Staying enforcement of an adjudicator’s decision to permit a cross-claim

Background

A & V Building Solutions Ltd and J & B Hopkins Limited [1]  is the latest instalment in the long running dispute between J & B Hopkins (“Hopkins“) and A & V Building Solutions (“A&V“) (the previous judgments were discussed in our March 2023, July 2023, and November 2023 editions of our Adjudication Matters series). Hopkins was appointed as a mechanical and electrical contractor on a student accommodation development for the University of Brighton and sub-contracted the plumbing works to A&V. A dispute crystallised in relation to a payment application, which led to A&V leaving the project before practical completion of their sub-contracted works.

A&V were successful in a first adjudication and were awarded £138,010.86. Hopkins refused to comply with this award and brought a pre-emptive Part 8 claim for a declaration that the application for payment from A&V was invalid. The first adjudication decision was later reversed in a second final value adjudication. The adjudicator in the second adjudication decided that A&V must pay Hopkins the sum of £82,956.88. However, enforcement of this second adjudication decision was stayed by the Court owing to A&V’s inability to pay and the potential harm it could cause to A&V’s cross claim. This A&V cross claim is the subject of this latest judgment.

The latest claim

This latest hearing sought to conclude a final determination of three disputed points: (1) the value of A&V’s works at the time it left the project; (2) claims by A&V for losses allegedly suffered before it left the project; and (3) competing claims between the parties as to the financial consequences of A&V’s decision to abandon the sub-contract works.

The Court’s decision

Hopkins was found to have breached several clauses of the sub-contract, particularly in relation to non-compliance with a designated notice period, failure to grant an extension of time and, most importantly, denying A&V access to the system used to record work completion.

The works conducted by A&V under the sub-contract were measured to be worth £407,156.25 as at the time it left the project. Variation works were valued at £53,200.

A&V’s loss of profit claim is split into two different limbs in the judgment as follows:

1. Loss of profits on the sub contract work remaining as part of the project at the time that A&V left site.
2. Loss of potential future profits.

In respect of the first limb, A&V was awarded £6,096.56. It was held that had Hopkins not repudiated the subcontract, A&V could and would have completed the original subcontract works.

The second limb (which the Court noted was more difficult factually and legally) failed. The judge agreed with Hopkins’s submission that as a matter of law, A&V would not be entitled to claim loss of profits on variations. The correct approach was “to apply the balance of probabilities approach to what would have happened between the claimant and the defendant” in the event that the sub-contract had not been repudiated

A&V failed to establish a significant loss of business opportunity resulting from Hopkins’s breach, therefore any loss claimed was deemed too remote to be recoverable. Based on the same reasoning, A&V’s claim for damages for loss of reputation also failed. A&V’s claims for overheads and directors’ and consultants’ time were also dismissed.

Hopkins put forward a counterclaim/contra-charge regarding the adjudicator’s fees of £13,962. The judge asked the parties to provide submissions following the issuing of the judgment, to further consider this issue.

The Court found that £101,543.17 was outstanding and payable to A&V after subtracting the payments already made by Hopkins.

Takeaway Points

First and foremost, the outcome displays the importance of this judge’s previous decision to stay Hopkins’s adjudication enforcement proceedings. If the adjudicator’s decision had been enforced this may have entirely prevented A&V from obtaining this successful outcome, unfairly pushing them into liquidation by paying an opposing party who ultimately owed them a sizeable sum for previously completed work.

This demonstrates the Courts’ intention to allow parties to fight on equal footing, preventing larger contractor companies from shutting out sub-contractor claims through use of their larger financial resources.

Will a party’s unreasonable behaviour during adjudication enforcement proceedings be considered by the Court in respect of recovery costs?

In Alandale Plant & Scaffolding Ltd v Ilford (Jersey) Ltd [2] the TCC granted summary judgment to enforce an adjudicator’s decision and awarded the claimant’s costs on an indemnity basis as a result of poor conduct by the defendant, due to its failure to engage in the proceedings.

What are indemnity costs?

Costs in litigation are usually awarded standard basis. Costs on a standard basis are those which are reasonable in amount, reasonably incurred and proportionate to the matters in issue. The receiving party must prove these elements for costs to be granted on this basis, and costs will be disallowed if they are not proportionate [3]. In some circumstances the Court will award costs on the more generous indemnity basis. An indemnity basis costs order aims to reimburse a party as fully as possible for the trouble of having to resort to litigation. Indemnity costs need only be reasonable and there is no proportionality requirement.

Factual background

Here, Alandale Plant & Scaffolding Ltd (“Alandale“) asked the Court to award costs on the indemnity basis citing Ilford (Jersey) Ltd’s (“Ilford“) unreasonable behaviour which Alandale said had led to the accrual of unnecessary legal costs.

This dispute was in relation to a construction contract for the hiring out of scaffolding equipment. Alandale made30 payment applications, 7 of which Ilford failed to pay. A payment dispute was referred to adjudication and Ilford was ordered to pay £119,500 (plus interest) to Alandale and to pay the adjudicator’s fees to the adjudicator. Ilford paid the adjudicator’s fee but refused to pay the decision award. Alandale sought to enforce the decision through the Courts and Ilford indicated an intention to defend the claim.

During enforcement proceedings, Ilford failed to comply with an order to serve and file evidence, despite a reminder to do so being provided by Alandale. As such, Alandale requested summary judgment and submitted an application for costs to be awarded on the indemnity basis.

The Court’s Decision

The Court referred to Coventry Scaffolding Company v Lancsville Construction [4]. In that case, guidance was provided (which now appears in paragraph 9.2.12 of the TCC Guide [5]) on how parties should act where a defendant fails to acknowledge service of enforcement proceedings or (if they have acknowledged service) where they indicate they will take no further part in proceedings. The guidance confirms that parties looking to enforce adjudication decisions may be able to obtain judgment in default of service of an acknowledgement of service (or where the other party files no evidence in response).

In light of this, summary judgment was granted in favour of Alandale to enforce the decision of the adjudicator.

Costs were also awarded to Alandale on the indemnity basis. The Court considered Ilford’s misleading indication of an intention to defend enforcement proceedings highly unreasonable, taking into account its failure to communicate with Alandale or the Court throughout the litigation. There had been no real prospect nor intention of defending the claim, thus avoidable legal costs were incurred and unnecessary time had been wasted. This was contrary to the pay now, argue later principle of adjudication.

The Court commented that Ilford’s behaviour had “put the claimant to unnecessary cost in circumstances where it appears that the defendant had no real defence to the proceedings and has strung things out in a way that has caused delay, which is contrary to the policy of the 1996 Act [6] and the way it is supposed to work and generated wholly avoidable costs”.

Takeaway Points

This case emphasises the Court’s efforts to minimise wasted costs and time, and highlights that they will show little sympathy for those who try to undermine these established principles. When making an order for indemnity costs, the Court will consider factors beyond the factual merits of a claim, including the conduct of the parties throughout litigation. Further, an attempt to deter an opposition party from enforcing an adjudication decision by indicating a false intention to defend proceedings may put a party in an even worse financial position that it was after losing at adjudication.

The importance of clear documentation and consistency in witness statements

Ubhi Construction Limited v Aspire Enterprises (UK) Limited [2024] EWHC 1089 (TCC)

This case isn’t adjudication related, but it demonstrates how the court will approach the question of whether or not a contract exists, which is a key issue in many adjudications.

Factual background

It was common ground that Mr Dhanda had discussed with Ubhi Construction Limited (“Ubhi“) a development concerning the build of houses and apartments. The parties disputed what contracts had been entered into and which parties had entered into those contracts.

The Millenium Contract

On 5 February 2016 Ubhi signed a JCT contract with Millenium Enterprises Limited (“Millenium“) for a residential development (“the Millenium Contract”).

The Millenium Contract was also signed by Mr Dhanda; a shareholder of Millenium.

On 21 January 2016 Mr Dhanda had resigned as a director from Millenium as such he was not a statutory director at the time of signing the Millenium Contract.

Mr Singh was also a director and shareholder of Millenium.

The Aspire Contract

Mr Dhanda and Mr Singh were both also associated with the defendant, Aspire Enterprises (UK) Limited (“Aspire“).

It was Ubhi’s case that they entered into a contract with Aspire for the construction of 14 houses on 19 August 2016 (“the Aspire Contract“) and that Mr Dhanda had signed the Aspire Contract on behalf of Aspire. Aspire denied that it ever entered into the Aspire Contract. Aspire stated that Mr Dhanda “did not execute the Contract on behalf of the Defendant and that the signature B Dhanda was not written on the Contract by Mr Dhanda or with his authority or with that of the Defendant” [7].

Aspire’s alternative case was that if the Aspire Contract had been entered into, this contract was conditional on Aspire obtaining funding for the work.

The November 2015 Oral Agreement

Aspire alleged that Ubhi and Aspire entered into an oral agreement on 27 November 2015 (“the November 2015 Oral Agreement“) under which Ubhi agreed to clear the site for the price of £30,000. Aspire alleged that the November 2015 Oral Agreement was the only contract between Ubhi and Aspire.

Site Clearance

In early September 2016, Ubhi secured and cleared the site ready for development. Ubhi said this clearance was done as part of the preliminary work under the Aspire Contract.

Aspire denied the existence of the Aspire Contract and said that the clearance work had been completed and paid for before the date of the Aspire Contract in accordance with the November 2015 Oral Agreement.

Termination and Engagement of an Alternative Contractor

Ubhi remained on site and continued to hire plant and equipment for the site.

On 31 October 2017, Aspire signed a contract with another contractor for a price significantly lower than stated in the Aspire Contract.

The parties agreed that Aspire paid Ubhi £30,000. Ubhi said that the payment was towards the price under the Aspire Contract. Aspire said that the payment was the agreed price under the November 2015 Oral Agreement.

Ubhi raised invoices for the period between September 2016 and October 2017 for the hire of plant and equipment and standstill charges, on the basis of delay to the project. In addition, it claimed damages for breach of contract, being its lost profit on the Aspire Contract which Aspire prevented Ubhi from performing.

Issues for the Court

The issues in this case were:

1. Did Mr Dhanda sign the Aspire Contract?
2. If so, was the Aspire Contract conditional on funding so that it did not bind Aspire until Aspire had obtained funding?
3. If the Aspire Contract was not conditional, was Ubhi entitled to payment of the invoices that it raised for the costs of the hire of plant and equipment and for standstill charges?
4. If the Aspire Contract was not conditional, what was Ubhi’s recoverable loss? On this point, there was no issue between the parties that, if the Contract was not conditional, Ubhi was entitled to damages for Aspire’s breach by refusing to allow Ubhi to carry out the contract works.

The Court’s Decision

The Court’s decision was based on the strength of the witness evidence and documentation provided by each party.

1. The Court considered that Mr Dhanda’s submission that he would not sign a contract on behalf of a company for which he is not a registered director to be inconsistent with his previous signing of the Millenium Contract. This damaged the credibility of Mr Dhanda’s submission that he did not sign the Aspire Contract.
2. Furthermore, the Court was presented with overwhelming contemporaneous documentation supporting the existence of an executed Aspire Contract. Some of this evidence included an email from Mr Dhanda to one of the witnesses Mr Matharu stating “I appreciate your help and signing up the contract before I went away protects both parties“.

This further damaged the credibility of Mr Dhanda’s evidence. The Court therefore found that Mr Dhanda did sign the Aspire Contract on 19 August 2016.

3. The Court also found that the contemporaneous documents presented were overwhelmingly consistent with Ubhi’s case that the parties entered into the Aspire Contract in August 2016 and inconsistent with Aspire’s case that the Aspire Contract was conditional on obtaining funding and did not bind the Aspire until funding was in place.

Ubhi’s witnesses were entirely credible. With the exception of a couple of witnesses who were independent witnesses for Aspire, the Court did not find Aspire’s witnesses to be credible. Their evidence was inconsistent with their own witness statements and the contemporaneous documents, and the Court had the impression that Mr Dhanda was making his evidence up as he went along.

It was found that the Aspire Contract was not conditional on funding. It followed, by agreement, that Ubhi was entitled to damages for Aspire’s failure to allow Ubhi to perform the Aspire Contract.

4. Ubhi accepted that one of its invoices duplicated sums claimed in other invoices and clarified it did not seek to recover twice for the same sums.

The Court however was satisfied that Ubhi incurred a cost in hiring fencing and plant so it was able to clear the site and be ready to perform the Aspire Contract. Ubhi was entitled to recover these damages for Aspire’s breach of contract for failing to honour the Aspire Contract.

The Court therefore allowed the charges for plant and machinery but did not allow the standstill charges, which would have amounted to a double recovery.

Ubhi claimed 20% of the price of the Aspire Contract as loss of profit. Aspire provided no evidence to rebut this 20% and as such the Court awarded the full 20% claimed.

Takeaway Points

When considering whether or not a contract was entered into, the credibility of witness evidence and the contemporaneous documentation is paramount. Aspire and Mr Dhanda became unstuck in witness testimony due to evidential inconsistencies.

Aspire also failed to provide evidence disproving Ubhi’s loss of profit calculations. This demonstrates the importance of advancing an alternative defence so as to reduce quantum even in circumstances where the primary defence is to deny liability.

The Supreme Court rules – collateral warranties are not construction contracts

Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [8]

In June 2015 the appellant, Augusta 2008 LLP, formerly Simply Construct (UK) LLP (“Simply”), was engaged by Sapphire Building Services Ltd (“Sapphire”) to design and build a care home in Mill Hill under a JCT Design and Build Contract 2011 with bespoke amendments (“the Contract”).

In October 2016 the works under the Contract were completed.

In June 2017 the Contract was novated from Sapphire to Toppan Holdings Ltd (“Toppan”). Toppan was the owner of the property.

In August 2017 Toppan granted a 21-year lease of the property to Abbey Healthcare (Mill Hill) Ltd (“Abbey”), the respondent. Abbey ran the care home.

In August 2018 Toppan discovered alleged fire safety defects at the property. Toppan asked Simply to rectify them. Simply did not. Toppan engaged a third party to rectify them. These rectification works were carried out between September 2019 and February 2020. Abbey paid for these works on Toppan’s behalf.

In June 2020 Toppan asked Simply to provide a collateral warranty to Abbey (which Simply was obliged under the Contract to provide on notification by Toppan). Simply did not.

In September 2020, after Toppan had begun specific performance proceedings, Simply did execute a collateral warranty in favour of Abbey (“the Collateral Warranty”). Among other things, the Collateral Warranty provided that Simply “has performed and will continue to perform diligently its obligations under the [contract]”, and that in carrying the works under the Contract, Simply “has exercised and will continue to exercise all the reasonable skill care and diligence to be expected of a properly qualified competent and experienced contractor…”.

The Adjudication

In December 2020, Toppan and Abbey each referred to adjudication a dispute regarding the alleged defects and costs of remedial works. Toppan and Abbey sought in excess of £8.8m and £5.5m respectively.

Abbey’s claim was under the Collateral Warranty. Simply challenged jurisdiction. Simply said the Collateral Warranty was not a construction contract. The adjudicator rejected that challenge.

In April 2021 the adjudicator decided in favour of Toppan and Abbey. However, Simply did not pay.

The TCC and Court of Appeal

Toppan and Abbey therefore sought enforcement of the decision in the TCC.

In July 2021 the Judge granted summary judgment in favour of Toppan, but not Abbey. In Abbey’s case, the Judge found that the Collateral Warranty was not a construction contract within the meaning of s.104(1) of the Act, so the adjudicator lacked jurisdiction. Integral to the Judge’s reasoning was that the Collateral Warranty was executed years after practical completion and months after the remedial works had been completed. In that respect, the Collateral Warranty was not a contract for carrying out works, but rather a contract warranting what had already been done.

Abbey then appealed to the Court of Appeal.

The Court of Appeal held that the timing of a warranty (relative to the works it warranted) could not determine if the warranty was a construction contract.

All three Lord Justices of Appeal held that a collateral warranty could be a construction contract.

However, they disagreed about whether the Collateral Warranty in this case was a construction contract.

• Coulson LJ thought it was, mainly because Simply warranted both past and future.
• Peter Jackson LJ also thought it was, mainly because it was a direct promise to Abbey to perform, as opposed to a promise to compensate Abbey if there was a default in the Building Contract.
• Stuart-Smith LJ thought it was not, because it was not a direct promise to carry out the construction operations, which meant it was not for such operations.

The Supreme Court

Simply appealed to the Supreme Court – essentially arguing that Stuart-Smith LJ was right. Permission was given in December 2022. The appeal raised two issues. First, what is the meaning of an agreement “for… the carrying out of construction operations” in s.104 of the Act? Second, was the Collateral Warranty properly construed an agreement “for…the carrying out of construction operations”?

As to the first issue Lord Hamblen ruled “that a collateral warranty will not be an agreement “for” the carrying out of construction operations for the purposes of section 104(1) if it merely promises to perform obligations owed to someone else under the building contract. There needs to be a separate or distinct obligation to carry out construction operations for the beneficiary; not one which is merely derivative and reflective of obligations owed under the building contract”.

Lord Hamblen gave various reasons:

1. First, there was no reason why s.104 of the Act required a broad interpretation. Nothing was gained from a broader construction or by considering neighbouring statutory provisions. It was wrong to equate contracts ‘for’ construction operation as contracts ‘in respect of’ construction operations.
2. Second, the natural meaning of ‘for’ denotes function and purpose. The question, therefore, is whether the object or purpose of a contract is the carrying out of construction operations. It was generally difficult to see how that was a collateral warranty’s object or purpose: “The main object or purpose of such a warranty is to afford a right of action in respect of defectively carried out construction work, not the carrying out of such work.” A contract ‘for’ construction operations “must…give rise to the carrying out of such operations”. A mere promise that construction operations will be done is not enough.
3. Third, a warranty does not give the beneficiary any rights to regulate how the works are done.

As to the second issue, Lord Hamblen held that the Collateral Warranty was not an agreement ‘for’ construction operations. The promises in the Collateral Warranty, though they covered past and future operations, were “entirely derivative”. Simply was promising nothing to Abbey that Simply had not already promised to the employer under the Contract.

The second issue allowed Lord Hamblen to explain a new dividing line between warranties that would not fall within the Act and those that would.

Instead of depending on “niceties” of language in each instance, a “far more principled and workable” dividing line is between warranties that, on the one hand, “merely replicate undertakings given in the building contract” and those, on the other hand, that “give rise to separate or distinct undertakings for the carrying out of construction operations”. The former would not fall within s.104. The latter would.

That means that “most collateral warranties will not be construction contracts”.

This dividing line also agreed with the Act’s broad rationale of improving cashflow because the Act’s payment provisions were also inapplicable to collateral warranties.

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[1] A & V Building Solutions Ltd v J & B Hopkins Limited [2024] EWHC 1510 (TCC)

[2] Alandale Plant and Scaffolding Ltd v Ilford (Jersey) Ltd [2024] EWHC 1484 (TCC)

[3] CPR 44.3(5)(a)-(e)

[4] Coventry Scaffolding Company (London) Ltd v Lancsville Construction Ltd [2009] EWHC 2995 (TCC)

[5] Paragraph 9.2.12, TCC Guide

[6] Housing Grants, Construction and Regeneration Act 1996

[7] Ubhi Construction Limited v Aspire Enterprises (UK) Limited [2024] EWHC 1089 (TCC)

[8] Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2024] UKSC 23