Construction Law Update – March 2019

Insolvency Set-Off Rules Over Construction Act

In 2018, the TCC ruled on whether a company in liquidation could refer a claim for further payment to adjudication. In Michael J Lonsdale (Electrical) Limited v Bresco Electrical Services Limited, the TCC found that, as Bresco was in liquidation, all claims and cross-claims between the parties were no longer capable of separate enforcement. The rules required the “mutual dealings” (i.e. sums claimed) to be taken into account to arrive at a net balance due to, or from, Bresco, under the 2016 Insolvency Rules (as opposed to using the provisions in the construction contract). The dispute involved both money claims and cross-claims, and the TCC had ruled that the adjudicator lacked jurisdiction. The decision of the TCC was upheld by the Court of Appeal, despite Coulson LJ (a former head of the TCC) finding that the adjudicator had theoretical jurisdiction.

The granting of an injunction (preventing further adjudication proceedings) was upheld on the grounds of “practical utility”.  In giving his judgment, Coulson LJ highlighted the fundamental incompatibility of the adjudication and insolvency regimes stating that, whilst the right to refer a dispute to adjudication is not automatically lost on liquidation, any attempt by a liquidator to use adjudication to recover sums owed to an insolvent company will be an “exercise in futility” where there is a genuine cross-claim; only in exceptional circumstances will the courts uphold the adjudicator’s decision. This decision has important ramifications on the construction industry and the interplay between the construction adjudication process and the insolvency regime.

For a more detailed analysis of this decision and its implications please see our latest article.

The court’s decision

“Disclosure” Pilot Scheme

On 1 January 2019, a new set of rules for disclosure of documents came into force in the Business and Property Courts of England and Wales, replacing those currently set out in CPR Part 31. The new rules apply for two years to existing and new proceedings.

‘Initial disclosure’ must now be given alongside statements of case, meaning that the key documents on which the parties rely (or which are required for the other parties to understand their case) must be disclosed when the Particulars of Claim or Defence are served.

After this, the parties must cooperate to complete a Disclosure Review Document, setting out the list of issues, thereby allowing the judge at the Case Management Conference (CMC) to understand the landscape of the dispute.  At the CMC the parties might seek ‘extended disclosure’ and the rules contain five extended disclosure models giving the courts greater flexibility and, it is hoped, making the process more efficient (and less costly).

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Things to look out for in 2019

2019 is set to be an important year for the construction industry in the UK, not least because the UK is set to leave the European Union on 29 March 2019 – see our January bulletin for more information specifically about Brexit. Some of the other key developments to look out for in construction this year are:

• The issue of the current product standards regime and its application post-Brexit is causing concern within the industry.  The draft Construction Products (Amendment etc) (EU Exit) Regulations 2019 attempt to ensure that the current Construction Product Regulations (which form part of EU law and govern the current regime) are amended to directly apply in the UK, in the event that a no-deal Brexit occurs. For more information please read our article here.

• From 6 April 2019, new measures to extend existing security deposit legislation to include corporation tax and deductions due under the Construction Industry Scheme (CIS) will take effect. This extension of the rules allows HMRC to require financial security where there is a risk of non-payment of tax. Read more

• The UK Government’s Building Better, Building Beautiful Commission, which was established in November 2018, is due to publish its final report in December 2019. The Commission was established by the Communities Secretary with the intention of developing practical measures to help ensure new developments meet community needs. The commission was created to expand on the ways in which the planning system can encourage a greater emphasis on design, style and community consent, when planning for development. Read more

• In November 2015, the Building Research Establishment and CEEQUAL (the sustainability rating scheme for civil engineering, infrastructure, landscaping and public projects) announced that they were merging standards to form a new, combined programme. This was due to be released during 2018 but is now expected to be released in 2019. It is intended that this new scheme will introduce a new best practice approach to deliver better outcomes in infrastructure sustainability. Read more

‘Construction’ of ‘Practical Completion’

A recent declaration by HHJ McKenna in the TCC has considered how ‘practical completion’ should be construed under an amended JCT Design and Build 2011.  The University of Warwick had engaged Balfour Beatty to design and build a research and development facility, with completion occurring in 4 sections. Balfour Beatty sought to argue that practical completion meant that the entire works had to be complete before a single section could be certified as complete, an assertion with which an adjudicator agreed. However, the TCC ruled that, looking at the way the parties had intended it to work at the outset, the correct allowed for sectional completion.  As ever, this case highlights the importance of using clear language in drafting contract terms, even (or perhaps especially) when dealing with what is perceived as being a commonly understood term.

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Late Referral Can Be Fatal Under NEC

In Sitol Ltd v Finegold, the claimant contractor applied for summary judgment to enforce an adjudicator’s award, following a payment dispute that had arisen under an NEC3 Short Form Contract. The adjudicator found in the claimant’s favour, but the defendant argued that the adjudicator lacked jurisdiction for multiple reasons, including that the referral had been made too late, under clause 93.3 of the NEC. The court agreed.  The notification of a claim did not automatically mean that a dispute had arisen but it was the rejection by the defendant’s solicitors that marked the ‘crystallisation’ of the dispute. Once the claimant was aware of the dispute, it had to notify the defendants within four weeks; it did not do so and, as a result, the adjudicator lacked jurisdiction.