parties until finally determined, it was not open to the adjudicator to change his mind in Adjudication 2.  It mattered not whether the decision was right or wrong. 

Alan Tang and Alison Wong v Grant Thornton & Others

Full case name: Tang Chung Wah (Aka Alan Tang), Lee Fung Ying (Aka Alison Wong) v Grant Thornton International Limited, Jonathan Russell Leong, Ringo Chiu Wing Cheung, Andrew Lam Hung Yun, Gary Terence James, Lo Ngai Hang (Aka Tony Lo Ngai Hang), Au Yiu Kwan (Aka Alvin Au Yiu Kwan), Li Wing Yin (Aka Amos Li Wing Yin), Norman Twui Ka Che, Paul Chow [2012] EWHC 3198 (Ch)

Keywords: Arbitration, certainty, conciliation provisions, condition precedent to arbitration

The Issue

The Court considered whether contractual provisions relating to the requirements for the conciliation of disputes prior to arbitration were sufficiently clear and certain to be given binding effect and to act as a condition precedent to arbitration proceedings.

The Facts

The Claimants were minority partners in a partnership governed by Hong Kong law.  The Second to Tenth Defendants were the majority partners.   The First Defendant was the “umbrella” organisation for the Grant Thornton network of accountancy and audit firms.  The First Defendant instigated arbitration proceedings in Hong Kong following the expulsion from the Claimant’s partnership from an accountancy and audit network.  Membership of the networks was governed by a Master Agreement, which was subject to English law and contained certain provisions on conciliation of disputes prior to arbitration.  The First Defendant and the Second to Tenth Defendants entered into a settlement agreement and agreed to discontinue the arbitration.  The Claimants contested their application to do so, alleging that the tribunal had no jurisdiction, because the provisions on conciliation of disputes had not been followed. 

The tribunal found that it had jurisdiction as the provisions of the contract relating to conciliation of disputes was not sufficiently precise or certain to be contractually binding or, alternatively, that they had not been intended to prevent a reference to arbitration.  The tribunal made a final order terminating the arbitration.  The Claimants made a claim under section 67 of the Arbitration Act 1996 to set aside this final award on the basis that the parties had not followed the conciliation provisions and, consequently, the tribunal did not have jurisdiction.

Held

Hildyard J

The Judge began by identifying that the tribunal’s own view of its jurisdiction has no legal or evidential value, although it wold be analysed carefully by the Court and proceeded to consider the reasons given by the tribunal.  After reviewing the authorities, the Judge then set out the following guidelines:

Agreements to agree and agreements to negotiate in good faith, without more, must be taken to be unenforceable: good faith is too open-ended a concept or criterion to provide a sufficient definition of what such an agreement must as a minimum involve and when it can objectively be determined to be properly concluded. That appears to be so even if the provision for agreement is one of many provisions in an otherwise binding legal contract, with an exception where the provision in question can be construed as a commitment to agree a fair and reasonable price.

However, especially when the relevant provision is but one part of a concluded and otherwise legally enforceable contract the Court will strain to find a construction which gives it effect. For that purpose it may imply criteria or supply machinery sufficient to enable the Court to determine both what process is to be followed and when and how, without the necessity for further agreement, the process is to be treated as successful, exhausted or properly terminated. The Court will especially readily imply criteria or machinery in the context of a stipulation for agreement of a fair and reasonable price.

The Court has been in the past, and will be, astute to consider each case on its own terms. The test is not whether a clause is a valid provision for a recognised process of ADR: it is whether the obligations and/or negative injunctions it imposes are sufficiently clear and certain to be given legal effect.

In the context of a positive obligation to attempt to resolve a dispute or difference amicably before referring a matter to arbitration or bringing proceedings the test is whether the provision prescribes, without the need for further agreement:

  1. a sufficiently certain and unequivocal commitment to commence a process
  2.  from which may be discerned what steps each party is required to take to put the process in place and which is
  3. sufficiently clearly defined to enable the Court to determine objectively:
  • what under that process is the minimum required of the parties to the dispute in terms of their participation in it and
  • when or how the process will be exhausted or properly terminable without breach.

In the context of a negative stipulation or injunction preventing a reference or proceedings until a given event, the question is whether the event is sufficiently defined and its happening objectively ascertainable to enable the court to determine whether and when the event has occurred.

Applying those guidelines to this case, the Judge found that the provisions lacked sufficient definition and certainty to constitute enforceable conditions precedent to the commencement of arbitration or, alternatively, the provisions, properly construed, did not prevent a party to the Master agreement from commencing arbitration proceedings after a period of two months after the request for conciliation or the failure of the conciliation process.

PC Harrington Contractors Ltd v Systech International Ltd [2012] EWCA Civ 1371

Keywords: Adjudication, adjudicators, fees, construction of adjudicator’s contract, jurisdiction, Scheme for Construction Contracts (England and Wales) Regulations 1998

The Issue

Whether a contractor was liable to pay the fees of an adjudicator who made an unenforceable decision

The Facts

The Appellant sub-contractor ("PC Harrington") withheld payment from one of its sub-sub-contractors in relation to a dispute over three projects. The matter went to adjudication and the adjudicator, Philip Doherty of the Respondent company ("Systech"), ordered PC Harrington to release the money. However, the adjudicator failed to take into account PC Harrington’s principal defence when he made his decision, rendering it unenforceable.

PC Harrington refused to pay the adjudicator as a result. Systech sued PC Harrington for the adjudicator’s outstanding fees.

Mr Justice Akenhead held that the adjudicator’s decision was indeed unenforceable due it breaching the rules of natural justice in not considering PC Harrington’s defence. However, the judge found the adjudicator was still entitled to his fees because the bargained-for performance included steps leading up to the decision, as well as the decision itself.

PC Harrington appealed.

Held

Leading judgment by Dyson, MR

The Court of Appeal overturned the High Court’s decision and held that the adjudicator was not entitled to his fees. It held that the contract was constructed as an entire contract such that the bargained-for consideration was an enforceable decision.

The court reviewed Part 1 of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (‘the 1998 Regulations’) and the adjudicator’s terms of appointment and found that neither of these provided for the adjudicator to be paid in instalments for carrying out discrete tasks. Therefore the contract was not divisible. The court concluded that paragraphs 8, 9, 11 and 26 of the 1998 Regulations clearly showed Parliament had not intended for the adjudicator to be paid in cases where he did not perform all his obligations, including making an enforceable decision.  Moreover, the parties had agreed with the adjudicator that if there was any default or misconduct on his part before he gave his decision, they did not have to pay him. Therefore it made sense that the parties were also not liable to pay the adjudicator if his default or misconduct related to the decision itself.

Comment

The Court of Appeal suggested adjudicators could amend their standard terms to ensure they are paid whatever the quality of their decisions. It remains to be seen whether this will happen. It is questionable whether such a term would be enforceable under section 3 of the Unfair Contract Terms Act 1977, let alone commercially acceptable.

Clark Electrical Ltd v JMD Development (UK) Ltd [2012] EWHC 2627 (TCC)

Keywords: Adjudication, adjudicators, ad-hoc adjudication, fees, submission to jurisdiction, summary judgments

The Issue

Whether the parties had entered into an ad-hoc adjudication agreement

The Facts

The Defendant sub-contractor (‘JMD’) engaged the Claimant sub-sub-contractor (‘Clark’) to carry out electrical works. Clark claimed JMD owed it more money than JMD had already paid it and served a notice of adjudication.
JMD emailed the adjudicator stating it was unrepresented and requesting guidance on how adjudication worked. It paid its £6,000 share of the adjudicator’s appointment fee.

After JMD organised legal representation, it denied that the adjudicator had jurisdiction and refused to take any further part in the adjudication.  JMD claimed it had not submitted to an ad-hoc jurisdiction and the adjudicator had no statutory right or express contractual right to jurisdiction. The adjudicator made an award in favour of Clark. 

Clark insisted JMD had, by its email and payment of the fee, fully submitted itself to the adjudicator’s jurisdiction, in respect of both the award itself and the jurisdiction the adjudicator had to make it.

Held

Behrens, J – Leeds

The parties had not entered into an ad-hoc adjudication agreement, as the adjudicator had found. Therefore the adjudicator had no jurisdiction and his decision was not enforceable.

JMD’s email requesting guidance on the adjudication as an unrepresented party was not an unequivocal submission to the adjudicator’s jurisdiction in its full sense; it made no reference to the decision itself and merely asked for guidance and more time. JMD’s payment of the adjudicator’s appointment fee did not constitute full submission to the adjudicator’s jurisdiction either. JMD could have been liable for the adjudicator’s fees even if it had contested jurisdiction Linnett v Halliwells LLP [2009] EWHC 319 (TCC), [2009] 1 CLC 157.

AG Quidnet Hounslow LLP v London Borough of Hounslow [2012] EWHC 2639 (TCC)

Keywords: Public procurement, development, freedom to provide services, Article 56 TFEU

The Issue

Whether a local authority could enter into a land development agreement having negotiated the terms of that agreement exclusively with one company

The Facts

The Claimant ("Quidnet") sought a declaration that an agreement that the Defendant local authority ("Hounslow") proposed to enter into with a third party breached the freedom to provide services under Article 56 of the Treaty on the Functioning of the European Union ("TFEU").

Quidnet owned one of the shopping centres in Hounslow town centre and the third party owned the other. Hounslow agreed with the third party that it would grant it a long lease of a site adjacent to the third party’s shopping centre. Hounslow also promised the third party it would not enter into negotiations with any other party during a defined period while detailed heads of terms were agreed.

Held

Coulson, J

The High Court held that the proposed agreement did not engage Article 56 TFEU as it did not involve Hounslow imposing any obligations on the third party to develop the site or provide any services at all. The agreement merely provided for the grant of a head lease, which itself did not oblige the third party to carry out any development.

Furthermore, if the land were ultimately developed, the third party would be acting as a developer rather than a contractor, and if contractors or suppliers then provided services to the third party to develop the site, these would not engage Article 56.

Hounslow wished to grant a long lease to the third party rather than Quidnet or anyone else because the third party could raise the necessary capital for the project.  The court held that neither European or domestic law required a landowner to grant a lease of land to a party with whom it did not wish to contract, even if the landowner happened to be a public authority. For the law to have actually required that would have involved a radical stretching of the ambit of Article 56.

Lastly, the court held that the matter was internal to the UK and as such Article 56 was not engaged. It held this because Hounslow is a UK authority, Quidnet a UK company and the land in question is in the UK. Moreover, there was no evidence of any company in any other EU member state being interested in developing the site.

Comments

This new form of challenge to a local authority development scheme failed because there was no obligation placed on any private sector party to deliver anything. 

When it brought its action, Quidnet also claimed that the proposed agreement was a public works contract, to which the public procurement rules in the Public Contracts Regulations 2006 (‘the 2006 Regulations’) applied. It claimed Hounslow were in breach of these regulations. This claim was stayed while the alternative case under Article 56 was heard. The decision under Article 56 means Quidnet  now has a low chance of succeeding under the 2006 Regulations.

Alstom Power Ltd v Somi Impianti SRL [2012] EWHC 2644 (TCC)

Keywords: Equipment, ownership

The Issue

Whether a clause in a sub-contract which provided that all the sub-contractor’s equipment when on the construction site was the contractor’s property actually transferred permanent ownership of the equipment to the contractor

The Facts

The Claimant contractor ("Alstom") sought a declaration against the Defendant sub-contractor ("Somi") regarding the ownership of certain equipment in an ongoing dispute relating to the construction of a power station.
One clause of the sub-contract between the parties provided that all the sub-contractor's equipment when on the site was “deemed to be” the contractor's property. Another clause mentioned goods supplied under the sub-contract “becoming” the contractor's property when they were delivered to the site. If the sub-contract was terminated, a third clause provided that the contractor could take possession of such equipment on the site that was reasonably required to complete the work.

Somi failed to perform its obligations under the sub-contract and Alstom terminated Somi’s employment. Somi went into liquidation. Alstom retained the equipment brought on site by Somi.

Alstom obtained summary judgment on its claim against Somi for £5.3 million and argued that this summary judgment application had already decided it owned the sub-contractor's equipment so its further application for declaratory relief was res judicata.

Held

Akenhead, J

The court held the property was deemed to be the contractor’s whilst on site but not before or after. The construction and interpretation of the contract indicated that the property had not been transferred by the contract.

As Somi conceded, the clause discussing the goods “becoming” the contractor’s property when they were delivered to the site was clear and made commercial sense. However, the court held that permanent ownership was not intended to be passed by the clause containing the phrase “deemed to be”.

There was no obvious commercial reason why it would be necessary to deem that permanent ownership transferred to the contractor; the equipment was only the contractor’s property while it was on site. The court also held that the contractor’s right to retain the sub-contractor’s equipment had not yet been triggered as the works were still in the warranty period and had not been “completed”.

The issue of the ownership of Somi’s equipment was held not to be res judicata because there had been no argument at the summary judgment application about the permanent or temporary nature of ownership set out in the deeming provision.