Construction and Engineering Legal Update January 2010

In this month's digest we highlight  the following recent developments of interest: negotiating interest clauses for late payment; drafting guarantees to enforce an adjudication award against a guarantor; the importance of following contractual notice procedures; whose contract terms apply - the "battle of the forms"; Government Guidance on draft Blacklisting Regulations; challenges to adjudication awards and the need to pay adjudication awards to avoid costs and interest penalties, or having your later challenge to the award stayed. 

We also summarise the recommendations of Lord Justice Jackson in his final report following his review of civil litigation costs, focussing on construction and engineering cases.

All links are correct at the time of publication.

The following topics are covered:

• Commercial
• Case Law
• Summary of Lord Justice Jackson's recommendations on civil litigation costs 

Commercial

Interest on late payment of commercial debts: can you get away with less than 8%?

The Late Payment of Commercial Debts (Interest) Act 1988 requires commercial contracts to include a "substantial remedy" for late payment.  If they do not then the statutory rate of effectively 8% over base will apply.

Parties to a commercial contract should therefore negotiate a rate of interest or other terms which  represent a "substantial remedy" for late payment.  Contract terms will be void if they do not confer a substantial remedy. In determining what is a substantial remedy the courts will look at all the circumstances, including the rate of interest that applies to late payments,  the parties' costs of borrowing, the length of credit periods and rates which are normal in that particular sector of the economy.  On this last point, standard forms of contract vary in the suggested or specified rate, from 2% above base to 8% above base.  However, terms for agreed rates which deviate too far from 8% over base are more likely to be found to be void, with the 8% default rate held to apply.  The Government's User Guide in this topic provides further guidance.

The recent case of Fitzroy Robinson v Mentmore Towers (No 3) [2009] EWHC 3365 (TCC) has provided a timely reminder of this issue.  In that case  professional firm was entitled to interest at 8% above base rate on unpaid instalments of  fees due under a contract, pursuant to the Late Payment Act.

Drafting to enforce an adjudicator's decision against a guarantor

The Technology and Construction Court refused to enforce an adjudicator's decision against the guarantor of one of the parties to the adjudication, where the guarantor was not a party to the adjudication.

The court refused enforcement on the ground that the guarantor had a reasonable prospect of successfully defending the claim by showing that its guarantee was subject to a condition that had not been fulfilled by the contractor. However, the court made in addition a non-binding comment that a guarantor will not be bound by an adjudicator's decision, unless that is expressly stated in the wording of the guarantee.  The terms of guarantees should therefore contain express wording to ensure that a guarantor is bound by any adjudication decision.  In these circumstances, guarantors will probably want the right to be kept fully informed as to disputes which may go to adjudication, and may seek the right to take over the conduct of any adjudication.

Beck Interiors Ltd v Dr Mario Luca Russo [2009] EWHC B32

The importance of following contractual notice procedures

Many contracts contain procedural provisions for giving notice.  The importance of following such procedures rigourously was highlighted inHHR Pascal BV v W2005 Puppet II BV [2009] EWHC 2771, where a buyer was entitled to the return of  a EUR 25million deposit.  In this matter, the seller had not given the buyer the amount of notice required in the contractual procedure for determining when substantial completion had occurred.  The High Court held that the fact that the works had in fact completed before a long stop date was irrelevant.

Whose contractual terms apply?  The "battle of the forms"

An offer to buy containing the purchaser's terms which is followed by an acknowledgement of purchase containing the seller's terms which is followed by delivery will (other things being equal) result in a contract on the seller's terms. If, however, it is clear that the neither party ever intended the seller's terms to apply and always intended the purchaser's terms to apply, it is conceptually possible to arrive at the conclusion that the purchaser's terms are to apply. It will be a rare case where that happens.  In Tekdata Interconnections Ltd v Amphenol Ltd [2009] EWCA Civ 1209 the issue was whether in what is sometimes called "the battle of forms", there can be circumstances in which a traditional offer and acceptance analysis can be displaced by reference to the conduct of the parties over a long-term relationship.

In the leading judgment in the Court of Appeal, Lord Justice Longmore said he thought it would always be difficult to displace the traditional analysis, in a battle of forms case, unless it can be said there was a clear course of dealing between the parties.

This confirms that, absent a clear course of dealing which demonstrates that the parties agreed to use a particular set of terms,  the seller will usually be in the stronger position since he can refuse to deliver until the buyer agrees to the seller's terms.  If the buyer has good negotiating leverage he should ensure that agreement is reached on his terms applying, and ensure that that agreement is recorded in writing before the seller's "last shot" acknowledgement and terms are received.

Government Guidance on draft Blacklisting Regulations

It is a common practice for employers or employment agencies to seek references on potential recruits or otherwise vet individuals for employment. Those vetting practices should be transparent, fair and open, and they should comply with the Data Protection Act 1998 and the data protection principles that the Act lays down. In contrast, the blacklisting of trade unionists is an unfair practice. It involves the systematic compilation of information on individual trade unionists and its use by employers and recruiters to discriminate against those individuals because of their trade union membership or because of their involvement in trade union activity.

The Employment Relations Act 1999 (Blacklists) Regulations 2010 are expected  to come into force between February and April 2010. The Regulations make it unlawful to compile, supply, sell or use a "prohibited list" (i.e. a blacklist).

The Regulations are designed to avoid interfering with normal listing or vetting practices which are not intended to discriminate against trade unionists. For example, they should not impact on the way trade unions and employers work with each other in drawing up and using lists of trade unionists who pay their union subscriptions from their pay at source (via the so-called "check-off" system).

The Department for Business, Innovation and Skills Guidance summarises the draft Regulations and provides guidance on their application in practice.

Case law 

Adjudication. Beware of making unreasonable challenges to adjudication awards

The Technology and Construction Court  held that where a party decided to raise unmeritorious defences to an application to enforce an adjudication decision and then abandoned many of those grounds, that was conduct which was unreasonable and needed an order for "indemnity costs" in favour of the other party.  (If a party is awarded "indemnity costs" he will recover more of his costs from the other side than would normally be the case). Such costs orders will be made to prevent parties from seeking to defend enforcement of adjudication decisions on grounds that have no merit.   Claims or defences which take the "kitchen sink" approach, and include unmeritorious contentions, will run the risk of adverse costs orders.

O'Donnell Developments Ltd v Build Ability Ltd [2009] EWHC 3388 (TCC)

Adjudication. "Pay now, argue later" (1)  ... or face costs and interest penalties 

It is not uncommon for a party, whose defence to a claim in an adjudication is based on a point of construction or a point of law, to refuse to pay the sum awarded by the adjudicator and commence court proceedings to challenge the award, confident in the knowledge that the Technology and Construction Court  (TCC) will endeavour to get the matter on as quickly as possible. The TCC will always try to do that and will always give directions so as to resolve finally any court proceedings as quickly as it can. The question is, of course, what happens to the money in the interim.

The Judge made it clear that if a party does not comply with the adjudicator's decision, then, whatever the result of the subsequent court  proceedings, that party should expect to be penalised for its default by way of both interest and costs. As to interest, the court may well impose a punitive rate of interest in accordance with the Late Payment of Commercial Debts (Interest) Act 1998 and the decision of the Court of Appeal in Ruttle Plant Hire Ltd v Secretary of State for Environment Food & Rural Affairs (No 3) [2009] EWCA Civ.  Further or alternatively, orders for costs, including costs on the indemnity basis, may be appropriate to make up for the failure to comply with the agreed contractual régime. (If a party is awarded "indemnity costs" he will recover more of his costs from the other side than would normally be the case).

Fenice Investments Inc v Jerram Falkus Construction Ltd  [2009] EWHC 3272

Adjudication. "Pay now, argue later" (2)  ... or risk having your later challenge stayed

An adjudicator decided that  Anglo and other claimants ("Anglo") should pay the defendant certain sums of money.  Anglo subsequently issued proceedings in the Technology and Construction Court  (TCC), claiming recovery of alleged overpayments made to the defendant.  However, Anglo had failed to pay the sums awarded to the defendant by the adjudicator, and failed to comply with court orders made in related proceedings.  The defendant applied for a stay of Anglo's proceedings, and sought an order that Anglo provide security for costs.

The Judge found that there was unreasonable and oppressive behaviour and some elements of bad faith involved in Anglo pursuing its claims without first honouring the adjudicator's decisions (in particular) and the Court judgements enforcing them.  The Judge therefore stayed Anglo's proceedings until the adjudicator's decision had been honoured in full.  In addition the Judge made an order that Anglo provide security for the defendant's costs.

The Judge refused to order a stay of Anglo's action on the ground that Anglo had failed to comply with the Construction and Engineeering Pre-Action Protocol.  This was because a party does not have to comply with the Protocol before commencing proceedings to the extent that the proposed proceedings relate to the same or substantially the same issues as had been the subject of a recent adjudication under the Housing Grants, Construction and Regeneration Act 1996.

Anglo Swiss Holdings Ltd & Anor v Packman Lucas Ltd [2009] EWHC 3212 

Summary of Lord Justice Jackson's report on civil litigation costs

Lord Justice Jackson's final report on civil litigation costs was published on 14 January 2010. His terms of reference were to review the rules and principles governing the costs of civil litigation and to make recommendations in order to promote access to justice at proportionate cost. He also had to review case management procedures; to have regard to research into costs and funding; to consult widely; to compare our costs regime with those of other jurisdictions; and to prepare a report setting out recommendations.

It should first be noted that Jackson LJ's recommendations are at present no more than recommendations.  Further legislation and/or consultation would be required to bring most of his proposals into force. 

Jackson LJ noted that litigation in theTechnology and Construction Court (the "TCC") is often conducted in a proportionate manner, and he made only modest recommendations concerning the operation of that court. The main recommendations relevant to construction and engineering claims are:

• The Pre Action Protocol

The cost of complying with the Pre-Action Protocol for Construction and Engineering Disputes could be reduced.  The Protocol should make it clear that the letter of claim should not annex or reproduce draft pleadings or experts' reports, and documents should not be annexed to the letter of claim or the response.  In addition, documents in the possession of both parties should not be supplied.  The parties should state at the first Case Management Conference what costs have been incurred in complying with the Protocol, with the Judge having power to disallow costs if a party has gone beyond the requirements of the Protocol

• The TCC Guide

The TCC Guide should be amended to draw attention to the power of the court to disallow costs in respect of pleadings or witness statements which contain extensive irrelevant or peripheral material.  The courts should be flexible in allowing witnesses to give supplementary evidence in the witness box.  If shortcomings in pleadings are identified (a) at an early stage, the defaulting party could be ordered to re-plead, or (b) later, then costs sanctions may apply.

• Lists of issues.

Paragraphs 14.4.1 and 14.4.2 of the TCC Guide should be amended, so that Lists of Issues are focused upon key issues rather than all issues in the case.

• Disclosure of Documents.

A "menu" of options for disclosure is proposed.  The parties would agree, or the court would make an order for, the disclosure option to be used.  The options would include no disclosure; disclosure on documents relied upon and requesting specific documents from the other party; standard disclosure; disclosure by issue; disclosure of documents which contain information which advances a party's case or damages the opponent's (or documents which could lead on a train of enquiry which could have either of these consequences).

• The Civil Procedure Rules

Should be amended so that appropriate TCC cases can be allocated to the fast track which applies to cases where the sum in issue is not more than £25,000, the trial can be concluded within a day and there is one expert on each side. 

• County Court Jurisdiction

Greater publicity should be given to the fact that the County Court already has jurisdiction to deal with TCC low value cases.

• Use of District Judges

Legislation should be amended, so that district judges of appropriate experience may be authorised to manage and try fast track TCC cases.

• Mediation

Should be promoted with particular vigour for those low value construction cases in which conventional negotiation is unsuccessful.  He said that in relation to small building disputes it is particularly important to pursue mediation, in the event that conventional negotiation fails.

•  Costs generally

Judges, litigators and barristers should receive training on costs budgeting.  A standard costs management procedure should be established. There should be increased judicial responsibility for controlling costs

•  Litigation funding

Significant changes to the current litigation funding regime are proposed.  these include

• Success fees and after-the-event insurance ("ATE") premiums should no longer be recoverable from unsuccessful opponents in conditional fee arrangements (CFAs)
• Litigation costs can be reduced by taking away the need for ATE insurance in the first place. This can occur if qualified one way costs shifting is introduced, at least for certain categories of litigation in which it is presently common for ATE insurance to be taken out. Subject to some qualifications, "Qualified" one way costs shifting would mean that the claimant would not be required to pay the defendant’s costs if the claim is unsuccessful, but the defendant would be required to pay the claimant’s costs if it is successful.
• A contingency fee model (where the lawyer is paid from the settlement sum or the damages awarded) should be introduced, but the terms of contingency fee agreements must be properly regulated, to protect the interests of clients. 

If you require any further information about any of the items mentioned, or if you have been forwarded this update by a colleague and would like to receive it direct, please contact David Kirkpatrick , Associate Solicitor and Professional Support Lawyer for the Construction & Engineering Department.