Update: construction

The last construction update (Solicitors Journal 153/27, 14 July 2009) outlined the changes to the Pre-action Protocol Practice Direction in the context of expert evidence. Well, there's more. Following the coming into force of the Civil Procedure (Amendment) Rules 2009 (SI2009/2092) on 1 October 2009, a few changes have been made to both part 35 of the Civil Procedure Rules and the practice direction accompanying it (see 'Be my witness', Solicitors Journal 153/39, 20 October 2009, and 'Civil conduct', in this issue, page 20).

Construction is one of those disciplines for which expert evidence is fundamental. Any dispute concerning delay and disruption, variations or defects will usually involve expert evidence, so it is vital that construction practitioners understand the rules and keep abreast of changes.

One of the changes which could have quite an impact is that an expert will now have to confirm in his report that he understands part 35 of the protocol and the practice direction. While at first glance this seems fairly innocuous, the impact could be significant in that it could lead to experts being cross-examined on these provisions. A failure of an expert to keep up to date on the relevant rules could result in his credibility being damaged. Practitioners should be careful to ensure that their experts have up-to-date and accurate knowledge on these points, however irrelevant that might be to the discipline in which they are giving evidence.

It will be interesting to see if the rules concerning single joint experts will change practice in construction disputes. I question whether it will, because in construction disputes experts are often brought in early by both parties '“ for example, to analyse delay or to value a variation '“ so it could be that two or more experts continue to be used in construction cases; even where those cases are fast track. As to the other changes, they largely restate current practice and so should not make a big difference to the way experts are used in construction proceedings.

Set-off between adjudicators' decisions

Barely a month goes by when the Technology and Construction Court is not asked to look at set-offs between two adjudicators' decisions. In September, two cases on this issue came before the court. Hart (t/a DW Hart and Son) v Smith & Another [2009] EWHC 2223 involved not allowing set-off between a second and first decision, and JPA Design and Build Limited v Sentosa (UK) Limited [2009] EWHC 2312 concerned allowing a set-off but staying enforcement. These cases are instructive in terms of how the court will deal with set-off, an issue which is increasingly common in the construction industry particularly where one of the parties is in a precarious financial position.

In Hart, Mr Hart was contracted under a JCT Standard Building Contract to convert barns into houses on behalf of Mr and Mrs Smith. During the works, the contract administrator issued interim certificates. The Smiths made no payment pursuant to two certificates, without (said Hart) issuing valid withholding notices. The matter was referred to adjudication and the adjudicator decided in favour of Hart, ordering the Smiths to pay the value of the two certificates.

A later interim certificate certified a payment to the Smiths. The Smiths issued a withholding notice for £138,185, alleging late completion. To complicate matters though, the contract administrator had not issued certificates of non-completion. The Smiths went to adjudication to claim, among other things, certificates of non-completion and an entitlement to deduct liquidated damages. The adjudicator found the Smiths were entitled to certificates of non-completion for the late barns. He acknowledged could not issue them but made a declaration. As the certificates had not been issued, the Smiths, he said, had no right to liquidated damages. The decision did award certain other sums to the Smiths.

Following the second decision, the contract administrator issued certificates of non-completion and the Smiths claimed liquidated damages from Hart. Hart offered to set-off the amounts awarded to it in the first adjudication against the sums he had to pay following the second. The Smiths did not pay so Hart went to court.

The court rejected the Smiths' claim that they could set-off their claim to liquidated damages against sums they otherwise had to pay because the second decision was a declaration and nothing more. Where an adjudicator makes a decision akin to a declaration, the court cannot, in the absence of a withholding notice, set-off against other sums due under the contract a payment of money which arises as a natural consequence of the declaration.

In JPA, Sentosa employed JPA under a JCT Design and Build Contract to design and build a new medical centre. The contract obliged Sentosa to make an advance payment of £300,000 to JPA, which was repayable at final account stage. Only part of this advance payment was made and was subsequently deducted from interim valuation 2. The contract was terminated a few months later. JPA adjudicated and the adjudicator decided that it was entitled to immediate payment of the £300,000.

Sentosa subsequently adjudicated in relation to delay issues and the adjudicator decided that: (1) Sentosa was entitled to claim £180,000 liquidated damages for delay caused by JPA; but (2), as Sentosa had failed to issue a withholding notice, it had no right to withhold or deduct that sum.

At enforcement, Sentosa accepted that JPA was entitled to the £300,000 but wanted to set-off the £180,000 that the second adjudicator had declared it was entitled to claim. It also asked for a stay of execution on the basis that, Sentosa said: (1) JPA would not be able to repay the £300,000 at final account; (2) if there was no set-off, the £180,000 entitlement should be taken into account by the court when considering a stay; and (3) the £300,000 was due to be repaid at final account stage, which was due to be resolved within two months of the termination.

The court allowed the set-off and stayed execution. JPA had argued that the second adjudicator had acknowledged that Sentosa could not withhold the £180,000 because of a lack of a valid withholding notice, and that, for this reason, the £180,000 could not be set-off. The court found that because the adjudicator had actually ascertained Sentosa's entitlement, and as this finding was temporarily binding on the parties, the £180,000 could be set-off. The court pointed out that Sentosa was not asking to be paid the £180,000, instead asking for it to be set-off against sums owed by it. The reason for the stay was largely because of a deterioration in the financial position of JPA and the concern that it would not be able to repay the £300,000 at final account time.

At first glance, these two cases seem inconsistent; the first appears to say that set-off is not possible without a withholding notice and the second allows it. The distinction appears to be that, where an adjudicator actually calculates an entitlement, that sum can be set-off without a withholding notice but, where there is simply a declaration that a party is entitled to an unspecified sum, a withholding notice is needed. This case also reaffirms that the court will be mindful of a party's financial status when enforcing an adjudicator's decision.

First corporate manslaughter trial

On 12 October, Bristol Crown Court held the plea management hearing in respect of Cotswold Geotechnical Holdings and its director, Peter Eaton, in the first corporate manslaughter prosecution under the Corporate Manslaughter and Corporate Homicide Act 2007; the trial of which is to begin on 25 February 2010 and is listed for five weeks. This prosecution follows the death of an employee of Cotswold Geotechnical Holdings who was killed while taking soil samples from a building site. Eaton has been charged with the common law offence of gross negligence manslaughter. During committal proceedings, Stroud Magistrates' Court was told in relation to the company's prosecution that it had been charged because 'the way in which the organisation's activities were managed or organised caused the death of a person, namely Alexander James Wright, by gross negligence, which amounted to a gross breach of a relevant duty of care owed to the deceased, contrary to section 1 of the Corporate Manslaughter and Corporate Homicide Act 2007'.

This is likely to be the first of many prosecutions under this legislation, particularly in the construction industry where 2,800 people have died from injuries they received as a result of construction work over the past 25 years.

Refusal to enforce

The Technology and Construction Court has always taken a robust approach in the enforcement of adjudicator's decisions, with a refusal to enforce being rare. A case decided in August is an example of such a refusal and provides an interesting insight into the court's view concerning the severability of parts of an adjudicator's decision.

In Estor Limited v Multifit (UK) Limited [2009] EWHC 2108 (TCC), Estor was the holding company for The Ginger Group, which operated hairdressing salons. The Ginger Group was owned and run by Keith Warner, who set up Ginger Westfield Limited to operate a salon. The Ginger Group employed Hub Design Limited to fit out the new salon and Hub sub-contracted a large portion of this work to Multifit (UK) Limited. Subsequently, it was agreed that Hub would leave the project and Multifit would finish the work. Multifit emailed Warner its quotation for this work and Warner replied to accept the quotation, giving no indication of which company he was accepting on behalf of.

Multifit carried out the works and was paid but it was unclear which company had made the payment. A dispute arose concerning defects in the floor, work which had been carried out by another of Hub's sub-contractors. That sub-contractor had been paid by Multifit, allegedly at the direction of Warner. Multifit referred this dispute to adjudication but, following doubts as to whether the notice of adjudication had been served, the adjudicator resigned.

Subsequently, Multifit began a second adjudication to decide the extent to which Multifit was contractually responsible for the floor. The adjudicator decided that Multifit was responsible for the flooring sub-contractor's work but that the defects to the floor were not proved. Estor was ordered to pay Multifit a sum of money.

Estor did not make payment but issued proceedings for a declaration that there was no contract in writing between it and Multifit and that the adjudicator's decision was unenforceable. Multifit counterclaimed asking for summary judgment to enforce the adjudicator's decision, stating that Estor had no realistic defence to the summary judgment application.

The judge decided that Estor had an arguable defence that it was not party to the construction contract, although noted that its case was 'at the weak end of the scale'. However, the court used its discretion to grant Estor leave to defend the summary judgment application and ordered Estor to make a payment into court of just over half of the sum claimed by Multifit, reflecting the court's view that Estor's prospects of succeeding in defending the application were slight.

Interestingly, the court also made a comment as to the severability of elements of an adjudicator's decision as the adjudicator had decided that an element of the costs incurred in the first (abortive) adjudication should be payable in the second and the court commented that, although not relevant in this particular case, it did have the ability to sever the part of the adjudicator's decision which dealt with fees incurred in the first adjudication had that been a decision that was outside the jurisdiction of the adjudicator.