Issue 59 January 2010

Construction & Engineering London Legal Update

Page

1. In this issue…

2. The demise of construction litigation.

6. Middle East Briefing:

––Contracting in Lebanon – the French connection; ––Contracting in Jordan – the importance of homework; ––Contracting in Turkey – and the is....? ––International Arbitration in the Middle East – the Quick Reference Guide.

9. Updating your – dull but vital.

10. Extras.

12. Do you know about TeamBuild?

13. Public procurement review:

––The new Remedies Directives; ––OGC guidance on development agreements; ––Procurement limitation periods.

16. Does a confidentiality clause protect your rates and prices?

18. Non-compliant tenders – who needs ?

19. The nuts and bolts of a reasonable settlement.

21. What’s been happening @ Mayer Brown.

22. Winner takes all - or at least its costs?

24. Antitrust & Competition Update: Bid-rigging.

26. Case notes.

29. Special offer – pay less for the same – but is it a binding ? In this issue… Welcome to issue 59 of the Construction & Engineering Update.

In the leading article, Michael Regan expertly analyses the demise of construction litigation but there is no shortage of construction and engineering law issues and challenges to discuss.

Jon Olson-Welsh and Laura Holtham headline the key changes made to the EU procurement regulations implementing the Remedies Directive and Jon also notes the less than comprehensive OGC guidance on Auroux v Rouanne and a limitation problem for the of of the European Union. We also review another Canadian decision which reminds us that detailed regulations may not be the only answer on public procurement.

Raid Abu-Manneh previews contracting in Lebanon, Jordan and Turkey and introduces us to the Quick Reference Guide to International Arbitration in the Middle East. (Call or email Raid for your copy).

Gillian Sproul brings us up to date with the OFT bid-rigging blitz, which seems to have bounced back to bite the OFT, Ruth Wilkinson reminds us how to improve the chances of recovering money paid under a settlement and Seema Patel and Jeremy Snead have a cautionary tale about checking your contract forms when changes. And then we take a look at issue based costs, some inconsistent contract law on consideration and a case on confidentiality of PFI rates and prices that may come as a surprise to many. Not to mention a round up of the cases and other news.

We hope you enjoy the contents.

1 Construction & Engineering London Legal Update The demise of construction litigation Any construction surveying the litigation landscape in England and Wales over the last 30 years or so would agree that it has changed considerably during that period. A cursory examination of recent volumes of the Building Law Reports indicates the scope of the changes which have taken place, revealing a mixed bag of cases drawn together under a general “” theme. There are cases that involve , arbitration, procedural issues and several decisions from other , but comparatively few which a construction lawyer would readily equate with the heart and soul of this area of law.

However, it would be wrong to conclude the previous years’ reported cases (or those that the editors have chosen to include) are anything other than an imprecise snap- shot of the types of dispute which now arise. It is the fact that certain types of cases are no longer finding their way through to final judicial determination which is more revealing, and it is only those which involve adjudication which give a clue to the true present status of in the construction industry.

Of course, in any analysis of the changes which have taken place, it is necessary to consider the effect which the Woolf reforms have had, and the subsequent introduction of the Rules. Undoubtedly these have had an impact, but one of the principal planks, active case management, was not unusual to practitioners in the Official Referees’ Court (the forerunner of the Technology and Construction Court); they had been used to the setting out a path leading to a date for which was fixed at an early stage, and the Official Referees had developed a reputation for innovations which subsequently were adopted in other parts of the High Court.

The most significant change brought about by the Woolf reforms has nothing to do with case management or the litigation process at all. For construction , it is the introduction of a pre-action protocol stage which represents the real revolution.

The theoretical purpose of the pre-action protocol is to encourage the early exchange of information about a dispute in the hope that the issues will be narrowed and, if the parties’ differences cannot be resolved, that this will enable any subsequent proceedings to be conducted more efficiently. There is also encouragement for the parties to consider whether some form of alternative dispute resolution process might be appropriate. These are all laudable aims and it is impossible to criticise the principle, but one wonders if the way in which the theory has been brought into practice is really what Lord Woolf had in mind.

Far from setting out a clear and coherent statement of a claimant’s position, many letters of claim are devoid of analysis and, at worst, are simply a series of mere assertions without any attempt to explain the legal basis of the claim or how the alleged losses have been caused by failures on the part of the defendant. After a series of exchanges in correspondence, further information may emerge and sometimes the claim may undergo a metamorphosis where the nature of the

mayer brown 2 allegations bears little resemblance to those set out in the original letter of claim. Any attempt to object to dealing with a claim on this basis is often met with the assertion that the defendant is ignoring the “spirit” of the protocol, as if precision in pleading a claim was one of the ills which Lord Woolf was trying to cure. In practice, it is hard to escape the conclusion that, in many cases, a defendant will know much less about the case it has to meet than would have been the position had a properly particularised pleading been served in the first place.

Faced with such a claim, a defendant could choose to disengage from the pre-action process, but that is a dangerous strategy, particularly if an invitation is extended to mediate the dispute. To do so would expose the defendant to incurring a costs penalty, even if it is ultimately successful in subsequent litigation. A cynical view might be that some claimants deliberately avoid any proper analysis of their claims, and see the pre-action process as necessary foreplay to achieving their goal of simply securing a deal at a mediation. Of course, an effective outcome of a mediation can be to convince a party that it has no hope of success, but experience suggests that this rarely happens as parties are often encouraged to find some middle ground, whether that is just or otherwise. And it is not only some claimants which are culpable; defendants can use the process to avoid engaging on the issues and see mediation as the end-game which provides the best opportunity of denying a claimant the right to recover the full extent of its actual losses.

A lack of clarity is often a feature of construction claims during the pre-action protocol stage. This is because there are rarely simple issues which lie at the centre of a dispute. Usually, the facts are complicated and there are often technical issues which demand expert input and detailed analysis. However, the protocol expressly states that the parties are not required to marshal and disclose all the supporting details and that may ultimately be required if the case proceeds to litigation. Clearly, it makes sense to avoid imposing an obligation on the parties to incur unnecessary costs, but it has to be recognised that it is impossible to avoid significant costs in complicated cases, if they are to be resolved. It is unfortunate if the signals in the protocol that proportionality is to be observed may be interpreted as encouraging a claimant to dispense with undertaking a proper analysis when it presents its claim. It could not have been the intended result that a defendant should, as a consequence, be left to work out for itself how the claim might ultimately be presented and established, or to try to piece together the allegations which seemingly are being made so that it can carry out a risk assessment.

The introduction of the pre-action protocol certainly has had the effect of reducing the amount of litigation in the Technology and Construction Court. However, has it reduced the amount of claims, or claims which, if subjected to the forensic rigours of the litigation process, would either never have seen the light of day or been settled at an early stage? The answer is probably not. Instead, parties have found themselves caught up in a world where the rules of engagement are uncertain, albeit that they will almost inevitably end up in a mediation and under huge pressure to settle.

3 Construction & Engineering London Legal Update One year prior to the introduction of the Civil Procedure Rules, the Housing Grants, Construction and Regeneration Act 1996 came into force. This includes provisions which allow any party to a construction contract to refer a dispute to adjudication for determination within a very short period. Although an adjudicator’s award is usually only binding on a temporary basis and the dispute can then be referred to a court or arbitrator, in practice the vast majority of parties are prepared to accept the award and take the dispute no further.

Clearly, many construction disputes which were traditionally the subject matter of litigation are now referred to adjudication, and the amount of reported cases which concern the adjudication process bears testament to its impact. Without a doubt, the introduction of statutory adjudication has had as much influence on the way in which construction disputes are determined as any of the Woolf reforms, and some may say that it has been even more influential. Both have resulted in less claims finding their way into the , but adjudication is a radically different model to the consensual formula adopted in a pre-action protocol process leading to mediation. Adjudication is adversarial and, in the vast majority of cases, the “judge” is not a lawyer, but an industry professional. It is ironic that in an era where the avoidance of conflict is generally regarded as the way forward, a new form of dispute resolution has been introduced specifically for the construction industry which generates so many hard- fought battles.

Adjudication serves a purpose as it is relatively inexpensive and provides access to justice of sorts in circumstances where previously a party may have been deterred by the costs of pursing its claim and the time which that would take. However, as a process, adjudication is relatively crude and there is an inevitable sacrifice of quality in favour of speed. Although any type of construction dispute can be referred to adjudication, claimants have tended not to use this method of dispute resolution for professional negligence claims. This unofficial self- has probably arisen because, within the construction industry, it is generally felt that claims of this nature are not suitable for the rough and ready justice of the adjudication process. The types of dispute which therefore form the subject matter of are frequently those which concern payment or delay-related claims.

Of course, there is nothing wrong at all with crude justice if it is possible sensibly to shoe-horn the adjudication of a dispute into the short period contemplated by the 1996 Act, particularly if the alternative would be to deny a claimant a remedy simply because it is deterred from pursuing its claim on grounds of cost. However, it is questionable whether complicated claims which depend upon a detailed enquiry into numerous facts and require expert input are really suitable for adjudication. A claimant can take its time, prepare its case and marshal its evidence well in advance, leaving a defendant with very little time to respond. Looked at in this way, adjudication does seem a process which again is balanced in favour of claimants.

mayer brown 4 The twin attack of the pre-action protocol and statutory adjudication has meant that there are fewer claim forms being issued in the Technology and Construction Court and consequently fewer reported cases of real interest to construction lawyers. The dearth of such reported cases has meant that the law reports have ceased to be the rich vein of they once were, and there is now much greater reliance placed on decisions from other jurisdictions. If these other jurisdictions adopt similar far-reaching anti-litigation features, there does seem to be the real prospect of some stagnation in the development of the law.

The life of a construction lawyer is therefore very different in 2009. A visit to the Technology and Construction Court is a relatively rare experience and the Civil Procedure Rules, no doubt providing for the much more effective dispensation of justice, are generally only of academic interest to the practitioner. It is impossible to avoid the feeling that this is a pity, bearing in mind that the Technology and Construction Court now has some of the most talented in living memory. However, it seems that construction litigation has had its time in the sun and its position at the centre stage has been taken by less refined dispute resolution processes which are the preserve of the private sector. Does it matter? The answer really depends upon what the parties want out of a civil justice system.

Michael Regan [email protected] Construction & Engineering Group (UK)

This article was first published in New Law Journal on 24 April 2009.

5 Construction & Engineering London Legal Update Middle East Briefing Raid Abu-Manneh, our Middle East specialist, discusses current construction legal issues in the region.

Contracting in Lebanon – the French connection The good news for contractors seeking projects in Lebanon is that, unlike Dubai, Lebanon has been relatively unaffected by the credit crunch.

Lebanese law is very close to French law and therefore will be familiar to those who usually contract under systems.

Lebanese law The Lebanese Code of Obligations and Contracts of 1934 is inspired by the French Civil Code. In fact, it was originally drafted in French and subsequently translated to Arabic, which is today the official language of the Lebanese Courts.

Significantly, unlike other Arab Civil Codes, Shari’a law is not a source and therefore plays no part in considering contract obligations. Instead, Lebanese lawyers look to French cases and to fill any gaps in the Civil Code. FIDIC contracts are widely used for projects in Lebanon.

Enforcing entitlements Lebanese Courts have a good reputation but they are not commonly confronted with large and complex disputes that construction projects can produce. Lebanon does not have a widely recognised Arbitration Centre and arbitrations tend to be referred to international bodies, particularly the ICC. A major improvement for foreign contractors entering into contracts with the Lebanese state took place in 2002 when a new law was passed which allowed public bodies to enter into contracts which provided for international arbitration.

Lebanon is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and has entered into 49 bilateral investment treaties with various countries providing for the protection of foreign investments made in Lebanon. Lebanon is also a signatory to the 1965 International Convention on the Settlement of Investment Disputes.

This article first appeared in a slightly different form in Construction News, 9 July 2009.

Contracting in Jordan – the importance of homework Jordan is recognised as a country which welcomes foreign investment, but contractors should still carry out a proper review of contract terms and assess the impact of Jordanian law on their contracts.

Contract terms FIDIC contracts are extensively used in Jordan but contractors should note that the FIDIC terms are often changed significantly in the employer’s favour. A comparison with the original FIDIC form is therefore sensible.

mayer brown 6 FIDIC contract terms are also subject to Jordanian mandatory . For example, contractors and engineers are subject to decennial liability, which means that they will be jointly liable for a period of 10 years to compensate the employer for any partial or total collapse of the works and for any defect which threatens the stability or safety of a building. A court or also has the right to adjust liquidated damages to reflect actual loss suffered.

The Jordanian Civil Code is similar to other Arab codes but while these mandatory laws may look familiar, contractors should not assume that Jordanian law is identical to, for example, UAE law. Specific Jordanian legal advice is recommended.

Enforcing entitlements The Jordanian courts generally have a good reputation but they are unlikely to be able to cope with a large and complex project dispute.

Effective contract management may, of course, avoid disputes but, as a deterrent it is important to ensure that contracts include reference to international arbitration in an established venue such as London and Paris. This is particularly effective where the employer has assets outside Jordan against which the contractor could execute an award.

This article first appeared in a slightly different form in Construction News, 9 July 2009.

Contracting in Turkey – and the law is....? The importance of Turkey as the gateway between the west and central Asia cannot be overestimated. There are many opportunities for foreign contractors in Turkey, particularly on major infrastructure work, and Turkish contractors work round the globe, especially in central Asia and the Middle East. Which means it is essential for foreign companies to understand what Turkish law may mean for their contracts.

Turkey is a civil law and its law is based on the Swiss Civil Code, Zivilgesetzbuch, which it adopted in 1926 after the downfall of the Ottoman Empire. The new Turkish Republic decided to abandon Shari’a law in favour of a more western- orientated legal system and, in this respect, it is significantly different from legal systems in the Middle East where Shari’a law continues to apply to varying degrees.

Contracts in Turkey are often based on the FIDIC suite of contracts, depending on the size, nature and complexity of the project. This is unsurprising because FIDIC forms are internationally recognised contracts with which foreign contractors and investors are more familiar.

There remain, however, some pitfalls for foreign companies to avoid. Turkish courts, for instance, can review and reduce the liquidated or delay damages otherwise payable, if the court believes that the amounts payable do not reflect the actual loss.

Another key issue is Turkey’s treatment of foreign arbitration awards. Turkey is a signatory of the New York Convention and the power to refuse enforcement of an arbitral award on grounds that the award violates the country’s public policy is rarely exercised by the national courts.

In 1995, however, the Turkish Supreme Court refused to enforce an arbitral award on narrow technical grounds which were contrary to the parties’ agreement. The Supreme Court’s approach is a reminder that Turkish Courts might not always uphold the parties’ agreement.

7 Construction & Engineering London Legal Update Turkey is also a signatory of the International Convention on the Settlement of Investment Disputes (ICSID) and has signed about 80 Bilateral Investment Treaties, including one with the United Kingdom. This has created a fairer legal playing field for foreign investors working in Turkey and, to date, foreign investors have initiated at least six ICSID arbitrations against the Turkish government.

Raid Abu-Manneh [email protected]

Phillip Coady [email protected]

Construction & Engineering Group (UK)

This article first appeared in a slightly different form in Construction News, 8 October 2009.

International Arbitration in the Middle East – the Quick Reference Guide Our Middle East team has produced a quick reference guide to key facts on international arbitration in the Arab countries of the Middle East. It is designed as a good place to start when considering arbitration issues - such as the seat of the arbitration and any protection afforded by bilateral investment treaties.

Which countries does it cover? Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, UAE and Yemen.

What information does it provide? • New York Convention: Has a country acceded to the New York Convention? If so, on what basis and when? • ICSID Convention: Has a country acceded - and when? • Inter Arab conventions: Is a country signatory to any of the Arab conventions relevant to arbitration - the Riyadh and the GCC Conventions? • Local arbitration law: What is the arbitration law of each country? When was it enacted and is it based on the UNCITRAL model law? • Local arbitral institutions: Does a country have a local arbitration institution and (if figures are available) how many cases is that institution presently administering. • Bilateral investment treaties: What bilateral investment treaties has each country entered into? • ICSID Cases: The number of pending and concluded cases. If you would like a copy please contact:

Raid Abu-Manneh [email protected]

Construction & Engineering Group (UK)

mayer brown 8 Updating your contracts - dull but vital Updating construction contracts is unexciting. But not keeping them fully up to date can be disastrous, as a contractor discovered in William Hare Limited v Shepherd Construction Limited, when it found itself unable to rely on a “pay when paid” clause. “Pay when paid” clauses were, of course, prohibited by section 113(1) of the Housing Grants (Construction and Regeneration) Act 1996, unless, however, it can be shown that the ultimate employer is insolvent. Which is where our case begins.

The main contractor, Shepherd, had entered into a subcontract with Hare for fabrication and erection of steelwork. When the employer (Trinity) became insolvent, Shepherd withheld sums due to Hare, relying on a “pay when paid” clause in the subcontract. Clause 32 entitled Shepherd to withhold amounts where the employer went insolvent by reference to four specified routes, including an administration order made by the court under the Insolvency Act 1986.

Clause 32 did not, however, take account of amendments to the Insolvency Act 1986 (introduced by the Enterprise Act 2002) which had brought in a form of out of court administration. Trinity appointed administrators using this out of court route rather than any of the four options specified in clause 32. Hare argued that Shepherd’s withholding notices were invalid as Trinity had not become insolvent pursuant to clause 32.

The court agreed and said that, on a true construction of clause 32, Hare was entitled to payment of the withheld sum of approximately £997,000 plus VAT and interest. The court was not willing to “rewrite” the clause to allow for the amendments to the legislation and one of the reasons cited for the decision was that it was not prepared to pass on to Hare the risk of the employer’s insolvency.

Another factor in the court’s decision was that the subcontract had been entered into a number of years after the changes to the legislation and the court thought that a diligent party would have included the amended provisions. In fact, elsewhere in the subcontract, a clause referred to “the Insolvency Act 1986 or any amendment or re-enactment thereof ” and so it seemed evident, in contrast, that clause 32 was for specific instances of insolvency. The burden of Trinity’s insolvency therefore fell on Shepherd, rather than being passed on.

The case provides a simple, but important, lesson not to use out-of-date definitions in contracts (or to refer to legislation “as amended from time to time”) and a reminder to look closely at the wording of “pay when paid” clauses to check what degree of protection from employer insolvency they provide. In the current economic climate it could be crucial.

Seema Patel [email protected]

Jeremy Snead [email protected]

Restructuring, Bankruptcy & Insolvency Group

9 Construction & Engineering London Legal Update Extras

Sister Act? Changes to the Construction Act become law – but when? The Local Democracy, Economic Development and Construction Bill finally completed its journey through Parliament and became an Act in November. Part 8 of the new Act, which contains the changes to the original Housing Grants Act, can be found through this link: http://www.opsi.gov.uk/acts/acts2009/ukpga_20090020_en_12#pt8

The critical unknown is when the new Act will come into force. That depends on the drafting and approval of amendments to the Scheme for Construction Contracts, the secondary legislation. Consultation on draft amendments is anticipated in the early part of 2010 and the finalised amendments will need to be approved by both Houses of Parliament. Early 2011 currently looks like a reasonable guess as to when the new Act and revised Scheme might come into force.

Companies Act 2006 The Companies Act 2006 finally came into full force on 1 October 2009. Watch out for:

Definitions - “subsidiary”, “holding company” and “wholly-owned subsidiary” now defined in s1159 Companies Act 2006; “subsidiary undertaking” and “parent undertaking” now defined in s1162 Companies Act 2006.

Authorised share capital has been abolished.

All companies now have a short form memorandum of association (minus objects etc).

New companies should be adopting articles based on the new model articles.

More details at: http://www.mayerbrown.com/publications/article.asp?id=6618&nid=6

Civil Law Reform Bill In November the Government announced that this Bill would be published in December but would not now include provisions to reform the law on limitation. Apparently a recent consultation with key stakeholders had demonstrated that there were insufficient benefits and potentially large-scale costs associated with the reform.

The Donaghy report and directors’ duties Following the Donaghy inquiry into construction deaths, it has been reported that the HSE Board will decide in the spring of 2010 whether to recommend to ministers the introduction of statutory health and safety duties for directors. In the meantime, the publications ‘Health and Safety at Work’ and the ‘Health and Safety Bulletin’ claimed that the case for duties being imposed on directors had now become compelling and launched a campaign for a statutory approach.

mayer brown 10 Proposed new planning restrictions on supermarket expansion. The Competition Commission has recommended to the Department of Communities and Local Government that they introduce a competition test in planning decisions on larger grocery stores. The test would prevent supermarket developments, including extensions to existing stores, by retailers with a strong presence in a local area, to make competing developments from rival retailers easier.

The Jackson costs review Lord Justice Jackson’s report and recommendations following his fundamental review of civil litigation costs were due to be completed by 31 December 2009, with publication scheduled for 14 January 2010.

FIDIC Conditions of Subcontract for Construction (Test Edition 2009) FIDIC has published a Test Edition of Conditions of Subcontract for Construction, for use with the 1999 Red Book and the 2006 Multilateral Development Bank Harmonised Edition of the Red Book. Details are at:

http://www1.fidic.org/news/content.asp?articlecode=80Co&Rubrique=Contracts

11 Construction & Engineering London Legal Update Do you know about TeamBuild? The TeamBuild competition aims to promote understanding and co-operation between young professionals in the construction industry as well as helping competitors fulfil several of the core objectives required for chartered membership of many institutions.

The idea for the competition arose in the Institute of Civil Engineers around 1990, as a result of concern about poor communication between construction professions aiming to deliver projects for clients. It is a communication, management and team-working competition with the focus on project delivery, and not exclusively on a design solution.

The competition is now in its eighteenth year and Teambuild 2009 challenged teams to plan and design the development of a new civic centre in South London. This year’s competitors represented 45 top employers and, after a pre-qualification selection process involving eighteen teams, nine teams were invited to a weekend-long final event at Eynsham Hall in Oxfordshire. The nine finalist teams were made up of six individuals from varying disciplines, including architecture, structural engineering, environmental engineering, project management, interior and urban design, and law.

The selected teams were given a brief based on a real site, presenting a masterplan on the opening evening. Several quick-fire challenges spread over an intense weekend took them right through the design process, finishing with the construction stage. In a simulation of the design and construction process for the development of a real site, competitors had to present their team’s work to pre-eminent judges representing industry institutions including ICE, CIBSE and RIBA. The teams had to role play and respond to challenging questions.

Team rEvolve, all working for BDP in London, took the overall prize at the finals. Our own Tamsin Travers was a member of one of the three gallant losing teams that made the finals on the final day.

The competition has an impressive list of supporters: ConstructionSkills, the Worshipful Company of Chartered Architects, the Worshipful Company of Constructors, CIOB, CIBS, ICE, ICES, IStruct.E, SCL, G4C – Generation for collaboration, RIBA, RICS and West Quarter Consulting, with John Laing and EPR Architects generously providing the site briefing information for this year.

If you are interested in entering a team or an individual in Team Build 2010, you can register your interest or find out more at www.teambuilduk.com.

mayer brown 12 Public procurement review Jon Olson-Welsh highlights recent developments in public procurement.

The new-look public procurement remedies - the quick guide to the changes When did the rules change and why? 20 December 2009, when the imaginatively named Public Contracts (Amendment) Regulations 2009 and Utilities Contracts (Amendment) Regulations 2009 came into force. They strengthen the legal review procedures for dealing with procurement rule breaches and increase the remedies available.

Who needs to know? Those advising clients on procurement strategy need to understand the changes, so as to be able to advise on compliance and how to respond to a challenge. Economic operators, on the other hand, will have more opportunity to challenge decisions made in breach of the rules.

What are the main changes? Notification Procuring entities have obligations to notify participants (with reasons) as soon as they are excluded from the procurement process - even if this is before the award decision is made. The rules were previously ambiguous as to when notification should be given. A procuring entity still has to inform tenderers of its decision to award the contract, or conclude the framework agreement, as soon as possible after the decision has been made.

Standstill period The standstill period (the enforced wait between announcing the award decision and entering into the contract - to allow for any challenge) remains at 10 days if the standstill notice is sent electronically or by facsimile, but is 15 days where sent by other means (or, if the period is shorter, 10 days from the date the last tenderer receives the standstill notice).

Reasons Reasons for the award decision, including the criteria used to reach that decision and the “characteristics and relevant advantages” of the successful tenderer, must be given to unsuccessful tenderers at the beginning of the standstill period, and not, as previously, on request.

Suspending the procedure The new Regulations provide for an automatic suspension of a contract award procedure where proceedings are started to challenge a decision, until either the court ends the suspension, or the first instance proceedings come to an end without any order continuing the suspension.

13 Construction & Engineering London Legal Update Declaration of ineffectiveness Where a contract had been entered into, damages were previously the only remedy. Under the new-style Regulations, however, a court can declare a contract prospectively “ineffective” where there has been a serious breach of procurement rules (as defined in the Regulations) - for example where a contract is awarded without prior publication of a required contract notice in the Official Journal.

Avoidance? A declaration can be avoided by the procuring entity publishing a “voluntary transparency notice” in the Official Journal – if the contract is not entered into within 10 days of publication and no challenge is made during that period.

Overriding reasons not to? Courts will not make declarations of ineffectiveness if “overriding reasons relating to a general interest require that the effects of the contract should be maintained”. But “general interest” does not mean economic interests directly linked to the contract – for instance, costs from delays in signing the contract or starting the procurement procedure again, costs relating to legal obligations resulting from the ineffectiveness, or costs resulting from a change of entity performing the contract.

Ineffective framework agreements Framework agreements may be declared ineffective for the same reasons. Any contracts awarded under them can also be declared ineffective if awarded in breach of the specified framework procurement requirements (as defined in the Regulations), so long as the estimated value of the contract exceeds the relevant threshold. A declaration will not be made if the procuring entity complies with the standstill notice requirements.

A declaration of ineffectiveness in respect of a framework agreement does not automatically apply to a contract issued under it. The court has to make a separate declaration for each relevant contract.

Financial penalties and contract shortening Once a contract has been concluded, the additional remedies of financial penalties and contract shortening may apply. Financial penalties will always accompany declarations of ineffectiveness and, in the event of specified serious breaches where no entitlement to a declaration is established (or none is sought), or the overriding reasons apply, a court must impose a financial penalty (a civil penalty of an amount ordered by the court) or contract shortening (where the duration of the contract is shortened to an extent specified by the court) (or both). Any penalty or contract shortening must be “effective, proportionate and dissuasive”, but no further guidance on the amount of the penalty or the length of the shortening is given.

Time limits for claims An economic operator (which for this purpose means anyone who was involved in the tender process or who would have wished to have been involved) has six months to bring an ineffectiveness claim but this can be reduced to 30 days where the procuring entity has published a contract award notice justifying why no prior notice was published, or has otherwise notified the economic operator of the conclusion of the contract and a summary of the relevant reasons.

mayer brown 14 Which contracts and procedures are caught by the new Regulations? The new Regulations do not affect any contract award procedures commenced, or any awards of contracts under framework agreements, before 20 December 2009.

For further details of these and the other changes see the Regulations at http://www.ogc.gov.uk/.

Jon Olson-Welsh [email protected]

Laura Holtham [email protected]

Construction & Engineering Group (UK)

OGC guidance on procurement rules and development agreements The case of Auroux v Roanne in the European Court of Justice (see issue 56) prompted some uncertainty about the applicability of the EU procurement rules to development agreements entered into by public authorities. The OGC has now issued preliminary guidance but it is neither definitive nor comprehensive, it depends on future feedback from the European Commission and, most importantly, it does not apply to agreements made by local authorities under s106 of the Town and Country Planning Act 1990 or to agreements in connection with the exercise of compulsory purchase powers. A further paper on this subject is to be published by the OGC “…in due course”.

ECJ to rule on EU conflict on procurement limitation period According to Advocate-General Kokott’s opinion in the European Court of Justice case of C-406/08 Uniplex v UK, however, to comply with the principle of effectiveness (namely that national procedural rules must not render virtually impossible or excessively difficult the exercise of rights derived from Community law) the UK courts would invariably be required to exercise that discretion so that the three month period would not start to run until the time when the applicant knew or ought to have known of the alleged breach. And this could be some time after the relevant breach. The Court of Justice of the European Union (the CJEU, as it is now called) has an important choice to make in this case deciding which view to follow.

15 Construction & Engineering London Legal Update Does a confidentiality clause protect your rates and prices? Can you keep a secret? Perhaps not, if you are a public authority. Just suppose you are a contractor that has been awarded a PFI contract by a public authority to supply a public service over many years. Your contract naturally includes a confidentiality clause. Open book accounting is adopted and the authority has copies of your invoices, rates and prices. But all that information is, of course, strictly between you and the authority (and their auditors) and the Freedom of Information Act and the Environmental Information Regulations protect commercial information (subject to the public interest). So there is no way that anyone else is entitled to see it – or is there?

An unassuming section of the Audit Commission Act 1998, s15 (1), says that:

“15(1) At each audit under this Act, other than an audit of accounts of a health service body, any persons interested may –

(a) inspect the accounts to be audited and all books, , contracts, bills, vouchers and receipts relating to them, (emphasis added)

(b) make copies of all or any part of the accounts and those other documents.”

And this section was thrust into the judicial limelight after Nottinghamshire County Council notified the public that its accounts for the year ended 31 March 2009 “together with all books, deeds, contracts, bills, vouchers and receipts relating to them” were to be open for public inspection. A local elector, Mr Shlomo Dowen, asked to inspect and take copies of documents open to inspection including all books, deeds, contracts, bills, vouchers and receipts relating to waste management in the area of the Council.

The Council proposed to comply with the request and the documents it proposed to disclose included invoices and schedules which showed rates, quantities, work pricing formulae, key performance indicators and other financial information relating to a PFI waste management contract entered into by the Council with its chosen contractor, Veolia ES Nottinghamshire Limited.

Veolia understandably objected. It said its information was valuable to commercial competitors and to its sub-contractors under the contract. Its contract contained a confidentiality clause. It challenged the Council’s decision in the Administrative Court in the High Court and the key question was whether the Veolia documents constituted information “...relating to...” the accounts to be audited.

Mr Justice Cranston said that they did. The accounts were “...the general ledger and any account feeding into it. Thus the accounts show all the financial movements or items of account in the Council’s funds.....Parliament’s intention in using the words “relating to” in section 15(1) was simply that there should be an enquiry as to the factual connection between the limited category of documents mentioned on the one hand and the accounts to be audited on the other.” On that interpretation, the factual connection between the disputed documents and the Council’s accounts was “obvious”.

mayer brown 16 The right to inspect and copy documents is given to “persons interested”, but who are they? The judge said that the group was “..a wider group than local government electors and could include local businesses and community groups. It seems to me that the Parliamentary purpose is to enable those with a real and close interest in a council’s activity to scrutinise its accounts in the audit process.”

And can a person interested who inspects documents under s15 (1) use the information for any purpose? The judge referred to two cases which indicated that they could.

But then the Freedom of Information Act and the Environmental Information Regulations protect commercial information from disclosure (subject to the public interest). Does the Audit Commission Act 1998 not do the same? Remarkably, it does not. S15(3) of the Act gives confidentiality protection, but only for “personal information”.

So Veolia’s challenge to the Council’s decision failed before Mr Justice Cranston but Veolia are off to the Court of Appeal to ask for permission to appeal. The story is not over yet.

Richard Craven [email protected]

Construction & Engineering Group (UK)

17 Construction & Engineering London Legal Update Non-compliant tenders – who needs regulations? Don’t tell anybody, but it might be possible to live without EU-style procurement regulations. The proof could be alive and well and living in Canada, with the latest evidence a decision of the Court of Appeal for Ontario in Maystar General Contractors Inc. v The Corporation of Town of Newmarket.

In issue 57, we saw the two contract analysis of tenders adopted by the Supreme Court of Canada in The Queen in Right of Ontario v Ron Engineering & Construction (Eastern) Limited. There the Supreme Court said that a unilateral contract (contract A) arises automatically on the submission of a tender by a contractor, and under that contract, the tender cannot withdraw the tender for a specified period of time. The terms of Contract A are found in the express provisions of the tender requirements or can also be implied where the criteria for the implication of terms in a contract are met.

Since the Ron Engineering decision (and leaving aside the federal bid challenge regime created pursuant to Canada’s obligations under certain trade agreements), the Supreme Court has added to the law in Canada governing the tender process for public construction projects, finding:

• in M.J.B. Enterprises Limited v Defence Construction an implied term that an owner was obliged to accept only compliant bids; • in Double N Earthmovers Limited v Edmonton (City) that the compliance required is “substantial compliance” with the tender documents and all material conditions of the tender; • and in Martel Building Limited v Canada an implied term that an owner must treat all bids fairly and equally.

In Maystar the Town of Newmarket accepted a tender that contained a discrepancy in the bid price. The price was uncertain and incapable of forming the basis of a contract but the Town corrected the discrepancy. But for the discrepancy, Maystar would have been the lowest bidder.

Maystar brought proceedings against the Town, alleging that the accepted bid was non-compliant and had been improperly amended by the Town, and that the Town was therefore in breach of its contract A with Maystar. The Ontario Court of Appeal agreed. Amending the bid was a breach of the duty to treat all bidders fairly and equally. It noted that the Supreme Court had made clear that:

“...the integrity of the tender process is essential in order to foster a fair and orderly bidding process where contractors will expend the time, effort and expense to bid, knowing they will be treated fairly and equally. A public owner cannot undermine that process by purporting to accept a bid with an uncertain price, or to encourage contractors to believe that they can communicate with owners after the fact to clarify or explain inconsistencies in their bids. In M.J.B. Enterprises, .....Iacobucci J pointed out that good faith on the part of the owner is not a defence to the claim for breach of contract.”

And all without the benefit of sophisticated regulations...

Richard Craven [email protected]

Construction & Engineering Group (UK)

mayer brown 18 The nuts and bolts of a “reasonable settlement” In 2001 a simple nut and bolt connection on a float valve failed. Water from the sprinkler system storage tank overflowed into the basement of a new office building tenanted by a firm of in London. The ensuing flood caused extensive damage to electrical equipment.

As it had taken more than one party to fit the sprinkler system, the owners and tenants brought a claim against the main contractor, the M&E subcontractor, the sub-subcontractor and the sub-sub-subcontractor. This story concentrates on the last link of the chain, because the sub-subcontractor (Siemens) settled the claims up the contractual chain and tried to recover the settlement sum (£2.72m or 48% of the total sum claimed (£5.61m)) from the sub-sub-subcontractor (Supershield). Siemens said it was a reasonable settlement but Supershield disagreed.

The concept of a reasonable settlement stems from the Court of Appeal decision in Biggin v Permanite (1951) and over the years the court has set out a number of guidelines. In Siemens Building Technologies FE Ltd v Supershield Ltd, Mr Justice Ramsey reviewed the authorities and summarised the principles:

Principles • For C to be liable to A in respect of A’s liability to B which was the subject of a settlement it is not necessary for A to prove on the balance of probabilities that A was or would have been liable to B or that A was or would have been liable for the amount of the settlement. • For C to be liable to A in respect of the settlement, A must show that the specified eventuality (in the case of an indemnity given by C to A) or the breach of contract (in the case of a breach of contract between C and A) has caused the loss incurred in satisfying the settlement in the manner set out in the indemnity or as required for causation of damages and that the loss was within the loss covered by the indemnity or the damages were not to remote. • Unless the claim is of sufficient strength reasonably to justify a settlement and the amount paid in settlement is reasonable having regard to the strength of the claim, it cannot be shown that the loss has been caused by the relevant eventuality or breach of contract. In assessing the strength of the claim, unless the claim is so weak that no reasonable party would take it sufficiently seriously to negotiate any settlement involving payment, it cannot be said that the loss attributable to a reasonable settlement was not caused by the eventuality or the breach. • In general if, when a party is in breach of contract, a claim by a third party is in the reasonable contemplation of the parties as a probable consequence of the breach, then it will generally also be in the reasonable contemplation of the parties that there might be a reasonable settlement of any such claim by the other party. • The test of whether the amount paid in settlement was reasonable is whether the settlement was, in all the circumstances, within the range of settlements which reasonable people in the position of the settling party might have made. Such circumstances will generally include:

19 Construction & Engineering London Legal Update • The strength of the claim; –– Whether the settlement was the result of legal advice; –– The uncertainties and expenses of litigation; –– The benefits of settling the case rather than disputing it.

• The question of whether a settlement was reasonable is to be assessed at the date of the settlement when necessarily the issues between A and B remained unresolved.

Application Mr Justice Ramsey decided, on the facts, that Supershield was responsible for the installation of the float valve and that the leak was caused by its failure to tighten the nuts and bolts sufficiently when it was initially installed. But was Siemens’ settlement reasonable?

Supershield said it was reasonable for Siemens to settle but not at a level of just under 50% of the sums claimed because, on the basis of its arguments as to causation and remoteness, the claims were too weak to justify settlement at that level.

Mr Justice Ramsey considered it was reasonable to settle the case and even went so far as to say that “it is difficult to think that there will be many cases where it would not be reasonable to settle a case.” He concluded that the arguments on causation and remoteness which Supershield had relied on would not have succeeded. In his view, the claim was strong and the defences weak but, on any view, the case justified a settlement in the mid range of around 50% of the sum claimed.

The claim was settled on legal advice. The judge also considered that the settlement was within the range of settlements that reasonable people in the position of Siemens might have made having regard to the strength of the claim, the uncertainties and expenses of litigation and the benefits of settling the case rather than disputing it.

How to improve the prospects of recovery To improve the prospects of recovering money paid under a settlement from a third party, it is prudent to obtain a reasoned advice from legal advisers, showing how the settlement sum has been arrived at, and if part of that sum is to be recovered from a third party, the sum attributable to that third party.

Sequel? An appeal to the Court of Appeal was heard as this update was finalised. A note on the nuts and bolts of the Court’s should appear in the next Update.

Ruth Wilkinson [email protected]

Construction & Engineering Group (UK)

mayer brown 20 What’s been happening @ Mayer Brown

Procurement Lawyers’ Association Jon Olson-Welsh reports that in September, Mayer Brown hosted at its offices the second meeting of the Procurement Lawyers’ Association. The aim of the meeting was for the Association’s working group to report on its findings on public procurement and land development agreements after Auroux.

Association for Consultancy and Engineering conference in Abu Dhabi In October, Raid Abu-Manneh spoke at the Association for Consultancy and Engineering conference in Abu Dhabi on “The Path Towards Amicable Resolutions with Clients in the GCC”. Raid examined local law implications, the suitability of arbitration and the feasibility of dispute avoidance.

IBA Madrid conference Nick Henchie spoke at the Madrid IBA conference in October, on latest developments in international construction.

Mining Seminar in London In November, members of the Mayer Brown mining team were speakers at an afternoon seminar at Mayer Brown’s London office, on topical issues facing the mining sector in project finance, construction and shareholder activism. Ian Coles spoke on project finance, mining project workouts and when projects go wrong, Jonathan Hosie looked at mining construction risks and how to resolve them and Michael Hutchinson discussed shareholder activism in the mining sector.

21 Construction & Engineering London Legal Update Winner takes all - or at least its costs? If you win your litigation, you might once have expected to be awarded your costs and to be able to recover a good proportion of them. But what if the court makes an issue based costs order? What does that mean?

The Civil Procedure Rules encourage the court to consider making costs orders which reflect a more detailed analysis of success and failure and, in particular, to make costs orders in respect of certain periods, or by reference to certain issues, or by way of percentages.

In Costain Ltd v Haswell & Partners the judge stated that: “the time-honoured rubric that “costs follow the event” is no longer applied automatically in this kind of situation even though a clear winner of the litigation has emerged.”

Costain provides a good example of an issue based costs order in action. There the initial claim was for £3.5m, but even before trial this figure was reduced to about £1.8m (including finance charges). At trial Costain were awarded £163,478.51 but the case had occupied the court for 14 days and the combined legal costs of the parties amounted to approximately £2.9m.

Which meant that the court’s order as to costs would affect the financial position of the parties far more than the decisions on liability and quantum since the sum recovered by Costain was small compared with the sums spent on legal costs.

In reaching his decision on costs, the judge, Richard Fernyhough QC, looked at these issues:

• Who was the successful party? The judge was in no doubt that Costain was the successful party, despite the award being considerably less than their original claim. The award was “substantial”.

• On what issues did Costain succeed and fail? Costain had succeeded on all but one of the liability issues and on a prolongation claim, but, on quantum, on only four of the eleven heads of claim. The judge translated this analysis into percentages:

“I estimate that the issues of liability and prolongation of the works in principle upon which Costain succeeded took up approximately 60% of the time at trial.. (and) quantum issues upon which Costain succeeded...5%... I also consider that the time taken in preparation of this case can be properly allocated in the same proportions.”

He concluded that Costain was entitled to recover 65% of its total costs from Haswell and that Haswell should recover 35% of its costs from Costain, but that was without taking into account the conduct of the parties.

mayer brown 22 • Conduct of the parties The judge said that Costain’s claim was initially exaggerated “...to a considerable extent...” and it was unreasonable of Costain to pursue certain claims. It was, however, not unreasonable of Costain to make the Part 36 offers that it did, in which it offered to accept sums in excess of £1m. Nor was it unreasonable for Costain to reject Haswell’s offer to “drop hands” but, in turn, it was unreasonable for Haswell to reject Costain’s offers of settlement out of hand without coming back with some form of substantive counter-offer.

Taking this conduct of the parties into account, the judge reduced Costain’s costs recovery from Haswell by 10% to 55% and reduced Haswell’s recovery from Costain by 15% of its costs to 20%. He then set 20% of Haswell’s estimated costs against 55% of Costain’s estimated costs to produce a figure (£620,000) that Haswell had to pay Costain, which was about 38.75% of Costain’s costs.

Which shows just how powerful a factor in litigation an issue based costs order can be. Enough to make claimants look even harder at the strength of their case.

Richard Craven [email protected]

Antonia Mortimer [email protected]

Construction & Engineering Group (UK)

23 Construction & Engineering London Legal Update Antitrust & Competition Update: Bid-rigging

OFT fines 103 construction companies record £129.5 million for bid-rigging - and 25 companies then appeal the level of their fines to the CAT In September 2009, the Office of Fair Trading issued a decision finding that 103 construction firms had infringed by engaging in bid-rigging in England in the period from 2000 to 2006. The fines the OFT imposed on individual companies ranged from £713 to £17.9 million.

The total amount of the fines is a record-breaking £129.5 million - the largest previously imposed by the UK competition authority being the £121.5 million fine in the British Airways/Virgin Atlantic fuel surcharges case.

The question, however, is whether these fines will stand. 25 of the construction companies concerned – nearly a quarter of those fined – have appealed against their fines to the Competition Appeal Tribunal (CAT). The case summaries on the CAT website suggest that the majority of the appeals are based on the disproportionate size of the fines.

The infringements The 103 firms were found to have engaged in 199 instances of bid-rigging, which took two forms:

• Cover pricing: a firm not intending to win a contract contacted another firm it knew was bidding for the same contract and obtained from that firm a price (a “cover price”) which would be too high to win the contract. By bidding in the knowledge that it would not win the contract, the firm was able to remain on the customer’s list of firms to invite to future tenders. This particular practice has been the subject of previous OFT infringement decisions in the roofing sector. (See issue 53.) • Compensation payments: in six instances, the OFT found that construction companies that won tenders on the basis of cover pricing also made compensation payments of between £2,500 and £60,000 to unsuccessful tenderers under other secret agreements. These are viewed by the OFT as a more serious anti- competitive practice.

The OFT’s investigation The OFT’s investigation, which it described as “one of its largest Competition Act investigations”, followed a complaint in relation to a tender in the East Midlands in 2004. The scope of the investigation then grew to include other tenders in the East Midlands, Yorkshire and Humberside, and eventually encompassed tenders across England. The OFT has stated that it received evidence of cover pricing implicating many more companies than the 103 companies fined, in relation to thousands of tender processes, but it focused its investigation on approximately 240 alleged infringements.

mayer brown 24 The OFT made site visits to 57 of the businesses under investigation and 37 firms made applications for leniency. 41 firms accepted the OFT’s subsequent “ fast track offer,” which granted a reduction of up to 25% in penalties in return for full cooperation in the investigation, an admission of infringement in relation to the contracts specifically identified by the OFT in the offer and certain ancillary promises.

A Statement of Objections (“SO”) was issued to 112 firms on 17 April 2008, after which they made written responses to the OFT, and some put forward their case at an oral hearing. The OFT later informed nine companies who were named in the SO that it had insufficient evidence to proceed with the case against them.

The fines Under UK competition law, companies that have infringed competition law can be fined up to 10% of the annual worldwide turnover of the corporate group to which they belong. The amount of the fine will vary according to a number of factors. These include the gravity of the infringement, its duration, the company’s turnover in the relevant market and aggravating and mitigating factors, including the extent to which a company cooperates with the investigation.

The non-confidential version of the OFT’s decision, published in November, indicates that 86 parties benefited from discounts to their fines, under the OFT’s leniency programme or the fast-track offer, or because they admitted the alleged infringements after receiving the SO. These reductions amounted to £64.9 million in total. However, many of the fines imposed on the addressees of the decision were set at a fixed percentage of their total turnover – referred to by the OFT as the “Minimum Deterrence Threshold” (MDT) – to ensure that the penalty represented a figure that, in the OFT’s opinion, would be a sufficient deterrent. The application of this MDT appears to have massively inflated some companies’ fines, and many of the appeals have challenged this aspect of the fine.

Next steps The hearing of the 25 appeals before the CAT is unlikely to take place until the second half of 2010. In the meantime, the CAT will need to determine the way in which it wishes to handle a large number of appeals, and the OFT will no doubt be considering the implications for its budget of defending so many appeals.

Gillian Sproul [email protected]

EU & UK Antitrust/Competition Group

25 Construction & Engineering London Legal Update Case Notes

Wrongful suspension and failure to spot defects An appeal against an arbitrator’s decision included these key questions. If a contractor suspends works under a construction contract for non-payment - wrongfully (because it transpires that it has already been paid), is that a repudiatory breach of contract that entitles the other party to bring further contractual performance to an end and sue for damages? As a matter of general principle, said the court, there is no simple answer as it will depend on the terms of the contract, the breach or breaches of contract and all the facts and circumstances of the case.

And if a contract administrator fails to require the contractor to remedy defective works, is the contractor then excused from compliance with the contract drawings? The court confirmed that a contractor, in breach of contract in carrying out defective works, is not relieved of liability by any implied approval derived from the contract administrator’s failure to draw the contractor’s attention to defective works which should have been apparent when the contract administrator attended the site.

Mayhaven Healthcare Limited v David and Teresa Bothma [2009] EWHC 2634 (TCC)

Does a website owner owe a duty of care? A swimming pool trade association listed installers on its website but without distinguishing full members from affiliate members. Full members were vetted by the association and were covered by the association’s bond and warranty scheme but affiliate members were not. The true position was, however, made clear in an information pack referred to on the website, which gave details of suitably qualified and approved installers. Was the association liable to customers who relied on the website to find an installer but failed to obtain the information pack, when the installer they appointed, who was only an affiliate member, became insolvent?

No, said the majority of the Court of Appeal. The association had not assumed a legal responsibility to the claimants for the accuracy of the website statements without the further enquiry which the website itself urged (obtaining the information pack). It also noted, however, that some websites are interactive and indicated that in particular circumstances a duty of care might be owed.

Patchett v Swimming Pool & Allied Trades Association Ltd [2009] EWCA Civ 717

Settlements and without prejudice protection The parties to a settlement agreement were in dispute about interpretation of the agreement. One of the parties wanted the court to look at exchanges between the parties before the agreement to show the contractual context but those exchanges were “without prejudice”. Did that prevent the court from looking at the documents?

mayer brown 26 Although the general rule is that without prejudice communications do not lose their privileged status because the parties conclude an agreed settlement, there are exceptions to that rule, in particular when the issue is whether those communications have resulted in a settlement agreement. The court thought that it would make little sense for the law to admit evidence about that issue without also admitting evidence about what the terms of a settlement agreement were. For this and other reasons, including the interests of justice, the court decided that evidence of the without prejudice exchanges was admissible to the extent that it would have been admissible had the exchanges not been without prejudice. Which would entitle the court to look at the factual background in accordance with the decision in Chartbrook Ltd v Persimmon Homes Ltd (see below).

Oceanbulk Shipping & Trading SA v TMT Asia Ltd & Ors [2009] EWHC 1946 (Comm)

Adjudication awards – setting off and staying A contractor obtained an adjudication award in its favour for £300,000 payable by the employer but the employer obtained a separate adjudication decision that it was entitled to £180,000 liquidated damages which, it claimed, it could set off against the £300,000 (plus interest). The court said that the employer could set off its liquidated damages award. It also stayed enforcement of payment of the balance of £120,000 because the contractor was in a “parlous financial position”, unable to repay the £300,000. Since there had been a serious and significant deterioration in its financial position since the contract was let and the absence of the advance payment had not caused its financial difficulties, the recognised exceptions to granting a stay did not apply. In addition, the advance payment would be repayable at final account stage, which apparently would already have been reached, but for the contractor’s delay in preparing the account.

JPA Design & Build Limited v Sentosa (UK Ltd) [2009] EWHC 2312 (TCC)

Request to nominate adjudicator - must it follow the notice of adjudication? A party served notice of adjudication, requested the appointment of an adjudicator and, very soon afterwards, served a slightly modified notice of adjudication on the other party. The adjudicator proceeded on the basis of the modified adjudication notice. Was the adjudication valid?

No, said the court, because the Scheme for Construction Contracts (which applied to the contract), contemplated that the request for an appointment should follow the giving of a notice of adjudication. The adjudicator’s decision was therefore invalid.

Vision Homes v Lancsville Construction [2009] EWHC 2042

27 Construction & Engineering London Legal Update Interpreting contracts The House of Lords has delivered a sharp reminder of the importance of drafting contracts clearly and accurately. A dispute between a developer and the owner of the development site turned on the interpretation of the wording of the contract formula for calculating the owner’s share of the sale proceeds. The House of Lords confirmed that a court can, in construing documents, correct mistakes, if it is clear that something has gone wrong with the language and it is also clear what a reasonable person would have understood the parties to have meant. It also confirmed that a court cannot refer to pre-contract negotiations to establish what a contract means, but it can refer to the negotiations for other purposes, for example, to establish a fact that may be relevant to the background or to support a claim for rectification or estoppel.

Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38

Enabling works – does the Housing Grants Act apply? The Housing Grants Act does not apply to certain specified activities, for instance, “assembly, installation or demolition of plant or machinery,....on a site where the primary activity is ...nuclear processing, power generation or water or effluent treatment...” But does this exclusion, under s.105(2)(c)(i), apply to subcontracts for enabling and civils works?

Previous on the issue was divided but Mr Justice Ramsey has now decided that s.105(2)(c)(i) should be narrowly construed, to exclude only the specific operations identified. Which means that a contractor’s operations may fall outside the Act but its subcontractor’s activities, for example the enabling or civils works in the case in question, may fall within it.

North Midland Construction Plc v A E & E Lentjes UK Ltd [2009] EWHC 1371

And the consequences of failure to give a contractual notice are…? There has been much discussion of the consequences of failure to serve a contractual notice, for instance for more time or money, and whether it is fatal to the claim. A PPP schools project in Ayrshire had anticipated a certain amount of asbestos removal work but if there was more to remove, or the removal took longer, that was a contractual compensation event. More asbestos than anticipated was found and the SPV claimed a 16 week extension of time and compensation.

The parties agreed that complying with the relevant clause for obtaining relief or compensation was a condition precedent to recovery and the court found that the SPV had failed to give the required notice. Which meant that the contractor lost any entitlement to time or money for its claim.

Education 4 Ayrshire Ltd v South Ayrshire Limited [2009] CSOH 146

mayer brown 28 Special offer – pay less for the same- but is it a binding contract? Just suppose a builder is pressurised to accept less, under its building contract, than it was entitled to receive. It agrees, perhaps thinking that 75% of the money today is better than the possibility of 100% at some indefinite future date (or even none at all). But is such an agreement legally binding?

Adam Opel v Mitras in our last issue reminded us that a party that agreed to pay its supplier more for the same performance was legally bound by the agreement (although it avoided the new agreement because there was economic duress). The Court of Appeal decision in Williams v Roffey (which governed the position) said that there was good consideration for an agreement to pay more because of the practical benefit to the paying party in not finishing a project late and having liquidated damages deducted (or in the Mitras case of not having to shut down a production line).

So does Williams v Roffey apply to this accept less for the same situation to find consideration in the practical benefit, for example, of obtaining some payment now rather than at some time in the future – if at all?

Strangely enough, the answer is no, even though there is an obvious lack of consistency. Foakes v Beer, decided in 1884 by the House of Lords (which followed Pinnel’s case of 1602) says that an agreement to accept payment of a lesser sum is not binding because there is no consideration, not even in a practical benefit.

There is case law to say that Williams v Roffey does apply to the accept less for the same scenario. In Anangel Atlas Compania Neaviera SA v Ishikawajima- Harima Heavy Industries Co. Limited the court applied Williams v Roffey to find a practical benefit in a ship builder’s promise to accept a reduced price. In Re Selectmove Limited, however, the Court of Appeal said there was no consideration in accepting less for the same. This was because of Foakes v Beer which was not considered in Williams v Roffey. Any changes to the position, said the Court of Appeal, would have to be made by the House of Lords or, more appropriately, Parliament.

There are some recognised exceptions to the Foakes v Beer principle:

• the debtor gives something additional for the agreement to accept less – for example early payment or a different method of payment; • the sum claimed is disputed and the agreement to accept less is a compromise of the claim; • the claim is unliquidated and what is agreed is the sum due; • to accept less involves a third party, for example, who makes the part payment.

Leaving aside these exceptions, however, English contract law currently leaves us with this contradiction. Williams v Roffey finds practical benefit consideration in pay more for the same scenarios and Foakes v Beer finds no practical benefit consideration in accept less for the same situations. And there the matter rests - unless and until the House of Lords gets an opportunity to sort it out.

29 Construction & Engineering London Legal Update There is, however, another avenue to explore where a party agrees to accept less for the same. Promissory estoppel achieved some notoriety, particularly with law students, through the decision of Lord Denning (as he became) in Central London Property Limited v High Trees House Limited in 1947. Its essential ingredients are:

• a promise by one party to the other; • on which that other party acts; • where it would be inequitable for the original party to go back on its promise; • it generally suspends, rather than extinguishes, rights; and • can only be operated defensively, as a “shield, but not as a sword”.

Might promissory estoppel therefore operate where a party is illegitimately pressurised into accepting less for the same, thus avoiding the Foakes v Beer no consideration obstacle?

Sorry - but no is the answer, because, in this situation, promissory estoppel has its own safeguard. For promissory estoppel to operate, it must be inequitable for the party agreeing to accept less, to go back on its promise. An example of this is D&C Builders v Rees where builders who were in desperate financial straits accepted a sum of £100 in respect of their bill of £482 and then sued for the balance. The Court of Appeal said there was no consideration because of Foakes v Beer and promissory estoppel did not apply because it was not inequitable for D&C to go back on its promise to accept less, because of the way that the debtor had behaved.

Which leaves us with Williams v Roffey on the one hand and Foakes v Beer on the other.

It’s not logical, it’s not consistent but it’s the law (at least in England and Wales) and just another obstacle for the commercial world to negotiate.

Richard Craven [email protected]

Construction & Engineering Group (UK)

mayer brown 30 About Mayer Brown Mayer Brown is a leading global law firm with offices in major cities across the Americas, Asia and Europe. We have approximately 900 lawyers in the Americas, 300 in Asia and 450 in Europe. Our presence in the world’s leading markets enables us to offer clients access to local market knowledge combined with global reach. We are noted for our commitment to client service and our ability to assist clients with their most complex and demanding legal and business challenges worldwide. We serve many of the world’s largest companies, including a significant proportion of the Fortune 100, FTSE 100, DAX and Hang Seng Index companies and more than half of the world’s largest investment banks. We provide legal services in areas such as Supreme Court and appellate; litigation; corporate and securities; finance; real ; tax; ; government and global trade; restructuring, bankruptcy and insolvency; and environmental. OFFICE LOCATIONS AMERICAS • Charlotte • Chicago • Houston • Los Angeles • New York • Palo Alto • São Paulo • Washington ASIA • Bangkok • Beijing • Guangzhou • Hanoi • Ho Chi Minh City • Hong Kong • Shanghai EUROPE • Berlin • Brussels • Cologne • Frankfurt • London • Paris ALLIANCE LAW FIRMS • Mexico, Jáuregui, Navarrete y Nader • Spain, Ramón & Cajal • Italy and Eastern Europe, Tonucci & Partners Please visit www.mayerbrown.com for comprehensive contact information for all Mayer Brown offices.

©2010. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved. Mayer Brown is a global legal services organisation comprising legal practices that are separate entities (the “Mayer Brown Practices”). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership (regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); JSM, a Hong Kong partnership and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia. In Brazil Mayer Brown is in association with Tauil & Chequer Advogados, a Brazilian law partnership. “Mayer Brown” and the “Mayer Brown” logo are the trademarks of the individual Mayer Brown Practices in their respective jurisdictions. This Mayer Brown publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

0175con January 2010