Adjudication Matters – April 2016: Part 2Print publication
Welcome to part two of the April edition of Adjudication Matters in which we consider four recent judgments from the Technology and Construction Court.
Click here to read part one which summarised three other recent Technology and Construction Court decisions and a case from the Court of Appeal.
- When will a machine ‘form part of the land’ so that it is a construction operation under the Construction Act?
- Can an adjudicator deal with more than one dispute at the same time?
- What happens if the contractual payment terms agreed between the parties do not comply with the Construction Act and the problem can’t be fixed by implying the Scheme?
- Can emails between the parties negotiating the value of an interim application be shown to the adjudicator?
When will a machine ‘form part of the land’ so that it is a construction operation under the Construction Act?
Fahstone Limited (Fahstone) contracted with Biesse Group UK Limited (Biesse) for Biesse to supply and install a woodworking machine (the Uniwin). Fahstone subsequently commenced adjudication due to delays in commissioning the Uniwin, and defects with the machine and its software.
Fahstone were awarded £125,000 in respect of defects in the software, and £14,000 for delay. Biesse paid the £14,000 for delay but refused to pay any more. Fahstone issued court proceedings to seek enforcement of the Adjudicator’s decision.
One of the arguments raised by Fahstone in order to resist enforcement was that the Adjudicator did not have jurisdiction on the basis that the contract was not a “construction contract” under Construction Act 1996.
What is a Construction Contract?
The Construction Act applies to ‘construction contracts’. Construction contracts are those concerned with the carrying out of ‘construction operations’. The Construction Act contains a detailed list of those activities which amount to ‘construction operations’. The supply and installation of machinery will only amount to construction operations if that machinery ‘forms part of the land.’
The key issue to be decided by the court in this case was whether the Uniwin formed part of the land.
What does ‘forms part of the land’ mean?
The judge set out the following guidelines to identify if an object forms part of the land for the purposes of the Construction Act:
- The object must be built or constructed as part of the relevant work – as opposed to being delivered ready-made. It must be intended to remain permanently in one place, (although it does not matter if it has movable parts) and it must be reasonably substantial (not easily moved).
- Fixtures will usually form part of the land, however there is a distinction between fixtures that are annexed or affixed to the land and building itself, and those that are attached to or within the building. An example was given of a washing machine that can be installed into a building however this is not a fixture and does not form part of the land. Nevertheless, an object which rests on the land under its own weight can still form part of the land.
- It is important to assess the purpose of the object or installation being on the land or building. This is an objective test, identifying the nature and type of the object or installation and how it would be intended to be used. If the purpose is to increase the value and utility of the premises then the object likely forms part of the land.
- Fixing with bolts to or within a building or structure is a strong indicator to the object becoming a fixture, but it is not determinative. If the object cannot easily be removed save by destroying or seriously damaging it, it likely forms part of the land. However, if the purpose of the screwing or bolting down is for the better use or enjoyment of the object (an example was given of screwing a cupboard to the wall to prevent it falling) this suggests that it does not form part of the land.
The burden of proving that an object forms part of the land will fall on the party seeking to enforce an adjudicator’s decision. If sufficient proof is not provided, then the decision will not be enforced.
Factors suggesting that the Uniwin did form part of the land
The judge thought it important that the Uniwin was of substantial size and weight, and had its main structure bolted to the floor with 54 bolts that were resin grouted into the concrete. It took over one week to install the machine, and it was installed on a specially constructed floor.
Factors suggesting that the Uniwin did not form part of the land
- The bolts were mainly in place to prevent the machine from moving or becoming out of level, and the bolts were not bonded to the machine in any way.
- It was possible for the machine to be moved without having to cut any bolts and, although in practice the bolts would be cut for convenience and to put the concrete floor back into its original state, the Uniwin could be removed without having any damage caused to it. This suggested that the bolts were for the better use of the object, rather than to form part of the land.
- The Uniwin could be bought on a hire purchase agreement, meaning that the machine could be redelivered at the expiry date.
- There existed a second hand market for these machines, which strongly suggested that they could be removed and installed more than once without damage.
The judge concluded that the Uniwin was not a structure, and did not form part of the land. As such the contract was not a construction contract under the Construction Act. This meant there was no statutory right to adjudicate under the contract and the Adjudicator did not have jurisdiction to determine the dispute between the parties. The court therefore declined to enforce the Adjudicator’s decision.
Whether something forms part of the land is ultimately a question of fact and degree. Although there are general principles to provide guidance, if there is uncertainty as to whether the Construction Act will apply, parties could consider expressly providing for a right to adjudicate under the contract. This will avoid time and cost being wasted in determining whether or not the Construction Act applies.
Can an adjudicator deal with more than one dispute at the same time?
Beck Interiors Limited (Beck) engaged Deluxe Art & Theme Limited (Deluxe) as its subcontractor. There were three adjudications between the parties, all started by Deluxe against Beck.
In adjudication 1 the adjudicator awarded sums to Deluxe for variations and acceleration costs. The amount awarded was paid by Beck.
In adjudication 2 the same adjudicator awarded Deluxe monies for loss and expense due to prolongation and an extension of time.
Whilst adjudication 2 was still ongoing, and before the Adjudicator issued his decision, Deluxe started adjudication 3 which related to retention.
Beck objected to the Adjudicator dealing with adjudication 2 and adjudication 3 at the same time.
The Adjudicator did not accept Beck’s objection, and issued his decision in adjudication 3 ordering that Beck pay monies to Deluxe.
Beck refused to pay the monies ordered in adjudication 2 and adjudication 3. Beck’s position was that the Adjudicator did not have jurisdiction to decide adjudications 2 and 3 at the same time and as such (so Beck argued) the Adjudicator’s decisions in both of these adjudications were invalid.
Deluxe commenced enforcement proceedings in the Technology and Construction Court (TCC).
Paragraph 8 of the Scheme
The general rule is that an adjudicator only has jurisdiction to deal with a single dispute at any one time. However the Scheme for Construction Contracts 1998 (the Scheme) provides at paragraph 8 of Part 1 that an Adjudicator may, with the consent of all the parties to those disputes, adjudicate at the same time on more than one dispute under the same contract.
The TCC held that the Adjudicator did not have jurisdiction to decide two adjudications at the same time here because Beck had not given their consent.
However the Adjudicator had jurisdiction to decide adjudication 2 because at the time that he was appointed in respect of adjudication 2 no other adjudication was ongoing between the parties (because adjudication 1 had finished and adjudication 3 had not yet been commenced). This meant that the Adjudicator’s decision in adjudication 2 was valid and enforceable.
Conversely, at the time of the Adjudicator’s appointment in adjudication 3, adjudication 2 was already ongoing, and as such the Adjudicator did not have jurisdiction to determine the dispute referred in adjudication 3.
The TCC therefore declined to enforce the Adjudicator’s decision in respect of adjudication 3.
Beck was only required to pay to Deluxe the sum awarded to Deluxe in adjudication 2.
Where the Scheme applies, it is important to obtain the consent of all of the parties before seeking to commence two adjudications at the same time or a single adjudication covering two separate disputes. If not, the adjudicator’s decisions could be unenforceable.
What happens if the contractual payment terms agreed between the parties do not comply with the Construction Act and the problem can’t be fixed by implying the Scheme?
Manor Asset Limited (MAL) commenced part 8 proceedings in the TCC seeking a declaration that an adjudicator’s decision was unenforceable due to a breach of natural justice and requesting that the TCC decide the correct deadline for submitting a pay less notice.
The contract was in the form of the JCT Minor Works with Contractor’s Design 2011 with bespoke amendments and was dated 13 April 2015 (the Contract). The Contract as originally entered into provided the following interim payment mechanism:
Due date – 4 week intervals from the Date for Commencement of the Works.
- Deadline for Interim Certificate – 5 days after the due date
- Final date for payment – 21 days from the due date
- Deadline for a pay less notice – 5 days before the final date for payment
The section of the Contract which related to payment was amended on 13 August 2015 to provide for payment to Demolition Services Ltd (DSL) of a percentage of the contract value upon the achievement of certain milestones.
The amendment provided that 60% of the contract value would be paid when demolition passed the black line as illustrated on a photograph of the site. The amendment said that payment was to be made within 72 hours of receipt of the invoice, issued when the milestone was achieved. The amendment did not refer to payment notices or pay less notices.
The parties’ disagreed as to how this amendment should be interpreted.
On 23 October 2015, DSL issued an invoice for 60% of the contract price asserting that it had achieved the first milestone under the amended contract.
On 28 October 2015 MAL issued a pay less notice. DSL argued that the pay less notice was invalid and that DSL’s invoice should have been paid within 72 hours of MAL receiving the invoice.
DSL commenced adjudication and the Adjudicator found that DSL had achieved the first milestone on 23 October 2015 and that MAL had failed to serve its pay less notice in time. He decided that the final date for payment was 26 October 2015, being 72 hours after MAL had received the invoice and the pay less notice should have been issued 5 days before this date. This meant that MAL should have issued the pay less notice before the invoice was received.
MAL did not agree with this and asked the TCC to provide its view as to the timing of the pay less notice. The TCC considered that the Adjudicator had failed to appreciate that the service of a pay less notice prior to the payment notice is not permitted by the Construction Act 1996.
The Construction Act contains detailed requirements regarding payment under construction contracts. If a construction contract does not comply with these requirements, the provisions of the Scheme for Construction Contracts 1998 (the Scheme) will be implied into the contract. Under the Construction Act (and the Scheme), the pay less notice cannot be served until after the payment notice. The Scheme provides that a pay less notice must be served not later than 7 days before the final date for payment.
If the final date for payment of the invoice was 72 hours after receipt of the invoice then MAL could not serve a valid pay less notice either in accordance with the original contractual provisions (5 days before the final date for payment) or under the Scheme (7 days before the final date for payment), because both of these timescales meant that the pay less notice needed to be served before the invoice was received and the pay less notice would therefore be invalid under the Construction Act.
The Court’s Decision
The court considered that neither party had advanced an interpretation of the contractual provisions which complied with both the express terms of the amendment to the Contract made by the parties and the Construction Act. The court acknowledged that the most usual interpretation of the contractual provisions would be that the parties intended there to be no provision in relation to pay less notices (as they did not include such a provision).
However, that would mean that the deadline for serving the pay less notice was seven days before the final date for payment (as the Scheme would be implied), which would be before the date of service of the invoice. This was expressly prohibited by statute.
In light of this problem the court held that this was one of those cases where a reasonable person in the position of the parties would understand the amendment to mean something else. Therefore in order to resolve this problem and give business efficacy to the Contract the court concluded that it was necessary to imply a term confirming the deadline to serve a pay less notice.
The court said that if faced with a choice between the amended provisions being wholly ineffective or enabling the Contract to work, the parties must surely have intended the Contract to work. The only way in which the Contract could be made to work was to say that the prescribed period before the final date for payment in which a pay less notice must be served was nil i.e. that the pay less notice could be served at any time between receipt of the invoice and the expiry of the 72 hours following its receipt.
This meant that MAL’s pay less notice had been served late and was not valid.
If there is ambiguity in the contractual payment provisions agreed between the parties, or they do not comply with the Construction Act, the court will imply the provisions of the Scheme instead. This judgment demonstrates that the court can also imply bespoke terms if the provisions of the Scheme will not resolve the ambiguity.
Following this judgment there has been much legal debate as to whether the court should have implied all of the provisions of the Scheme rather than attempting to fit the Scheme around the contractual provisions relating to due date and final date for payment which had been agreed between the parties. There has also been speculation that MAL deliberately chose to give up their right to serve a pay less notice when the amendments to the contractual provisions were made. If this were correct, the court’s decision here would have gone against the intention of the parties.
If the parties to a contract wish to avoid the contractual provisions being interpreted in a way which is contrary to what was intended they should ensure that when making amendments to the standard form they carefully consider both the contractual and statutory implications of such changes and ensure that the mechanism for payment can be clearly understood by an objective third party.
Can emails between the parties negotiating the value of an interim application be shown to the adjudicator?
RMC Building and Civil Engineering Limited (RMC), a subcontractor, made an interim application for payment no.8 (Application 8) to UK Construction Ltd (UKC), the main contractor. UKC did not serve a payment notice or a pay less notice so RMC claimed that it was entitled to payment of the sum claimed in Application 8 under the Construction Act. Apart from a small payment on account, the sum stated in Application 8 was not paid. After four or five months of negotiations RMC commenced adjudication.
The adjudicator ordered UKC to pay to RMC the sum claimed. UKC refused to pay and RMC commenced enforcement proceedings in the TCC.
UKC raised several jurisdictional challenges including an allegation that RMC had withdrawn its Application 8 as a result of the negotiations which had taken place between the parties prior to RMC commencing adjudication. If Application 8 had been withdrawn this would have meant that there was no dispute at the time when RMC issued its Notice of Adjudication and the Adjudicator would not have had jurisdiction to deal with the matter.
During the adjudication UKC showed some of the email negotiations between the parties to the Adjudicator. RMC argued during the adjudication that UKC should not have done this because the emails were all without prejudice, as they had been sent in an attempt to resolve the dispute between the parties.
UKC argued that whilst RMC might have sent their emails with a view to negotiating a settlement, UKC was not seeking to settle the application, and was instead trying to obtain sufficient information to calculate the true value of RMC’s account.
In particular, UKC relied heavily on an email from RMC which stated:
“I have reviewed your assessment and where I agree I have amended our latest Application…accordingly.”
UKC said that this was an admission that the sums referred to as amended were correct, with the result that RMC could no longer rely on the sum stated in Application 8, as the sum that was due.
The TCC rejected this argument and said that the exchanges between the parties were classic examples of the type of discussions that are protected by the without prejudice rule. The discussions were an attempt to resolve the dispute and the emails should not have been put before the Adjudicator.
RMC did not refer to the emails in their Notice of Adjudication or in the Referral Notice so they had not waived the without prejudice privilege that these documents attracted.
This case demonstrates the courts’ desire that all parties be able to speak freely with a view to resolving disputes so that formal adjudication or court proceedings can be avoided. Without prejudice correspondence such as email negotiations should not be shown to an adjudicator.
In order to ensure that an email regarding a disputed valuation attracts without prejudice privilege, parties should make sure that it is clearly marked ‘without prejudice,’ such that there can be no scope for dispute as to the parties’ intentions when the email was sent.