Category Archives: Alternative Dispute Resolution

No room for implied trust and confidence condition

A recent case raised whether and in what circumstances a contract may be subject to an implied term or condition that it will only continue in existence for so long as a relationship of mutual trust and confidence subsisted between the parties.

In the High Court case of Chelsfield Advisers LLP v Qatari Diar Real Estate Investment Company & Qatari Diar Development Company (UK) Limited [2015] the claimant (“Chelsfield”), the First Defendant (“QDREIC”) and the Second Defendant (“QDDC”) entered into a “Development Fees Agreement” (“DFA”) relating to the relocation of the US Embassy. The DFA provided that Chelsfield and QDDC would enter into a “Development Management Agreement” (“DMA”) for the provision of development management services.

It said that in the event that Chelsfield and QDDC (acting reasonably and with all due expediency and in good faith) had not agreed the terms of the DMA within 5 months they were to be determined by an Expert.

On the same day, QDDC entered into a contract with the US government for the purchase of the old embassy and its leaseback pending relocation of the embassy in 2018.

QDREIC and QDDC later gave notice that:

– they intended to treat their relationship with Chelsfield under the DFA, and the DFA, as at an end; and

– they would not enter into the DMA; and

stated that they had lost all trust and confidence in Chelsfield’s “ability to deliver what is contemplated of [Chelsfield] under the DFA and the DMA” on the following grounds:

(1) “[We] have become increasingly concerned about your capability to deliver the development management services on the terms contemplated by the DFA or at all”;

(2) “Our attempts to agree the terms of the DMA with you have been frustrated such that we had to refer the determination of the terms to an independent expert”; and

(3) “Your financial position is poor and you also have not been able to satisfy us that your organisation currently has the capability to manage the development of this world renowned listed building”.

The court said applying an objective as opposed to a subjective test to those grounds, they were no basis for there having been such a breakdown of trust and confidence as would justify QDREIC and QDDC treating the relationship between the parties or the DFA as being at an end, or refusing to enter into the DMA.

Ground (2) was covered by the express terms of the DFA. Under Clause 3.2, both QDDC and Chelsfield were obliged to negotiate reasonably, with all due expediency and in good faith; and, in the event that such negotiations did not enable them to agree all the outstanding terms of the DMA within 5 months, each of them could refer the matter to an Expert for him to decide.

Chelsfield’s failure to agree terms, which resulted in the invocation of the agreed contractual mechanism for resolving the matter, was not said to be unreasonable, tardy, or lacking good faith, so it was difficult to see how it could reasonably be regarded as giving rise to such a breakdown.

Similarly with the first part of Ground (3), the financial position of Chelsfield was expressly addressed in the DFA. If Chelsfield’s covenant strength deteriorated materially, Clause 4.2 obliged it to provide QDDC with reasonable security for the potential repayment of the Advance Planning Payment; and also Clause 13 entitled QDDC to terminate the DFA based on various insolvency events concerning Chelsfield. Also, requirements concerning Chelsfield’s ongoing financial strength were matters that the parties could seek to address in the terms of the DMA, and, in default of agreement, put to the Expert for him to determine (Clause 3.3).

Where:

– the parties had delineated those protections, and

– no breach of any term of the DFA was alleged,

it was difficult to see how Chelsfield’s allegedly poor financial position could reasonably be regarded as giving rise to such a breakdown.

As to the second part of Ground (3) viewed objectively, any such concerns could be met by the terms of the DMA, either being resolved by agreement between QDDC and Chelsfield, or, failing agreement, determined by the Expert.

Given the large potential for protections for QDDC in the DMA concerning Chelsfield’s capabilities: (a) objectively, trust and confidence should not be lacking; and (b) all reasonable grounds on which they might break down could be catered for by those terms.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Agreed adjudication procedure could by agreement make final and binding decision

A Scheme Construction Adjudication under Section 108(3) of the Housing Grants, Construction and Regeneration Act 1996 (“Construction Act”) carries with it an implicit proviso that, unless expressly stated in the Construction Contract or agreed between the parties to the contrary, the adjudicator’s decision will be only temporarily binding on the parties, in the sense that they must comply with it, and the court will enforce it, irrespective of any complaints about its correctness or other issues which the losing party may wish to raise, unless and until the dispute is finally resolved. That final resolution may be by legal proceedings, by arbitration (where applicable) or by agreement.

In the High Court case of Khurana & Anor v Weber Construction Ltd [2015] the right of adjudication under the Scheme did not statutorily apply to the construction contract, because under Section 106 of the Construction Act the right of adjudication under the Scheme does not statutorily apply to construction contracts with residential occupiers for operations on a dwelling house.

Nonetheless in a letter the Defendant’s solicitor expressly proposed, and in their written response the Claimant’s solicitors expressly agreed to, the appointment of a quantity surveyor under the Scheme under procedures to be “conducted in accordance with” the Scheme “save that the decision of the independent structural quantity surveyor shall be binding on the parties.”

The court said both parties must be taken to have been aware that a Scheme adjudication decision would be only temporarily binding, unless expressly stated to the contrary. The words “save that the decision … shall be binding on the parties” could only sensibly have been intended to derogate from that default position.

The reasonable observer could only have concluded that those words in the Defendant’s solicitor’s letter clarified that unlike a Scheme adjudication, the adjudicator’s decision would be permanently, as opposed to temporarily, binding on the parties if their proposal was accepted.

The letter made it plain that the losing party to the proposed adjudication could not subsequently elect to re-run the whole dispute afresh in legal proceedings if that proposal was accepted (which it was by the Claimant’s solicitor’s letter).

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Building Contracts: Act quickly if you wish to challenge a Final Certificate

JCT Forms of Contract try to ensure that, when works have been completed, outstanding disputes can be rapidly and finally resolved.

In part this is by the employer’s agent issuing a Final Certificate, whereupon the contractor (and sometimes the employer) has 28 days to challenge it.

In the absence of a challenge, the Final Certificate becomes conclusive evidence for a wide range of issues, including defects, delays and outstanding cash disputes.

In the High Court case of Marc Gilbard 2009 Settlement Trust (trustees of) v OD Developments and Projects Ltd [2015] the claimant employed the defendant contractor to carry out works. The contract incorporated the JCT Standard Building Contract, Without Quantities, Revision 2 (2009).

The Contract Administrator issued a Final Certificate showing the defendant owing the claimant £232,153.54 plus VAT.

Within the relevant 28 day period, the defendant issued Part 7 proceedings in the Technology and Construction Court disputing the validity and correctness of the Final Certificate. Those proceedings had proceeded so slowly that, 13 months on, the first Case Management Conference had yet to be scheduled.

The defendant now wished the issues raised in the Part 7 claim to be referred to adjudication.

The court said the real interpretation issue was whether clause 1.9.3 of the contract envisaged:

1. one set of proceedings (whether adjudication, arbitration or court proceedings) issued within the 28 days to challenge the Final Certificate, or

2. an initial set of proceedings in which the relevant “matters” could be raised, but then allowed the challenger to commence other proceedings, beyond the 28 days, which would be equally legitimate so long as those same matters were raised in those later proceedings.

The court ruled that interpretation 1 was the correct interpretation. The purpose of clause 1.9.3 was to limit issues for which the Final Certificate was not conclusive to matters raised in any proceedings issued within the 28 days of that certificate.

The clause assumed that the party challenging the Final Certificate could choose the venue in which that was to be done. It could choose one of adjudication, arbitration or other proceedings (that’s to say in court).

The clause did not envisage more than one set of proceedings.

Nothing in clause 1.9.3 allowed a series of subsequent proceedings, with the first being commenced within 28 days, and the others starting months or years afterwards.

However if adjudication is the first option of a challenger under clause 1.9.3:

A. a challenger under clause 1.9.3, can within the 28 days issue simultaneous protective arbitration or court proceedings. This would protect the challenger’s position if they have messed up the reference to adjudication or the outcome of adjudication was no decision or a decision which is unenforceable; and/or

B. clause 1.9.4 of the JCT provisions allows 28 days more for a party to issue arbitration or court proceedings to challenge an adjudicator’s decision as to the Final Certificate.

But, if arbitration or court proceedings are the first option of the challenger, or if the challenger messes up the reference to adjudication, a party may end up out of time to challenge the Final Certificate.

Subject only to the qualifications at A and B above, the challenger has to challenge the Final Certificate in one set of proceedings, and those proceedings are the only means by which the Final Certificate can be challenged.

The JCT Design and Build Contract has a provision very similar to clause 1.9 which additionally and usefully allows the employer or contractor, before the final date for payment, to give notice “disputing anything in the Final Statement”.

The moral of this case is, if you are thinking of challenging a Final Certificate, to act without delay within the 28 day period to secure your position as above.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Unfounded opposition to adjudicators invalidated decision

Where one party to an adjudication makes a fraudulent misrepresentation during the appointment process would that invalidate the process of appointment and make the appointment a nullity so that the adjudicator would not have had jurisdiction to act in the adjudication?

In the High Court case of Eurocom Ltd v Siemens Plc [2014] the application form sent to the Royal Institution of Chartered Surveyors (“RICS”) seeking the appointment of an adjudicator misrepresented to the RICS that a number of individuals had a conflict of interest.

Eurocom’s agent had admitted that he used the section of the application form allocated to name “adjudicators who would have a conflict of interest in this case” to refer to people without any conflicts of interest who he did not want to be appointed.

So there was a very strong prima facie case that the agent had made a clear misrepresentation and a deliberate and/or reckless false statement and that therefore he had made a fraudulent representation to the RICS as the adjudicator nominating body.

The High Court ruled that where a party applies to an adjudicator nominating body and makes a fraudulent representation then the fraud cancels the advantage which would otherwise have been got from the transaction by voiding the transaction completely.

The false statement had been material. It had been made during a process by which an adjudicator had to be nominated by an impartial adjudicator nominating body and, was improperly made to eliminate candidates based on them having a conflict of interest when actually they had none.

Where there had been a material fraudulent misrepresentation in the process of applying to an adjudication nominating body, the application for a nomination of an adjudicator would be invalid and it would be as if no application had been made.

It did not matter whether the RICS was deceived or not.

The fraudulent misrepresentation would have invalidated the process of appointment and made the actual adjudicator’s appointment a nullity so that the adjudicator would not have had jurisdiction to make the award Eurocom were now seeking to enforce through the courts.

So Siemens had an arguable defence to Eurocom’s claim. That claim must go to a full hearing and Eurocom were denied summary judgement on the claim to enforce the adjudicator’s award.

This case and it’s outcome is a clear warning to anyone who may be minded to use any parts of an application form for their own collateral purposes.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Challenge to adjudicator’s jurisdiction over “novation” unsuccessful and waived

Where the business of a partnership is incorporated the existing contractual rights and obligations of the partners are seldom novated to the new company. That is because that would involve the participation of each outside contracting party in the novation arrangements.

Instead the new company will, as between itself and the old partnership, take over the benefit of those rights, and assume responsibility for the performance of those obligations, probably informally.

However the position of the outside contracting parties remains unchanged. Generally, their contract will still be with the old partnership even if the old partnership has delegated its performance to the new company.

This was ruled to be the position in the High Court case of AT Stannard Ltd v Tobutt & Anor [2014] where the employing main contractor unsuccessfully challenged the sub contractor’s successful reference to adjudication.

The Employer challenged the adjudicator’s decision to award the full amounts claimed against the old partnership of £53,392.63 plus interest based on the facts that:

– the subcontractor had informally participated in the “novation” of the subcontract from the old partnership to the new company; and

– the breaches complained of had occurred whilst the contracting parties had still been the old partnership and the subcontractor; and

– such “novation” had passed the benefit of the old partnership’s rights and the burden of its obligations to the new company; and

– the “novation” which the subcontractor had informally participated in had released the old partnership from any liabilities for the breaches and had caused the new company to assume those liabilities; and

– the “novation” meant the parties to the contract were now the new company and the claimant; and

– therefore the adjudicator had had no jurisdiction to make the award against the old partnership.

The High Court rejected any idea that there had been any informal participation by the subcontractor or any “novation”. It had been the sort of informal takeover mentioned above.

Had the old partnership wished to challenge the adjudicator’s jurisdiction they should have done so in the adjudication proceedings instead of taking part in them without objection and waiting for an unfavourable outcome and doing it then. Indeed, by expressly and actively participating in the adjudication “without any reservation”, the old partnership had waived any right to challenge the adjudicator’s jurisdiction.

The court expressed disapproval of parties who challenge adjudications on jurisdictional grounds instead of challenging the substance of their outcomes in further arbitrations and legal proceedings.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Construction: Court’s discretion to order stays and cost budgets

Often at a case management conference (“CMC”), one or more of the parties will seek a stay of the proceedings whilst they endeavour to resolve their disputes by way of mediation or some other form of alternative dispute resolution (“ADR”).

They can apply for an immediate stay, or for a stay later – maybe after disclosure or after the exchange of witness statements or expert’s reports.

Otherwise a party may not seek a formal stay of proceedings, but may instead ask the court to identify and fix a ‘window’ in the timetable, possibly as long as three or four months, during which the parties can devote their attention to resolving the dispute by way of ADR instead of the proceedings.

Disputes are time-consuming and therefore expensive to fight out in court. Even if the trial is reduced to a minimum by ‘hot-tubbing’ the experts and timetabling cross-examination.

The parties may resolve the most difficult cases in ADR and save everyone a good deal of money, time and effort.

The High Court case of CIP Properties (AIPT) Ltd v Galliford Try Infrastructure Ltd & Ors [2014] related to alleged defects at a large development in Ladywood, Birmingham. The claim for damages against the main contractors, Galliford Try, was based principally on the actual/estimated costs of remedial works and the claimants had acquired the £18 million claim by assignment.

Galliford Try had issued third party proceedings against the architects and some sub-contractors. The trial would require expert evidence and might take longer than 6 weeks.

The court said a stay or a fixed ‘window’ was likely to lead to delay, extra cost and uncertainty, and should not ordinarily be ordered.

Nor should they be ordered if the stay or the ‘window’ proposed was opposed by a significant party to the litigation. The claimants had opposed it here.

A sensible case management tool was a sensible timetable for trial that allowed the parties to take part in ADR along the way.

The requirements of ADR, and of sensible case management leading up to a prompt trial date, could conflict. To the extent that there is such a clash at a CMC, sensible case management must come first.

So the court declined to order a ‘window’ of four months prior to disclosure.

Due to the costs of experts, the provision of costs budgets and the possibility of subsequent costs management orders are one way of keeping such costs under control.

They are not automatically required in cases worth over £2 million (old regime) or £10 million (new regime), mainly because the higher the value of the claim, the less likely it is that costs will get disproportionate to claims.

When this claim was started, the mandatory limit was still £2 million, even now risen only to £10 million, so the filing and exchanging of costs budgets pursuant to CPR 3.13 had not been compulsory in this case. But the defendant said the court had a discretion, and should exercise that discretion, to order such budgets to be provided. The third parties supported the defendant in that application. The claimants opposed it.

The court said the court had the necessary discretion to order the provision of costs budgets in this case.

The court’s discretion under CPR 3.12(1) was unfettered and extended to all cases where the claim was for more than £2 million (old regime) or £10 million (new regime).

Where, in such a case, there was an application for the filing and exchanging of costs budgets, the court had to weigh up all the circumstances to decide whether such budgets should be provided.

There was no presumption against ordering costs budgets in claims over £2 million or £10 million, and no additional burden of proof on the party seeking the order.

If the claimants continued their stance against the provision of such budgets, the CMC would need to reconvene for detailed argument on the point.

This blog is posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

“Friendly discussions” could be valid precondition to arbitration

Could a first instance Judge in England, rule that a time-limited obligation in a dispute resolution clause, to seek to resolve a dispute by friendly discussions, is enforceable, or would he or she be obliged by precedent to rule that it is unenforceable?

The requirement to try to settle a claim by friendly discussions might be considered, by the law, a mere agreement to negotiate and therefore unenforceable.

As an unenforceable condition precedent to arbitration it may be that, notwithstanding the commercial sense underlying the clause, a party was free to commence arbitration without having sought to resolve his claim by friendly discussions.

In Emirates Trading Agency Llc v Prime Mineral Exports Private Ltd (“PMEPL”) [2014] a clause obliged the parties to seek to resolve a dispute by friendly discussions and provided for the parties to see if they could resolve it within 4 weeks before arbitration could be commenced.

The court decided that precedent did not bind it to rule to be unenforceable a dispute resolution clause which required the parties to seek to resolve a dispute by friendly discussions, in good faith, and within a limited time, before the dispute might be referred to arbitration.

Such an agreement was complete – no essential term was lacking. Since it is an obligation to seek to resolve a dispute arising under the Long Term Contract dated 20 October 2007 (“LTC”) the discussions would concern the rights and obligations under the LTC so as to try to reach a compromise of the dispute which reflected the bargain the parties had entered into. It would not entail an open-ended discussion of each party’s commercial interests without regard to their rights and obligations under the LTC.

So the agreement had sufficient certainty to be enforceable.

A court should be able to identify behaviour at variance with the conduct anticipated of parties who had agreed to seek to resolve contractual disputes by friendly discussions. For example, a party who refused to discuss his claim at all could easily be shown to have breached the obligation to seek to resolve his claim by friendly discussion.

Problems proving breach, sometimes, did not mean that the clause lacked substance.

If a party sought damages for breach of the obligation it might be difficult to establish what the result of the discussions would have been, had they taken place, in accordance with the clause, but damages could be awarded for “loss of a chance”.

Besides, concluding that the obligation was enforceable would match the public policy of encouraging parties to resolve disputes without costly arbitration or litigation.

The obligation to seek to resolve disputes by friendly discussions must imply an obligation to try to do that in good faith. Conventionally such an obligation went without saying and was necessary to be implied to give “business efficacy” to the contract.

Friendly discussions had taken place in Goa on 1 and 2 December 2009 in which the parties sought to resolve PMEPL’s claim for US$45 million. The giving of a actual notice to enter into friendly discussions was not a mandatory requirement here. If notice to resolve the dispute by friendly discussions had been a mandatory requirement in this case enough notice must have been given in circumstances where the parties had assembled in Goa to discuss the issues between the parties. If the relevant clause of the LTC had required a written notice such requirement must (in those circumstances) have been waived.

So the arbitrators had jurisdiction to decide the dispute between the parties because the condition precedent to arbitration, although enforceable, had been satisfied.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.