J Murphy & Sons Ltd v W Maher and Sons Ltd [2016] EWHC 1148 (TCC) (23 May 2016)

A case examining a dispute as to when there has been a full and final settlement agreement between the contractual parties of the final account, whether the dispute arises “under" the sub-contract or under the alleged settlement agreement, or even both.

Key Facts

Murphy was engaged as a sub-contractor by Balfour Beatty Civil Engineering Ltd in 2013 to carry out shaft and tunnel work on a project at Trafford Park, Manchester.

By a sub-sub-contract made in February 2014, Murphy engaged Maher to provide “all labour plant, material and supervision” to carry out spoil (or arisings) removal in relation to this project and in particular to piling, shaft and tunnel excavations. The sub-sub contract incorporated much of the NEC 3 Engineering and Construction Subcontract form (June 2005 with June 2006 and September 2011 amendments). A Payment Schedule identified 9 payments with applications between 17 November 2013 and June 2014 and corresponding payment due dates between January and August 2014. An Activity Schedule identifies what appears to be a lump sum of £406,190 for work to 3 shafts and 2 tunnels as well as 4 rates for materials “from other activities”. The sub-sub contract also noted that any dispute arising under or in connection with it is referred to and decided by the Adjudicator. The TCC was to be the “Adjudicator nominating body”.

Maher started work in January 2014 and made some 16 payment applications for payment until and including for April 2015. Murphy paid some £466,832, which was less than applied for. Although Maher carried on further work pursuant to the subcontract its later monthly payment applications for payment yielded, it is said, neither acknowledgement nor further payment. Work by Maher of removing arisings and supplying aggregate, it is said, continued for the project until early September 2015, with the last call off for work then occurring in around September 2015.

Maher submitted to Murphy what has been its final payment application (No.21) on 28 September 2015 for a gross sum of £763,980.24 with a net sum of £297,149 said to be due. Murphy, it is said, did not acknowledge or respond to this Application for Payment No.21 and did not respond to Maher covering email which noted that the payments were now due and that a dispute exists which if not resolved within 14 days will be referred to Adjudication.

There followed a number of communications between Murphy contacted and Maher, by way of correspondence and by telephone, in relation to the final sum due to Maher. Maher’s case is that in a telephone conversation on 12 November 2015 a ‘final account sum’ was agreed at £720,000. Since Maher had received £466,831, this meant a net payment of £253,169. This alleged agreement of £720,000 was subsequently confirmed in writing by email from Maher to Murphy with Murphy confirming that they would make payment in the next “couple of weeks”. Despite this by March 2016 no payment was made with Murphy attributing the delay to head office sign off.

Murphy by letter on 3 March 2016 wrote to Maher, not referring to any agreement relating to £720,000 but setting out its gross valuation of Maher’s work at £483,529.03. The small balance as against what had been paid to Maher has not been paid.

BEA issued Maher’s first Notice of Adjudication on 7 April 2016 noting that, given the reference to the Adjudicator nominating body being the TCC, an application would be made to RICS. Mr Paul Jensen was appointed by the RICS as adjudicator and the Referral Document served. Murphy’s raised two jurisdictional issues and asked Mr Jenson to resign, firstly, because the specified nominating body was not a nominating body, there was no contractual basis for Maher to apply to RICS. It was also pointed out that there has been no “settlement agreement", but the dispute concerned payment under the terms of the existing Subcontract. The Adjudicator declined to resign.

Maher applied for a new appointment to the RICS, serving a second Notice of Adjudication on 19 April 2016. Although he formally resigned from his first appointment as adjudicator, Mr Jensen, was again appointed as Adjudicator. In its second Notice of Adjudication Maher stated that the dispute was referred pursuant to the Scheme (as amended). In later correspondence, Murphy maintained the second of its previous jurisdictional challenges, which it elaborated on in its letter of 25 April 2016 and it still maintains.

On 29 April 2016, Murphy issued the current proceedings seeking declaration in effect that the adjudicator has no jurisdiction under the Scheme provisions to entertain a dispute arising out of the alleged final settlement. This is predicated on the argument that such a dispute does not arise “under" the original sub-sub-contract.

Decision

Murphy argued that, as the (second) Notice of Adjudication is predicated on there being a cause of action based on an allegedly binding settlement agreement, the adjudicator has no jurisdiction because there is no adjudication agreement applicable to that agreement and the disputed claim does not arise “under" the original sub-sub-contract. The alleged settlement agreement was a standalone agreement and not a variation agreement. Reliance was placed on McConnell Dowell Constructors (Aust) Pty Ltd v National Grid Gas PLC [2006] EWHC 2551 (TCC), [2007] BLR 92 and other cases referred to in the judgment of Mr Justice Jackson as he then was including Shepherd Construction Ltd v Mecright Ltd [2000] BLR 489.

Maher argued that its claim, albeit related to the settlement agreement, arises "under” the original sub-sub-contract, the settlement agreement can be considered as a variation to the original sub-sub-contract and the words in the adjudication clause about "arising under or in connection with” this sub-sub-contract disputes being referable to adjudication and still has effect or at least some contractual resonance and sufficiently covers a disputed claim under the settlement agreement. Reliance was placed on Quarmby Construction Co Ltd v Larraby Land Ltd (TCC Leeds 14 April 2003), Westminster Building Company Ltd v Beckingham [2004] EWHC 138 (TCC), L Brown & Sons Ltd v Crosby Homes (North West) Ltd [2005] EWHC 3503 and Premium Nafta Products Ltd v Fili Shipping Co. Ltd "The Fiona Trust" [2007] UKHL 40.

Sir Robert Akenhead granted a declaration, but not the one the sub-contractor had sought. Instead, the court confirmed that the adjudicator did have jurisdiction to deal with the dispute set out in the adjudication notice dated 19 April 2016. Murphy’s claim failed and judgment was found in favour of Maher.

Comment

Sir Robert Akenhead concluded that he “would be sympathetic to an application for permission to appeal, albeit only on the basis that it would be helpful for there to be an appellate decision on the issues raised and that it is arguable that previous decisions may leave some uncertainty in this arguably important area of construction law”. Making it clear that parties need to act diligently and with care when they prepare contracts and identify appropriate adjudicator nominating bodies at the out-set.

Carillion Construction Ltd v Woods Bagot Europe Ltd & Ors [2016] EWHC 905 (TCC) (28 April 2016)

Whether an extension of time should run contiguously from the existing date for completion and whether the contractor's agreement with the employer concerning its liability for liquidated damages under a building contract extinguished its liability, thereby preventing a claim against its sub-contractors.

Key Facts

Carillion Construction Ltd (the contractor) was engaged by Rolls Development UK Ltd (the employer) to build the High Court's Rolls Building in London. The parties' contract was based on the JCT Standard Form of Building Contract with Contractor's Design, 1998 edition together with bespoke amendments (the building contract).

The contract provided for sectional completion and contained typical provisions for liquidated damages for delay and extensions of time on the occurrence of a "relevant event". The liquidated damages were not a single fixed amount, so that the rate payable for the first week of delay was lower than for subsequent weeks. The contractor was able to recover liquidated damages that had been levied if an extension of time was later granted in relation to that delay.

The works were delayed. In November 2010, the employer and contractor entered into a supplemental agreement, expressly agreeing that the contractor had no claims for an extension of time and setting a new contract sum that took account of the contractor's liability for liquidated damages, a further supplemental agreement followed in July 2011.

The contractor engaged two sub-contractors to carry out the mechanical and electrical works, EMCOR Engineering Services Ltd (EMCOR) and AECOM Ltd (AECOM). AECOM's sub-contract was novated to the contractor from the employer. AECOM was engaged to provide services and to perform them "regularly and diligently".

The contractor claimed damages caused by the sub-contractors' delay. This included the contractor's own costs and liquidated damages levied against it under the building contract.

In defence the sub-contractors argued that EMCOR was entitled to an extension of time and that neither EMCOR nor AECOM were liable for because the contractor had no liability to the employer for liquidated damages.

A preliminary trial covered the following questions:

Assuming that EMCOR was entitled to an extension of time, should that extension:

  • run contiguously from the end of the current period for completion to provide an aggregate period within which EMCOR had to complete its sub-contract works (as EMCOR contended); or
  • fix further periods during which EMCOR could undertake its sub-contract works, which were not necessarily contiguous but reflected the period for which it had been delayed (as the contractor contended)?

To the extent that the contractor's claim against the sub-contractors covered its liability to the employer for LDs under the building contract:

  • had the contractor's liability to the employer for LD's been extinguished by the further supplemental agreement; and
  • if so, how did that affect each sub-contractor's liability to the contractor

Decision

Miss Recorder Nerys Jefford QC, sitting as a judge of the Technology and Construction Court (TCC), held that and extension of time should be added contiguously and that the contractor’s liability to the employer was not extinguished.

Comment

Although the court focused on the natural meaning of the EMCOR contract the court did acknowledge contractual agreements could operative to absolve the sub-contractor of some liability in certain situations. This allows employers to amend contract provision to furnish for those situations. Contractors will be relieved by the court's finding that the further supplemental agreement did not extinguish the contractor's liability for liquid dated damages. The ability to compromise claims under a main contract can be key to developing large projects, so any judicial authority that made such compromise more difficult would be challenging.

AMEC Foster Wheeler Group Ltd v Morgan Sindall Professional Services Ltd & Anor [2016] EWHC 902 (TCC) (04 May 2016)

The court considered liability for ongoing projects under a business sale agreement that transferred a construction business from one contractor to another in addition to deciding the scope of a certificate of making good defects.

Key Facts

In 2005, Malmaison (Liverpool) Ltd (the employer) engaged Amec Foster Wheeler Group Ltd (the original contractor) to design and build a hotel and apartment complex in Liverpool using the JCT Standard Form of Building Contract With Contractor's Design, 1998 Edition with bespoke amendments. The contract includes sectional completion (i.e. two separate sections being the hotel and apartments) and a 12 month defect liability period. The definition of “Works” included to include any making good of defects following practical completion. If a defect was discovered the contractor upon discovery or notification of such discovery, state in writing to the employer the action it will take immediately at no cost to the employer, to establish that there is no similar failure in work already executed or materials of goods already supplied. Practical completion of the hotel section was achieved on 26 January 2007 and for the apartments on 22 June 2007.

The original contractor sold its construction business to Morgan Sindall by way of a business sale agreement on 27 July 2007. The new contractor assumed accountability for discharging the original contractor's liabilities from the business sale agreement date until the defect liability certificate was issued. Assumed Liabilities were defined in the business sale agreement as:

“all performance obligations and liabilities arising under or in respect of each of the Completed Contracts and which arise or fall due for performance from and after Completion up until a defects liability certificate ('DLC') is issued in respect thereof together with all liabilities arising from any such performance that is defective or from the acts or omissions of [the new contractor] after Completion in connection with the defects of which [the new contractor] is made aware to the extent [the new contractor] knew or ought reasonably to have known such liability arising in respect of the period from Completion to the issue of a DLC."

In September 2008, the contract administrator issued a certificate of making good defects under the building contract and the employer and new contractor went on to agrthe final account. The certificate of making good defects arrived to the employer and new contractor by email with the subject line, “Princess Dock Apartments - Certificate of Making Good Defects". The body of the email read, “Please find attached the certificate of making good defects for the Princess Dock apartments” identifying the works as, “Construction of 48 apartments, common areas, associated plant, passenger lifts and car parking to agreed specifications".

As defects arose the original contractor began court proceedings alleging that the new contractor was responsible for the defects under the business sale agreement.

The preliminary issues considered by the court included:

  1. Whether the certificate of completion of making good defects covered all of the works (i.e. the hotel and the apartments). The new contractor’s liability ended with the issue of defects liability certificate as per the business sale agreement;
  2. The meaning of the words "all performance obligations and liabilities arising... and which arise or fall due for performance from and after Completion up until a defects liability”. What type of obligations and liabilities were they?
  3. Whether the Assumed Liabilities included incomplete work and/or defects that the new contractor?
  4. Whether the new contractor was fixed with actual or constructive knowledge of defects and/or incomplete works from transferring employees and/or sub-contractors for the purposes of the Assumed Liabilities? If so, when?

Decision

Edwards-Stuart J in the Technology and Construction Court held that the certificate of making good defects applied only to the apartment’s on the basis that the document should be construed in accordance with contractual interpretation and the reasonable person test. The court also noted that the certificate defined the works to which it related as "Construction of 48 apartments, common areas, associated plant, passenger lifts and car parking to agreed specifications". It did not refer to the hotel. However, the court recognised the "operative" wording of the certificate.

Relating to the extent of assumed liabilities the court held it to include assumed liabilities included obligations to carry out and complete incomplete or defective work that had not been certified as having achieved practical completion. If a defect was discovered or notified to the new contractor after the 27 July 2007 then it was the new contractor who was obliged to address any defects. The court commented that the new contractor had stopped carrying out the Works by mid-September 2008 if so, any defect discovered after that was not the new contractor's responsibility and any actual knowledge was a precondition of liability. On that basis the new contractor was not liable to rectify any defect of which it was unaware, even if it ought to have been aware. The court also commented that any defects found by the original contractor before 27 July 2007 without action would not fall upon the new contractor. However, any defect discovered by a member of staff employed firstly by the original contractor and then secondly by the new contractor, that would become knowledge of the new contractor if known at the point of employee transfer. In order to incur liability that employee ought reasonably to appreciate that inaction by the new contractor in light of that knowledge might incur liability. The definition of employee being part of the original contractors team is down to individual circumstances.

Comment

Two key themes can be taken from the court’s decision; the importance of drafting of the certificate and apportioning responsibility between the parties when transferring or selling a construction business.

The drafting of the certificate led to confusion which, if it had been clear, could have been avoided. The court ultimately interpreted the certificate in line with the contract administrator's intended meaning. A noteworthy point to practitioners is that the court also relied upon the covering email that accompanied the certificate in an aid to interpretation. Accompanying emails should therefore also be clear, concise and accurate in content.

In terms of apportioning responsibility on a business sale clarity once again becomes paramount both from a drafting perspective but also the commercial meeting of minds between the parties. The main lesson therefore from the court's treatment of the business service agreement is that practitioners should ensure that the parties' commercial arrangement is clear before they sit down to draft contractual terms. The onus is on practitioners to ensure the drafting of such an agreement is simple to follow, clear and accurately reflecting the commercial drivers for the parties involved.