The Construction Disputes Law Review: United Kingdom - England & Wales

Introduction

Statutory adjudication dominates the construction disputes landscape in this jurisdiction. Sections 104 to 107 of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act), as amended by the Local Democracy, Economic Development and Construction Act 2009 and SI 1998/649 (the original Scheme for Construction Contracts (England and Wales) Regulations 1998 (the Scheme)), provide the legislative framework both for the right to adjudication and for payment protections within construction contracts. The majority of the case law thus relates to the application of statutory adjudication and enforcement of adjudication decisions (for example, whether an adjudicator had jurisdiction or exceeded jurisdiction, and whether a breach of natural justice had occurred). For example, Toppan Holdings Ltd & Anor v. Simply Construct (UK) LLP2 considered whether a collateral warranty could be a construction contract within the meaning of Section 104 of the Construction Act. The English courts have also published a number of decisions to guide parties on interpreting common issues such as extensions of time, liquidated damages, variations and on-demand bonds. These developments are discussed below.

Year in review

The Supreme Court decided in Triple Point Technology, Inc v. PTT Public Company Ltd3 that, subject to the precise wording of a clause, liquidated damages for delay accrue until the contract is terminated. At that point, the contractor becomes liable to pay damages for breach of contract. The Court of Appeal had held that in some cases it might be inconsistent with the parties' agreement to categorise the employer's losses as subject to the liquidated damages clause until contractual termination and thereafter as damages. The Supreme Court found that approach to be inconsistent with commercial reality and the accepted function of liquidated damages.

Eco World – Ballymore Embassy Gardens Company Ltd v. Dobler UK Ltd4 looked at a claim for declarations as to the proper construction and effect of the liquidated damages provisions in a construction contract in circumstances where the claimant had taken over part of the works as completed, but the liquidated damages remained as initially stated. Eco World is noteworthy because it applied the Supreme Court's thinking in the seminal case Cavendish Square Holding BV v. Makdessi5 and held that the liquidated damages clause in this case was not unconscionable or extravagant such that it amounted to an unenforceable penalty.

In Shanghai Shipyard Co Ltd v. Reignwood International Investment (Group) Company Ltd,6 the Court of Appeal looked at questions of construction of a guarantee given to support the obligation of a buyer to pay the final instalment of the price under a shipbuilding contract. The Court of Appeal reminded us that if the instrument places primary responsibility upon the guarantor, it is likely to be an on-demand or 'see to it' type of bond or guarantee. The Court of Appeal also rejected the 'Paget's presumption' (that where an instrument is not issued by a bank or other financial institution, it was unlikely to be an on-demand bond and 'cogent indications that the instrument was intended to operate as a demand guarantee will be required') stating that it would be 'a recipe for commercial uncertainty' if a bond given by a bank would 'mean something different' if the exact same wording was adopted by a non-bank. Put another way, the identity of the guarantor should not lead to any preconceptions as to the nature of the bond.

Tort and public authorities arose in Anchor Hanover Group & Ors v. Arcadis Consulting (UK) Ltd & Ors,7 where a claim arose out of a flood. The court summarised the relevant principles for establishing whether a public authority may owe a duty. Put shortly, public authorities do not owe a duty of care at common law to private individuals or bodies simply by exercising their statutory powers or duties; a common law duty to protect from harm may arise in circumstances where the principles applicable to private individuals or bodies would impose such a duty; such circumstances may include conduct undertaken by public authorities in the exercise of their statutory powers or duties that gives rise to an assumption of responsibility.

In the context of adjudication, Quadro Services Ltd v. Creagh Concrete Products Ltd8 considered whether the adjudicator had decided more than one dispute. The defendant resisted enforcement on the grounds that the adjudicator had no jurisdiction because three disputes had been referred. It is settled law that an adjudicator does not have jurisdiction to adjudicate more than one dispute in a single adjudication. However, the court considered that it is clear from the authorities that one dispute can include numerous sub-issues that might be capable of being determined independently from each other. Whether they are sub-issues or separate disputes is a question of fact. The court concluded, 'If the Defendant's argument were right, the result would be that the parties would be put to the very significant cost and inconvenience of numerous separate adjudications to recover a single claimed balance under a single contract. That would be contrary to the policy underlying the adjudication process of efficient, swift and cost-effective resolution of disputes on an interim basis.' It is apprehended that the notion of sub-issues sitting under one dispute will become a new battleground.

Courts and procedure

i Fora

For the purposes of all substantial civil cases, there are three relevant courts in England and Wales: the High Court, the Court of Appeal and the Supreme Court (in ascending order of hierarchy). All complex commercial cases will begin, at first instance, in the High Court. There are three divisions of the High Court: the Chancery Division, the Queen's Bench Division (QBD) and the Family Division. High Court cases are heard and decided by one judge. Most complex commercial disputes are heard by the QBD, as the largest division with the broadest and most varied jurisdiction. The Commercial Court is a specialist court within the QBD that has a wide jurisdiction over banking and international credit and trade matters. The Technology and Construction Court is another specialist court within the QBD and has jurisdiction over areas including construction, engineering and information technology disputes, traditional building cases and professional negligence claims. The Chancery Division has jurisdiction over company law, partnership claims and some other areas, and includes the Companies Court and the Bankruptcy Court. These courts tend to deal with compulsory liquidations, personal bankruptcy and other matters arising under the Insolvency Act 1986 and the Companies Act 2006. The Financial List is a specialist QBD/Chancery cross-jurisdictional list that deals with the particular needs of parties litigating on financial matters of more than £50 million in value or that require particular market expertise. The Financial List nominates judges from the QBD and Chancery divisions with particular financial expertise and experience.

The Court of Appeal and the High Court together make up the Senior Courts of England and Wales. The Court of Appeal is divided into two divisions: civil and criminal. The civil division hears all appeals in civil and family justice from the High Court. The judges who sit in the Court of Appeal consist of Heads of Division (i.e., judges who lead various jurisdictions of the courts) and the Lord Justices of Appeal, who are the most senior judges with extensive judicial experience. The Supreme Court is the ultimate court of appeal in the UK. It has jurisdiction over the whole of the UK (not just England and Wales) in civil matters and decides on arguable points of law of general public importance. The Supreme Court must, however, give effect to any directly applicable EU law, as well as the European Convention on Human Rights (and take into consideration any decision of the European Court of Human Rights).

The appeal process

To appeal a decision to the Court of Appeal, a party must obtain permission from either the High Court or the Court of Appeal itself. Court of Appeal decisions generally correct the decision of the judge at first instance ('allowing' the appeal) or agree with the judge at first instance ('dismissing' the appeal). Court of Appeal decisions constitute binding precedent on all courts lower down the hierarchy (including the High Court) and can only be overturned by the Supreme Court. To illustrate the frequency of appeals by number: in 2020, 6,100 sets of proceedings were started in the Chancery and QBD divisions of the High Court combined. In the same period, 730 appeals were filed in the Court of Appeal.

Permission to appeal to the Supreme Court will only be given if a case raises an arguable point of law of real general public importance. Either five, seven or more of the 12 Supreme Court judges hear Supreme Court cases. Each judge reaches his or her own decision and a simple majority (or unanimity) reaches overall decisions. Supreme Court decisions constitute binding precedent on all courts of England and Wales, including the Court of Appeal and the High Court. In financial year 2020–2021, 217 applications to appeal were made to the Supreme Court and 42 were allowed. Of the 50 cases decided in that same period, 12 were allowed in full, 22 were dismissed in full, two were withdrawn and 14 had a mixed result.

ii Jurisdiction

There are three regimes under which the English courts may have jurisdiction when litigation has a foreign element (e.g., where there is one or more foreign party or where some relevant events took place in another jurisdiction): the EU regime, common law and the Hague Convention on Choice of Courts Agreements 2005 (the Hague Convention). The UK's exit from the EU at 11pm on 31 December 2020 (Brexit) complicated the issue of the foreign jurisdiction of English courts.

In proceedings instituted prior to Brexit, the common law was largely used to establish English jurisdiction over defendants domiciled outside the EU. In proceedings instituted post-Brexit, common law is also used to establish jurisdiction over defendants domiciled within the EU but outside the UK. There are two elements to establishing jurisdiction under common law: service of process and submission to the jurisdiction by the defendant. Effective service is essential before English courts will accept jurisdiction. To serve process on a defendant outside England and Wales, a claimant must get the permission of the court (unless certain exceptions apply). The purpose of this mechanism is to allow English courts to exercise jurisdiction over defendants where the dispute has a sufficient connection to English law. A defendant has the right to contest the English courts' jurisdiction, usually by promptly making an application under the Civil Procedure Rules (CPRs) Part 11. This right can be lost if the defendant takes one of various steps, by which the defendant can waive or lose that right and be deemed to have submitted to the jurisdiction of the English courts. The defendant is deemed to have submitted to the jurisdiction of the English courts if he or she does not challenge service within 14 days of filing an acknowledgement of service. To obtain permission to serve outside the jurisdiction, the claimant must show that the following requirements are satisfied:

  1. the claim falls within one of a number of categories or jurisdictional 'gateways' listed in the CPR – the gateways include situations such as the defendant being domiciled in England, the contract being governed by English law or the defendant having property in England, among many others;
  2. the claim has a reasonable prospect of success; and
  3. England is the proper place for the claim.

The EU regime is prescriptive and largely automatic when it comes to which courts have jurisdiction over a claim, and it applies to civil and commercial disputes where the defendant is situated in an EU Member State or a state in the European Free Trade Association (except Liechtenstein). The system works on reciprocity and cooperation between Member States (and the UK, before 1 January 2021). The relevant instruments for the EU regime are the Recast Brussels Regulation, the 2001 Brussels Regulation and the Brussels Convention. The key general principle is that a defendant should be sued in his or her country of domicile. Where the EU regime applies, the English common law rules above cannot be used to establish English jurisdiction. There are various situations, however, in which jurisdiction over a dispute involving a defendant domiciled in another Member State can be allocated to the English courts. These situations include (but are by no means limited to): when England is the place for performance of the contract; when another defendant in the same proceedings is being sued in England; when the defendant has property in England; and when the contract contains an agreement for English jurisdiction.

iii Procedure rules

The CPRs form a procedural code that governs civil judicial procedure in England and Wales. The overriding objective of the CPRs is to 'enable the court to deal with cases justly and at proportionate cost', which includes factors such as ensuring parties are on equal footing; saving expense; dealing with the case in ways that are proportionate to its value, complexity and importance; ensuring the case is dealt with expeditiously and fairly; allotting the case an appropriate share of the court's resources; and enforcing compliance with rules, practice directions and orders. The CPRs comprise rules and practice directions (which supplement the CPRs). The pre-action protocols are a key element of the CPRs. There are various specific pre-action protocols,9 as well as the Practice Direction on Pre-action Conduct and Protocols (the Pre-action PD).10 Before proceedings are commenced, the claimant must comply with the provisions of the Pre-action PD or any other pre-action protocol that it believes applies to the proceedings. Compliance with the protocols is essential and the courts will take account of non-compliance when making considerations in the case as to management directions, costs and interest. The broad aims of the pre-action protocols are: to encourage the exchange of early and full information between parties; to encourage parties to seek settlement and avoid litigation; and, where litigation cannot be avoided, to promote efficient management of proceedings. The court has discretion as to the consequences of a party's failure to comply with pre-action protocols, including taking non-compliance into account when making case management directions and orders as to costs and interest; ordering that the parties be relieved of the obligation to comply with the protocols; staying proceedings until a particular stage has been complied with; and applying various sanctions.

Alternative dispute resolution

Paragraphs 8–9 of the Pre-action PD state as follows:

8. Litigation should be a last resort. As part of a relevant pre-action protocol or this Practice Direction, the parties should consider whether negotiation or some other form of ADR might enable them to settle their dispute without commencing proceedings.
9. Parties should continue to consider the possibility of reaching a settlement at all times, including after proceedings have been started. Part 36 offers may be made before proceedings are issued.

It is important that parties adhere to the requirements of pre-action protocols and the Pre-action PD. Therefore, it is important that parties attempt to use some form of alternative dispute resolution (ADR) before commencing litigation proceedings, and keep the possibility of settlement in mind throughout any litigation that does ensue. Failure to attempt or consider ADR, as a breach of the Pre-action PD, could result in adverse case management directions, adverse costs orders and various other sanctions. Table 1 below lists types of ADR recognised by courts.

Table 1: examples of ADR methods

ADR methodDescriptionAdvantagesDisadvantages
NegotiationNegotiation involves the parties discussing the dispute without the assistance of a third party.Full control over proceedings (as there is no third party involved).
Very low cost.
Full confidentiality.
The ability to keep negotiations entirely without prejudice.
The possibility of deadlock and inability to find a resolution without a neutral third party involved.
Early neutral evaluationBy this process, the parties appoint a neutral third party to provide a non-binding opinion on certain discrete issues or on the whole case.Quick and low cost.
Can provide fresh perspective where there is a deadlock in negotiations.
Can identify a weakness in a party's argument, which that party can then assess before any following arbitration or litigation.
Can solidify one party's view if the opinion is in its favour.
No witness evidence is shared (so issues of fact may not be determined).
The losing party can choose simply to ignore the opinion.
MediationMediation is similar to negotiation, except that a neutral third party is involved to assist with the process of identifying the issues and exploring resolution options – this is facilitative mediation, which is the most common form of mediation in the UK. A key aspect of mediation is that the mediator does not make a decision– the mediator's role is to facilitate and aid negotiation, and resolution.Privacy.
A consensual resolution (limiting damage to ongoing business relationships).
Flexibility.
Low cost.
The process can be a catalyst to settlement offers (even if no full resolution of the issues is found).
The possibility that parties might refuse to engage fully even with a neutral third party present.
ArbitrationAll parties agree to submit to arbitration before it can be commenced. The arbitrator decides the case and makes an award, which is binding on the parties and enforceable (with recourse to the courts, if necessary). Arbitrations seated in England are governed by the Arbitration Act 1996.Confidentiality and flexibility.
The ability to nominate members of the tribunal.
The binding and enforceable nature of the award.
The certainty of the process (i.e., the parties do not have to grapple with issues of national court jurisdiction).
The process is not appropriate for multi-party disputes.
Summary judgment is not as forthcoming from a tribunal.
Limited opportunity for appeal or challenge.
Med-arbMed-arb is a hybrid of mediation and arbitration. The process begins as mediation and if no solution is reached, the parties can agree that the mediator becomes an arbitrator, who can then make a binding award.The theory is that parties will want to avoid an award being imposed on them and will therefore negotiate more effectively during the mediation phase.The possibility of the mediator becoming an arbitrator may affect the parties' willingness to discuss frankly during the mediation stage.
Confidential information disclosed to the mediator may taint the credibility of any arbitral award.
Expert determinationExpert determination is a process by which an expert is appointed to make a contractually binding decision on a dispute (typically, the dispute is of a highly technical nature).Particularly useful for technical disputes.
Faster than arbitration and litigation.
An expert can be sued for negligence if the appropriate care or skill is not exercised.
Not useful in extensively factual or legal disputes (as the expert's remit is limited to the technical issues).
Opportunities for appeal or challenge are limited.
AdjudicationThe process usually allows an adjudicator to make a decision on disputes as they arise in the course of the contract and that decision has 'interim binding effect', in that it is binding until the parties either agree to alter it or refer it to arbitration or litigation.28-day or 42-day procedure conducted in real time.
Cheaper than litigation or arbitration.
Choice of adjudicator and established enforcement process.
Costs are not usually recoverable.
Limited pre-action procedures mean parties can be 'taken by surprise'.

Multi-tier dispute resolution

International arbitration is facing continued problems stemming from multi-tier arbitration clauses. What should happen when one party has not complied with a pre-arbitral step but nonetheless commenced arbitral proceedings? Quite often, the parties have a satellite dispute: on one side, whether the commencement of the arbitration is void therefore depriving the tribunal of all jurisdiction because of the non-compliance or, on the other side, whether there are issues of admissibility that fall within the arbitral tribunal's remit to address by way of procedural modification (for example, a stay of proceedings pending completion of a negotiation period). Legal jurisprudence is split on whether a failure to comply with a multi-tier resolution provision is an issue of jurisdiction (depriving the tribunal of the ability to hear the claim entirely) or admissibility (relating to a lack of ripeness of the dispute because of a failure to follow a pre-agreed procedure). The weight of authority in the arbitral community leans in favour of a failure to follow a multi-tier clause being characterised as an issue of admissibility that should be dealt with by the arbitral tribunal. There are three key points:

  1. Multi-tier dispute resolution clauses are complex both in their operation and in their legal effectiveness. This is especially so in international construction arbitration, where typically there are many discrete disputes travelling through different pre-arbitral steps (including dispute adjudication boards).
  2. The prevailing judicial view is that a failure to follow a pre-arbitral step is not fatal to the claim in arbitration. Courts and commentators prefer the notion that the arbitral tribunal has threshold jurisdiction and can thus work out what needs to be done. This normative proposition is not always feasible in practice where discrete claims are comingled and are at differing stages of the pre-arbitral process.
  3. Clarity creates certainty. A failure to follow a multi-tier clause is an issue of admissibility that should be dealt with by an arbitral tribunal. Institutional arbitral rules should be amended to make this expressly clear. Parties should also consider making this clear in arbitration agreements.

Republic of Sierra Leone v. SL Mining Limited11 discussed whether non-compliance with a multi-tier dispute resolution provision gives rise to a right to challenge an arbitral award under Section 67 of the English Arbitration Act. The High Court found that failure to adhere to multi-tier dispute resolution provisions is an issue of admissibility, not jurisdiction (and therefore not open to challenge under Section 67). Further, the High Court found that, on the facts of the case, the claimant had waived any challenge it may have possessed to the jurisdiction of the arbitral tribunal.

Construction contracts

i Public procurement

The EU procurement rules deal with how EU countries (and the UK) and their public authorities deal with public procurement. In March 2014, the EU changed its rules on procurement through the introduction of three new directives. Member States were required to transpose Directive 2014/24/EU on public procurement (the Public Contracts Directive), Directive 2014/25/EU on procurement by entities operating in the water, energy, transport and postal services sectors (the Utilities Directive) and Directive 2014/23/EU on the award of concession contracts (the Concession Contracts Directive) into national law by 18 April 2016. Each of these three Directives introduced by the EU addresses a different aspect of the EU's public procurement regime.

The Public Contracts Directive

The Public Contracts Directive establishes the procedures that must be followed for contracts awarded by central government, local authorities and other bodies in the public sector within the EU. Key articles of the Public Contracts Directive are:

  1. Article 1 defines procurement as 'the acquisition by means of a public contract of works, supplies or services by one or more contracting authorities from economic operators chosen by those contracting authorities, whether or not the works, supplies or services are intended for a public purpose'.
  2. Article 10 provides a list of excluded services, which was recently amended to exclude research and development services, unless they relate to certain types of public service contracts and are subject to certain conditions.
  3. Article 48 sets out a simplified procedure for authorities contracting below the central government level, including improved flexibility and fewer requirements for notices.

The Public Contracts Directive also sets out rules relating to preliminary market consultations, technical specifications and the award, division, modification and publication of contracts, as well as introducing a variety of new procedures, procurement methods and requirements for participation in procurement. In addition, the Public Contracts Directive contains provisions to deal with issues of conflict of interest, illicit conduct, unfair advantage and general oversight by national authorities.

The Utilities Directive

The Utilities Directive is largely procedurally and structurally the same as the Public Contracts Directive, with a few differences specific to utilities procurement. The utilities caught by the Directive include gas and heat; electricity; water; transport services; ports and airports; postal services; and extraction of oil and gas and exploration for, or extraction of, coal or other solid fuels. Key articles of the Utilities Directive are:

  1. Articles 28 to 31 clarify the rules relating to exemptions for contracts awarded to affiliated undertakings or joint ventures.
  2. Article 34 sets out a clear procedure for determining whether activities are considered 'directly exposed to competition' and therefore not within the scope of the Directive.
  3. Annex II establishes that a utility will not be a contracting entity within the scope of the Directive if its rights have been granted by means of a procurement process in which sufficient publicity has been given and where the outcome of the procurement process was based on objective criteria (such as those set out under the Public Contracts Directive).

The Concession Contracts Directive

The Concession Contracts Directive was introduced to harmonise the rules relating to the award of concession contracts between EU Member States. Key articles of the Concession Contracts Directive are:

  1. Article 5 defines how concessions should be interpreted and makes a clear distinction between a work concession or a services concession. In addition, this Article transfers the economic operating risk for these works or services to the concessionaire, specifying that the concessionaire is not guaranteed to recover its investment or costs incurred through the subject-matter of the concession.
  2. Article 18 makes clear that where a concession has a duration of more than five years, its duration will be limited to the time necessary for the concessionaire to recover its investments in the works or services, as well as a reasonable return on its investment.
  3. Article 37 provides a number of procedural guarantees designed to maintain a fair and transparent concession process.

Prior to Brexit, the EU's public procurement framework was transposed into UK law. The Public Contracts Directive was transposed by the Public Contracts Regulations 2015 (PCR 2015),12 the Utilities Directive was transposed by the Utilities Contracts Regulations 2016 (UCR 2016)13 and the Concession Contracts Directive was transposed by the Concession Contracts Regulations 2016 (CCR 2016). Post-Brexit, the EU's public procurement regime no longer applies directly in the UK. In November 2020, the UK introduced the Public Procurement (Amendment etc.) (EU Exit) Regulations 2020 (PPAR 2020)14 to bridge this legislative gap. The PPAR 2020 amends the PCR 2015, UCR 2016 and CCR 2016 and largely carries their provisions over into UK law. As the UK has largely retained the EU's public procurement framework, the current key UK rules and provisions are largely the same as those under EU procurement law. In particular, the exemptions are mostly identical. One key difference is that the UK is no longer obliged to provide information contrary to its national security and is not precluded from taking measures to protect its security (where such measures are connected with the production or trade in arms, munitions and war materials). In addition, every two years, the Minister for the Cabinet Office must review and potentially amend the thresholds set under the PCR 2015.

ii Contract interpretation

How construction contracts are interpreted

The guiding principles, as expounded by the UK Supreme Court in Arnold v. Britton,15 are as follows:

  1. The task of the court is to identify the parties' intentions by reference to what a reasonable person would have understood from their language, possessed of all the background knowledge that would have been available to the parties when the contract was made.
  2. A term should be construed according to its natural ordinary meaning, in the context of any other relevant terms, the overall purpose of the instrument and commercial common sense but disregarding any subjective evidence of the intentions of one party or the other.
  3. Reliance on commercial common sense and surrounding circumstances should not, however, except in the most exceptional circumstances, be permitted to devalue the first importance of the language the parties chose to use. Further, commercial common sense, if relevant at all, is only relevant to how matters would or could have been perceived at the date of the contract. That the natural interpretation would turn out badly, or even disastrously, for a party is not a sufficient reason to turn away from the natural interpretation on grounds of commerciality.
  4. The less clear the language used, the more the court may be justified in departing from its natural meaning, but the court should not be astute to seek errors of drafting as an excuse for doing so.
  5. The court should not invoke commercial common sense to protect a litigant from his or her own imprudence, where the natural meaning of the words used would have been unwise, even without the advantage of hindsight: the function of the court is to determine what the parties had agreed, not what the court thinks they should have agreed.

Where, judging from the language of the contract, an event occurs that plainly was not intended or contemplated by the parties when they made the contract, the court should give effect to the parties' intentions and may find for an implied term accordingly, if what they would have intended is clear (i.e., if any other result would defeat the parties' clear objectives, derived from what they must have had in mind when the contract was made).

In Teesside Gas Transportation Ltd v. CATS North Sea Ltd,16 Males LJ said at [55]:

The court's approach to the construction of commercial contracts is now well known and was not in dispute. Absent further intervention by the Supreme Court, the principles can now be taken as settled. They have been re-stated in Arnold v. Britton [2015] UKSC 36, [2015] AC 1619 and Wood v. Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173 and need not be repeated here.

At [56] by reference to the five factors in Arnold v. Britton, Males LJ said:

I propose to undertake the 'unitary exercise' of construction by considering (1) the language of [the clause], (2) other relevant provisions of the Agreement, (3) the overall structure of the Agreement's payment provisions, (4) the background circumstances known to the parties at the time the Agreement was concluded, and (5) commercial common sense.

Oral modifications to construction contracts

There were conflicting authorities as to whether a clause of a contract that states that it may be amended only in a particular way, such as in writing or in writing signed by the parties, is effective against a purported amendment agreed by the parties other than in accordance with the clause. It had been considered that the courts would be guided by remarks of Beatson LJ made, in Globe Motors Inc v. TRW Lucas Varity Electric Steering Ltd,17 to the effect that the parties, having made the clause, may also unmake it, orally or by conduct or otherwise, if they so choose, there being no public policy reason to hold otherwise, and that the burden of proof that the variation had been agreed is the normal standard in civil cases of balance of probabilities. However, the Supreme Court in Rock Advertising Ltd v. MWB Business Exchange Centres Ltd18 has now decided that such clauses, often also called 'no-oral variation' clauses or 'no oral modification' clauses, are effective.

Rock Advertising Ltd dealt with the question whether a clause requiring that amendments to the contract be in writing can be overridden by the subsequent conduct of the parties. Put shortly, the dispute related to a claim against Rock for arrears of licence fees and other charges. Rock had issued a counterclaim relying upon an oral agreement. The judge at first instance agreed that there was an oral agreement and that the individual who made that agreement had at least ostensible authority to commit MWB to an agreement of this kind. However, MWB had relied upon the express terms of the original written agreement, namely Clause 7.6, which stated:

This licence sets out all of the terms as agreed . . . No other representations or terms shall apply or form part of this licence. All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.

The question for the Supreme Court was whether Clause 7.6 precluded any variation of the contract other than one in writing in accordance with its express terms. Rock said that it was open to the parties to vary the contract as a whole, including Clause 7.6, orally or in any other way they chose. The Court of Appeal had agreed with Rock. In the Supreme Court, Lord Sumption disagreed with the Court of Appeal saying that: 'In my opinion the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.' Lord Sumption said that party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts bind the parties to some course of action and, to that extent, restrict their autonomy. To Lord Sumption, the offence against party autonomy was the concept that the parties cannot bind themselves to the form of any variation, even if that is what they have agreed. There was 'no mischief' in no oral modification clauses and they did not frustrate or contravene any policy of the law.

Rules on implied terms

The Supreme Court in Marks and Spencer plc v. BNP Paribas Securities Services Trust Company (Jersey) Limited and another19 clarified that, for a term to be implied into an agreement, it must be either necessary for business efficacy or so obvious that it goes without saying. Lord Simon's formulation, and Lord Neuberger's gloss on it, are that, for a term to be implied, the following conditions (which as Lord Simon had acknowledged, might overlap) must be satisfied:

  1. it must be reasonable and equitable (Lord Neuberger doubting whether this condition would often, if ever, add anything);
  2. it must be necessary to give 'business efficacy' to the contract (i.e., it must be essential for the contract to be effective or, alternatively, without the implied term the contract must lack commercial or practical coherence);
  3. it must be so obvious as to go without saying (a condition that Lord Neuberger considered to be virtually the same as the requirement for business efficacy);
  4. it must be capable of clear expression; and
  5. it may not contradict any express term.

Common substantive issues and remedies

i Time bars as condition precedent to entitlement

Whether a time-bar clause is upheld is likely to depend significantly on the precise language of the clause in question. Unless a clause expressly states that compliance with a given requirement is a condition precedent, the English courts are likely to require very clear language before they will construe a contractual time bar as a condition precedent.20 In addition, even requirements stated as conditions precedent are likely to be construed narrowly and in favour of the obligor given the serious consequences that may result if the contractor fails to comply with the notice requirements or conditions. Multiplex Constructions (UK) Ltd v. Honeywell Control Systems Ltd (No. 2)21 considered the 'prevention principle', and Jackson J (as he then was) decided that a time-bar clause was, in theory, effective and did not automatically offend the prevention principle. The Court of Appeal in North Midland Building Ltd v. Cyden Homes Ltd22 upheld the principles set out in Multiplex (albeit distinguishable on the facts of the contract based upon amended JCT Design and Build 2005 Standard Terms and Conditions before it).

ii Right to payment for variations and varied scope of work

The courts take a flexible approach with respect to a contractor's right to payment for varied works. Typically, this right is governed by the express contract terms, for which in many construction contracts there are often express provisions requiring a contractor to follow a specific procedure to propose and obtain approval for variation works before the right to claim for varied work can arise. Obrascon Huarte Lain SA v. H M Attorney General for Gibraltar23 is a case in the FIDIC Yellow Book, in which Akenhead J had to consider the effect of Clause 20, requiring time and money claims to be notified within 28 days of the point at which the contractor became aware, or should have become aware, of the circumstances giving rise to the claim. Taking into account its potentially drastic consequences, the judge saw no reason why this clause should be construed strictly against the contractor. He also took note of the provision in Clause 8.4 that the contractor should be entitled to an extension of time for specified circumstances that were causing delay to completion or that would cause such delay. He concluded that Clause 20 entitled the contractor to notify claims either when he was or should have been aware of impending delay or when that delay actually occurred.

Similarly, in WW Gear Construction Ltd v. McGee Group Ltd,24 Akenhead J had no difficulty in granting a declaration, purely as a matter of interpretation, that an amended version of Clause 4.21 of the JCT Trade Contract (TC/C), 2002 Edition imposed as a precondition of the contractor's entitlement to reimbursement of loss and expense under that clause that the contractor give notice not later than two months after the disturbance to the regular progress of the works had become apparent. The judge observed that there was nothing particularly difficult or onerous in the contractor making its application within either the general or specific required timetables. It was common ground in that case that Clause 4.21 did not exclude claims at common law, but, in that regard, Akenhead J noted that not all occurrences to which Clause 4.21 applied would constitute a breach of contract by the employer, so that recourse by the contractor to his or her common law rights would not necessarily be an adequate substitute for recovery under the express terms of the contract.

iii Concurrent delay

The majority of the case law and academic writing on concurrent delay originates from England, where the jurisprudence has been dominated by the Malmaison approach, named after the decision in Henry Boot Construction (UK) Ltd v. Malmaison Hotel (Manchester) Ltd25 (meaning that where there is concurrent delay the contractor is entitled to an extension of time but is not entitled to loss or expense incurred during the extended period). The prevention principle26 has been used by many to explain why the 'but for' test of causation for concurrent delay under English law can be relaxed and why other approaches to the assessment of concurrent delay (such as apportionment and dominant cause) are not feasible and should not be used.27 However, following three first instance decisions28 and comments from the Court of Appeal,29 the answer under English law may now be that the contractor is not entitled to an extension of time and is not entitled to additional loss or expense. This is because these cases support the proposition that the prevention principle does not apply when dealing with concurrent delay.

iv Suspension and termination

Suspension and termination are governed by contract. In addition to the right to suspend for non-payment (discussed below), parties may also agree a contract term giving the right to suspend for other reasons. For example, in Multiplex Construction Europe Ltd v. R&F One (UK) Ltd,30 the parties agreed that the contractor had a right to suspend performance of its obligations if the employer failed to provide the agreed payment security (a payment bond for £15 million from a surety approved by the contractor). The circumstances under which a contract may be terminated are typically specified in the contract and are also governed by common law, namely:

  1. where a party renounces a contract by words or conduct, conveying to the other party that it will not perform its contractual obligations at all; or
  2. where there is a breach of a 'condition' (i.e., a term so important that any breach, regardless of the actual consequences of such a breach, would entitle the innocent party to terminate the contract) or where the breach deprives the innocent party of substantially the whole benefit of the contract.

In England and Wales, there is no common law right for an unpaid party to suspend when payment is due. An unpaid party may rely on a contract term allowing it to suspend or, if it is a party to a construction contract, it will have a statutory right to suspend under the Construction Act 1996 (regardless of whether there is a contractual term). The statutory right to suspend does not have to be recorded in the construction contract. This means the statutory suspension rules will apply where a contract does not include an express suspension clause. Under Section 112 of the Construction Act 1996, the unpaid party: has a right to suspend if all or part of the notified sum remains unpaid by the final date for payment; may suspend performance of 'any or all' of its obligations under the contract; is entitled to the additional time involved in suspending and remobilising; and is entitled to the reasonable costs of suspension. However, a statutory suspension under Section 112 must relate to non-payment and follow a written notice from the unpaid party.

v Penalties and liquidated damages

Generally, liquidated damages will be upheld unless they can be shown to be penal. This was the approach of the Supreme Court in Cavendish Square Holding BV v. Makdessi,31 which looked at whether the impugned provision is a secondary obligation that imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The penalty test was restated by Lords Neuberger and Sumption (with whom Lord Carnwath agreed):

[31] In our opinion, the law relating to penalties has become the prisoner of artificial categorisation, itself the result of unsatisfactory distinctions: between a penalty and genuine pre-estimate of loss, and between a genuine pre-estimate of loss and a deterrent. These distinctions originate in an over-literal reading of Lord Dunedin's four tests and a tendency to treat them as almost immutable rules of general application which exhaust the field . . . The real question when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. The fact that the clause is not a pre-estimate of loss does not therefore, at any rate without more, mean that it is penal. To describe it as a deterrent (or, to use the Latin equivalent, in terrorem) does not add anything. A deterrent provision in a contract is simply one species of provision designed to influence the conduct of the party potentially affected. It is no different in this respect from a contractual inducement. Neither is it inherently penal or contrary to the policy of the law. The question whether it is enforceable should depend on whether the means by which the contracting party's conduct is to be influenced are 'unconscionable' or (which will usually amount to the same thing) 'extravagant' by reference to some norm.
[32] The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance. In the case of a straightforward damages clause, that interest will rarely extend beyond compensation for the breach, and we therefore expect that Lord Dunedin's four tests would usually be perfectly adequate to determine its validity. But compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter's primary obligations.
[33] The penalty rule is an interference with freedom of contract. It undermines the certainty which parties are entitled to expect of the law. Diplock LJ was neither the first nor the last to observe that 'The court should not be astute to descry a “penalty clause'”: Robophone at p. 1447. As Lord Woolf said, speaking for the Privy Council in Philips Hong Kong Ltd v. Attorney General of Hong Kong (1993) 61 BLR 41, 59, 'the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld', not least because '[a]ny other approach will lead to undesirable uncertainty especially in commercial contracts.'
. . .
[35] . . . In a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach.

There is a greater focus on the commercial benefits to both parties of an effective liquidated damages provision and thus a greater reluctance to set aside what has been pre-agreed. This was also considered in Triple Point Technology, Inc v. PTT Public Company Ltd32 per Lady Arden at [35]:

Parties agree a liquidated damages clause so as to provide a remedy that is predictable and certain for a particular event (here, as often, that event is a delay in completion). The employer does not then have to quantify its loss, which may be difficult and time-consuming for it to do.

vi Defects correction and liabilities

Work may be defective even if it has been carried out with all due skill and care, if it fails to meet a particular specification. For example, in MT Højgaard A/S v. E.On Climate and Renewables UK Robin Rigg East Ltd,33 the court held that the contractor was liable for defects in the works, notwithstanding that it 'used due care and professional skill, adhered to good industry practice, and complied with J101 [an industry technical standard]'. The courts allow parties to agree on how defects arising post-completion are to be treated. Even if a contract provides for a defects liability period, it may permit the employer to engage a replacement contractor to repair defects during the defects liability period. In Flexidig Ltd v. A Coupland (Surfacing) Ltd,34 the court rejected an application for injunctive relief by an original subcontractor to restrain a replacement subcontractor from repairing defects. If the employer engages a third party to remedy a defect instead of allowing the original contractor to return to site and remedy that defect, it may be criticised for acting unreasonably and failing to mitigate its loss. Equally, Pearce and High Ltd v. Baxter and Baxter35 suggests that refusal to allow the contractor to fix defects may mean that the employer is prevented from claiming more than it would have cost the original contractor to remedy the defects.

vii Bonds and guarantees

Calls on performance bonds may be restrained for fraud or if a step or notice in the underlying contract has not been properly performed. In Lukoil Mid-East Ltd v. Barclays Bank plc,36 the bond issuer contended that the employer had failed to follow the requirements for making a valid claim. The court found that the formal requirements for making a claim under the bond were far from clear as the bond included several provisions that were 'virtually incoherent' when the document was viewed as a whole. In these circumstances, the court held that the demand was valid. However, in Sea-Cargo Skips AS v. State Bank of India,37 the demand failed to track the required wording for a demand set out in the bond. As its meaning was ambiguous, the court held it was invalid and therefore not payable. Unlike in other jurisdictions, unconscionability as grounds for restraining calls on performance bonds has not been used by the English courts. There is a trend in drafting clauses stipulating that a contractor agrees not to restrain a call on a performance bond for any reason whatsoever, although it is unlikely that the courts will allow parties to agree to validly contract out of fraud as grounds for restraining a performance bond call.

viii Overall caps on liability

This is a complex area of law and also subject to the proper construction of the parties' agreement. Generally, contractual exclusion clauses are upheld, provided that they are clearly worded and validly incorporated into a contract. An exclusion clause must be properly brought to the attention of the plaintiff. A party cannot exclude liability for fraud, even where the Unfair Contract Terms Act (UCTA) does not apply. Where the UCTA applies, there are more liabilities that a party cannot exclude and others that can be limited only where reasonable. A blanket exclusion of all liability would have little chance of passing this test. A clause should not exclude a party's liability for breach of all its contractual duties or leave a party without any meaningful remedy for breach. A clause that purports to do this might be void or invalidate the contract, or be interpreted restrictively.

Outlook

The UK construction industry will continue to face financial and supply challenges, and not just from the pandemic. The statutory adjudication process will continue to thrive. However, the nature of evidence may now evolve, with a greater emphasis on contemporaneous documentary evidence rather than oral witness testimony (especially in light of an increase in virtual hearings). The key battlegrounds will be ownership of float; loss or expense for non-critical delay; and re-rating (following unexpected price increases in materials).

Footnotes

1 Hamish Lal is a partner at Akin Gump Strauss Hauer & Feld LLP.

2 [2021] EWHC 2110 (TCC).

3 [2021] UKSC 29.

4 [2021] EWHC 2207 (TCC) 63.

5 [2015] UKSC 67.

6 [2021] EWCA Civ 1147. See also, Shapoorji Pallonji & Company Private Ltd v. Yumn Ltd & Standard Chartered Bank [2021] EWHC 862 (Comm), which considered the legal question of how an English court should exercise its powers to restrain a bond call, where the dispute underlying the bond call was to be resolved in international arbitration. The court rejected the emergency arbitrator 'option' thus upholding the notion that autonomous financial instruments take effect without regard to related and underlying disputes.

7 [2021] EWHC 543.

8 [2021] EWHC 2637 (TCC). See too Delta Fabrication & Glazing Ltd v. Watkin Jones & Son Ltd [2021] EWHC 1034 (TCC), where the defendant resisted the summary enforcement of an adjudicator's decision on the basis that the claimant had referred disputes under two separate contracts to the adjudicator in the same adjudication. The parties agreed that if the referral did concern disputes under two separate contracts, the adjudicator did not have jurisdiction and the decision should not be enforced. Delta also agreed that they entered into two separate contracts but said that the decision was valid because the parties had later agreed, by their conduct, to vary the contracts so that they were amalgamated and so that there was only one contract and that if that conduct did not amount to a variation so that there was only one contract for all purposes, it had the effect of amalgamating the contracts into one contract for the purposes of the Construction Act.

9 There are different specific pre-action protocols for disputes on different subjects – for example, personal injury, negligence and judicial review.

10 Note that the Pre-action PD is actually a 'guide to pre-action conduct', rather than a general pre-action protocol. It applies where no specific pre-action protocol applies; for example, in contractual disputes.

11 (2021) EWHC 286 (Comm). While the position that the arbitral tribunal should decide issues of non-compliance with multi-tier dispute resolution clauses is relatively clear under English law, Singaporean law and in the United States, other jurisdictions take different views. It is advocated that the most legally pure way to move the issue from the competence of the courts to arbitral tribunals is to have the parties so agree by incorporating arbitral rules that make the point explicit. Until this reform is enacted, parties to international arbitration face uncertain resolution of the issue of non-compliance with multi-tier arbitration clauses.

12 Statutory Instrument 2015/102.

13 Statutory Instrument 2016/274.

14 Statutory Instrument 2020/1319.

15 [2015] UKSC 36, [2015] AC 1619.

16 [2020] EWCA Civ 503.

17 [2016] EWCA Civ 396, [2016] All ER (D) 171 (Apr). Followed in MWB Business Exchange Centres Ltd v. Rock Advertising Ltd [2016] EWCA Civ 553, [2017] QB 604 and in ZVI Construction Co LLC v. Notre Dame University (USA) in England [2016] EWHC 1924 (TCC), [2016] BLR 604.

18 [2018] UKSC 24, [2019] AC 119, [2018] 4 All ER 2.

19 [2015] UKSC 72.

20 In the case of WW Gear Construction Ltd v. McGee Group Ltd [2010] EWHC 1460 (TCC), 131 Con LR 63, Akenhead J had no difficulty in granting a declaration, purely as a matter of interpretation, that an amended version of Clause 4.21 of the JCT Trade Contract (TC/C), 2002 Edition, in essentially the same terms as the provisions of the JCT 1963 form considered by Vinelott J in Merton LBC v. Leach, validly imposed as a precondition of the contractor's entitlement to reimbursement of loss and expense under that clause that the contractor give notice not later than two months after the disturbance to the regular progress of the works had become apparent. The judge observed that there was nothing particularly difficult or onerous in the contractor making its application within either the general or specific required timetables.

21 111 Con LR 78, [2007] CILL 2458, [2007] EWHC 447 (TCC), [2007] BLR 195, [2007] BusLR D109, [2007] Bus LR D109.

22 [2018] EWCA Civ 1744.

23 [2014] EWHC 1028 (TCC), [2014] BLR 484.

24 [2010] EWHC 1460 (TCC), 131 Con LR 63.

25 (1999) 70 Con LR 32 (TCC).

26 This is widely understood to mean that an employer cannot hold the contractor to a specified completion date if the employer has prevented the contractor from achieving that date, in which case 'time becomes at large and the obligation to complete by the specified date is replaced by an implied obligation to complete within a reasonable time': Multiplex Constructions (UK) Ltd v. Honeywell Control Systems Ltd (No. 2) [2007] EWHC 447 (TCC); [2007] B.L.R. 195; 111 Con. L.R. 78 at [48]. Although outside the scope of the present discussion, there is now important analysis from the Right Hon Lord Justice Coulson suggesting that application of the prevention principle does not make time at large. See 'Prevention or Cure? Delay Claims and the Rise of Concurrency Clauses', Paper 218 published by the Society of Construction Law. In North Midland Building Ltd v. Cyden Homes Ltd [2018] EWCA Civ 1744, Coulson LJ said this, at [10–12]:

[10] In the 19th century, the courts concluded that it was wrong in principle for an employer to hold a contractor to a completion date, and a concomitant liability to pay liquidated damages, in circumstances where at least a part of the subsequent delay was caused by the employer. Thus, in Holme v. Guppy (1838) 3 M&W 387, the defendant failed to give possession of the site for four weeks following execution of the contract. Parke B found that there were clear authorities to the effect that 'if the party be prevented by the refusal of the other contracting party from completing the contract within the time limited he is not liable in law for the default'.
[11] Similarly in Dodd v. Churton [1897] 1 QB 566, where the employer ordered extra work which delayed completion. Lord Esher MR said:
'where one party to a contract is prevented from performing it by the act of the other, he is not liable in law for that default; and accordingly a well-recognised rule has been established in cases of this kind, beginning with Holme v. Guppy, to the effect that, if the building owner has ordered extra work beyond that specified by the original contract which has necessarily increased the time requisite for finishing the work, he is thereby disentitled to claim the penalties for non-completion provided by the contract.'
[12] As a result of these decisions, construction contracts began to incorporate extension of time clauses, which provided that, on the happening of certain events (which included what might generically be described as 'acts of prevention' on the part of the employer), the date for completion under the contract would be extended, so that liquidated damages would only be levied for the period after the expiry of the extended completion date. Such clauses were not, as is sometimes thought, designed to provide the contractor with excuses for delay, but rather to protect employers, by retaining their right both to a fixed (albeit extended) completion date and to deduct liquidated damages for any delay beyond that extended completion date.

27 These include: Sir Vivian Ramsey 'Claims for Delay and Disruption: The Impact of City Inn', a paper presented at the annual TECBAR conference in January 2011 and in the TECBAR Review for Spring 2011; Professor Doug Jones 'Can Prevention be Cured by Time Bars?', The Annual TECBAR Lecture 17 September 2008; John Marrin QC, 'Concurrent Delay' (2002) 18(6) Const. L.J. 436 and 'Concurrent Delay Revisited', published by The Society of Construction Law February 2013, Paper 179: www.scl.org.

28 Adyard Abu Dhabi v. SD Marine Services [2011] EWHC 848 (Comm); [2011] B.L.R. 384; 136 Con. L.R. 190; Jerram Falkus Construction Ltd v. Fenice Investments Inc [2011] EWHC 1935 (TCC); [2011] B.L.R. 644; 138 Con. L.R. 21; and North Midland Building Ltd v. Cyden Homes Ltd [2017] EWHC 2414 (TCC) where Fraser J. at paragraph 29 stated:

If the point were open to me for decision, which it is not in this case, I would apply and follow the same reasoning, and come to the same conclusions, as both Hamblen and Coulson JJ did in those cases, on the very same point. In so far as there may be other disputes where the parties find themselves at odds concerning the dicta in both Adyard and Jerram Falkus on the one hand, and other writing, commentary or articles which suggest such dicta are wrong on the other, cost-effective resolution of those other disputes is more likely if those parties proceed on the basis that the two authorities to which I have referred are correct. In my judgement, I agree with the analysis of each of them and would proceed on the basis that they both clearly are.

29 Coulson L.J. in North Midland Building Ltd v. Cyden Homes Ltd [2018] EWCA Civ.1744. North Midland is the first reported case in which a concurrency clause has been considered by an English court. The principal argument advanced by the contractor, North Midland, was that a concurrency clause was incompatible with the prevention principle. That argument was rejected at first instance by Fraser J. The appeal against that decision was dismissed by the Court of Appeal.

30 [2019] EWHC 3464 (TCC).

31 [2016] AC 1172.

32 [2021] UKSC 29.

33 [2017] UKSC 59.

34 [2019] EWHC 2578 (TCC).

35 [1999] EWCA Civ 789.

36 [2016] EWHC 166 (TCC).

37 [2013] EWHC 177 (Comm).

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