Category Archives: Arbitration

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.

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.

Third Party Rights Beneficiary of Appointment could not call for Adjudication

To what extent can an express term contained within the agreement between the original contracting parties make the rights of a third party, enforceable under the Contracts (Rights of Third Parties) Act 1999 (“the 1999 Act”), determinable by an adjudication under Housing Grants, Construction and Regeneration Act 1996 (“the 1996 Act”)?

It has recently been determined that a collateral warranty can be a “construction contract” covered by the Adjudication regime of the 1996 Act. What would be the position where a beneficiary was given third party rights under the 1999 Act rather than a collateral warranty?

In Hurley Palmer Flatt Ltd v Barclays Bank Plc [2014] Clauses 2.3 and 14.2 of the claimant’s Appointment said respectively:

“Unless expressly stated otherwise in this Agreement, nothing in this Agreement confers or is intended to confer any rights on any third party pursuant to the Contracts (Rights of Third Parties) Act 1999.”

“Save as expressly provided in Clause 14.3 and Clause 10 (Collateral Warranties) nothing in this Agreement shall confer or purport to confer on any third party any benefit or right to enforce any terms of this Agreement.”

Clauses 27.1 and 27.3 of the Appointment included provision for Adjudication and said respectively:

“The adjudication provisions contained in Part 1 of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (S.I. 1998/649) (the Scheme) shall apply to this Agreement.”

“The decision of the adjudicator shall be binding on the parties unless and until the dispute is determined by legal proceedings or by agreement.”

The claimant sought a declaration that as, now, third party to the Appointment Barclays was not entitled to commence adjudication proceedings against the claimant.

The High Court said the Appointment contained 31 Clauses some being substantive terms exposing the claimant to liability as the Consulting Engineer. Other provisions contained “procedural rights” including the ability of the Client to suspend the performance of the claimant’s Services or to terminate the claimant’s appointment as Consulting Engineer.

Clause 14.3, of the Appointment, when read with Clauses 2.3 and 14.2 contained the full scope of Barclays’ right to enforce any term of the Appointment.

Clause 2.3, meant that apart from Clause 14.3, no rights were given to a third party which could be enforced under the 1999 Act.

Clause 14.3 actually said:

“Any Affiliate [Barclays were included within this term] with a direct interest in the Project shall be entitled to enforce the terms of this Agreement as “Client” always provided that the Consulting Engineer shall be entitled [to] rely on the equivalent defences in respect of such liability which it has against the Client.”

The court latched onto the reference to “such liability” as “strongly” indicating an intention that the only rights the third party (i.e. Barclays) could enforce, under Clause 14.3, against the claimant were the rights giving rise to liability not the procedural rights such as those in Clause 27 (adjudication). It followed that Barclays had not been given any right to enforce the terms of the Appointment by adjudication under Clause 27.

We may doubt whether the draftsmen, or the parties, intended the word “such” to have such a restrictive effect.

In any case, the adjudication clause in Clause 27.1 was not applicable to the relationship between Barclays as a third party and the claimant

The Adjudication system under the 1996 Act had no equivalent to Arbitration in terms of Section 8(1) of the 1999 Act which enabled a third party to be treated also as a party to the arbitration agreement.

The Scheme for Construction Contracts (England and Wales) Regulations 1998 (“the Scheme”) which was incorporated in Clause 27, referred, in paragraph 1(1) of Part I, to a party to a construction contract being able to give written notice to refer disputes to adjudication. Also paragraph 1(2) stated that the notice of adjudication should be given to every other party to the contract. Barclays, the third party was not a party to a construction contract.

It was clear from those provisions of the Scheme and from the provisions of the Appointment (Clause 27.3, for example) that Clause 27 was inapplicable to the relationship between Barclays, as third party and the claimant. It was for that reason that the provisions of section 8 of the 1999 Act had been included in the case of Arbitration.

The 1999 Act had given no consideration to Adjudication or other means of Alternative Dispute Resolution.

This case highlights an anomaly in the 1999 Act whereby, for Adjudication purposes, Third Party Rights construction documents are prima facie outside Adjudication but Collateral Warranties are within Adjudication.

In the meantime precedent provisions, similar to Clause 14.3, could be redrafted to make it clear that procedural rights like the right to refer a case to Adjudication are also enforceable by a third party under the 1999 Act on the same basis as if they had been a party to the original contract.

This blog has been posted out of general interest. It does not remove 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.