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Construction Disputes and Winding up Petitions

Construction Disputes – A Recent Case Study.

The NDP Team of construction insolvency solicitors advises clients making or defending claims who are faced with severe financial disruption due to construction disputes. The construction industry is characterised by disputes over late or non-payment. This article, penned by Christoper Cox, looks at a recent case (April 2016) in which COD Hyde Limited, the employer, failed to pay its contractor Space Change Management Limited, and was served with a winding up petition. Ultimately, The Court did not restrain the petition, suggesting that employers trying to avoid payment need very good reasons for so doing.

Construction Disputes

The Details of This Construction Dispute

COD failed to respond to Space Change Management’s applications for payment and missed 3 interim payments that it was alleged were due to be made under contract. Most contractors in this situation would start the process of getting paid with an adjudication. In this case, however, Space Change issued a statutory demand for payment.

COD rejected this demand, whereupon Space Change issued a winding up petition, with COD applying to the Court for an injunction to restrain the presentation of the petition. The risks inherent in the contractor, Space Change, proceeding this way are well known. However, in so doing it immediately switched the emphasis onto COD who, if it could satisfy the court that the debt was disputed on the basis of a bona fide cross claim against Space Change, would likely get its injunction granted, along with costs, possibly on an indemnity basis.

The Court’s Decision

The Court’s decision was to dismiss COD’s application to restrain the winding-up petition. In the context of construction dispute law, the Court needed to look at the “pay now, litigate later” effect of the absence of the payment and pay-less notices that had not been issued by COD. However, the striking thing about this case is that the Court dismissed COD’s  arguments in relation to the cross claim, both on a legal and factual level.

This cross claim involved an argument that Space Change Management’s conduct, whereby they suspended work prior to issuing the statutory demand, amounted to a repudiatory breach which allowed the COD to repudiate the contract.  Surprisingly, the court decided to summarily determine the rights and wrongs of the case, with the outcome being success for Space Change Management and COD failing to get its injunction.

Our Comments on this Construction Dispute

One must question whether this outcome could be repeated.  It seems as though the Court was not provided with sufficient particulars of COD’s cross claim, and held that merely reciting a failure by the Space Management to suspend works without reasonable cause did not provide enough to rule in COD’s favour.

The lesson is clear: if you have a bona fide cross claim, you need to set it out in detail or you risk not getting injunctive relief. In this case, COD had not served their payment and pay less notices on time.

Contact us if you are involved in a Construction Dispute

Our construction dispute and insolvency solicitors are highly experienced in disputes of this nature, where non-payment is at the heart of the dispute. If you are involved in a construction dispute, contact us or call us on 0121 200 7040 for an initial chat and the chance to assess the merits of your position and the options available. The sooner you contact us, the more we can do to help.

Construction dispute laws and arbitration

Too Much? Not Too Late. Construction Dispute Laws and Adjudication by the Supreme Court. 

This news story looks at the significance of the Supreme Court’s first decision on adjudication pursuant to the Scheme for Construction Contracts 1998 (The Scheme) in the case of Aspect Contracts (Asbestos) Limited v Higgins Construction Plc made in June 2015. We believe that the outcome of this adjudication of a construction dispute, which effectively extends the limitation period of a claim, will continue to evolve but it is already clearly a reminder of the temporary nature of adjudication, a recognition of its limitations, and a reassertion of the legal entitlement owed to the paying party.

We look at the Supreme Court’s adjudication in this case, take into account the facts of the case and assess the practical implications for Construction Disputes and the Law, an area which our construction insolvency solicitors specialise in.

Key Points of ‘The Scheme’ for Construction Contracts

  • The Scheme contains an implied term giving rise to a separate six year limitation period from the date of payment of an adjudicator’s award.
  • A payng party in an adjudication has six years from the date of payment to challenge and recover any overpayment even if the limitation period under the contract has expired.
  • Parties should seek to agree that an adjudicator’s decision is binding or seek a final determination otherwise they are at risk of the paying party waiting until the expiry of the contractual limitation period to recover any sums paid.

Adjudication awards in construction disputes are a frequent topic of debate in the Technology and Construction Court (TCC) and recently there has been much discussion concerning the extent of an adjudicator’s jurisdiction in determining amounts properly due.

The court has provided useful clarification that the basic nature of ‘pay now, argue later’ remains steadfast at the core of adjudication. However, the paying party doesn’t usually take the concept of ‘later’ to mean a date that goes beyond the limitation period of the underlying contract. Until now…..

The Supreme Court’s Arbitration Decision in the Construction Dispute between  Aspect Contracts and Higgins Construction

June 2015, saw the Supreme Court issue a decision on this case predicated on the facts of a party doing exactly this; a decision which has been eagerly awaited by adjudication practitioners and industry professionals alike.

Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc [2015] UKSC 38 provides the first Supreme Court decision on adjudication pursuant to the Scheme for Construction Contracts 1998, and most importantly sets out a clear determination of the applicable limitation periods associated with an adjudicator’s award.

In many ways the judgement serves as an unequivocal warning to the successful party following adjudication. Put simply – seek a final determination.

In its simplest form, the issue before the court was whether a breach of an underlying contract gives rise to the only cause of action, or, whether an adjudicator’s decision provides a separate cause of action.

Lord Mance’s judgment begins, ‘This appeal raises difficult and important issues …’ He’s not wrong.

The Supreme Court has now answered this debate and in doing so has in effect extended the limitation period of a claim. It now sits as common law that the paying party may commence proceedings six years after a payment is made in accordance with an adjudicator’s decision.

The Facts of this Construction Dispute which initially went in Higgins’ favour after the first adjudication

Higgins Construction, a building contractor planned to redevelop numerous blocks of maisonettes in Hounslow. To this end, Higgins entered into a simple construction contract (i.e. not a deed, and so with a limitation period of six years) with Aspect Contracts (‘Aspect’) to carry out an asbestos survey and report. The survey was conducted and completed by April 2004, and the redevelopment process commenced.

In early 2005 during the redevelopment, Higgins allegedly found asbestos materials containing asbestos which had not been identified in the 2004 report produced by Aspect.

A  construction dispute arose, and with negotiation and mediation failing, the matter was referred to adjudication. Here, Higgins claimed a sum of £822,482 in damages plus interest on the basis that Aspect had breached its contractual duties to exercise reasonable skill and care.

Adjudication concluded in July 2009 with a decision in favour of Higgins. Aspect was said to be in breach of its duties, consequentially causing a loss to Higgins. The adjudicator decided that Aspect should pay Higgins a total of £658,017, which it did in August 2009. At this point approximately nine months remained until the expiry of the contractual limitation period. Neither party demonstrated any dissatisfaction with the adjudicator’s decision, and in the mind of Lord Mance, Higgins were ‘evidently content to let matters rest’. As such no final determination was made.

Aspect Commences Proceedings to Recover what it Paid – after the Limitation Period Expired

It was only after the expiry of the limitation period that Aspect found its voice. In February 2012, nearly three years later and without any notice to Higgins, Aspect commenced proceedings with the aim to recover what it termed an overpayment in the sum awarded to Higgins back in August 2009. Aspect’s claim contended that no sum was due to Higgins on an examination of the merits of the original dispute, but significantly Aspect argued that the Scheme contained an implied term giving rise to a wholly separate six year limitation period from the date of payment of the adjudicator’s award. The implied term read that a paying party,

‘… remained entitled to have the decision finally determined by legal proceedings and, if or to the extent that the dispute was finally determined in its favour, to have the money repaid to it.’

In response, Higgins lodged a counterclaim for the balance still owed from the same award. Aspect now elected to raise the limitation plea in response to Higgins’ counterclaim. It argued Higgins had no ability to lodge this claim as the limitation period for bringing a claim under the contract had expired.

January 2013 saw the TCC court give the first instance ruling on the matter ([2013] EWHC 1322 (TCC)). Mr. Justice Akenhead ruled Aspect could not rely on the implied term as it did not exist, and even if it did any claim arising under it would be subject to a limitation period of six years after the performance of the original contract. As such, Aspect was held to be time barred from recovering any alleged overpayment, and no claim existed in restitution due to the absence of any basis to set the adjudicator’s decision aside.

The Court of Appeal sitting in November 2013 reached an opposite conclusion ([2013] EWCA Civ 1541). Lord Justice Longmore submitted a concise unanimously agreed judgement that the Scheme did imply the ability to recover any overpayment. This was not based on any facts specific to the parties, but rather on a reading of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996) and the Scheme.

The Case Goes To The Supreme Court

With permission, Higgins appealed to the Supreme Court. The analysis of the Supreme Court centred on the key question:

‘how far a paying party…is able to disturb the provisional position established by an adjudicator’s decisions’.

The court asked this question on the basis that the pleaded implied term in the first instance did not exist, nor was particularly relevant.

Instead upon a further re-reading of the legalisation (mentioned above) there exists an alternate implied term giving rise to Aspect’s case. This is the steadfast foundation that the adjudicator’s decision is always provisional until finally determined.

Indeed, Lord Mance unequivocally declared that it is a ‘necessary legal consequence of the Scheme…’ that Aspect (or any paying party) must have and indeed does have, a:

‘directly enforceable right to recover any overpayment to which the adjudicator’s decision can be shown to have led, once there has been a final determination of the dispute’.

In respect of a claim in restitution, Lord Mance made clear this right arises on whatever basis,

‘either by contractual implication or, if not, then by virtue of an independent restitutionary obligation’.

The Supreme Court Rules in Aspect’s Favour

 

In short, the Supreme Court ruling in Aspect’s favour declares the entitlement to obtain a final determination of the dispute between itself and Higgins. The final determination operates as a pre-requisite to enabling the right to any recovery. This is as upon the adjudicator’s decision, whether determined as involving an overpayment or to be wrong entirely, ceases retrospectively to bind.

On the progression of this reasoning, the right to final determination arises therefore directly from the adjudicator’s award and subsequent payment forming a separate cause of action (and a separate limitation period) to the body of the dispute heard by the adjudicator. It is important to mention the upholding of the right also brings with it the obligation of the court to ‘look at the whole dispute’ afresh.

Significantly, this means Higgins (and any party similarly resisting repayment) is not confined to the points it originally raised at adjudication, but instead can ‘rely on all aspects of its claim’. Lord Mance held this follows naturally from the fact ‘the adjudicator’s actual reasoning has no legal or evidential weight’. Final determination therefore is to examine the justification for any payment ordered and made; and this was the duty of the court.

Nevertheless, the limitation argument pleaded by Aspect in response to Higgins’ counterclaim (and accepted by the court), prevents any final determination resulting in an order for Aspect to pay Higgins any more than it received under the adjudicator’s decision. This is as any such order would be pursuant to a claim under the original contract, which was now time barred.

In response to this declaration, Higgins complained Aspect in reality is awarded a ‘oneway throw’ bearing no risk of ending up worse off. Taking a hard-line stance, and embodying a clear message to the wider construction sector, the Supreme Court states this ‘advantage’ arises as a direct consequence of Higgins’s own decision not to commence proceedings earlier within the contractual limitation period. If it had done so, it may have hoped to improve upon the adjudication award, or obtain any amount not first awarded.

The Practical Implications of the adjudication in this construction dispute

Notably, the Supreme Court also, for the first time, considered the application of the Limitation Act 1980 to negative declarations. The court ruled that a declaration that, for example, establishes a person has not broken a contract or committed a tort, is not a ‘cause of action’ and so is not subject to any limitation period.

In the wider scheme of construction disputes, the facts of Aspect are relatively unique. The combined nature of the construction industry and adjudication often act as a breeding ground for more complex disputes involving multiple adjudications, claims and counterclaims. As such both parties are often proactive in achieving a final determination or agreement to remove the risk of later dispute. That said, moving forwards, the significance of the Aspect decision will undoubtedly continue to evolve. As it stands at this point, there are already a number of takeaways.

Recent key cases demonstrate the turbulent nature in valuing payments ordered under adjudication. Set against the back-drop of interim payment applications, pay less notices, and payment notices parties can be ordered to pay an amount in excess of what is actually owed. The ruling in Aspect is therefore yet another reminder of the temporary nature of adjudication, a recognition of its limitations, and a reassertion of the legal entitlement owed to the paying party.

For the receiving party, the message is simple.  Seek to agree that the adjudicator’s decision is binding, or alternatively begin proceedings to obtain a final determination. Without either, the paying party may wait until the expiry of the contract limitation period before attempting to recover any sums paid. Notwithstanding this, the use of contractual wording to achieve finality of an adjudicator’s decision is now likely to be high up on the checklist of clauses to be included in contracts incorporating the Scheme.

For the paying party, the enjoyed exclusivity of the implied term favourably makes it possible for it to seek repayment of sums under an adjudication decision up to six years later. Conversely, the above warning to the receiving party becomes an advantage. An election to wait until the expiry of the limitation period of the contract now acts as a risk mitigation exercise removing the chance of any additional award against the payer.

Our Construction Insolvency Solicitors Can Help

As this news story shows, the area of construction dispute laws is a complex one. Our team is experienced in this area, and often advises clients faced with financial problems caused by construction disputes. If you or your company have a Construction Insolvency dispute or problem, contact us or call us on 0121 200 7040 for a free initial discussion.

Tips for dealing with construction insolvencies in the supply chain

Having to deal with construction insolvencies in the supply chain is a common  occurrence.

Insolvencies in the supply chain on construction projects were a fact of life during the recession, particularly among sub-contractors, and although the economy is growing again, such insolvencies are still happening.

Here are a few tips to help you deal with supply chain insolvencies.

Look out for warning signs

Project consultants will often be aware of impending insolvencies some time before they happen. Keep an ear to the ground for this sort of information, as the sooner you find out the quicker you can take pre-emptive measures.

Contractual obligations

When a contractor becomes insolvent, it makes sense to terminate any contractual agreement. However, the contract needs to be checked carefully, as not all contracts terminate upon insolvency and not all contracts will give a right to terminate in the event of insolvency.

Don’t be too hasty to replace an insolvent sub-contractor.

Although a replacement contractor will need to be found, it is sensible not to rush into a decision, as it is important to choose the right contractor, at the right price on the right terms.

Issues of ownership in the event of a contractor becoming insolvent

When a contractor in a construction project becomes insolvent, there are some important practicalities to consider when introducing a new/replacement contractor.

The contract needs to be checked for provisions that can deal with potential problems, for example: securing the site to prevent the contractor or their suppliers from removing materials; who retains title in the contractor’s materials and who owns the copyright in designs and how can they be obtained?

What are the monetary consequences of insolvency?

Typically an insolvent contractor will be entitled to payment for the works carried out before insolvency, whilst the employer will usually be able to set-off the additional cost of completing the works with a new contractor against any outstanding entitlements to the (now) insolvent original contractor.

However, such discussions can become protracted if consensus cannot be reached on a fair assessment on the status and quality of the contractor’s work upon insolvency and termination. The aim should always be to resolves issues with as little disruption as possible.

We provide solutions for Construction Insolvency Disputes and problems

In the David and Goliath world of chains of construction contracts it is easy to find stresses and contractual power imbalances. Slow payment, mismanagement and overcharging are endemic, put projects in jeopardy and expose the parties to the risk of financial collapse and insolvency.

The NDP Team is headed by Christopher Cox. He advises clients who are making or defending claims and faced with severe financial disruption as a consequence of construction and engineering project problems. Often the solution comes through a dispute resolution process, which is one way of solving the problem of sub-contractor insolvency as discussed above.

If you have a Construction insolvency dispute or problem, contact us for a FREE initial consultation.

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