In an earlier decision on 12th September 2019, Lord Doherty issued a robust decision rejecting a number of grounds upon which the Respondents contended that the adjudicator’s decision against them ought not to be enforced. While the majority of the Respondents’ arguments were rejected by the Court, they were successful in arguing that the matters of extension of time and loss and expense which the adjudicator decided had not been validly referred to adjudication because there had been no proper crystallised dispute on those matters at the time of referral of the dispute to adjudication. At the end of his first decision, however, the Judge left the door open to hear arguments on severance, the process under which the Court may, in certain circumstances, be prepared to sever and enforce some elements of an adjudicator’s decision while refusing to enforce others. The arguments The Respondents argued, in essence, that a single dispute had been referred to adjudication. The adjudicator had not had jurisdiction to determine that single dispute because part of it had not crystallised. The logical consequence was that the single dispute had not crystallised and the adjudicator had not had jurisdiction to determine any of it. Further, on a proper construction of the contract between them, the parties had contracted to be bound by “the decision” of the adjudicator. They had not agreed to be bound by part of the decision where the adjudicator had lacked jurisdiction in relation to part of it. This was an adjudication under the Scheme for Construction Contracts (Scotland) Regulations 1998. An adjudication under the Scheme anticipated only one decision. Accordingly, the adjudicator’s decision should be reduced in its entirety and no part of it enforced by the Court. The Respondents also argued that there were no parts of the adjudicator’s decision where it could be said that it was clear and obvious that the reasoning had been untainted by the adjudicator’s decision on extension of time and related loss and expense. The Respondents argued that parts of the decision suggested that there may be some link between the sum awarded for work done and the extension of time and loss and expense the adjudicator awarded. The decision After a careful consideration of all the relevant authorities, the Judge refused to follow the approach in certain early cases and agreed with the approach taken on severance in the more recent cases from England and Wales. The Judge considered that something which may be a “dispute” in terms of the Scheme and which may be referred to an adjudicator as such, may on analysis fall to be treated as more than one dispute when it comes to determining whether severance is possible. One dispute could comprise a number of elements. In this case the claim set out in the Notice of Adjudication included a claim for extension of time and loss and expense which had not crystallised. The adjudicator was entitled to adjudicate on the parts of the dispute which had crystallised. He was not entitled to adjudicate on the parts which had not crystallised, but he had done so, mistakenly. His decision on the dispute which had crystallised should be enforced insofar as it is clear it is not tainted by his decision and reasoning concerning parts which had not crystallised as part of the dispute. The Judge disagreed with some earlier authorities. He considered that the preferable interpretation of the relevant paragraph of the Scheme was that the “decision” which binds parties is the decision in its entirety where all of it is a valid decision, or such part of it as was valid and severable where part of the decision is affected by invalidity. The Judge considered that interpretation is more in keeping with, and serves better to advance, the policy aims of the payment and adjudication provisions in the 1996 Act and the Scheme produced under it (as amended). Continued overleaf... Landmark decision on severance in Scottish adjudications (contd.) What are the implications of this case? An interesting aspect of this case was that a Final Certificate had been issued reflecting the Respondents’ view of the lesser amount they considered was due to the Claimant. As the Judge indicated, it was common ground between the parties that a further adjudication would not be possible if the award was reduced because there would not have been a valid reference to adjudication within 60 days of the Final Certificate with the result that the Certificate would have the finality provided for by the Contract Conditions. This may have been very much to the forefront of the Judge’s mind in reaching the decision that he did. That said, however, the Judge refused to follow some older authority which appeared to indicate that severance would not be permissible where one dispute had been referred to adjudication. Accordingly, his decision is reached on reasoned legal principles, not due to any sympathy for the Claimant because of the Final Certificate position. While it may be argued by some that different considerations could come in to play in the more common cases which deal with interim payments and there is an ability to refer the dispute after all aspects of it have crystallised, it is considered that the approach of the learned Judge has much to commend it, not least because it clearly and more readily achieves the aims of the payment and adjudication provisions of the 1996 Act and the Scheme (as amended). It remains to be seen whether the Respondents will seek to appeal this decision and the Judge’s earlier decision on the Respondents’ other arguments against enforcement. Watch this space! Meet the Author Neil Kelly is Head of MacRoberts’ Construction team. The rationale underlying the general principle that severance will not be available in a single dispute adjudication is that in such cases it may be more difficult to show that the reasoning in the invalid part of the decision had no impact on the other parts of the decision. If it is possible, however, to show that there was no such impact then the valid part may safely be severed and enforced. The Judge was not prepared to see a situation develop where it might be more difficult to sever awards in appropriate cases in Scotland than it is in similar cases south of the border. The practical effect of the Judge’s decision was that after deducting the monies awarded which were relevant to extension of time and loss and expense, the Court was prepared to enforce the remainder of the decision which meant a substantial payment was due to the Contractor. In spite of Westminster’s commitment to addressing the retentions issue, and support from across the industry to protect the monies, progress has been diverted by Brexit. And this is where the Scottish Government (SG) can steal a march on London. In October 2017, the Business Department in London published a consultation on retentions together with research into the practice carried out by Pye Tait. The research was focused on England, and it revealed that, over a three-year period, £229 million (at 2016 prices) of retention monies was lost as a result of upstream insolvencies. Two years later, firms have lost another £152 million worth of retention monies (not taking into account the, yet to be announced, huge retention losses following the Carillion collapse)! Let’s get retentions done! Rudi Klein, CEO of the Specialist Engineering Contractors’ Group, considers who will win the race to protect cash retentions – Scotland or England? The campaign to address the issue has not been helped by some of the large UK contractors believing that retentions will be “magicked away” by some ill-defined voluntary roadmap that will go nowhere. The only realistic solution is a statutory retention scheme in which the monies are protected in trust. This now seems to be the view of the SG, which has published a consultation document (CD) on the practice of retentions, including research carried out by Pye Tait. The research revealed some interesting comparisons between Scotland and England: The CD suggests that the SG is inclined to support the recommendation in Pye Tait’s report that retention monies must, by statute, be held in a separate retention deposit scheme (akin to tenants’ deposit schemes). It is vitally important that everybody responding to the CD backs this recommendation. There isn’t another solution that will be as effective in safeguarding the monies for small firms in Scotland. If the monies cannot be used and abused, it is highly likely that the demand for cash retentions will significantly decrease over the years. The consultation closes on 25 March 2020. Rudi drafted the Construction (Retention Deposit Schemes
MacRoberts was delighted to sponsor the award for Best Delivery of Customer Service at the 2019 SELECT Awards on 11th October 2019. The Awards, which have taken place annually since 2014, recognise individuals across Scotland and beyond, rewarding innovation and the highest standards in the construction industry. MacRoberts’ Head of Construction, Neil Kelly, presented the award which was won by Ayrshire-based Electrical Solutions Network. Congratulations to them and well done to all of the winners and finalists on the evening. SELECT leads campaign for regulation of electricians At present, anyone can claim to be an electrician and carry out electrical work in Scotland, putting consumers at risk. That’s why, over the past few years, SELECT has been pressing the Scottish Government to introduce protection of title. Such a move would mean that only those who hold industry-recognised qualifications would be able to call themselves an electrician. As well as press and radio appearances, SELECT has taken its campaign to Holyrood, hosting exhibitions and meeting politicians face-to-face. The result can be seen on its online Wall of Support, which shows cross-party backing from MSPs and MPs and other industry groups. The issue is now progressing through the Scottish Parliament and a Member’s Bill is being prepared for discussion. The Scottish Government has also pledged to publish a consultation on the regulation of electricians as part of its 2019-20 Programme for Government. SELECT is the trade association for the electrotechnical industry in Scotland. To find out more, visit www.select.org.uk. RIAS Andrew Doolan Best Building in Scotland Award 2019 Congratulations to The Macallan Distillery Experience (pictured on the front page) which has won the 2019 RIAS Andrew Doolan Best Building in Scotland Award. Seven buildings were shortlisted for the Doolan, with the panel looking for projects which showed innovation and design excellence, irrespective of size or type. Other key considerations were detailing, accessibility, environmental issues and technical skill. The £140 million Macallan Distillery and Visitor Experience was designed by Rogers Stirk Harbour + Partners to deliver a unique brand home at their historic site in Speyside. The contemporary distillery showcases the production processes and welcomes visitors while remaining sensitive to the beautiful surrounding countryside. The award was presented at a ceremony at the National Museum of Scotland in Edinburgh on 4th October. Others on the shortlist were: • V&A Dundee (Kengo Kuma & Associates with PiM.studio) • Collective on Calton Hill, Edinburgh (Malcolm Fraser Architects) • Mackintosh at the Willow, Glasgow (Simpson & Brown) • Scottish National Blood Transfusion Service at The Jack Copland Centre, Edinburgh (Reiach and Hall Architects) • The Black House, Skye (Dualchas Architects) • Tollcross Housing Association Offices, Glasgow (Elder and Cannon Architects) MacRoberts was delighted to be a donor to the construction of the V&A Dundee (pictured above) Meet the Author Alan Wilson is Managing Director of SELECT. Missing trader VAT fraud, where VAT is charged to a customer but not remitted to HM Revenue & Customs, has been a thorn in HMRC’s side for a number of years. HMRC’s latest effort to stop this mischief is the introduction of a domestic reverse charge on construction services. HMRC anticipates that the introduction of the new rules will stop fraud worth around £100m per annum. The new domestic reverse charge rules were meant to come into play in October 2019 but, following lobbying by a number of construction and tax professional bodies, the introduction was delayed until 1st October 2020. It is unlikely that the implementation date will be delayed again, so construction businesses need to start thinking now about how best to deal with the new rules. The effect of the introduction of a domestic reverse charge on construction services is to change who is responsible for reporting and paying VAT relating to construction services. Under the new rules, the obligation to account for VAT will move from the supplier to the customer who receives supplies of construction services. The rules will apply to certain standard and reducedrated supplies of construction services made to a UK VAT registered person who receives the supply as part of the operation of their own construction business. The reverse charge rules will not apply to supplies made to a non-UK VAT registered business, or where the recipient of the supply is an “end user”. An “end user” is a person who uses the construction services for themselves and does not make an onward supply of construction services. An example of an end user would be a restaurant owner who instructs renovation works, or a property investor who lets out the property. In general, any supply the payment for which falls within the Construction Industry Scheme (“CIS”) will be subject to the VAT new reverse charge rules. Those operating in the construction sector, or receiving supplies under construction contracts, are advised to start thinking now about how the new rules will affect any sales or purchases made by the business. The first stage of that process is to determine whether the rules will apply to any existing contracts. A client under a contract that is currently subject to the CIS will need to review the contract and inform the contractor whether the reverse charge applies. If the contractor receives confirmation from the client that the reverse charge is to apply to services under the contract, then the contractor still needs to issue an invoice to the client, but that invoice will state that the reverse charge applies to the supply and that it is the client’s obligation to account for the VAT to HM Revenue & Customers. Construction businesses also need to consider whether their current accounting system is capable of dealing with the new reverse charge procedures. Businesses also need to consider whether the new rules could have an adverse impact on the cash-flow position of the business due to the fact that the contractors/subcontractors will no longer receive payments of VAT. Finally, a key point in ensuring that the rules are dealt with correctly is to make sure that those who deal with the accounting and finance functions within the business and who will have to deal with the changes, are aware of what is happening and make certain that they are aware of how the changes will affect the business. Domestic reverse charge: Putting an end to missing trader VAT fraud? Meet the Author MacRoberts would be very pleased to help your business better understand the proposed changes. Please contact Ainsley MacLaren for assistance. Reviewing the situation: Appeal Court leaves no milestone unturned Background Bennett, acting as a contractor, engaged CIMC as a subcontractor to build 78 prefabricated bedroom units (the “Units”) in China, for a London hotel for around £2m. The Subcontract contained five milestone payments, in place of the standard time period mechanism. Milestones 1 and 5 did not require a “sign-off” as they were payable upon execution of the Subcontract and completion of the Subcontract works. Milestones 2, 3 and 4 all required sign-off, with 2 and 3 relating to the prototype room and snagging items in China, and 4 relating to the Units once they had been delivered to the site. A dispute meant that there was no “sign-off” of Milestones 2 and 3 for the prototype or completed Units. The Main Contract was eventually terminated following the liquidation of the developer, Key Homes. Following the termination, an adjudicator found in favour of Bennett in relation to a dispute regarding the milestone payments. CIMC then took this dispute to Court, with the Court finding that milestones 2 and 3 did not comply with the statutory requirements for payment as prescribed by the Housing Grants, Construction and Regeneration Act 1996 (the “1996 Act”). Bennett (Construction) Ltd (“Bennett”) recently appealed against a Court decision holding it liable to make three interim “milestone” payments to its subcontractor CIMC MBS Ltd (“CIMC”) in relation to prefabricated bedroom units in a London hotel. The Court determined that it could not alter milestones 2 and 3 alone, and instead incorporated paragraphs 2, 4 and 5 of Part II of the Scheme for Construction Contracts (the “Scheme”) to wholly replace milestones 2-5. As a result, Bennett was held liable to make payments by reference to the value of CIMC’s work. Bennett appealed this decision. The Court at first instance took the view that: 1. Milestones 2 and 3 required to be physically signed-off, based on the underlying premise that the clients could refuse to sign even if the units had reached a stage of completion; 2. The criterion to be applied to any sign-off was itself uncertain and vague, because of the use of the “clients representative” in the Subcontract; and 3. The mechanism was inadequate because no payment date for each milestone was set out in the Subcontract. The arguments CIMC claimed that the sign-off requirement did not comply with s.110 of the 1996 Act, which requires that “an adequate mechanism for determining what payments become due under the contract and when” is provided for. In their view Bennett could deliberately refuse to sign off the works to avoid making payment. Milestones 2 and 3 requiring sign off did not comply with the Act and had to be replaced by the Scheme provisions. Bennett contended that the relevant “sign-off” was simply the date on which the identified stage of the work was achieved in accordance with the Subcontract requirements, and on that basis provided an adequate mechanism was provided in respect of milestones 2 and 3 in satisfaction of the Act. There was no need to incorporate the terms of the Scheme.