Adjudication Matters: August 2022

Can collateral warranties be construction contracts?

The Construction Act [1] grants a statutory right to refer to adjudication a dispute arising under a “construction contract“. In Abbey Healthcare v Simply Construct [2] the Court of Appeal considered for the first time the meaning of “construction contract” and confirmed that a collateral warranty can be a construction contract if it warrants both past and future performance. Importantly it does not matter if the collateral warranty was provided after completion of the works, provided that it refers to past and future performance. Key wording to look out for is “has performed and will continue to perform“.

This is good news for beneficiaries of collateral warranties as they can advance their claim without incurring the costs of litigation. Parties providing collateral warranties may wish to consider including a contractual adjudication procedure to avoid the uncertainty of relying on the statutory regime. If a warranty is being provided after completion of the works the statutory right to adjudicate could be avoided if the warranty does not relate to future performance.

Where an adjudicator declines to decide a particular dispute, can that same dispute be referred to a second adjudicator?

An adjudicator must resign if the dispute before them is the same or substantially the same as one referred to adjudication previously [3]. In ML Hart v Swiss Cottage [4] the TCC [5] confirmed that “same or substantially the same” depends on what issues were in fact decided by the adjudicator in the previous adjudication, rather than on what issues were referred to the previous adjudicator. Here the first adjudicator in his decision did not assess the final account under a building contract despite the final account being one of the issues that had been referred to adjudication. The TCC held that the final account was therefore not the “same or substantially the same” as the matters which had in fact been decided by the first adjudicator and the final account could therefore be referred to a second adjudicator for determination. The TCC also confirmed that a settlement agreement between the Employer and the Surety did not bind the Contractor.

This case demonstrates the difficulties in dealing with serial adjudications under the same contract. Before referring a dispute to adjudication it is important to consider what has in fact been decided in the previous adjudication(s) and make sure you only refer issues which have not yet been decided.

Is an adjudicator’s decision on an interim valuation binding on the final account?

In Essential Living (Greenwich) v Elements (Europe) [6] the TCC confirmed that where an adjudicator’s decision determines discrete issues of entitlement or valuation (such as variations) in respect of an interim valuation, that decision binds the parties and any subsequent adjudicator until the issue is finally determined by a court or subsequent settlement. As such, these items cannot be revalued in the final account.

However, if the contract includes a mechanism for a post completion review of the contractor’s entitlement to extensions of time, then the adjudicator’s decision regarding extensions of time in respect of an interim valuation, will not bind the parties in so far as the extensions of time can be amended by the post completion review mechanism in the contract.

The clause in question here was clause 2.27.5 of the JCT Construction Management Trade Contract 2011 which allows the Construction Manager not later than 12 weeks after the date of practical completion to:

• Fix a Completion Period for completion of the Works which is later than previously fixed
• Where there has been an omission, fix a Completion Period which is shorter than that previously fixed or
• Confirm the Completion Period previously fixed.

Accordingly the adjudicator’s decision on the interim extension of time does not prevent the Construction Manager (or a subsequent adjudicator) from granting a further extension of time under clause 2.27.5. However importantly the only circumstances in which clause 2.27.5 allows the Construction Manager (or a subsequent adjudicator) to reduce the extension of time granted in the adjudicator’s decision is where there has been an omission.

This case demonstrates that identifying whether a previous adjudicator’s decision is binding is not straightforward and parties should obtain expert advice before seeking to depart from the same.

Will the court enforce an adjudicator’s decision where the party seeking payment is subject to a CVA?

In FTH v Varis Developments [7] the TCC declined to enforce two adjudicator’s decisions because the party seeking payment was subject to a CVA. The TCC held that there was a real risk that the claimant might enter liquidation, denying the defendant the possibility of recovering any monies back from the claimant in the future. Key factors in the TCC’s decision were:

• The defendant had a cross claim of £1.7 million
• The CVA was designed to produce dividends of just 56p for every £1 so even if the CVA was successful it was likely that the claimant would still then need to enter liquidation
• The TCC was not persuaded that the claimant had recently been trading profitably
• The TCC also had little faith that the CVA would be successful
• The claimant was not able to offer the defendant any security in respect of the proposed payment.

In light of this case it could be argued that there is little benefit to a company in insolvency (or about to enter insolvency) incurring the costs of referring a dispute to adjudication. However the TCC did make clear that enforcement is determined on a case by case basis such that where a CVA has good prospects of allowing the company to trade out of insolvency the court may be willing to grant enforcement and adjudication could be a useful way to improve cash flow to assist a CVA in being successful.

In what circumstances are loss of profits and overheads recoverable?

In Mallino Development v Essex Demolition [8] the TCC held that a Contractor can be awarded damages for loss of profits and overheads where the Employer is under a contractual obligation to re-tender the contract works and it fails to do so. Here the contract between the parties was varied so that the final section of the works would be re-tendered. The TCC accepted that where there are alternative methods of performance, damages are assessed on the basis that the defendant will act in the way most favourable to themselves. However this was not a case of alternative methods of performance as the contract imposed a strict obligation to re-tender.

This case provides guidance regarding the assessment of damages where the contract does or does not provide for alternative methods of performance. Compensation will be based on the probabilities of the case (i.e. the remuneration a claimant might reasonably expect to receive) rather than the minimum necessary to constitute performance. This can include damages for loss of profits where a strict obligation to re-tender is not complied with.

Please get in touch with Carly if you have any queries or would like to know more about adjudication.

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[1] Housing Grants, Construction and Regeneration Act 1996 (as amended)

[2] Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2022] EWCA Civ 823

[3] Paragraph 9, the Scheme for Construction Contracts (England and Wales) Regulations 1998 (as amended)

[4] ML Hart Builders Ltd (In Liquidation) v Swiss Cottage Properties Limited [2022] EWHC 1465 (TCC)

[5] The Technology & Construction Court Division of the Business and Property Courts

[6] Essential Living (Greenwich) Ltd v Elements (Europe) Ltd [2022] EWHC 1400 (TCC)

[7] FTH Ltd v Varis Developments Ltd [2022] EWHC 1385 (TCC)

[8] Mallino Development Ltd v Essex Demolition Contractors Ltd [2022] EWHC 1418 (TCC)