Lawyers to the real estate & construction industry
insite
Spring 2004
contents
Withholding notices
1
Duty to warn
2
Choosing the right form
of contract
3
Adjudication update
4
Letters of intent
6
Third Party Rights Act
revisited
7
Affordable Housing
8
Who to contact
8
Get Your Withholding Notices Right!
Welcome to the Spring
edition.
We consider the importance of
issuing valid withholding
notices and a professional's
duty to warn of potential
hazards. We consider what to
bear in mind when deciding on
procurement routes. We give an
update on adjudication cases
and consider the potential
pitfalls of relying on letters of
intent. The Contracts (Rights of
Third Parties) Act 1999 has come
before the courts and we report
on the outcome. Finally, there
is an update on initiatives
within NGJ regarding affordable
housing.
www.ngj.co.uk
The importance of issuing valid
withholding notices cannot be
overestimated if you have proper
grounds for resisting payment of a sum
claimed against you. The withholding
notice provisions of the Housing
Grants, Construction and Regeneration
Act 1996 are aimed at protecting cashflow and section 111(1) provides that
"a party to a construction contract may
not withhold payment after the final
date for payment of a sum due under
the contract unless he has given an
effective notice of intention to
withhold payment…".
There has been considerable, and often
conflicting, case law on the meaning of
section 111 and on the boundaries of
situations in which it is possible to
withhold payments without the need
to issue a withholding notice first. The
'narrow' construction of section 111
has tended to be that if a sum is not
"a sum due under the contract" in the
first place (for example because the
work was not performed at all) then
section 111 does not apply. The 'wide'
construction is that once a certificate
has been issued, the sum is due and a
failure to issue a section 111 notice
within the prescribed time means the
certified sum must be paid.
This issue has recently been considered
further by the Court of Appeal in
Rupert Morgan Building Services v
Jervis. The architect issued an interim
certificate for sums due to the builder.
The client disputed around half the
amount, but failed to issue a
withholding notice within the relevant
in site
time, and the builder claimed summary
judgment of the disputed balance.
When a warning is not a warning
Adopting the 'narrow' construction of
section 111, the client argued that he
did not need to issue a withholding
notice because the disputed sums
related to work that had not been
done, duplications of previous
payments and snagging for works
already done and paid for i.e. sums
that were not ever "due" in the first
place.
The Court of Appeal has recently
considered the extent of a
professional's duty to warn in the case
of Six Continents Ltd v Carford
Catering Ltd.
The builder naturally argued for the
wide construction.
In reminding the parties that the cashflow aspects of section 111 are
"fundamental" and are not dealing
with the final payment position
between the parties, the Court agreed
with the builder's position and held
that if the client failed to issue a
withholding notice on time, then he
had to pay the sum certified. If he has
overpaid he can get the matter put
right on future certificates, or
commence proceedings to recover the
money.
So it is extremely important to check
certificates or applications for payments
early enough to get your withholding
notice in if need be. Those performing
the role of contract administrator or a
cost control function should also pay
heed to the need to inform their clients
as to the need to issue timely
withholding notices. The Court
considered that section 111 "provides
a fair solution, preserving the builder's
cash flow but not preventing the client
who has not issued a withholding
notice from raising the disputed items
in adjudication or even legal
proceedings".
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Carford was engaged by Six
Continents, the owners of a Harvester
restaurant, as project managers for the
design and installation of kitchen
catering equipment. Carford were told
to get hold of a certain type of
rotisserie (which could be either table
or wall mounted). Carford chose the
wall mounted design and the rotisserie
was subsequently installed on a timber
stud wall faced with plywood then
tiled. Problems with heat distribution
arose after practical completion and
Carford called in the suppliers, who
made some minor modifications. They
sent Carford a report on the same day
recommending that a stainless steel
sheet be fitted at the back of the unit
to prevent a fire risk. Carford
forwarded this report onto Six
Continents and asked "can you please
advise us what action, if any, you wish
us/the builders to take?" Six
Continents never replied to this
message and, unfortunately, there was
a fire.
Six Continents brought a claim for
damages against Carford. The trial
judge decided that, although Carford
was in breach, the letter which
Carford sent to Six Continents broke
the chain of causation. In other words,
the losses fell at Six Continents' door
because they did not heed the
warning sent to them in the letter. Six
Continents did not agree that a simple
letter asking for advice could take
away Carford's responsibility to act
and they appealed.
The Court of Appeal held that because
Carford had a contract with Six
Continents, they owed them a duty to
install the kitchen equipment properly
and to see there was no fire risk.
When subsequently considering the
issue of causation the judge should
not have just asked 'what caused the
fire?', but whether Six Continents'
failure to heed the warning letter
should relieve Carford from what was
otherwise a breach of contract. They
held that sending a warning letter to
Six Continents was not enough to
discharge Carford's duty. The Court of
Appeal also decided that the letter
was not really even a warning. It was
merely a question. Carford were
asking whether Six Continents would
like them to take any action. This
suggested that action was optional,
not necessary.
The Court of Appeal, in this case, has
helped to clear up the law relating to
the situation where one party to a
contract tries to avoid liability on the
grounds of causation. In effect the
Court has made it very difficult for
that party by ensuring that when
deciding upon causation, courts and
adjudicators alike will no longer just
look at the facts but question more
widely who should be responsible for
the loss. The pros and cons of this
method of approaching causation are
many and varied but just alerting a
party to a problem may not be
sufficient if you actually ought to be
doing something about it.
Spring 2004
Deciding on the form of contract
that is right for you
There are a wide - and growing array of contract forms to choose
from. In recent editions of "In Site"
we have covered the introduction of
the JCT Major Project Form, the new
FIDIC 'rainbow' forms, and the Be
Collaborative Contract which now all
sit alongside the older, more familiar
forms and the option of drafting
bespoke documents. Which is the one
for you?
It is important to step back and decide
on the best procurement route first.
The decision to proceed rests with the
client and different considerations will
apply depending on whether they are
a private or public sector entity and
the extent of past experience with
different procurement routes. Timing
of the decision to proceed, and
whether advisors and contractors are
on board at that stage, will also be
relevant factors, as will be the
potentially competing objectives of
time, cost and quality.
The procurement method adopted will
depend partly on the length of time
available for design before needing to
start on site. Obviously the longer
that is available the more detailed the
design can be before going out to
tender. With that in mind,
procurement options include
competitive tendering on the basis of
detailed bills and specifications and
two stage tendering commencing
with less detailed design information
but moving to detailed design and
fast-track procurement. Other options
include negotiated or 'bespoke'
contracts and open-book partnering.
It is important to consider the type of
contract structure which reflects the
intended risk allocation and the
intended rights and obligations of the
parties. The choice of contract
structure will typically be between the
traditional structure, design and build,
management contracting,
construction management and
partnering-style contracts. Another
issue that should be addressed as
early as possible is the appropriate
type and level of insurance cover, and
who is responsible for taking it out.
The traditional structure allows the
employer to retain responsibility and
control over the design and
specification and the contractor is
responsible for carrying out the works.
It can be slower than other
procurement routes however as
design often needs to be complete
before invitations to tender are
released. If something goes wrong it
is often difficult to determine whether
the defect is due to a design fault or
workmanship and hence who is at
fault. Examples of Standard Form
contracts include the various forms of
Private With/Without Quantities JCT
Standard Form of Building Contract
1998 and the NEC Engineering and
Construction Contract (Second
Edition).
Design and build contracting offers
the employer the clear advantage of a
single point of responsibility. It also
allows the contractor to use its
expertise in the design and therefore
the 'buildability' of the project and
may mean that construction work can
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in site
be started earlier than under the
traditional structure, as design work
can proceed in parallel. However, it is
the contractor and not the employer
that has a high degree of control over
the project. Risks from the employer's
point of view may include a higher
price to compensate the contractor
for that responsibility. From the
contractor's perspective, a key
commercial risk is that a fitness for
purpose warranty is often implied
even if it is not an express term.
Design and build standard forms
include JCT 98 With Contractor's
Design, the ICE Design and Construct
Conditions of Contract and the JCT
Major Project Form.
Management contracts, a form of
prime cost contracting, allow for the
management contractor to be
engaged early on and to be treated as
part of the design team, assisting in
splitting the works into discrete works
packages and is not usually directly
involved in carrying out any of the
construction work. Works contractors
are directly responsible to the
management contractor. The
employer can be exposed to interrelated delay claims and increased
costs, but this method of procurement
can have the attraction of speed and
flexibility.
Under a construction management
arrangement, the construction
manager is paid a fee for
management and co-ordination of the
work, and the employer retains a
large proportion of the risk. The trade
contractors are directly contractually
responsible to the employer. The
main problem is again co-ordinating
the different trade contractors and the
employer is potentially exposed to a
4
large number of inter-related delay
claims.
The JCT offers the MC98 Standard
Form of Management Contract 1998
edition, and a Construction
Management Agreement C/CM.
The decision to adopt a partnering
style contract will involve a
consideration of some or all of the
above issues, depending upon the
identity of, and relationship between,
the partners. It will also depend upon
the degree of trust and existence of
common goals which can be covered
by partnering principles. A willingness
to adopt partnering principles is key to
the success of a partnering
relationship, but the need to provide
for mechanisms to deal with any
breakdown in that relationship must
also be considered. Common forms
of partnering contracts available are
the Be Collaborative and PPC2000
contracts.
Adjudication
update
Professional negligence
In the Scottish case of Gillies Ramsay
Diamond v PJW Enterprises Limited (27
June 2002), GRD were appointed as
contract administrator by PJW. The
appointment did not contain an
adjudication clause but despite this,
when PJW terminated GRD's
appointment, they served a notice of
adjudication. The adjudicator awarded
damages to PJW in respect of overpayments made to GRD arising from
the lack of written instructions, sums
in respect of bank overdraft costs and
additional legal fees incurred as a
result of an incorrect grant of an
extension of time and a further sum in
respect of losses and costs incurred on
the early termination of GRD's
contract.
GRD sought judicial review of the
adjudicator's decision, which resulted
in a clear statement by the Court that
an adjudicator is fully entitled to reach
conclusions about the manner in
which a professional person has
carried out his or her duties in the
course of the construction contract,
including conclusions as to whether
there might have been any
professional negligence.
Timely decisions
The question of what happens when
an adjudicator does not issue a
decision within the required timescale
was considered in Simons Construction
Limited v Aardvark Developments
Limited (29 October 2003). The
adjudicator issued a draft decision on
the date when the final decision was
Spring 2004
due. The "final decision" was not
issued until a week later.
The Court held that the "draft"
decision was not an effective decision
because it was not signed or dated, it
was marked "for the Parties'
comments" (and each party had the
opportunity to make comments on it)
and the adjudicator did not say that
the "draft" was for practical purposes
final or final subject to textual
corrections. The Court held however
that the late final decision was a
binding and effective decision. The
failure to produce a decision within
the required timescale did not deprive
the adjudicator of jurisdiction. The
contract was silent on the
consequences of an adjudicator failing
to reach a decision within the agreed
period and under the Scheme, if an
adjudicator fails to reach a decision
within the relevant time period, any of
the parties may serve a fresh referral
notice. In this case no referral notice
was served.
Natural justice
Natural justice issues were considered
in the Scottish case of Costain Limited
v Strathclyde Builders Limited (17
December 2003). During the course of
an adjudication between the parties,
the adjudicator discussed a point with
his legal adviser and went on to decide
in Costain's favour without disclosing
the substance of the advice he had
received or giving the parties an
opportunity to comment.
The Court identified two principles of
natural justice to which adjudicators
must adhere: an adjudicator should
not have any bias or personal interest
in the outcome, and both sides must
be given a fair opportunity to present
their cases. Looking at the issue of
fairness in more detail, the Court set
out certain propositions to ensure that
parties to an adjudication receive a fair
hearing. These propositions included:
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each party must be given a fair
opportunity to present its case.
Subject to that, and any express
provisions in the contract, the
adjudicator has procedural
discretion;
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the strict time limits of adjudications
must be borne in mind, which may
mean that the time given to
comment can be severely restricted;
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each party must be given an
opportunity to make comments at
any relevant stage in the process
and to respond to written
contentions submitted by the other
party insofar as they contain new
material. Further, if an adjudicator is
given the power:
J
to use his own knowledge
and experience in applying
propositions that have not
been canvassed by the
parties;
J
to require further information
or test results to be provided;
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to obtain technical or legal
advice from a third party on a
matter that has not been
canvassed by the parties,
then in each case the
information should be shared
with the parties with an
opportunity given to them to
comment.
On the facts in Costain, the fact that
the adjudicator had failed to allow the
parties the opportunity to comment on
the legal advice he had received was a
breach of natural justice which had
given rise to the opportunity for
injustice to be done. Costain's
application for summary judgment to
enforce the adjudicator's decision was
refused.
London & Amsterdam Properties v
Waterman Partnership (18 December
2003) also considered natural justice
issues in the context of 'evidential
ambush'. The adjudicator received late
evidence from London & Amsterdam
and found in their favour. Waterman
had not been given a fair opportunity
to comment. The Court held that the
adjudicator should have either allowed
an extension of the timetable for
Waterman to comment, or excluded
the late evidence. This case is also
important because the Court
considered the extent to which it is
appropriate for complex disputes (in
that case one involving questions of
professional negligence) to be dealt
with by way of adjudication. This
decision highlights a potential tension
between the legislation, which confers
the right to adjudication in respect of
any dispute that arises under a
construction contract, and the
feasibility of dealing with complex,
time consuming and document heavy
claims such as final account disputes
or negligence claims within the
timeframe provided by adjudication.
Judge Wilcox concluded his judgment
in this case by suggesting "A review as
to the working of the Act is perhaps
now timely". The extent to which
arguments that a dispute was 'too
complex' becomes a possible
enforcement challenge and/or calls are
made for Parliament to narrow the
range of disputes that have an
automatic right to adjudication
remains to be seen.
5
in site
Judge follows
adjudicator’s
decision
In the case of Westminster Building
Company Limited v Andrew
Beckingham (20 February 2004),
Westminster tendered for the
refurbishment of Mr Beckingham's
townhouse. The contractual
documents proposed by Mr
Beckingham's team included the JCT
Intermediate Form. Mr Beckingham
refused to pay two interim certificates
because, he contended, that an
agreement between him and
Westminster capped the total sum
payable for the work. The adjudicator
found in favour of Westminster. Mr
Beckingham resisted enforcement
proceedings on three grounds:
1. Mr Beckingham claimed
the contract contained no
adjudication clause.
As the works were to a dwelling
house and Mr Beckingham was a
residential occupier, the Housing
Grants, Regeneration and
Construction Act 1996 did not apply.
Therefore the question of whether
there was an adjudication clause in
the contract depended upon whether
the terms of the JCT Intermediate
Form had been accepted by the
parties.
Mr Beckingham sent a Letter of Intent
to Westminster which envisaged
formal contract documents being
signed. Westminster later signed the
standard form contract but Mr
Beckingham never did. He raised no
objection to the form or content of
the contract and the work proceeded
6
and was completed in accordance
with the standard form. The Judge
held that Mr Beckingham had
accepted the standard form (including
an adjudication clause) by his conduct
and waived any precondition that
both parties should sign the
document. Therefore the parties had
accepted the adjudication provision,
which would otherwise not have
applied.
J
the terms had been decided by Mr
Beckingham's team and he had
competent/objective advice
available to him. The clause did
not contravene the requirements
of good faith;
J
the clause did not, if considered at
the time of making the contract,
constitute a significant imbalance
to Mr Beckingham's rights; and
2. Mr Beckingham claimed the
Capping Agreement precluded the
adjudicator from having jurisdiction to
decide the dispute.
J
the clause did not significantly
exclude or hinder Mr Beckingham's
right to take legal action or other
legal remedy.
The adjudicator decided that the
Capping Agreement constituted a
variation to the original contract and
was therefore within his jurisdiction.
He concluded that the Capping
Agreement was not effective because
it was not supported by consideration
as there was "no practical benefit to
Westminster" and therefore the
original agreement applied. As Mr
Beckingham had not served Notices to
Withhold (as required by the original
agreement) the sums due under the
disputed certificates were both due
and payable. The Judge agreed with
the adjudicator.
Therefore, the adjudication clause was
not unfair and was binding on Mr
Beckingham.
3. Mr Beckingham claimed the
adjudication clause was not binding as
it was unfair under the Unfair Terms in
Consumer Contracts Regulations
1999.
The Judge considered case law and
decided:
J
although the terms were not
individually negotiated, they were
couched in plain and intelligible
language;
This case highlights the importance of
clarity of terms to narrow the scope
for dispute.
Letters of intent
Judge Richard Seymour QC, in his
judgment on preliminary issues in the
case of Tesco v. Costain Construction
Ltd (2 July 2003), delivered some
useful guidance on the true effect of
letters of intent.
He held that a letter of intent, which
had been sent by a Tesco
representative to Costain in March
1989, represented the sole contract
between Tesco and Costain for the
construction of a supermarket. The
parties did not agree a formal
contract. Accordingly, the letter of
intent contained the only terms
governing the relationship between
Tesco and Costain: namely that
Costain would commence the
construction of the supermarket in a
Spring 2004
”those who wish to ensure
Third Party Rights Act
that third parties are not
A Contracts (Rights of Third Parties)
Act 1999 case has finally come
before the courts in Nisshin Shipping
Co Ltd v Cleaves & Company Ltd and
Others (7 November 2003). One
reason this case has been a long time
coming is no doubt the willingness of
contract drafters to exclude its
provisions. The decision in Nisshin
may well reinforce some drafters'
views that the Act is best excluded.
granted rights should
expressly exlude the Third
Party Rights Act”
good and workmanlike manner using
reasonably satisfactory materials, and
if it took any design decisions the
design would be reasonably fit for its
purpose. In return, Tesco would pay
Costain.
The terms of the letter of intent did
not make Costain responsible for the
design, even though it had always
been intended that Costain would be
the design and build contractor. This
proved crucial, because several years
later a fire caused extensive damage
to the supermarket, which would not
have spread so quickly if the design
had included appropriate fire stops.
For employers, this case emphasises
the importance of concluding
construction documentation. Once a
letter of intent has been signed, the
works have commenced and the
contractor has been paid, execution of
a formal contract can sometimes risk
falling by the wayside. Contractors
and consultants will also benefit from
concluding the construction
documents, because they will know
exactly where they stand, particularly
in the context of express and/or
implied terms regarding reasonable
skill and care and fitness for purpose.
Clarity of terms will not always
prevent disputes, but at least narrows
the scope for arguing what those
terms in fact are.
The case concerned the
interpretation of sections 1 and 8 of
the Act. Section 1 provides that a
third party can enforce a term of a
contract if the contract expressly
provides that he may, or the term
purports to confer a benefit on him
(subject to the proviso in section 1(2)
that unless, on a proper construction
of the contract, it appears that the
parties did not intend the term to be
enforceable by the third party).
Where a section 1 right is subject to
a term providing for the submission
of disputes to arbitration and that
agreement is in writing, section 8 of
the Act provides that the third party
is entitled and, indeed obliged, to
refer the dispute to arbitration.
Cleaves acted as brokers and
arranged a number of charters for
Nisshin with each charterparty
providing for payment of commission
to the brokers. Nisshin said, however,
that the brokers were not entitled to
the commission as they were
allegedly in breach of the agency
relationship.
Cleaves referred the matter to
arbitration. This was despite the fact
that it was not a party to any of the
chaterparties which contained
arbitration clauses. These clauses did
not provide for the broker to refer a
dispute to arbitration but were wide
enough to cover a claim by charterers
to enforce the promise to pay
commission against the owners.
The arbitrators decided that under
sections 1 and 8 of the Act, they did
have jurisdiction to determine claims
for commission said to be due to
Cleaves. Nisshin then applied to the
courts for a declaration that the
arbitrators had no jurisdiction. The
judge agreed with the arbitrators
however and held that Cleaves fell
within section 1 of the Act and they
were therefore entitled to enforce
the commission clauses. It did not
matter that the arbitration clauses
did not make express provision for
enforcement by Cleaves, and
although there was no positive
indication that the parties intended
Cleaves to have enforceable rights,
they could not rely on the section
1(2) proviso as they had not
demonstrated that they did not
intend there to be third party
enforcement.
The decision is this case serves as a
reminder to those who wish to
ensure that third parties are not
granted any rights under a contract:
expressly exclude the Act. For those
in favour of the Act, this case
indicates that the courts are likely to
give as liberal an interpretation to the
contract as possible so as to give
effect to the Act, which would be
good news to those relying upon
third party rights in substitution of
collateral warranties.
7
in site
Affordable Housing Group
The affordable housing sector is
undergoing considerable change, and
facing many new challenges.
Nicholson Graham & Jones has formed
an Affordable Housing Group to draw
together its expertise in construction,
real estate, projects, and finance, in
this important sector. The work of the
Group will be of interest to all those
involved in the sector including:
J
Those involved in social housing PFI
or in the diversification of Housing
associations into non-housing PFI,
social care or education;
J
Developers and contractors
involved in regeneration or working
with housing associations on mixed
use or residential sites;
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Housing associations looking to
merge or restructure, or to expand
their development programmes;
Nicholson Graham & Jones has skills in
a wide range of areas from town and
country planning to tax, charities to
corporate, and commercial property to
litigation, all working together to
deliver commercial solutions to the
ever more demanding needs of clients
in this sector.
Please contact Sebastian Charles, or
your usual contact at Nicholson
Graham & Jones for more information.
”... Affordable Housing Group
to draw together expertise in
construction, real estate,
projects, and finance...”
Lenders looking to develop
innovative structures secured on
affordable housing stock, or
offering development finance.
Who to contact
For further information contact David
Race, James Hudson, Kevin Greene,
Christopher Causer or Linda Kent.
Nicholson Graham & Jones
110 Cannon Street, London EC4N 6AR
020 7648 9000
david.race@ngj.co.uk
james.hudson@ngj.co.uk
kevin.greene@ngj.co.uk
christopher.causer@ngj.co.uk
linda.kent@ngj.co.uk
Internationally a member of GlobaLex.
The contents of these notes have been
gathered from various sources. You
should take advice before acting on any
material covered in this newsletter.
© Nicholson Graham & Jones 2004
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