Construction case law update – May 2015

Ecovision Systems Ltd v Vinci Construction UK Ltd (Rev 1) [2015] EWHC 587 (TCC)

Keywords

Adjudication – Appointment adjudicator – Enforcement

Synopsis

The court refused to enforce an adjudicator’s decision on finding that the adjudicator was not properly appointed and had followed the wrong rules in the adjudication. For both reasons, he lacked jurisdiction.

Facts

The Defendant contractor entered into a sub-contract with the Claimant sub-contractor under which it agreed to design, supply and install a heating and cooling system for an office development.

The contractor served a notice of adjudication after the parties failed to resolve a dispute between them. The contractor then approached the president and vice president of the RICS to see if they were free to act as the adjudicator. As they were unavailable, the contractor applied to the RICS for an adjudicator and one was nominated.

A dispute then arose between the parties and the adjudicator over which adjudication rules applied. The Defendant served its referral, but the Claimant declined to respond. The adjudicator decided the adjudication in favour of the Defendant, granting it the declaration it sought.

The Claimant sought a declaration under CPR 8 that it was not bound by the adjudicator’s decision on the basis that:

(1) There were three adjudication procedures that could apply to the dispute because of the way the sub-contract had been put together and how it cross-referred back to the main contract, and it was unclear which set of rules the adjudicator had been appointed under. The Claimant submitted that identifying the correct adjudication procedure was important because it went to the heart of the adjudicator’s jurisdiction. It suggested that unless a notice of adjudication made clear what contractual provision or legislative power to adjudicate was being invoked, it was invalid, including where the request was made to an ANB.

(2) The adjudicator’s decision was made late and was therefore a nullity.

(3) The adjudication was “tainted by apparent bias and want of impartiality and fairness”, rendering the adjudicator’s decision not binding. Alternatively, any future adjudication should not be undertaken by the same adjudicator.

The contractor resisted the declaratory relief application, arguing that:

(1) It was clear which set of rules the parties had intended to apply.

(2) There was no need to make clear which rules applied in the notice of adjudication when both parties agreed that they were parties to a construction contract, as defined by the Construction Act 1996.

Decision

HHJ Havelock-Allan QC held that the adjudicator was not properly appointed and followed the wrong rules in the adjudication. For both reasons, he lacked jurisdiction. However, the court rejected any suggestion that the adjudicator was biased or there was apparent bias.

In reaching this conclusion, the court held that the TeCSA adjudication rules applied, not Option W2, as the contractor had argued and the adjudicator had adopted.

The court also held that the adjudicator’s decision was “probably” made out of time, although it was not necessary to decide that point following the decision on which adjudication rules applied.

Further, the court held that an adjudicator lacks jurisdiction to determine whether he has jurisdiction (even on a temporary basis), and choosing between two sets of adjudication rules will amount to such a determination if the choice “makes a material difference as to how he should be appointed”. There was an exception to this if the adjudicator’s choice coincided with the referring party’s contentions and the referring party was correct.

However, the court was not prepared to find that it was a requirement that the notice of adjudication should identify which contractual provision or legislative power to adjudicate was being invoked. The court noted that the Scheme for Construction Contracts 1998 and the various adjudication rules did not specify this, and it would be wrong to find a notice of adjudication or an application to an ANB was invalid without this information.

The court also rejected any suggestion that there was apparent bias against the sub-contractor. In doing so, it considered the test of a fair minded and informed observer. The court indicated that the adjudicator may be assumed to be trustworthy and capable of dealing with the dispute if it came before him again.

Comment

The overriding message of this judgment is that the adjudicator lacked jurisdiction because he was appointed under or decided he was appointed under the wrong adjudication rules, but the parties did nothing to help the adjudicator or themselves in this regard.

Further, the fact that there was a potential choice of three adjudication procedures suggests that those putting the sub-contract together could have been clearer in their drafting, ensuring something as important as resolving disputes was straightforward and obvious to all the parties involved.

In concluding that the TeCSA adjudication rules applied, the court noted that it made commercial sense for the main contract and the sub-contract to have back-to-back adjudication provisions. Otherwise, the parties risked a situation where an adjudicator’s decision may become conclusive under the sub-contract (if Option W2 applied), when a corresponding dispute under the main contract did not (where the TeCSA rules applied). While this may have been the parties’ intention, it took the court’s intervention to ensure it was clear to all those involved.

It is further notable that the court held that a notice was not invalidated if the relevant contractual or statutory basis for the adjudication was not included in the notice. However, that approach is not best practice and had the Defendant’s advisors had been clearer, the parties could have saved the time and cost of the adjudication and the subsequent declaratory relief proceedings.

Bristol Missing Link Ltd v Bristol City Council [2015] EWHC 876 (TCC)

Key Words

Public Procurement – Automatic Suspension

Synopsis

The TCC rejected an application by the Council to lift an automatic suspension for the procurement of a significant contract for domestic violence and abuse support services in Bristol on the basis of the Claimant’s genuine non-profit status, which meant that damages could not be an adequate remedy.

Facts

On 8 July 2014 the Council issued an invitation to tender for the award of a contract entitled “Bristol City Council Domestic Violence and Abuse Support Service”. The invitation stipulated a tender return date of 6 October 2014. The contract was to be awarded for a three year period starting on 1 April 2015, with an option to extend for a further two years. It also explained that the tender evaluation would be carried out in two stages. Stage one involved questions to ensure that the tenderers met the Council’s minimum requirements. Stage two was an evaluation of the tenders according to the evaluation criteria.

There was an 80/20 split in the weighting of the award criteria between Quality and Price respectively. In respect of Quality, the principal element was Service Delivery, which was worth 70% of the Quality component of the score and which was itself subdivided into eight, separately weighted sub-criteria. The evaluation was subject to a scoring matrix where individual scores were to be awarded for each sub-criteria, on a scale of 0-5.

The Claimant was the incumbent provider of the service to the Council and submitted a tender by the due deadline. The Council received two other tenders, including one from Refuge. The other tenderer did not get past stage one.

Although the Council said that they would inform the tenderers of the result of the competition in early December 2014, it was not until 8 January 2015 that the Claimant was informed that its tender had been unsuccessful. At the same time, Refuge were told that their tender had been successful.

There then followed detailed correspondence, first between the Claimant and the Council, and then through the Claimant’s solicitors, in which the Claimant’s unhappiness with the result and their concerns over the tender evaluation process was debated. One feature of that correspondence was the Claimant’s repeated attempts to see the material relating to the evaluation of Refuge’s tender. The Council refused to provide copies of Refuge’s tender, and the primary evaluation documents relating to that tender, despite the Claimant’s offer that these documents would be disclosed into a confidentiality ring. The Council did, however, provide certain information relating to the evaluation of the Claimant’s tender.

On 5 February 2015, as a result of the failure to resolve the issues between the parties, and in the light of the strict timetable provided by the Regulations, BMLL commenced proceedings challenging the procurement of the contract on the basis that (a) its scores were subsequently adjusted downwards from the individual scores produced by the evaluation panel as part of a subsequent moderation process (b) the council did not score the Claimant properly in accordance with its own tender evaluation criteria. 
 
On the basis of the Claimant’s challenge, Regulation 47G(1) of the Public Contracts Regulations 2006 imposed an automatic stay and prevented the Council from entering into the proposed contract with Refuge. This Judgment dealt with the Defendant’s application pursuant to Regulation 47H to lift that automatic stay.

Decision

Coulson J confirmed that the approach to be adopted by the court when determining an application to lift the automatic suspension is essentially the same as the test as to whether or not to impose an interim injunction, adopting the principles in American Cyanamid Co v Ethicon Ltd (No 1) [1975] AC 396. The Court of Appeal case of DWF LLP v Secretary of State for Business Innovation and Skills [2014] EWCA Civ 900 was binding authority on this matter (see [17] and [18]).

Serious Issue to be Tried

In determining whether there was a serious issue to be tried, Coulson J stated that in a suspension dispute in a procurement case, it is usually accepted by the contracting authority that there is a serious issue to be tried, “such an acceptance might be thought to be consistent with the absence of documentation: the authority taking the view that it was not obliged to (and so would not) disclose the underlying documents, but that, in consequence, it would not suggest that there was not a serious issue to be tried” (see [31]). As a result, in cases where there was a clear issue arising out of individual scores, it would usually be difficult for the court to conclude that there is no serious issue to be tried, particularly because of the lack of disclosure of the relevant documents.

In the present case the Court therefore rejected the Defendant’s submission, finding it “rather surprising that the Council considered that it was even arguable that there was no serious issue to be tried” (see [39]).

Balance of Convenience

Coulson J dealt with the balance of convenience from [48] of the Judgment, setting out “four elements… that need to be considered on an application of this kind”:

(a) the adequacy of damages;
(b) the importance of the remedy of review;
(c) the advantages and disadvantages to the parties if the suspension is not lifted; and
(d) the advantages and disadvantages to the parties if the suspension is lifted.

In respect of the adequacy of damages, the Judge considered that damages would not be an adequate remedy for the Claimant on the basis that the Claimant was not a profit making organisation, which meant that if the suspension was lifted, BMLL would have no claim for anything other than nominal damages (see [51]). Coulson J concluded that “In my view, a non-profit making organisation, which has bid for a contract making no allowance for profit at all, and a minimal amount for overheads, is entitled to say that, in such circumstances, damages would not be an adequate remedy” (see [55]).

Coulson J also accepted that the effect of the lifting of the suspension would have catastrophic consequences for the Claimant (see [56]). In particular:

(a) the work done for the Council by the Claimant, in respect of women who have suffered from domestic violence and abuse, amounted to just over a third of the Claimant’s total turnover. Without this contract the entire organisation “will suffer catastrophic harm. This will not only harm BMLL, it will also have a significant adverse impact on the vulnerable women in Bristol who depend on our services.”
 
(b) The Claimant carried out a range of services dealing with the linked problems of domestic violence, sexual violence and mental health and “The lifting of the suspension in respect of the domestic violence strand will disconnect what had hitherto been an integral provision of services by BMML.”

(c) This part of the work could not be replaced in circumstances where there is only one domestic violence and abuse support service contract available in Bristol “and therefore the absence of this work would not only be catastrophic in itself but it would have a knock-on effect on the provision of services by BMLL in other locations”.

(d) If the suspension was lifted, the Claimant would be locked out from this core element of their work and would have no chance of doing it again until three or five years have expired. Again that would have an effect on other services provided by the Claimant.

(e) The lifting of the suspension and the effective determination of the case against the Claimant would have a significant effect on their reputation. Again, that could not be compensated for in damages.

On the last point, counsel for the Defendant relied on the case of Solent NHS Trust v Hampshire County Council [2015] EWHC 457 (TCC) to suggest that claims for reputational harm were of little consequence where the claim was linked to the unsuccessful attempt to obtain the contract in the first place. However, Coulson J accepted the Claimant’s submission that “in this case, the reputational damage arises from BMLL’s inability to do their core work in their only market, rather than their failure to win the contract per se” (see [57]).

By contrast, the court considered that damages were an adequate remedy for the Council if the suspension was lifted and it turned out that the Claimant’s claim was ill founded. This was for two reasons (see [60]): “First, if that happens… then that will lead to a six month delay in Refuge starting work. The costs savings to the Council (if any) which they will have been deprived of, because of that six months delay, can easily be calculated. So too can any administrative costs referable to the delay. What is more, the evidence from Mr Kandola shows that BMLL’s cross-undertaking in respect of such damages would be met.”

Next, Coulson J considered the remedy of review citing the case of Morrisons Facilities Services Ltd v Norwich City Council [2010] EWHC 487, in which Arnold J said that the fact that the only remedy available once a contract had been entered into was that of damages, as opposed to the potential remedies envisaged by the New Remedies Directive, was a relevant consideration to be taken into account in assessing the overall balance of convenience. Coulson J also cited the cases of Alstom Transport v Eurostar International Ltd [2010] EWHC 2747 in which Vos J (as he then was) stressed the importance of the remedy of review and the recent case of R (on the application of Edenred (UK Group) Ltd v Her Majesty’s Treasury and Others [2014] EWHC 3555 (QB). In that case, Leggatt J said:

“31. Looking at the matter overall, I accept the defendants’ contention that there is a public interest in the avoidance of delay and that there will be a detriment to that interest if it is necessary to wait a further six weeks before the TFC scheme can be launched. I do not, however, consider that detriment to be sufficient to outweigh the strong public interest in compliance with the law and the benefits that implementing the scheme in a lawful way may be expected to bring. That is particularly so given the arrangements that have been made for an expedited trial and the fact that, as I have assumed for the purpose of this judgment, a decision on the question of legality can be expected within a relatively short time.”

Coulson J therefore determined that this is therefore a matter to which the court must have regard when assessing the balance of convenience (see [64]). The Judge set out his conclusions at [65] and [66], finding that the public interest in ensuring compliance with the law is particularly significant in the present case because if the suspension is lifted, that is effectively the end of the Claimant’s claim. Therefore if the Claimant was right and the procurement process was not properly operated, they will have been deprived for all time of a significant legal right.

Coulson J went on to state that “Of course, in all cases where this issue arises for consideration, what matters is whether or not the trial can be heard in a reasonably short time in order for the issues to be finally determined. In some procurement disputes, the issues raised are so complicated, and require such preparation prior to trial, that the delay before the issues can be properly determined is too long, and the suspension has to be lifted. However, that is not this case. As I have demonstrated, the issues which are raised here are straightforward. Some documents have already been disclosed. The major work before trial will be the preparation of witness statements but that, in itself, is not an overly onerous task” (see [66]).

Finally, in respect of the advantages/disadvantages to each party if the suspension was not lifted, the Judge found that the Council’s evidence did not demonstrate that the new contract would provide services to the users that were significantly better than the services currently provided by the Claimant. The Judge also found that a delay of six months in rolling out a new overarching contract would not have any adverse effect on the service users. The Judge therefore concluded that “the advantages to the Council if the suspension is lifted are either non-existent or negligible; the disadvantages to BMLL are fundamental” (see [80]).

Comment

Coulson J’s comments on whether there is a serious issue to be tried in suspension/injunction cases indicate a clear need for a contracting authority to think very carefully whether to argue that there is no serious issue to be tried, particularly in cases where there were issues arising out of individual scoring. The case also highlights the importance of a contracting authority answering the claims made by a Claimant in detail. In this case, the judge remarked that “many important matters raised in their pleaded claim by BMLL had not been answered at all” and concluded that it was “self-evident” that there was a serious issue to be tried.

The case also makes clear that a court will be persuaded that damages are not an adequate remedy for a genuine non-profit organisation (to be distinguished from the case of Solent where the tender had allowed for a specific profit margin).

Finally, the case demonstrates that arguments about reputational damage are still worth making, albeit that in the present case the Judge was persuaded that the reputational damage would arise from the Claimant’s inability to carry out its core work in their only market.

MT Højgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Ltd [2015] EWCA Civ 407

Key Words

Construction Contracts – Breach of Contract – Reasonable Care and Skill – Absolute Obligations

Synopsis

The Court of Appeal reversed a decision of the TCC in which a contractor had been found liable for a failure to achieve a 20 year life in respect of grouted connections in the foundations of an offshore wind farm in reliance on a design standard which contained a fundamental error.

Background

In May 2006, E.ON invited tenders from a number of contractors, including MT Højgaard (‘MTH’), for the design, fabrication and installation of foundations for 60 turbines, which would comprise a new wind farm. In due course, E.ON accepted MTH’s tender and the parties entered into a contract dated 20 December 2006.

The contract contained the following obligations:

“8.1 GENERAL OBLIGATIONS
The Contractor shall, in accordance with this Agreement, design, manufacture, test, deliver and install and complete the Works:
(i) with due care and diligence expected of appropriately qualified and experienced designers, engineers and constructors (as the case may require);
(ii) within the Time for Completion;
(iii) providing all necessary Contractor’s Equipment, superintendence, labour and, (except as stated in the Employers Requirements) all necessary facilities therefor;
(iv) in a professional manner in accordance with modern commercial and engineering, design, project management and supervisory principles and practices and in accordance with internationally recognised standards and Good lndustry Practice;
(v) using only materials and goods which are new, unused and factory fresh and of a sound satisfactory quality and workmanship, manufactured and fabricated in accordance with internationally recognised standards, codes of practice and in accordance with Good Industry Practice;
(vi) so that each item of Plant shall, upon Completion in accordance with this Agreement, satisfy the Tests on Completion set out in this Agreement unless otherwise agreed in writing by the Employer;

The Technical Requirements specified, inter alia, that MTH must comply with the internationally recognised standard (“J101”) and included a requirement that the foundations would have a service life of 20 years.

It subsequently transpired that J101 contained an error of which MTH was unaware when it undertook the design. Shortly after completion of the works, the grouted connections in the foundations started to fail as a result of that error. Remedial works were commenced in 2014 amounting to EUR 26.25 million and a dispute arose as to whether MTH was liable for the cost of the remedial works.

At first instance, the judge found MTH liable due to a breach of the fitness for purpose obligation contained in the contract, namely that MTH warranted the foundations would have a service life of 20 years. Whilst MTH had relied the erroneous standard J101 for the design of the foundations, due to the fitness for purpose guarantee it gave it still had to deliver the design it guaranteed regardless of the error. MTH appealed to the Court of Appeal on the ground that the TCC had erred in construing the provisions of the contract.

Decision

The Court of Appeal determined that the question for it to decide was whether or not clause 8.1 of the contract conditions in conjunction with the Technical Requirements required MTH not only to comply with J101, but also to achieve a result, namely foundations with a service life of 20 years (see [87]). Part of the problem lay with the error contained in J101, not known about at the time the contract was entered into, which dramatically reduced the service life of the foundations; compliance with J101 would not therefore allow the foundations to fulfill their intended purpose for a period of 20 years, as envisaged by a number of contractual provisions.  

The Court started by considering the Technical Requirement which stated that the design of the foundations “shall ensure a lifetime of 20 years in every respect without planned replacement”.  The Court stated that “at first sight, such a provision, if incorporated into the contract, is a warranty that the foundations will function for 20 years” (see [91]).

However, such a warranty was inconsistent with the Contract conditions, which instead required “due care, professional skill, adherence to good industry practice, compliance with the Employer’s Requirements and so forth”. The Court took into account the hierarchy of the various contract documents and stated that the contract conditions took precedence over other contract documents, the Technical Requirements falling fourth in the order of precedence.  Jackson LJ reasoned that “if the contract required an absolute warranty of quality, one would expect to see it in [the conditions of the contract], not tucked away in the Technical Requirements” (see [97]).

The Court also held that the fit for purpose obligation was also inconsistent with all of the other provisions of the Technical Requirements, which referred to a “design life” of 20 years, which fell short of a guarantee to achieve an operational life of that period. The Court concluded that a reasonable person in the position of E.ON and MTH would know that the normal standard required in the construction of offshore wind farms was compliance with J101 and that such compliance was expected, but not absolutely guaranteed, to produce a service life of 20 years (see [104]).

The Court thereby found that the Technical Requirement was “too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations […] Clause 8.1 does not contain any warranty that the foundations will have a 20 year life”.

Comment

This case turned upon the construction of conflicting provisions in a contract as a whole and provides a useful summary of the principles of contract interpretation and emphasises the judgment in Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900 that “…if there are two possible interpretations of a provision, the court is entitled to prefer the construction which is consistent with business common sense”.

More importantly, the case demonstrates the difficulties posed by obligations requiring performance to a certain standard and obligations to carry out the works with reasonable skill and care. Whilst in the present case the Court concluded that the contractor did not provide a warranty or absolute guarantee, the Court of Appeal acknowledged that if drafted with “sufficient clarity”, a contract can impose upon a contractor both an obligation to comply with particular standards and specifications and to achieve a particular result (i.e. a “double obligation”).

MW High Tech Projects Ltd v Haase Environmental Consulting GmbH [2015] EWHC 152

Key Words

Construction Contracts – Fitness for Purpose – Reasonable Skill and Care

Background

MW High Tech Projects (“MW”) was appointed main contractor under a fixed price contract for the design and construction of a waste to energy plant in Horsham. MW appointed Haase Environmental Consulting (“HEC”) to provide design services under a letter of intent, in respect of which HEC completed a basic design. MW based its own tender to the employer on HEC’s basic design, which was incorporated into the EPC delivery plan.

The parties subsequently entered into a formal contract. Under the terms of the contract, HEC was obliged to use “all the reasonable skill, care and diligence to be expected of properly qualified and competent design professional experienced in the design of works similar in size, scope nature and complexity to the Process Technology” (clause 5.9.1). The appointment also required HEC to design the EPC works in accordance with the EPC output specification and the EPC delivery plan “….subject to the Consultant’s overriding obligations to exercise reasonable skill and care as more particularly provided in Clause 5.9.1” (clause 11.4).

A dispute arose between the parties in relation to HEC’s design, which was developed beyond the parameters of its basic design. This lead to MW incurring significantly increased costs which could not be recovered under the fixed price main contract.

MW brought a claim against HEC for the additional costs incurred from HEC on the basis that in making such significant changes to its original design, HEC had breached its obligation to design in accordance with the specified design requirements. MW argued that under the appointment there were two separate duties: (a) to use reasonable skill and care in carrying out the services under the appointment; and (b) to design the work in accordance with the EPC Output Specification or EPC delivery plan. According to MW, the latter requirement was a strict obligation and failure to comply, even if could not be shown that HEC had not been negligent, was a breach. HEC on the other hand argued that it was not in breach so long as it had used reasonable skill and care in carrying out its design.

The Decision

Coulson J determined that “the starting point” of HEC’s obligations was to exercise reasonable skill and care in accordance with clause 5.9.1; the court considered this to be an appropriate starting point on the basis that all other obligations under the contract were made either expressly or impliedly subject to it, see [44] – [45]:

“…the obligations at clause 11.3 to design, commission and test in accordance with, for example, the EPC Output Specification and the EPC Delivery Plan are made “subject to the terms of this Appointment”. That would of course include clause 5.9.1. Furthermore, clause 11.4 makes express the qualification that, although the obligations to comply with, for example, the EPC Output Specification and the EPC Delivery Plan are independent, they are all “subject to the consultant’s overriding obligation to exercise reasonable skill and care as more particularly provided in clause 5.9.1.”

The Court determined that the effect of this was “straightforward”; if any other obligation on the part of HEC would mean that he would be acting in breach of his obligation to exercise reasonable skill and care in accordance with clause 5.9.1, then that other obligation is overridden by the obligation to exercise reasonable skill and care. For example, if compliance with a particular part of the EPC Delivery Plan would make HEC’s design negligent, then they would not be obliged to comply with that part of the EPC Delivery Plan. Coulson J emphasised that “In the hierarchy of the principal obligations, the obligation to exercise reasonable skill and care is paramount” (see [46]).

The next question for the Court to determine was the extent, if at all, to which the obligation to exercise reasonable skill and care was affected by what appear to be other clear obligations on the part of HEC, such as the obligation to design, commission and test in accordance with the EPC Output Specification and the EPC Delivery Plan.

Coulson J stated that there was a “clear and unequivocal” obligation to comply with the EPC Output Specification and the ECP Delivery Plan and “Those repeated obligations cannot simply be ignored; they have to be construed as part of the contractual obligations owed by HEC to MW” (see [59]). He went on to determine that as a matter of proper contractual construction, the obligation to comply with the EPC Output Specification and the ECP Delivery Plan could be read as an independent obligation alongside the over-riding obligation to take reasonable skill and care:

“HEC were obliged to design in accordance with reasonable skill and care: they were also obliged to comply with the EPC Delivery Plan and the EPC Output Specification. I have already said (paragraph 46 above) that if complying with some part of the EPC Output Specification or EPC Delivery Plan would thereby render HEC negligent, then they were not obliged to comply with that part of the EPC Output Specification or EPC Delivery Plan. But if they could comply with the EPC Output Specification and the EPC Delivery Plan and produce a design which was not negligent, then they were obliged to take reasonable skill and care to do so. That is what the words of the Appointment say.” (see [50]).

Comment

Whilst Coulson J remarked that his conclusion was “hardly earth shattering”, the Judge provided a useful reminder that the relationship between a “basic obligation” (i.e. the duty to exercise reasonable skill and care) and an obligation to comply with particular requirements/documents can provide difficulties in contracts where both sets of obligations sit side by side, without any sort of hierarchy provision.