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Adjudication tactics
– the rush to judgment
The adjudication process lends itself to tactical thinking and participants
in the process have deployed a number of tactical devices over the years
to try to secure an advantage.
‘Ambush’ was added to the lexicon of One of the strengths of the adjudication
adjudication soon after the statutory process has been the robust approach
process was introduced. Claimants which the courts have taken to the
realised that there was considerable enforcement of adjudicator’s awards.
advantage in taking time to prepare The courts are not easily convinced
a claim and serving it at the most that an adjudicator has exceeded his
inconvenient moment leaving the other power or has infringed the basic rules of
side to scramble around to put together natural justice (just about the only two
a response in a matter of days. There bases upon which enforcement might be
were tales of notices of adjudication defeated). They are also cautious about
being served on Christmas Eve. Whilst attempts to stay enforcement judgments
this extreme version of the ambush on the basis that the successful party
certainly does happen, there seems to be would be unable to pay the money back
no evidence that it is commonplace. (See if the adjudicator’s decision ultimately 4 in which Interserve would claim a
Report 9 from the Adjudication Reporting turns out to have been wrong. further substantial sum. The court said it
Centre at Glasgow Caledonian University) would enforce adjudication number 2 and
The courts have dealt with a number of
Cleveland would have to wait its turn to
Another common tactic has been to limit cases where a party on the receiving end
try to enforce the decision in adjudication
the ambit of an adjudication by carefully of an adverse adjudicator’s decision has
number 3 later.
drafting the notice of adjudication to sought to avoid paying up on the grounds
refer only a narrowly formulated dispute. that it has good claims against the other In Hillview v Botes, Hillview sought to
It is clear from the many cases on the party which should be set-off against the enforce a substantial adjudication award.
subject that the adjudicator’s remit is adjudicator’s award. By way of example: In the meantime, Botes had started
limited to the dispute identified in the proceedings for payment of its final
In Interserve v Cleveland Bridge there
notice. If there are other issues that account. It thought its claim was bound to
was a series of adjudications. Interserve
the responding party wants decided, succeed and sought summary judgment.
were the winners in adjudication number
he must start his own adjudication. It asked the court to delay enforcing the
two. They were awarded £1,368,270
Clearly, the tactical response from the adjudicator’s decision until the summary
including interest. Cleveland did not
responding party must either be to judgment application was heard about
pay up so Interserve sued for payment.
derail the first adjudication if possible a month later. ‘No’ said the court. The
Some ten weeks later, on the day of the
or to start his own adjudication as soon adjudicator’s award was to be paid and
hearing of Interserve’s enforcement
as he can. A key question will be: does it could be repaid later if Botes’ final
claim, the decision in adjudication
the responding party have to pay out account claim succeeded.
number 3 was issued. Cleveland won
whatever the claiming party wins in the
this one. The amount payable to There are, however, some limited
first adjudication and then try to claim
Cleveland under adjudication number circumstances where it is permissible
it back if he is successful in the second
3 was £1,450,352.90. Cleveland said to set-off against sums awarded by an
adjudication or can he avoid doing so by
that this should be set off against the adjudicator. In Balfour Beatty v Serco,
setting off his claim or his adjudication
sum awarded in adjudication number the judge held that it was permissible to
award against the amount awarded
2 or at the very least, they should not deduct liquidated damages from sums
against him in the first adjudication? Two
be ordered to pay up on adjudication awarded by a adjudicator when it follows
recent decisions have addressed these
number 2 until their application to logically from an adjudicator’s decision
questions. Before we come to them, let’s
enforce the decision in adjudication that the employer is entitled to recover
look at the approach of the courts in
number 3 had been decided. There was a specific sum by way of liquidated
previous cases.
also the prospect of adjudication number damages, provided that the employer
2
of multiple adjudications. JPA had an
award for payment of £300,000 which
was the advance payment due under
the contract. Sentosa had an award
of £180,000 for liquidated damages.
Sentosa could not deduct the liquidated
damages from payments to JPA because
they had not served a withholding
notice. Could they set it off against the
£300,000 adjudication award in favour
of JPA?
This was not a case like Balfour Beatty
v Serco or Hart v Smith where it was
argued that the entitlement to liquidated
damages was a logical consequence of
an adjudicator’s decision. This was a
case like Interserve v Cleveland Bridge
where there were two adjudication
decisions awarding payments in opposite
directions. This case differed from
Interserve in that not only did Sentosa
have an adjudicator’s award but they also
managed start enforcement proceedings
and get them to a hearing at the same
time as JPA’s enforcement was heard.
has given proper notice (insofar as repayment of £7,381.20 which the contract
That, it seems, was a crucial difference
required). Typically this will arise when administrator certified they had overpaid.
and the set-off was allowed.
the adjudicator deals with an extension They served a withholding notice for this
of time claim but does not deal with sum and the liquidated damages. There are lessons to be learned from
liquidated damages consequent on his these cases. The best way to deal with
The adjudicator decided that the Smiths
decision. The court said that where the an adjudication that is framed in a way
were entitled to the non-completion
entitlement to liquidated and ascertained that prevents you bringing in claims
certificates but said he could not issue
damages has not been determined either you want to make, is to start your own
them himself. He also decided that until
expressly or implied by the adjudicator’s adjudication as soon as possible to give
they were issued, there could be no
decision, then the question whether the yourself the best chance of having any
entitlement to liquidated damages. Hence,
employer is entitled to set off liquidated enforcement proceedings heard at the
he did not award liquidated damages.
damages against sums awarded by the same time. Secondly, you need a little
adjudicator will depend upon the terms Following the decision, the contract tactical thinking of your own. If it had
of the contract and the circumstances of administrator issued the non-completion been possible in the Hart case, it would
the case. certificates and the Smiths claimed the have been better for the Smiths if the
liquidated damages. The issue for the contract administrator had issued the
This all sets the scene nicely for our two
court was whether the Smiths could non-completion certificates and if the
recent decisions. First up was Hart v
deduct the liquidated damages from the liquidated damages had been demanded
Smith on 3 September 2009. The Smiths
sums they owed under the decision in before starting the adjudication.
engaged Hart to convert three barns
adjudication number 1. The court held Entitlements that may at first seem
into four dwellings. Disputes arose and
that they could not. The adjudicator to follow as a matter of logic from an
there were two adjudications. In the first,
had made no finding as to liquidated adjudicator’s decision often do not follow
Hart claimed payment under two interim
damages and it could not be said that the on closer examination. The Balfour Beatty
certificates. Hart was successful and was
liquidated damages claimed followed as v Serco line of authorities will be of
awarded £79, 900.43.
a matter of logic from his decision that limited application.
The Smiths then started adjudication the Smiths were entitled to certificates of
number 2 claiming that they were entitled non-completion. For further information please contact
to certificates of non-completion and Mark Clinton on 01293 742811
The second case was JPA Design
to payment of liquidated damages (this mark.clinton@thomaseggar.com
and Build v Sentosa, decided on 28
was all under a JCT Standard Building
September 2009. This was another case
Contract, 2005). They also claimed
3
‘There is potential for misunderstanding
and uncertainty whenever the drafting is
not spot on’
Overage clauses –
lessons to be learnt from
Chartbrook v Persimmon
Overage clauses are often used as a good way to protect both Buyer and
Seller of development land from the uncertainties of the planning process,
or fluctuations in market prices.
The idea is simple. The developer pays purpose of the contract, rather than a
a guaranteed minimum price when strict grammatical interpretation of the
he acquires the site, and agrees to words used. In considering the contract
make a further payment at a later date in this way they came close to blurring
depending on the outcome of his planning the rule that where there is a written
application, or actual sales values. contract the courts can only decide what to give Chartbrook an increment to the
it means against the background facts, price which Persimmon had already paid
The legal mechanics and drafting are
and not by evidence from the parties for the land in the event that sale prices
often very complex and the subject of
themselves of what they had actually were higher than anticipated at the date
detailed one off negotiations. There
intended at the time of the contract. of the contract.
is potential for misunderstanding and
uncertainty whenever the drafting is At the heart of the case was a formula The minimum guaranteed payment was
not spot on, and these cases are ripe for calculating Additional Residential meant to reflect the land value element.
for litigation given the very large sums Payments to be made by Persimmon The additional residential payment
which are often at stake. depending on the outcome of ultimate similarly was meant to reflect the
sales values, which read: increase in the land value element, and
A recent example is Chartbrook v
was not intended to be a proportion of
Persimmon which was finally decided by 23.4% of the price achieved for each
the value of the completed development.
the House of Lords on 1 July 2009. residential unit in excess of the minimum
Chartbrook only contributed the land.
guaranteed residential unit value less
Chartbrook brought their claim under Why would Persimmon agree to pay
the costs and incentives.
a contract by which they had sold Chartbrook more than the value of that
development land to Persimmon on Chartbrook said that this meant: contribution?
which Persimmon were to build new
ARP = 23.4% of (£ Price achieved minus The trial judge and two out of three
apartments. Chartbrook believed they
£ Minimum Guaranteed minus £ Costs judges in the Court of Appeal were
were entitled to an additional payment
and (incentive). not prepared to look further than the
of £4,484,862. Persimmon thought that
natural reading of the words used, and
Chartbrook were entitled to an additional Persimmon said it meant:
considered that they were not able to
payment of £897,051. Chartbrook won
ARP = [23.4% of (£ Price achieved minus take into account the facts and the
the trial, and won in the Court of Appeal,
£ Costs and (incentives)] minus valuation evidence which made sense of
but they lost in the House of Lords on
£ Minimum Guaranteed. those words.
a unanimous decision. There is a lesson
here that the outcome of litigation is an It is a shame the lawyers did not use Persimmon went to the House of Lords
uncertain business even when judges Year 10 algebra rather than uncertain thinking they would need to persuade
in the High Court, Court of Appeal, and wording. the Court to overturn the rule which
the House of Lords are considering excludes evidence of what was said or
The natural reading of the words used
competing interpretations of contracts done during the course of negotiating
favoured Chartbrook. However, on the
drafted by lawyers. However, the the agreement for the purpose of
facts and the valuations it was obvious
unanimous decision of the House of Lords drawing inferences about what a
that the idea was that 23.4% was the
should give us signposts for the future. contract means.
element of the land value in the sale
The House of Lords were prepared to price of the finished apartments and the In the event, the House of Lords was
base their decision on the underlying mechanism in the contract was intended able to reach a decision in favour of
4
Newsbrief
Services for Construction
Contractors – Fixed price
legal work
Is the prospect of open-ended,
hourly rate based fees deterring
you from taking the top quality
legal advice you need?
We believe that clients’ relationships
with their lawyers should be value-
loaded and as transparent and as
‘shock-free’ as possible. With that
in mind we have devised a range
of services for contractors that are
straight-forward, fixed-fee products
built around the core characteristics
Persimmon without disturbing this long the agreement on the basis that the
of the construction industry:
established rule. Two points of principle document had been signed by the
emerge from the House of Lords decision, parties in the mistaken belief that it • In-house service – this is
both of which support the general represented what they had previously designed to give you access to
trend in reported decisions on the agreed as it appeared from their pre- our construction lawyers as if
interpretation of contracts that the Court contract correspondence and the oral they were your own in-house
should be ready to recognise and enforce evidence given at trial. team at a fraction of the cost
the parties contractual commitments • F
ixed-price contract reviews – our
There are subtle distinctions here. Pre-
even where those commitments are not team will review and provide
contract evidence is not admissible to
expressed as clearly as they would be in a advice on contracts, warranties and
prove the intention of the parties for the
perfect world. other documents at fixed prices,
purpose of interpreting the contract,
alerting you to the key risks in the
First the House of Lords decided the but it is admissible for the purpose of
documents you are asked to sign
case on the basis that: establishing ‘prior consensus’ to see
without the uncertainty of hourly
whether or not the contract should be
Something has gone wrong with the rate based fees
rectified.
language – not, in this case, with • F
ixed-price adjudication –
the meaning of words, but with the The practice of the House of Lords in adjudication was designed to be
syntactical arrangement of those this case (which should be reflected in a quick and inexpensive means
words. If, however, the context drives more junior courts in cases to come) is of resolving disputes. In reality
one to the conclusion that this must that it is very important for the courts it can be anything but, with
have happened, it is no answer that the to give sensible commercial effect to advisors charging by the hour.
interpretation does not reflect what the commercial contracts, even where the We therefore offer a fixed price
words would conventionally have been drafting is not all it should be. service giving you the ability to
understood to mean. assess the cost effectiveness of
It is disappointing that Persimmon had to
In other words, the contract would be go all the way to the House of Lords to taking action before you start.
interpreted in line with Persimmon’s get the right result, but it is encouraging If you would like further
view of the commercial reality of the to think that Courts of Law are also information on our fixed fee
deal, rather than the natural meaning of Courts of Justice, and to see pragmatic products, please contact
the words taken in isolation from their decisions which produce a fair result Mark Clinton on 01293 742811 or
commercial context. interpreting the parties true commercial mark.clinton@thomaseggar.com
intentions, even where specific words or John Kittow on 01293 742791
Second, the House of Lords said that
used are less than crystal clear. or john.kittow@thomaseggar.com
if the proper interpretation of the
meaning of the contract had been For further information please contact
different, the House of Lords would John Kittow on 01293 742791
have been prepared to step in to rectify john.kittow@thomaseggar.com
5
‘The production of the design and
approval process must dovetail with the
technical services agreement and the
operating agreement.’
Legal issues in
hotel procurement
Procuring a hotel, whether as the owner or as the architect or project
manager on behalf of the owner is different from procuring any other
building. How you may ask? Well many of the principles are the same, but
there are agreements between the owner and third parties which must be
considered from the outset when constructing a hotel.
6
‘The penalties on conviction include
unlimited fines and ‘remedial’ and ‘name
and shame’ orders.’
Corporate manslaughter
know the risks
One third of all work related deaths so far this year have been in the
construction industry. The HSE tells us that over the last 5 years there
was an average of 3.4 deaths per 100,000 construction workers. The
good news is that the numbers are falling, but whether that is because
of safety improvements or is simply a sign of the economic times remains
to be seen.
April 2008 saw the introduction of The or organised. In essence this is senior
Corporate Manslaughter and Corporate management failure and can be either
Homicide Act 2007 which created individual or collective. The relevant duty
a new criminal offence of corporate will extend to sub-contractors who are
manslaughter that only companies can be employed by the company.
charged with. The penalties on conviction
The senior management failure must
include unlimited fines and ‘remedial’ and
cause the death. It does not need to be
‘name and shame’ orders.
the only cause.
The Act has been brought in as a result
The breach of duty must be gross.
of public demand following a perceived
Then you have the banks. We know what The test is whether the conduct that
failure to hold companies to account
the banks are looking for when it comes constitutes the failure falls far below what
for major public disasters. Whilst this
to financing. A mistake often made is would reasonably have been expected.
was the driving force behind the Act,
to negotiate a management agreement, the application of the Act is not limited In addition, the jury must consider:
appoint a design team and then go to large scale catastrophes and given l whether the company failed to comply
to the bank for finance. Bank’s are its record, the construction industry in
looking for specific terms in all of your with any health and safety legislation;
particular vulnerable.
contracts, they want to be involved in l the seriousness of that failure; and
negotiating the management agreement The first prosecution under the Act l the degree of the risk of death.
and they want the appointments of the has been brought against Cotswold Further, the jury may also consider:
professionals and contractor to include Geotechnical Holdings. A pit collapsed
l attitudes, policies, systems, practices
certain terms, not least of which are whilst a member of staff was taking
and matters likely to have produced a
prescribed third party rights or collateral soil samples. The company has been
management failure or a tolerance of
warranties in favour of the bank. The charged and faces an unlimited fine if
it; and
best advice we can give is to have a convicted. A director has been charged
with the criminal offence of gross l health and safety guidance.
proper appointment drafted by your
lawyer who specialises in the hotel sector negligence manslaughter and faces life It is relatively easy to see how all of
prior to tendering for consultants and imprisonment, if convicted. this will apply in the case of small
contractors. This will give you far better The following elements must be present companies. It will be interesting to see
value for money and access to funding before a company can be convicted: how the law is applied to larger, more
with far less hassle and legal cost. complex organisations. For example,
The company must owe a ‘relevant duty will a parent company be liable for its
The message is the same for all projects, of care’ to a victim who is connected to
legal and procurement costs are higher subsidiaries’ failings? What approach will
the company in some way. This stems be taken where there are many layers
if you appoint your project manager and from the law of negligence and examples
lawyer once the horse has bolted. of management? The first case will not
include the duty to ensure a safe system answer these questions as it involves a
of work for all employees and the duty small family company but the courts will,
For further information please contact owed airlines to their passengers. no doubt, be called upon to grapple with
Kim Teichmann on 01293 742792 The company must breach that duty by them in subsequent cases.
(kim.teichmann@thomaseggar.com) the way its functions are managed and/ continued on back page
7
For all enquiries please contact our
Construction team:
Mark Clinton, 01293 742811
mark.clinton@thomaseggar.com
Rebecca Evans, 01293 742814
rebecca.evans@thomaseggar.com
John Kittow, 01293 742791
john.kittow@thomaseggar.com
Kim Teichmann, 01293 742792
kim.teichmann@thomaseggar.com
key to self-protection is the taking of number of prosecutions. authorised and regulated by the Financial Services
Authority. Thesis has its own framework of investor
reasonable precautions backed up with a Be aware. Review and tighten your health protection and professional indemnity cover but
paper trail. and safety procedures. Take reasonable Thesis clients do not enjoy the statutory protection of
solicitors’ clients.
You could consider insurance as second precautions.
measure to protect yourself. Cover
For more information please contact
may be available for the legal costs of
Rebecca Evans on 01293 742814 Chichester Gatwick London Newbury Southampton Worthing
defending a prosecution but as a matter
rebecca.evans@thomaseggar.com Telephone 0870 160 1300 www.thomaseggar.com