Well, it is finally going to happen!  After a very long consultation period, the amendments to the Housing Grants, Construction and Regeneration Act 1996 will come into force in England on 1 October 2011 and in Scotland on 1 November 2011.

The amendments, which are effected by The Local Democracy, Economic Development and Construction Act 2009 (“Construction Act 2009”), makes sweeping changes to the Housing Grants, Construction and Regeneration Act (“HGCR”), including removal of the requirement for construction contracts to be in writing, pay-when-paid clauses linked to other contracts and enhancements to the statutory right to suspend performance for non-payment.

The JCT has already published its new 2011 suite of construction contracts covering the new payment legislation and amendments to the HGCR made by the Construction Act 2009, including a tracked version.  In addition, the JCT has also used this opportunity to include other amendments:

• A revised Insolvency definition in the Termination section.
• The revised Terrorism Cover provisions that were included in JCT’s December 2009 Update.
• Extended provisions for appointment of the principal contractor under CDM Regulations to cover that function under the Site Waste Management Plans Regulations 2008.
• Statutory reference to the Bribery Act 2010.
• Retention provisions revised in the sub-contracts.

The main changes to the Act are as follows:

• Section 106 is repelled (provisions applicable only to agreements in writing).  This means that there is now no requirement for construction contracts to be in writing for statutory adjudication to apply.
• The Construction Act 2009 makes changes to the provisions governing payment of the costs of adjudication.  Section 108 (rights to refer disputes to adjudication), now has 3 additional sub-clauses:

• Any attempt to allocate the costs of adjudication between for the parties will be invalid, unless that agreement is made in writing after the adjudicator is appointed.
• Power to determine that any agreed allocation, made in accordance with section 108A, of any part of the costs which a party is required to pay is unreasonable.
• The parties are jointly and severally liable to pay an adjudicator’s reasonable fees and expenses.

• A slip rule is introduced.
• There is a new regime for payment notices (section 110).  The new system requires “payment notices” to set out the sum the payer considers to be due and the basis upon which that sum is calculated.  It also provides for payee notices, which can be given in default of the payment notice. If the payer does nothing, the payee can serve their own payee notice which will set out the sum the payee considers to be due and the basis upon which that sum has been calculated.  These notices are known as "notified sums" and payment must be made unless a section 111 has been issued.
• It prohibits pay-when-certified clauses linked to other contracts.
• There is a new section 111, where a party can only withhold payment from the notified sum in accordance with this section. This new section states that the payer must pay the notified sum unless the payee is given a notice of the payer’s intention to pay less than the notified sum.  That notice must specify the sum the payer considers to be due and the basis upon which that sum has been calculated.  By simplifying the payment provisions, it is now unlikely for there to be any recourse for a failure to serve a section 111
  notice.  This requirement to pay the notified sum is intended further to facilitate cash flow by determining what is provisionally payable. What is properly due and ultimately payable, as a matter of the parties’ contract, is unaffected.
• There are enhancements to the statutory right to suspend performance for non-payment.  New paragraph 112(3A), makes the defaulting payer liable to pay the suspending party “a reasonable amount in respect of costs and expenses reasonably incurred” as a result of suspending.

Statutory Adjudication
The major change is that the Construction Act 2009 has been widened to include oral contracts.  This gives a party to an oral contract the right to refer a dispute or difference to statutory adjudication.  Although this removes jurisdictional challenges insofar that a contract is not in writing, it will of course create another new challenge in proving that an oral contract exists and what terms are agreed. 

Payment Notice
This is a significant area of change.  Previously, section 110 of the HGCR Act required the payer to issue a payment notice within a specific time.  However, if no payment notice was issued, there was no sanction.  This has now changed under the Construction Act 2009.  If the payer fails to issue a payment notice within 5 days of the due date, then the application for payment may serve to be the payment notice by default.  In such circumstances, the payer would have to pay the sum as contained in the payee’s application, by the final date for payment.

Payless Notice
There is also the introduction of a ‘pay less notice’, which replaces the section 111 withholding notice, and has to be received by the payee within the prescribed period before the final date for payment.  This new section 111 states that the payer must pay the notified sum unless the payee is given a notice of the payer’s intention to pay less than the notified sum.  That notice must specify the sum the payer considers to be due and the basis upon which that sum has been calculated.  The content of a pay less notice is different from a withholding notice, as it provides the payer the opportunity to give notice of his intention to pay less than the notified sum.  In other words, this provides the payer a second opportunity to value the works, whereas previously the payer could only notify the amount he intended to withhold from the amount due.

Suspension rights
There are more rights under The Construction Act 2009 in respect of suspending the work for non-payment. A contractor, in exercising its right to suspend works, is now entitled to “a reasonable amount in respect of costs and expenses reasonably incurred” as a result of suspending.

© Michael P. Gerard MSc, PGDipLaw, PGDipBar, FCIOB, MCIArb, MAE                                                                            September 2011

Author background
Michael is a *Barrister, Chartered Builder, **Registered Adjudicator & ***Accredited Expert in quantum and planning matters. He is Managing Director of Michael Gerard & Co., who are chartered building consultants and quantity surveyors who provide a specialised service in the areas of construction law, quantum, programming, business recovery and insolvency support to the construction industry.

*Michael Gerard holds the degree of barrister but does not hold himself out as a barrister in connection with the supply of legal services.
**Registered on the panels of the Royal Institution of British Architects, the Chartered Institute of Arbitrators and TECBAR
***Accredited Expert of the Academy of Experts

The recent judgement of Jones –v– Kaney [2011] (UKSC 13) is a landmark case.  Having ruled that expert witnesses should not be immune from an action of breach of duty, it has removed protections that expert witnesses have enjoyed for centuries.

Before Jones –v– Kaney

Prior to this decision, expert witnesses had enjoyed the benefit of being almost wholly immune to an action of negligence.  Experts had been immune from action where their work was for the substantial purpose of litigation, although where the bulk of their work was not for the purpose of litigation, they still owed a duty of care to their client, breach of which was actionable.  Initial preliminary advice that was not intended to be used in litigation would not have been protected, for example.  This position was established in the Court of Appeal decision in Stanton –v– Callaghan [2000], which in turn had approved the 1992 decision of Palmer –v– Durnford Ford.  The Judge in Palmer, at page 488A-F, stated:

“…I approach the matter by noting first that experts are usually liable to their clients for advice given in breach of their contractual duty of care and secondly that the immunity is based upon public policy and should therefore only be conferred where it is absolutely necessary to do so. Thus, prima facie, the immunity should only be given where to deny it would mean that expert witnesses would be inhibited from giving truthful and fair evidence in court. Generally I do not think that liability for failure to give careful advice to his client should inhibit an expert from giving truthful and fair evidence in court…I can see no good reason why an expert should not be liable for the advice which he gives to his clients as to the merits of the claim, particularly if proceedings have not been started and a fortiori as to whether he is qualified to advise at all. Since both these allegations are made in this case I do not think that the decision [of the District Judge] to strike out the whole of the statement of claim can be justified…”

Following Palmer, Chadwick LJ stated in the decision in Stanton that:

“In my view, the only ground of public policy that can be relied upon as a foundation for immunity in respect of the contents of an expert’s report, in circumstances where no trial takes place and the expert does not give evidence, is that identified by Lord Morris of Borth-y-Gest in Rondel v Worsley [1969] 1 AC 19, at page 251G and referred to by Lord Diplock in Saif Ali v Sydney Mitchell [1980] AC 198, at page 222B: It has always been the policy of the law to ensure that trials are conducted without avoidable strains and tensions of alarm and fear.”

The Facts

Jones –v– Kaney was a straightforward road traffic accident claim.  Liability had been admitted by the insurer, Fortis.  Only the level of quantum had to be agreed or decided.  Doctor Susan Kaney, a consultant clinical psychologist, was instructed by the solicitors acting for the insured, Mr Jones.  At issue was whether Mr Jones actually suffered any post traumatic stress disorder (“PTSD”), and whilst Dr Kaney originally supported his claims, the defendant’s instructed expert, Doctor El-Assra believed that the symptoms had been exaggerated.

The experts spoke on the telephone and shortly after Dr El-Assra issued to Dr Kaney a draft joint statement, which she duly signed without amendment or comment.  However, the joint statement was damaging to Mr Jones’ claim.  The signed statement included Dr Kaney’s agreement that there  were doubts that Mr Jones’ complaint of PTSD was genuine.  This was a sea change to Dr Kaney’s previous evidence and resulted in Mr Jones settling for a significantly lower sum.  Mr Jones subsequently launched a professional negligence claim against Dr Kaney.

The Case

In her defence, Dr Kaney pleaded witness immunity, as cited in Stanton –v– Callaghan.  Traditionally, expert witness immunity had been justified by reason of public policy insofar that an expert should give truthful, honest and fair evidence in court, without fear of an unsuccessful party bringing a law suit. 

At first instance, the court followed the Court of Appeal decision in Stanton –v– Callaghan and ruled against Mr Jones.  However, the original trial judge could not have felt comfortable with the decision as he granted permission for an appeal straight to the Supreme Court under section 12 of the Administration of Justice Act 1969.  

By a majority of five to two, the Supreme Court overturned the decision of first instance.

Lord Phillips stated at paragraph 117 of the Judgement that:

“…Whether professional persons are willing to give expert evidence depends on many factors. I am not persuaded that the possibility of being sued if they are negligent is likely to be a significant factor in many cases in determining whether a person will be willing to act as an expert. Negligence is not easy to prove against an expert witness, especially in relation to what he or she says in the heat of battle in court. This is the second of the three strands identified by Lord Wilberforce at p 214E in Saif Ali. Professional indemnity insurance is available. Professional persons engage in many activities where the possibility of being sued is more realistic than it is in relation to undertaking the role of an expert in litigation…”

Commentary

Yes, so immunity has gone for expert witnesses.  But is it a bad thing?  Will litigants find it difficult to get experts to accept their instructions in the future?  Could this mean that an expert is reluctant to capitulate or resile on a previous opinion?  In my experience as an expert witness, the answer to each one of these questions is no. 

First and foremost, an expert witness will have (or should have), the appropriate level of professional indemnity cover for the relevant area of expertise.  Perhaps premiums will increase, but this should not perturb experienced expert witnesses that have a solid and long history of providing reports without mishap.  And there is of course the distinct possibility that ‘hire guns’, rogue experts and experts that accept instructions outside their normal practice area will find it increasingly difficult to obtain PI insurance as their legacies are pursued by the client.  In other words, the genuine expert who is only focused on assisting the court will reap the benefits from this case. 

It may also assist the client retaining the services of an expert from the outset.  Experts, like any other professionals, will have a commercial approach to instructions, and I am sure there has been a number of experts in the past who, when instructed to provide an opinion [in anticipation of proceedings] concerning a client’s case and its chance of success, may have been reluctant to provide a forthright ‘warts ‘n’ all’ opinion, and so to potentially lose a large source of income, only to change his or her opinion when the proceedings are at a much advanced stage. 

Perhaps therefore, the cream will come to the top? 

This judgement just may therefore, improve the quality of expert witnesses.  At least it may make those experts, such as the ‘hired gun’, consider putting forward opinions which fall below the requisite standard expected.  Further, those instructing expert witnesses will also need to be vigilant in the wake of Kaney, as otherwise they will also need to ensure their PI is on hand.

Under Kaney, an expert witness will therefore be liable for breach of duty in negligence.  However, the decision does extend to an expert witness’ privilege in respect of claims in defamation. 

© Michael P. Gerard MSc, PGDipLaw, PGDipBar, FCIOB, MCIArb, MMAE
June 2011

Author background
Michael is a *Barrister, Chartered Builder, **Registered Adjudicator & ***Accredited Expert in quantum and planning matters. He is Managing Director of Michael Gerard & Co., chartered building consultants and quantity surveyors who provide a specialised service in the areas of construction law, quantum, programming, business recovery and insolvency support to the construction industry.

*Michael Gerard holds the degree of barrister but does not hold himself out as a barrister in connection with the supply of legal services.
**Registered on the panels of the Royal Institution of British Architects, the Chartered Institute of Arbitrators and TECBAR
***Accredited Expert of the Academy of Experts

The economic gloom continues to wreak havoc in the construction industry, and with little signs that there will be any significant improvements in the near future contractor insolvency will not abate any time soon

Whilst this doom and gloom directly affects employees of the insolvent companies and suppliers alike, it will also have an adverse effect on debtor clients who face the prospect of incomplete projects that may cost substantially more to complete.  This means that Insolvency Practitioners will be faced with the prospect that a potentially large book debt will be ‘neutralised’ from the debtor claiming set-off against the debt.

This briefing examines the different categories of set-off pre and post insolvency:

• Mutual
• Contractual
• Equitable
• Legal
• Abatement
• Statute

Introduction

Set-off is a defence to a sum of money owed.  In addition to set-off, there are also other defences that a debtor can raise to off-set a claim.  These include counter-claim and abatement.  Set-off, counter-claim and abatement are mutually exclusive. 

Set-off is a defence to a monetary claim that is used to either reduce the amount owed or completely extinguish the debt.  It is not used where a party wishes to obtain more than merely extinguishing a claim and hence, it can only be used as a ‘shield’. 

A counter-claim, whilst also resulting from a party’s breach of contract, may also give rise to an award for damages which may exceed the sum claimed.  A counter-claim therefore is a ‘sword’ with which a claimant may be attacked but which provides a defendant no protection against a claimant’s claim as such, unless it can also be pleaded as a set-off.

Set-off has a distinct advantage if the claimant becomes insolvent, as rights of set-off, subject to strict rules, may be effective against the claim of a liquidator. If, however, a claimant’s action is discontinued, it would appear that, in the absence of counter-claim, the set-off falls away.

Hanak –v– Green [1958] 2 QB 9, provides a good illustration of the doctrine of set-off.

Pre-Insolvency

Mutual (or liquidated) set-off
Mutual set-off is only available where both the Claimant and Defendant claims are in respect of liquidated debts or money demands and the amount of the cross-claim is known, or can be ascertained with certainty. 

Under the Hanak –v– Green test, cross-claims arising from under the same contract is permitted. However, although theoretically the same applies to a debt on a different contract, providing the sum is readily and without difficulty ascertainable, in practice it is difficult to persuade the courts to allow this (see Anglian Building Products Ltd. –v– W & C French (Construction) Ltd. [1972] 16 BLR 1).

Contractual set-off
It will be a contracting party’s right of set-off if a term is expressly included under the contract.  In practice, it will be mutual or equitable set-off in any event, although a term may include the right to set-off from another separate contract.   

Equitable set-off
A cross-claim can be made where it is so closely connected with the claim that it would be manifestly unjust to allow the claim without taking into account the cross-claim – and the sum does not need to be readily ascertainable.  For example, where 2 contracts are intrinsically linked, where in Hanak –v– Green, the court held that the contractor was entitled to claim for the additional work it undertook that was outside the contract.  However, the mandatory close link will not normally be found where cross-claims arise out of separate transactions.

Legal set-off
The roots of legal set-off can be found in the 1729 and 1735 Statutes of Set-off. 

Legal set-off is a procedural defence and is defined in Part 16.6 of Part A of the Civil Procedure Rules (CPR).  It is only available in litigation and needs a judgement to take effect and requires mutual debts to be present between the parties.  ‘Debt’ does not only mean money but any claim where the amount sought can be ascertained.  An example of legal set-off is illustrated below:

• Capital Builders enters into a contract with Mr Jones to build him a house. 
• Capital, who learns that Mr Jones wishes to also build a yacht, introduces him to Pristine Boats Ltd.
• Mr Jones subsequently enters into a contract with Pristine to build a yacht.
• Capital guarantees Pristine’s performance to build the yacht to Mr Jones.
• The house gets completed, but Mr Jones refuses to pay Capital as Pristine have not completed the yacht.
• If Capital instigates proceedings against Mr Jones for the monies owed under the house contract, Mr Jones is entitled to plead set-off in respect of the amount due from Capital under the guarantee.

Abatement
This is not a true set-off.  A set-off involves some kind of cross-claim, whereby abatement is a defence of an allegation that a contractor’s work is unjustified.  The remedy for abatement is the ‘diminution in value’, where a price is only reduced on grounds such as the work has not been carried out to specification.  An example of this is the House of Lords decision of Ruxley Electronics & Construction Limited –v– Forsyth [1996] AC 344.

Post Insolvency

Statute
Rights of set-off also arise under statute, for example section 323 of the Insolvency Act 1986 (mutual credit and set-off in bankruptcy), and rule 4.90 of the Insolvency Rules 1986 (mutual credit and set-off in liquidation), which allows set-off against monies owing (i.e. retention), should a contractor enter into liquidation.

Liquidation
Rule 4.90 of the Insolvency Rules provides for automatic set-off in a liquidation where there has been mutual dealings.  Any common law or contractual terms covering set-off is replaced by a mandatory set-off under the rule.  This was considered in the Court of Appeal case of Bouygues –v– Dahl-Jensen [2000] BLR 522, paragraph 30:

"(1) This rule applies where, before the company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation.
(2) An account shall be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other. 
(3) … 
(4) Only the balance (if any) of the account is provable in the liquidation. Alternatively (as the case may be) the amount shall be paid to the liquidator as part of the assets."

Administration
The Insolvency Rules do not apply where a company is in distress or in administration and the applicable pre-insolvency set-offs of contractual, equitable and legal remain unaffected.  Legal proceedings against a company in administration cannot be brought without the consent of the administrators or leave of the court. 

© Michael P. Gerard MSc, PGDipLaw, PGDipBar, FCIOB, MCIArb, MAE
June 2011

Author background
Michael is a *Barrister, Chartered Builder, **Registered Adjudicator & ***Accredited Expert in quantum and planning matters. He is Managing Director of Michael Gerard & Co., who are chartered building consultants and quantity surveyors who provide a specialised service in the areas of construction law, quantum, programming, business recovery and insolvency support to the construction industry.

*Michael Gerard holds the degree of barrister but does not hold himself out as a barrister in connection with the supply of legal services.
**Registered on the panels of the Royal Institution of British Architects, the Chartered Institute of Arbitrators and TECBAR
***Accredited Expert of the Academy of Experts

In the case of CN Associates (A Firm) –v–Holbeton Limited, CN Associates (“CN”) sought to summarily enforce the decision of an adjudicator. 

The court had to determine whether there was an effective reservation by Holberton Limited (“Holberton”) in relation to the jurisdiction of the Adjudicator and, if not, whether the parties agreed to give to the Adjudicator jurisdiction to decide his own jurisdiction.  If there was an effective reservation, whether the Adjudicator had jurisdiction insofar that there was an effective construction contract in writing between the parties and, if not, as to whether there was such a contract between the parties.

The case is therefore interesting on a number of fronts including jurisdictional issues, contract evidenced in writing and agency.  In addition, the case also highlights an important aspect of adjudication by showing just how quick the courts can accommodate a party’s application for summary judgement (Part 24 of the Civil Procedure Rules), with the Adjudicator’s decision delivered on 15 October 2010, and a hearing taking place just 3 months later. 

Background

Holberton, a company registered in the Isle of Man, purchased a substantial house in north London from a Mr Ahmed, who was a director of a company called Bright Services Limited (“BSL”) which specialised in managing high value residential construction projects.  In 2004, Holberton decided to carry out major reconstructing work on the property and sought assistance from BSL.

BSL approached CN Associates (“CN”), who were a firm of quantity surveyors, and by its letter dated 3 March 2004 to BSL, CN proposed terms for its engagement.  BSL accepted the terms and work progressed. 

CN issued its first invoice to BSL, who subsequently asked that the invoice be re-issued to Holberton, care-of BSL.  Holberton duly paid the invoice amount, with the following four invoices also being similarly addressed, whilst referring to the fee arrangement of 3 March 2004.

On 15 June 2005, Holberton’s solicitors forwarded to CN a standard form of appointment in respect of its professional services.  Although CN replied and suggested amendments to the form be made, it appears that the form of appointment was never formalised, whilst subsequent invoices (some 16 in number) issued by CN to Holberton between June 2005 and March 2007, followed the same format as the initial invoices, and all were paid.  The project achieved practical completion in spring 2007.

On 3 February 2010, CN wrote to Holberton (addressed to Mr Ahmed), seeking payment of the balance of its fees.  An invoice was raised in May 2010, with the total sum inclusive of VAT of £155,177 said to be outstanding.  Again the invoice referred to the application being made "in accordance with the Agreement dated 3 March 2004 and letter of appointment dated 19 March 2004".  No monies were forthcoming and hence CN served a Notice of Adjudication on 23 August 2010 upon Holberton. 

The Referral proceeded on the basis that BSL acted as an agent of Holberton, with authority to enter into negotiations about the terms of the appointment and relied on the evidence that Holberton had in fact made all of the payments. 

In the adjudication, Holberton argued that the Adjudicator had no jurisdiction because the contract relied upon was said to be contained in the exchange of the letters in 2004, which Holberton was not a party to.

Courts Conclusion

CN applied to the court to have the adjudicator’s decision enforced.  This was on the basis that Holberton had no real prospect of successfully defending the claim (CPR r24.2 (a)(ii)).  Holberton had claimed that it was not itself that was liable for the payment of the fees, but BSL by virtue of the exchange of letters between CN and BSL in 2004, and Holberton was not party to this contract. 

According to the view of Mr Justice Akenhead, Holbeton has just passed the threshold of establishing a realistic prospect of a successful defence for the purposes of CPR Part 24, and that he had little doubt that a contract was created in March 2004 between BSL and CNA.

Commentary

A simplistic message from this case is that the payee party (that is the party who has the benefit of receiving payment), must not rely on a party that is issuing payment as being the actual contracting party.

Of course, the ‘confusion’ centred on the effect of the exchange of communications between CN and BSL in 2004, where CN asserted that BSL was acting in an agency capacity on behalf of Holberton, and thus relying on the rules of agency that provide “he who does an act through another does it himself”.  Holberton clearly did not accept this, and on balance the court considered that there was just about enough evidence to show that Holberton’s stance has merit. 

From the facts of the case, I consider that the judge arrived at a sensible decision, and probably the only decision available at the time.  Clearly CN was only communicating with BSL pre March 2004 and continued to do so immediately post BSL accepting CN’s terms.  Even the first invoice, CN made no attempt to direct this to Holberton, and although payment was forwarded from Holberton, seasoned professionals will know that showing a payment chain does not establish liability as after all, a burden cannot be assigned without consent.

The parties now face the prospect of a full hearing, with the associated costs, which is in addition to the costs already incurred by the parties as a result of the adjudication.  That then raises the question over the adjudicator and why did he not resign?  The court concluded that the adjudicator did have jurisdiction by virtue that the contract was evidenced in writing. 

But what about the agency argument?  As a practising adjudicator [or otherwise], it would be improper to answer this question having not had sight of the papers upon which the adjudicator made his decision on, but no doubt it would have been a complicated set of facts.

The parties to this dispute may continue to full trial.  But, this could have been avoided had CN ensured that Holberton was clearly identified as the other contracting party.

© Michael P. Gerard MSc, PGDipLaw, PGDipBar, FCIOB, MCIArb, MAE. March 2011

The following article was recently published in the Estates Review magazine, and is wholly relevant to Insolvency Practitioners who may encounter businesses operating in the construction industry.  By understanding how projects are administered and engaging the right professionals, book debts will be maximised whilst set-offs will be minimised.

With the building industry in the grip of the economic downturn, casualties are inevitable. Michael Gerard advocates that as creditors look towards the insolvency practitioner, a debtor may view insolvency as an opportunity…

During times of economic hardship, there will always be some services and sectors that thrive.  In regards to the construction industry, the sector that is currently experiencing a boom time perhaps more than any other is the one dealing with insolvency.  As more and more companies operating in the construction market struggle to stay afloat, Insolvency Practitioners are experiencing an abundance of insolvency-related instructions arising from the beleaguered construction industry.

For investors in the industry, this can be highly frustrating. However, by taking time out to investigate the form of contract and researching the appropriate terms and conditions appertaining to the contractor’s insolvency, the recovery of debts can be maximised.

Once an insolvency expert begins to investigate a claim, first and foremost they should dedicate some time to investigating what particular forms of contract the various projects are under. They will need to become familiar with the relevant clauses appertaining to insolvency and thoroughly examine set-off claims.  Doing this sort of background preparation can be time consuming, but will pay handsome dividends in the long run.

For the purposes of this article, the contracts referred to will be those that have been executed using the Joint Contract Tribunal (JCT) Intermediate Form of Contract 2005 edition (IFC 2005).  This is a commonly-used form of contract used by the construction industry when a contractor is undertaking works for an agreed lump sum.

Terminating employment, but not the contract

The IFC 2005 contains a useful definition of insolvency in section 8. By this definition, if a contractor is insolvent, under clause 8.5.1 an employer can give notice to the contractor to terminate their employment under the contract.  However, it is important to note that the employer can only give notice providing the works have not achieved practical completion. It is also important to realise that, in issuing the notification, it is the contractor’s employment that is terminated, not the contract, which remains in place.

Although, more often than not, it is the employer who will terminate the employment of a contractor, it is good practice for the appointed IP to inform the employer of the contractor’s insolvency as soon as possible. Doing this has two purposes:

1. It satisfies clause 8.5.2 of the IFC.

2. It enables the IP who is overseeing the insolvent contractor’s affairs to make initial beneficial offers immediately post the insolvency. These could include completing the works or assisting with procurement information, all of which will minimise set-off against monies owed.

Completing the works

If an employer has terminated the contractor’s employment, then it has the option whether to complete the works or not. If it decides not to complete, then clause 8.8.1 requires the employer to notify the contractor in writing within six months from the date of termination.  In addition, the employer is required to send a statement of account within a reasonable period of issuing such notice.  This statement is extremely important to the IP, as it provides the employer’s view of the monies due or owed.  However, before this statement is accepted, it should be examined by a quantity surveyor. This part of the process can sometimes be omitted which is an error. Without a proper examination from a suitably qualified professional, the accepted statement may be misleading or even incorrect, as often only the trained and experienced eye can detect anomalies.

Where an employer elects to complete a project, under clause 8.7.4, an account will still be due (set out in a certificate), but only within a reasonable time after completion of the works and the making good of any defects.  It is therefore vitally important that the IP is aware of all incomplete projects at the time of the insolvency and that the progress and completion of such projects is carefully monitored henceforth.

Statement of accounts

Experience shows that employers can sometimes be reluctant to issue a statement of the account.  This is because the valid cost of completing a project is often not enough to completely set-off against the insolvent company’s account.  However, as an essential part of the process, the IP will need to ensure that employers, or their agents, obtain the relevant proof of cost, so that the documentation can then be checked by an experienced and qualified quantity surveyor.

By examining all of the insolvent contractor’s contracts, abstracting the pertinent information relating to time, progress and payment rules, together with engaging appropriately qualified and experienced contractual professionals to assist in the examination of the costs, the IP can ensure that returns for creditors can be made to their fullest and that the best outcome in a difficult situation is achieved.

Despite some tentative whispers of recovery, things look unpromising for those allied to the construction industry for the foreseeable future.  Development investment is floundering and projects at any current stage of development are increasingly facing stagnation.  As the nature of our economy has always been cyclical – and will continue to be so – even when the economic tide turns for the better, the issue of insolvency is one that won’t go away.  So it pays to be prepared for the worst a situation can be: Ensure that the proper process is followed, that paper work is in order and qualified professionals are sought for this complicated matter.  Being open with information and helping the correct people get the figures they need very much works for everyone’s benefit in the long term.

© Michael P. Gerard MSc, PGDipLaw, PGDipBar, FCIOB, MCIArb, MAE. March 2011

The Case of Straw Realisations (No 1) Ltd (in administration) –v– Shaftsbury House (Developments) Ltd

Although this case is interesting and highly relevant to those companies, organisations and professional advisors involved in statutory adjudication, it is particularly relevant to insolvency practitioners and solicitors charged with enforcing adjudicators’ decisions.  The case is also a reminder of the laws on assignment, including those standard forms which expressly forbid assignment.

Background

In 2007, Straw Realisations (No 1) Ltd, who were formerly known as Haymills (Contractors) Ltd. (“Straw”) entered into a contract with Shaftsbury House (Developments) Ltd (“Shaftsbury”), for Straw to build a new mixed residential and retail development in Islington, for about £8,500,000.  Practical completion was achieved in April 2009.  The Contract was administered under the JCT Standard Form of Building Contract with Quantities 2005, and included various amendments including clause 8 which provided that, if the contractor became insolvent (including administration), any provisions of the contract which required any further payment or any release of retention would cease to apply.  The contract also provided for adjudication which the Scheme for Construction Contracts was to apply, although this was amended insofar that within 3 months of the decision, in the absence of any effective notice [under paragraph 23(2)(a)], an adjudicator’s decision becomes final and binding.

Long before practical completion was issued, the parties were in dispute concerning the classification of certain disposable materials.  In September 2008, an adjudicator was appointed who decided on 17 October 2008, that a sum of £182,000 plus costs be paid to Straw.  Shaftsbury did not agree with the decision and served a ‘23(2)(a) notice’ within the stipulated 3 month period, subsequently issuing proceedings in January 2009.

At the time of practical completion, the parties were further in dispute, this time over delays, a loss and expense claim of £801,000 and the deduction of liquidated and ascertained damages of £551,696. 

On 3 July 2009, Straw referred a further dispute to adjudication (adjudication 2), with the scope limited to the question of damages of about £50,000.  On 27 July 2009 and before the decision from adjudication 2 was issued, Straw issued a further Notice of Adjudication (adjudication 3), in relation to the deduction of the remaining damages of £500,000.  The decision in adjudication 2 was issued on 31 July 2009 in which Straw was substantially successful.

On 13 August 2009, Straw was placed in administration.  The administration was post the issue of the decision in adjudication 2 and post the referral in adjudication 3.  However, the decision in adjudication 3 had not been issued at the time of the administration.  Also at the time of administration, Shaftsbury had not complied with the decision in adjudication 2 and no monies were received by Straw.

The latter half of August 2009 was busy for both parties’ advisors.  Shaftsbury argued that the adjudicator in adjudication 3 had no jurisdiction and therefore should resign and in any event, the decision could not be enforced.  Straw on the other hand stated that the adjudicator did in fact have jurisdiction and if he resigned, he would forfeit his fees.  Simultaneously to these exchanges, the administrators had purportedly assigned the contract to another contractor, Vinci Construction, who in turn warranted that it would be responsible for the costs incurred by the administrator in adjudication 3.  In the event, the adjudication went on, with the decision being issued on 13 October 2009 in which Straw was almost wholly successful.

Enforcement

Straw commenced proceedings in the TCC to enforce the decisions in adjudications 2 and 3.  Shaftsbury resisted enforcement on several grounds including that the adjudicator in adjudication 3 did not have jurisdiction as a result of Straw going into administration before the decision was issued.  Shaftsbury also argued that in issuing proceedings in January 2009, it made it unnecessary for the Defendant to comply with paragraph 23(2)(a).

The Court’s view

At paragraph 28 of the Judgement, referring to Westwood Structural Services Limited v Blyth Wood Park [2000], HH Mr Justice Edwards-Stuart stated that the adjudicator in adjudication 3 “had no jurisdiction to consider the consequences of the Administration Order because it occurred after the commencement of the adjudication.”  The adjudicator was therefore quite correct in continuing with the adjudication after Straw had been placed into administration.

The Court also stated that issuing proceedings and filing defences and the like before a decision was made by the adjudicator [in adjudication 2] cannot be an effective notice for the purposes of paragraph 23(2)(a).  Paragraph 39 of the Judgement states: “For these reasons, I reject the submission that the Defendant served a notice in relation to [the adjudicator’s] Decision that complied with paragraph 23(2)(a) or that the service of the Defence and Counterclaim by the Claimant on 9 July 2009 rendered such a notice unnecessary.” 

The Court did however find that a letter written on behalf of Straw on 24 November 2009 was an effective notice for the purposes of paragraph 23(2)(a), in relation to the decision in adjudication 3, but not against the decision in adjudication 2 as it was written 3 months after the decision date.

The effect of the Administration Order and clause 8 of the contract

The Judge considered Rule 2.85 of the Insolvency Rules 1986, and decided that application of the rules of statutory set-off had not been triggered as a consequence of the making of the Administration Order (as opposed to liquidation).

The contractual provision of clause 8 was said to mirror that of the insolvency provisions in the Insolvency Rules so that any claim to payment ceased to exist as at the date of the administration.  The Court accepted that nothing short of liquidation was sufficient to bring about the automatic mutual setting-off of accounts “and thereby to prevent enforcement of an adjudicator’s decision. The authorities showed that compliance with an adjudicator’s decision…should take precedence over any clauses in the contract that purported to achieve the contrary.” And clause 8 ran contrary to this principle.

The effect of the insolvency

The Court made note that the effect of the administration order was that a potential Claimant making a claim against a company in administration does not have an absolute right to start proceedings, and it could only do so with the leave of the court or the consent of the administrator (paragraph 43(6) of Schedule B1 to the Insolvency Act 1986).  It is therefore possible a Claimant may not obtain that permission meaning that in practical terms any adjudication decision becomes final, which is contrary to the principle “pay now, argue later”. 

At paragraph 89 of the Judgement, the Judge helpfully set out the relevant established principles which determine whether an adjudicator’s decision will be enforced when one party is insolvent, and these principles are summarised below:

(1) A clause in a contract that purports to supersede the obligation to comply with an adjudicator’s decision, cannot prevail over an obligation to comply with the decision of an adjudicator (see Ferson Contractors –v– Levolux AT Ltd [2003] and William Verry –v– London Borough of Camden [2006])

(2) If, at the date of the hearing of the application to enforce an adjudicator’s decision, the successful party is in liquidation, then the adjudicator’s decision will not be enforced by way of summary judgment (see Bouygues (UK) Ltd v Dahl Jensen (UK) Ltd [2000] and the House of Lords decision of Melville Dundas –v– George Wimpey UK Ltd [2007]). The same result follows if a party is the subject of the appointment of administrative receivers (per Melville Dundas).

(3) For the same reasons, if a party is in administration and a notice of distribution has been given, an adjudicator’s decision will not be enforced.

(4) If a party is in administration, but no notice of distribution has been given, an adjudicator’s decision which has not become final will not be enforced by way of summary judgment.

(5) If the circumstances are as in paragraph 4 above, but the adjudicator’s decision has, by agreement of the parties or operation of the contract, become final, the decision may be enforced by way of summary judgment (subject to the imposition of a stay).

(6) There is no rule of English law that the fact that a party is on the verge of insolvency ("vergens ad inopiam") triggers the operation of liquidation / bankruptcy set-off.

(7) If a party is insolvent in a real sense, or its financial circumstances are such that if an adjudicator’s decision is complied with the paying party is unlikely to recover its money, or at least a substantial part of it, the court may grant summary judgment but stay the enforcement of that judgment.

Paragraph 90 of the Judgement referred to authorities which reconciled the issue in the consideration of whether or not to grant a stay where it appears that the successful party would be unable to repay an award if it was subsequently held to be wrong: “…where a party is in insolvent liquidation or there is no dispute on the evidence that it is insolvent (or unlikely to be able to repay the sum awarded by the adjudicator), a stay of execution will usually be granted unless either that party’s financial situation was the same or similar to its financial situation at the time when the relevant contract was made or its insolvency is due, either wholly or in significant part, to the other party’s failure to pay the sums awarded by the adjudicator…” 

Held

The Court held that:

1. Straw was entitled to summary judgement of the decision in adjudication 2, because the adjudicator’s decision has become final and binding.

2. Straw was not entitled to summary judgement of the decision in adjudication 3, because of the absence of a valid notice under paragraph 23(2)(a).

3. That an order to stay the enforcement of the decision in adjudication 2 as a result of Straw’s insolvency (The decision in Bouygues (UK) Ltd v Dahl Jensen (UK) Ltd [2000] and Mead General Building Ltd v Dartmoor Properties Ltd [2009] followed). 

Comment

It is well established that under the Housing Grants, Construction and Regeneration Act, otherwise disputable debts can become indisputably due, albeit temporarily, which is the principle central to the Act of “Pay now, argue later”.  This principle is also at ease with the original intentions of the Act and Michael Latham’s Constructing the Team report of 1994, insofar that a quick decision would be made as to which party should be the temporary custodian of the monies in dispute. 

However, although the courts are usually enthusiastic about enforcing adjudicators’ decisions, even where a decision is wrong, insolvency is one of the very few areas, which includes breaches of natural justice and jurisdictional issues, where courts are cautious when it comes to enforcing an adjudicator’s decision by way of summary judgement and even if issued, whether to stay the enforcement of the judgment:  But this is the only sensible approach to take as after all, the paying party is highly unlikely to recover its money, which is not what the Act intended.

The court will not enforce an adjudicator’s decision by way of summary judgement if the successful party is in liquidation or in administration where a notice of distribution has been given.  This also applies to where no notice of distribution has been given and the decision has not become final and binding.  Although the court may enforce an adjudicator’s decision by way of summary judgement where it has become final and binding on the parties, it is clear that this will be the subject of an imposition of a stay to the judgement.

A court will carefully consider the precise circumstances surrounding an insolvent company who has been on the end of a beneficial decision, including whether the conduct of the defending company brought about the demise.  But the insolvent company must not merely be insolvent in the sense of being unable to pay its debts as they fall due (see All in One v Makers). 

Where the successful, but [actual] insolvent party seeks to enforce an adjudicator’s decision, it is difficult to see how its monies can be secured, as the courts are fully aware that the likelihood of the paying party recovering even a small part of the monies in future proceedings is remote, and only then providing a Claimant can take action, as the Insolvency Act does not permit a Claimant to instigate proceedings without permission of the Court or Administrator: “The party who has paid money to the other pursuant to an adjudicator’s award no longer has an unfettered right to have the issue decided by the adjudicator determined finally by a court or arbitrator.”  Whilst the Insolvency Rules for liquidation provide for the administrator, when making a distribution to creditors, to exercise mutual balancing of accounts. 

Thus, although courts may grant to an insolvent party that is successful in an adjudication summary judgement, the judgement will inevitably be subject to a stay of execution.  It therefore begs the question why insolvent parties actually bother with a process that it cannot win.

© Michael Gerard Consulting Limited
February 2011