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Tees Esk & Wear Valleys NHS Foundation Trust v Three Valleys Healthcare Ltd & Anor [2018] EWHC 1659 (TCC) (29 June 2018)

Judge: Mrs Justice O’Farrell DBE

This case involved a dispute regarding a Project at Roseberry Park Hospital in Middlesbrough. The NHS Foundation Trust (“the Claimant”) sought an order as to the validity of notices, which it served pursuant to a Funders Direct Agreement (“FDA”), with the intention of terminating the Project Agreement.

On 12 December 2007, the Claimant entered into a special purpose vehicle agreement (“TVHL Agreement”) with Three Valleys Healthcare Limited (“First Defendant”), for the design and construction of the hospital and provision of operational services (“the Project Agreement”).

On 12 December 2007 the Claimant, the First Defendant and the Second Defendant entered into the FDA, in respect of the financing of the project. The FDA was attached as a schedule to the Project Agreement.

Disputes arose between the Claimant and the First Defendant in respect of the services provided by the First Defendant. In 2016, the Claimant obtained adjudication awards in its favour, allowing it to terminate the Project Agreement.

The FDA contained provisions that require the Claimant to give notice to the Second Defendant as a condition precedent in order to exercise its termination rights under the Project Agreement. On 1 June 2017, the Claimant served the termination notice on the Second Defendant under the FDA. The validity of the termination notice was not in dispute.

On 29 June 2017, the Claimant served its notice as per paragraph 3.2.2 on the Second Defendant, which included details of amounts allegedly owed to the Claimant by the First Defendant under the Project Agreement and other accrued liabilities or obligations on the part of the First Defendant.

Paragraph 3.2.2 of the FDA states:

…containing details of any amount owed by Project Co to the Trust, and any other liabilities or obligations of Project Co of which the Trust is aware (having made proper enquiry) which are: (a) accrued and outstanding at the time of the Termination Notice; and/or (b) which will fall due on or prior to the end of the Required Period, under the Project Agreement.”

The Claimant’s case is that the notices served under the FDA were valid and therefore entitled it to terminate the Project Agreement. The Second Defendant argued the following: (a) the Claimant had failed to comply with its obligation under the paragraph 3.2.2 notice of the FDA; (b) that the notice was not sufficiently clear and unambiguous to constitute a valid notice; and (c) that there was no evidence that the Claimant made a proper enquiry as stipulated by the FDA.

Justice O’Farrell held the following:

  1. The purpose for which the Claimant is required to serve on the Second Defendant, prior written notice of its intention to terminate the Project Agreement, and written details of amounts owed and other liabilities and obligations on the part of Project, is to enable the funders to decide whether or not to exercise their step-in rights under the FDA;
  2. Paragraph 3.2.2 provides that: “The Trust shall not terminate … the Project Agreement … without giving … a notice …”. This functions as a condition precedent to the Claimant’s entitlement to terminate the Project Agreement;
  3. Therefore, as a condition precedent to termination under the Project Agreement, the Claimant must provide details in its paragraph 3.2.2 notice of:
    1. amounts owed, of which the Claimant is aware: which are accrued and outstanding at the time of the termination notice (para.3.2.2(a));
    2. amounts owed, of which the Claimant is aware, which will fall due on or prior to the end of the Required Period (para.3.2.2(b));
    3. other liabilities and obligations, of which the Claimant is aware, which are accrued and outstanding at the time of the Termination Notice (para.3.2.2(a)); and
    4. other liabilities and obligations, of which the Claimant is aware, which will fall due on or prior to the end of the Required Period (para.3.2.2(b)).
  4. Paragraph 3.2.2 does not impose an obligation on the Claimant to notify the Second Defendant of sums owed of which it is not aware. Furthermore, it is not required to provide quantum details of claims that do not give rise to an obligation to make payment or where the quantum has not yet been ascertained.
  5. The obligation on the Claimant to notify details of claims under paragraph 3.2.2 is limited to claims of which it is aware “having made proper enquiry”. This requires the Claimant to make proper enquiry but does not require it to provide evidence of such enquiry to the Second Defendant. There is no express provision imposing such an obligation and no room for the implication of such term.
  6. The paragraph 3.3.2 notice contains sufficient details to comply with the requirements of the FDA. The descriptions are sufficiently clear and unambiguous to enable the funders to understand the nature and basis of the claims.
  7. The Second Defendant’s case is rejected as the FDA draws a distinction between amounts owed, which must be quantified, and other liabilities and obligations, which do not have to be quantified.

In conclusion, the court granted the order as sought by the Claimant.

Michael Wilson & Partners Ltd v Emmott [2018] EWCA Civ 51

 

Judges: Sir Terence Etherton MR, Jackson and Underhill LJJ

As per the approved judgement of Sir Terence Etherton MR

BACKGROUND

  1. The dispute in this case is based on an agreement dated 7 December 2001 (“the MWP Agreement”) between Mr Emmott (“the Respondent”) and Michael Wilson & Partners, MWP acting by its ultimate beneficial owner and controller, Michael Wilson (“the Appellant”).
  2. The Appellant was incorporated in the British Virgin Islands and has a legal practice in Kazakhstan. The purpose of the MWP Agreement was to establish a “quasi partnership” under which the Respondent became a director of the Appellant and the shares were to be divided as to 33% to the Respondent and as to 67% to the Appellant.
  3. Clause 5.2 of the MWP Agreement contained the following arbitration provisions:
    This Agreement shall be governed by and interpreted in accordance with the laws of England and Wales and all and any disputes shall be referred to and are subject to arbitration in London before a tribunal of three arbitrators with one arbitrator to be appointed by each party and the chairman of the tribunal to be appointed by the President of the Law Society.”
  4. On 20 December 2005, the Respondent entered into a co-operation agreement with David Ross Slater, Robert Nicholls and Armen Shaikenov, [“the Co-operation Agreement”]. Mr Slater and Mr Nicholls were Australian lawyers who had joined the Appellant as employees and were subject to restrictive conditions. Mr Shaikenov was a Kazakh lawyer. The Co-operation Agreement directed that Mr Shaikenov and Mr Slater establish and operate a consultancy business. Mr Nicholls and the Respondent would thereafter be able to join the consultancy on the basis as set out in the Co-operation Agreement.
  5. The Co-operation Agreement would be owned and operated by Temujin (comprising of “Temujin International Ltd” and “Temujin Services Ltd”).
  6. Clause 7 of the Co-operation Agreement provided that “any and all differences, discrepancies, divergences or disputes arising out of or in connection with the Co-operation Agreement” were to be resolved by arbitration in English, in London or such other location, as the parties may agree under the rules of the London Court of International Arbitration.
  7. In December 2005 Mr Slater left the Appellant to work at Temujin and Mr Nicholls joined him in March 2006. The Appellant and the Respondent had a disagreement in the middle of 2006, each alleging to accept a repudiatory breach of the MWP Agreement by the other. The Respondent thereafter left the Appellant on 30 June 2006 and went to work for Temujin.
  8. In August 2006, the Appellant gave notice of arbitration to the Respondent under clause 5.2 of the MWP Agreement.
  9. The Appellant initiated numerous claims against the Respondent, including the claim that, while still a director of the Appellant, he diverted work, commercial opportunities, clients and potential clients to Temujin. The Respondent, claimed that he was entitled to 33% of the issued share capital of the Appellant up and until he left the employment of the Appellant in June 2006. His claim was denied by the Appellant on the grounds that the conditions under which he was to become entitled to the shares were not satisfied before his departure.
  10. The arbitrators concluded that the Respondent was entitled to have his 33% shareholding in the Appellant issued or transferred by the end of the calendar year 2004. The arbitrators considered that the fairest and most practical solution was to treat the Respondent’s liability to compensate the Appellant for his undercharging as satisfied by denying him the right to recover anything for the work he did for the Appellant during the period from August 2005 to 30 June 2006. They concluded that the Respondent had been guilty of deliberate, serious and dishonest breaches of his fiduciary obligations to the Appellant.

IN THE APPEAL UNDER JUSTICE O’FARRELL

  1. This application was an appeal by, the Appellant, against the Respondent, in respect of the judgement handed down by Justice O’Farrell.
  2. The appeal was granted by the court in its order directing, inter alia, that:
    1. The assigned claims for contribution and account in New South Wales (“NSW2”) fell within the scope of the arbitration clause in the MWP Agreement; and
    2. If she was incorrect in the above finding, the assigned claims in respect of Mr Nicholls and Mr Slater, would fall within the arbitration clause in the Co-operation Agreement.
  3. The Respondent issued the claim in which this appeal is based claiming, inter alia:
    1. An order prohibiting the Appellant from continuing its claims in NSW2; and
    2. Prohibiting the Appellant from commencing, or pursuing any other claim, or proceedings arising out of or in relation to the MWP Agreement, or the Co-operation Agreement, other than in accordance with clause 5.2 of the MWP Agreement or clause 7 of the Co-operation Agreement.
  4. Sir Terence Etherton MR dealt with Justice O’Farrell’s order and stated the following:
    1. The scope of clause 5.2 of the MWP Agreement – “all and any disputes”- is extremely wide;
    2. The Appellant and the Respondent were parties to the NSW2 and the MWP Agreement. The matters in NSW2 concern the alleged breaches of obligations the Respondent owed to the Appellant, in terms of conducting the Appellant’s business.
    3. He disagreed with Justice O’Farrell in that the claims fell within the scope of the arbitration clause in the MWP Agreement;
    4. The rights which the Appellant sought to enforce were rights of individuals who had not been parties to the MWP Agreement. The disputes mentioned in the clause were disputes between the Appellant and the Respondent in their capacity as quasi-partners (para 41, 42, 45). It could not be said that the arbitration provisions in the Co-operation Agreement incorporated the claims in New South Wales (para 50).
    5. The rights which the Appellant seeks to enforce in NSW2 are rights of those people that were not parties to the MWP Agreement or bound by the arbitration.
    6. Justice O’Farrell referred to Lord Hoffmann’s comments in Fili Shipping Co Ltd v Premium Nafta Products Ltd [2007] Bus LR 1719, at [5] – [8] and [13] regarding the interpretation of arbitration agreement. Lord Hoffmann emphasised the need for the court to give effect to the commercial purpose of the arbitration clause. He also stated that the interpretation of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal.
    7. It is highly unlikely that, at the time they entered into the MWP Agreement, the Respondent and the Appellant had any intention to include such claims within clause 5.2 of the MWP Agreement.
    8. He disagreed with Justice O’Farrell that the claims in NSW2, fell within the scope of clause 7, in terms of Mr Nicholls and Mr Slater. He held that in terms of Temujin, it is not in dispute that the claims in NSW2, do not fall within clause 7, as neither of the entities forming Temujin were a party to the Co-operation Agreement.
  5. In conclusion, Sir Terence Etherton MR granted an order prohibiting the Appellant from pursuing any NSW2 claims which it had lost in the arbitration; matters contrary to findings in the arbitration which were adverse to the Appellant; and claims for fraud or conspiracy.

THE INTERPRETATION OF CLAUSE 20.4

In Salz-Gossow (Pty) Ltd v Zillion Investment Holdings (Pty) Ltd, a matter heard in the Namibian High Court in 2016. The court was called upon to consider the interpretation of clause 20.4 of the Standard FIDIC Conditions of Contract (“Clause 20.4”). This Clause provides that, inter alia, a decision by a Dispute Adjudication Board (“DAB”), pursuant to a dispute referred to the DAB by a party, is binding on both parties and must be given effect to, unless and until revised by agreement or an arbitration award.

The facts in this case were that a dispute had been referred to the DAB by the Applicant. In the dispute, the Applicant claimed payment in the sum of N$3,246,792.71 (“Debt”) for work completed. In its decision the DAB had upheld the Applicant’s claim, directing the Respondent to pay the Debt. The Respondent delivered its notice of dissatisfaction to the DAB’s decision and refused to comply with the DAB’s decision that it must pay the Debt, alleging that, the notice suspended the operation of clause 20.4 and as such, it was not obliged to pay the Debt. In addition, the Respondent alleged that paying the Debt would be unreasonable as it would impact it financially, which a later arbitration could reverse. In this regard, the court should exercise its discretion and suspend the operation of Clause 20.4. The Applicant had approached the court to make the DAB’s award an order of court, and force payment from the Respondent.

The interpretation of clause 20.4 has previously come before a South African court in the Tubular Holdings case (“Tubular”). The facts of the Namibian case were similar to those of the Tubular case, except for the additional legal point of exceptional circumstances raised by the Respondent, as a ground on which the court could exercise its discretion and refuse to enforce clause 20.4 – setting aside the DAB’s decision pending the arbitrator decision. In the Tubular matter the court accepted the interpretation of Clause 20.4, which directed the Respondent in that matter to pay the amount owed to the Applicant, following a DAB decision directing it to do so.

In the Namibian case the court confirmed this approach and interpretation adopted in the Tubular case, that Clause 20.4 is binding on both parties. In the circumstances, both parties must comply with the decision by the DAB, irrespective of whether a party delivers a notice of dissatisfaction against the decision. When considering the circumstances on which it could exercise a discretion not to enforce Clause 20.4, the court confirmed, the court’s discretion not to enforce an award of specific performance. This discretion was to be exercised in light of the prevailing circumstances of each case. In the Court’s view, an uncertain, future event which may or may not have a financial impact on the Respondent, did not demonstrate exceptional circumstances to exercise this discretion.

The South African high courts too, are empowered to exercise their inherent discretion when determining a matter. It is unclear from this judgement, what constitutes exceptional circumstances. However, each allegation of an exceptional circumstance is decided on its own merits. What is clear from this judgment is that the accepted view on the interpretation of Clause 20.4 remains.

Contractors and employers alike, can rest assured that courts in multiple jurisdictions accept the interpretation that Clause 20.4 is binding on both parties. These decisions provide certainty on the dispute resolution procedure and to not leave the successful party vulnerable to the other party delaying payment of monies due, by litigating for no bona fide reason other than to frustrate him.

Fluor v Shanghai Zhenhua Heavy Industry Co Ltd

Fluor entered into a contract with Greater Gabbard Offshore Winds Ltd (“GGOWL”) to engineer, procure and construct the foundations and infrastructure to support 140 wind turbine generators to be installed in the North Sea.

Each foundation comprised of a massive steel structure consisting of rolled steel plates which were welded together to form a cylindrical column. Fluor’s plan was to fabricate the columns in Shanghai and then ship them to the Netherlands to be installed.

Fluor contracted Shanghai Zhenhua Heavy Industry Co Ltd (“Shanghai Zhenhua”) to carry out the welding. The welding carried out by Shanghai Zhenhua contained a significant and unacceptable amount of cracking. The cracks in the welds ultimately put the project into complete disarray.

A dispute arose between Fluor and Shanghai Zhenhua about the quality of Shanghai Zhenhua’s fabrication of steel, which was heard before the Technology and Construction Court (the “TCC”). In its judgment on liability, the TCC held that Shanghai Zhenhua had breached the contract due to its shortcomings in the welding procedure.

In the TCC’s judgment on quantum, Sir Anthony Edwards-Stuart made some interesting points on claims for overheads.

Office overheads are the costs of running the contractor’s operation as a whole, such as the rental of buildings and costs of office staff.[1] If a project is delayed, the contractor’s overheads will continue while its turnover will reduce. In certain circumstances, the contractor may be able to claim the loss and expense associated with its overheads.[2] Importantly, a contractor must show that if the delay had not occurred, it would have secured work or projects which would have produced return which would have contributed towards head office overheads.[3] If a contractor cannot prove this, it will face the argument that the costs would have been incurred in any event and that they are therefore not “losses”.[4]

Fluor sought to claim overheads at a rate of 4%. The figure of 4% was calculated as follows:[5]

  • The GGOWL project amounted to 57% of Fluor’s overall activity for the year.
  • Fluor’s total overheads for the year were £ 22 million
  • 57% of £ 22 million is £ 12.645 million
  • £ 1.3 million was added to this £ 12.645 million for certain infrastructure project-specific overheads
  • The total for overheads on the GGOWL project was thus £ 13.986 million which amounted to 4% of the total GGOWL project cost.

Sir Anthony Edwards-Stuart was not prepared to accept such a calculation. He held that the 4% is simply a ratio of one set of costs against another and tells one nothing about how the costs were increased as a result of the breaches of contract by Shanghai Zhenhua.[6]

Consequently, Sir Anthony Edwards-Stuart concluded that, while Fluor may well have incurred increased overhead costs, Fluor had failed to establish the facts necessary to support its claim therefor and remarked that he was “not prepared to pluck a figure out of the air”.

This case highlights how the courts may not accept simple calculations or estimates when it comes to a claim for office overheads and that doing so may lead to a dismissal of the claim altogether.

  1. [2018] EWHC 490 (TCC), para 20.
  2. Para 20.
  3. Walter Lilly & Company Ltd v Mackay & Anor [2012] EWHC 1773 (TCC) (11 July 2012), 543.
  4. [2018] EWHC 490 (TCC), para 20.
  5. Para 30.
  6. Para 31.

By Kelly Stannard

Jacobs UK Ltd v Skanska Construction UK Ltd [2017] EWHC 2395 (TCC)

Judge: Mrs Justice O’Farrell DBE

This case involved an application by the claimant (“Jacobs”) against the defendant (“Skanska”) for a court order restraining Skanska from proceeding with an adjudication, following Skanska’s withdrawal from an earlier adjudication in respect of the dispute between the parties. The material question raised by the dispute is whether a party to an adjudication is entitled to withdraw a dispute from adjudication and refer the same, or substantially the same, dispute to a second adjudication.

BACKGROUND

  1. In February 2011, Skanska entered into a formal agreement with Jacobs for the design and replacement of street lighting in Lewisham and Croydon (“the Design Agreement”) for a PFI project.
  2. A dispute arose between the parties as to the adequacy of the design services provided by Jacobs to Skanska.
  3. Skanska argued that Jacobs provided the design and advice in which Skanska relied on, when submitting its bid for the PFI project, which was successful. The design prepared by Jacobs following commencement of the PFI project differed materially from the design provided for the purposes of the bid. Skanska claimed that as a result of that difference, together with delays in the production of the design and the poor quality of the design, it had suffered loss and damage.

  4. The Design Agreement is a construction contract for the purposes of section 108 of the Housing Grants Construction and Regeneration Act 1996 (“the 1996 Act”) and Clause 21 of the Design Agreement contains an adjudication provision.

  5. On 8 February 2017 Skanska gave notice of its intention to refer the dispute to adjudication. Thereafter, the parties agreed the procedural rules and timetable for the adjudication. Furthermore, that the statutory scheme for adjudication (“the scheme”) would apply subject to the agreed timetable.

  6. The adjudication proceeded, an adjudicator was appointed, and the parties subsequently served their referral and response documents in accordance with the agreed timetable. However, Skanska’s counsel became unavailable and Skanska was unable to serve its reply as agreed.

  7. Skanska requested an extension of time from Jacobs and the adjudicator, but the request was denied from both parties. As a result, Skanska withdrew its reference to adjudication and invited the adjudicator to resign.

 

  1. On 21 June 2017 Skanska issued a new notice of intention to refer the same dispute to a second adjudication.

THE CLAIM


  1. On 4 July 2017 Jacobs commenced these proceedings, seeking the following relief:

    1. a declaration that in proceeding with Adjudication No.2 Skanska are acting unlawfully;
    2. an order restraining Skanska from taking any further steps in furtherance of Adjudication No.2;
    3. an order requiring Skanska to withdraw from Adjudication No.2;
    4. a declaration that Jacobs are entitled to be paid their costs of Adjudication No.1; and
    5. further or other relief.

  2. Jacobs argued that the parties agreed that the reference of this dispute should be to an adjudicator appointed under the Scheme and that the adjudication should be conducted in accordance with an agreed timetable. Jacobs argued further that the court should grant appropriate relief to protect their right to a procedurally fair process of the dispute which is not unreasonable and oppressive.

  3. Skanska argued that there is no concept of abuse of process in adjudication and a referring party is free to obtain whatever tactical advantage it can. A party has the right to start adjudication in relation to a dispute at any time. Therefore, a party has an unrestricted right to start, abandon and pursue consecutive adjudications in respect of the same dispute.

  4. The issues for the court to decide were:

    1. whether a party to an adjudication is entitled to unilaterally withdraw a dispute referred to adjudication and commence a second adjudication in respect of the same, or substantially the same, dispute;
    2. whether, in such circumstances, the court has power to grant an order to restrain the pursuit of the second adjudication;
    3. if so, whether the court should exercise its discretion on the facts of this case; and
    4. whether Jacobs is entitled to its wasted costs in respect of the first adjudication.

THE 1996 ACT AND THE SCHEME


Section 108(1) of the 1996 Act provides:

“A party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with this section.”


Section 108(2) of the 1996 Act provides:

The contract shall-

(a) enable a party to give notice at any time of his intention to refer a dispute to adjudication;

(b) provide a timetable with the object of securing the appointment of the adjudicator and referral of the dispute to him within 7 days of such notice;

(c) require the adjudicator to reach a decision within 28 days of referral or such longer period as is agreed by the parties after the dispute has been referred;

(d) allow the adjudicator to extend the period of 28 days by up to 14 days, with the consent of the party by whom the dispute was referred;

(e) impose a duty on the adjudicator to act impartially; and

(f) enable the adjudicator to take the initiative in ascertaining the facts and the law.”


Section 108(3) of the 1996 Act provides:

“The contract shall provide that the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement. The parties may agree to accept the decision of the adjudicator as finally determining the dispute.”


The Scheme contains the following material provisions:

Paragraph 1(1):

“Any party to a construction contract (the “referring party”) may give written notice (the “notice of adjudication”) of his intention to refer any dispute arising under the contract, to adjudication.”

Paragraph 7(1):

“Where an adjudicator has been selected in accordance with paragraphs 2, 5 or 6, the referring party shall, not later than seven days from the date of the notice of adjudication, refer the dispute in writing (the “referral notice”) to the adjudicator.”

Paragraph 9(1):

“An adjudicator may resign at any time on giving notice in writing to the parties to the dispute.”

Paragraph 9(3):

“Where an adjudicator ceases to act under paragraph 9(1) –

(a) the referring party may serve a fresh notice under paragraph 1 and shall request an adjudicator to act in accordance with paragraphs 2 to 7; and

(b) if requested by the new adjudicator and insofar as it is reasonably practicable, the parties shall supply him with copies of all documents which they had made available to the previous adjudicator.”

Paragraph 11(1):

“The parties to a dispute may at any time agree to revoke the appointment of the adjudicator…”

Paragraph 13:

“The adjudicator may take the initiative in ascertaining the facts and the law necessary to determine the dispute, and shall decide on the procedure to be followed in the adjudication …”

Paragraph 14:

“The parties shall comply with any request or direction of the adjudicator in relation to the adjudication.”

 

THE DECISION


  1. The court stated the following:

    1. In terms of the adjudication procedure under the 1996 Act and the Scheme, the referring party has an advantage in selecting the timing and scope of the dispute. Adjudicators have wide powers to determine the procedure and evidence considered to reach their decisions.
    2. There is no express or implied restriction in the 1996 Act or the Scheme that prevents a party from withdrawing a disputed claim which has been referred to adjudication: Midland Expressway Ltd v Carillion Construction Ltd [2006] EWHC 1505 per Jackson J at para [100] and [101]: The entitlement of a party to withdraw its claim continues even after the referral and does not prevent that party from pursuing the claim in a later adjudication: Lanes Group plc v Galliford Try Infrastructure Ltd [2012] EWCA Civ 1617 per Jackson LJ at para [38] – [40].
    3. The principle of abuse of process does not apply to adjudication: Connex South Eastern Ltd v MJ Building Services Group plc [2005] EWCA Civ 193 per Dyson LJ at para.[40].
  2. Justice O’Farrell held the following:
    1. There can be instances in which the courts will intervene and prevent a party from pursuing a claim in adjudication.
    2. Subjecting a party to serial adjudications in respect of the same claim and requiring it to incur irrecoverable costs could amount to unreasonable and oppressive behaviour. This is a question of fact, which is dealt with on a case by case basis, as to whether the behaviour of the party initiating the adjudication is found, on an objective basis, to be unreasonable and oppressive.
    3. The court has the power to grant an order preventing the second adjudication if it is established that it is unreasonable and oppressive.
    4. Skanska’s withdrawal of the claim was unreasonable. However, initiating a second adjudication two months later was not oppressive as the substance of Skanska’s claims remained the same. Therefore, Jacobs would be entitled to rely on its prepared response. The court will not intervene unless it is both unreasonable and oppressive to allow the second adjudication.
    5. Jacobs is entitled to any wasted or additional costs caused by Skanska’s failure to comply with the procedure and timetable as agreed between the parties.
  3. Conclusively, a party to an adjudication is entitled to withdraw a dispute referred to adjudication and commence a further adjudication in respect of the same, or substantially the same, dispute. The court has power to grant an order restraining the pursuit of the further adjudication if it is unreasonable and oppressive. In terms of this case, the second adjudication is not unreasonable and oppressive.

Wierda Road West Properties (Pty) Ltd v Sizwentsabulagobodoinc 2017 JDR 1936 (SCA)

Invalidity of a lease agreement –does the absence of an occupation certificate invalidate a lease agreement?

Wierda Road West Properties (Pty) Ltd (“Wierda”), the appellant, instituted action against the respondent, SizweNtsabulaGobodo Inc (“Sizwe”) for the amount of R 7 867 548.78, in respect of rentals and municipal charges for the lease of its property at 41 West Street, Houghton, Johannesburg (“the property”).

The claim was based on a written lease agreement concluded between the parties on 3 August 2012 for a period of 5 years. The claim was based on the period July 2014 to March 2016, as Wierda had sold and transferred the property in March 2016. Sizwe raised various defences and instituted a counterclaim for an order declaring the lease agreement to be void ab initio.

Sizwe is a merged entity, comprising of Gobodo Incorporated (“Gobodo”) and SizweNtsaluba VSP. Wierda is a property-owning company entirely owned by the shareholders of the erstwhile Gobodo, whose premises at the time had become too small.

Wierda undertook to refurbish the property at Gobodo’s instance to meet its requirements and Gobodo moved in on 1 August 2010. In the course of the refurbishment it was discovered that there were no building plans in respect of the new wing added to the property by the previous owner. Wierda was unable to get building plans from the seller and it instructed its architects to draw plans for the new additions and submit them to the City Council of Johannesburg for approval.

On 1 June 2011 Gobodo merged with Sizwe to form the respondent, which concluded a new lease agreement in respect of the property with Wierda on 3 August 2012 for a period of 5 years.

Wierda got the building plans approved during mid-2015, without the approved plans, Wierda could not obtain an occupancy certificate. This was as a result of section 14(1)(a) of the National Building Regulations and Building Standards Act (“the Act”) rendered the granting of an occupancy certificate subject to the requirement, amongst others, that the building concerned was erected in accordance with the approved building plans.

All the shareholders in Gobodo were shareholders of Wierda, and five of them, were appointed as its directors. All the shareholders were aware of the absence of the occupancy certificate, as well as the City Council, as their inspectors conducted an assessment of the property and there was no objection to the occupation.

In June 2014, Sizwe vacated the premises without notice to Wierda. On 25 September 2014, after Sizwe vacated the property, Sizwe sent a letter to Wierda stating that the reason for vacating the property was due to the absence of the occupancy certificate, and therefore the lease agreement was invalid.

The high court found that the lease agreement was valid but unenforceable, as a result of the contravention of section 4(1) of the Act (lack of approved building plans for the leased property) and section 14(1) of the Act (the lack of the occupancy certificate for the leased property). Wierda appealed the decision.

The issues in the appeal were the following:

  1. whether the agreement is void ab initio due to the contraventions of section 4(1), read with 4(4), or section 14(1), read with section 14(4) of the Act;
  2. whether the failure to obtain an occupancy certificate rendered the property not suitable for the purposes for which it was let; and
  3. in respect of the cross-appeal, whether the high court erred in its finding that the agreement was not invalid, but merely unenforceable.

The relevant sections from the Act are as follows:

Section 14(1)(a):

(1) A local authority shall within 14 days after the owner of a building of which the erection has been completed, or any person having an interest therein, has requested it in writing to issue a certificate of occupancy in respect of such building –

  1. Issue such certificate of occupancy if it is of the opinion that such building has been erected in accordance with provisions of this Act and the conditions on which approval was granted in terms of section 7…”

Section 4(1):

(1) No person shall without the prior approval in writing of the local authority in question erect any building in respect of which plans, and specifications are to be drawn and submitted in terms of this Act”.

Section 4(4):

Any person erecting any building in contravention of the provisions of subsection (1) shall be guilty of an offence and liable on conviction to a fine not exceeding R100 for each day on which he was engaged in so erecting such building”.

Section 14(4)(a):

The owner of any building, or any person having an interest therein, erected or being erected with the approval of a local authority, who occupies or uses such building or permits the occupation or use of such building-

  1. Unless a certificate of occupancy has been issued in terms of subsection (1)(a) in respect of such building;

Shall be guilty of an offence.”

The SCA held the following:

  • Non-compliance with section 4(1) and 14(1) of the Act does not render the parties’ lease agreement void and unenforceable as there is no basis to justify reading an implied meaning into section 4(1) that the use or occupancy of a building which has no approved plans is prohibited.
  • Sizwe was fully aware of the lack of the occupancy certificate and had consented to the use and occupation under the circumstances. Therefore, Sizwe had received exactly what it had bargained for, which was office accommodation refurbished to its needs, in a building with an outstanding occupancy certificate which, to its knowledge, the owner (Wierda) was in the process of obtaining. Sizwe never complained of this alleged unfitness for letting, and only did so after it had vacated the property and to avoid the consequences of being held to a contract it had freely entered into.
  • The appeal was upheld with costs and the cross-appeal was dismissed with costs.

Bryte Insurance Company (Pty) Ltd / Raubex Construction (Pty) Ltd (Appeal case no. A5067/2016 – 8 December 2017)

The case involved an appeal by Bryte Insurance Company Limited against Raubex Construction (Pty) Limited’s claim for payment under a retention guarantee given in terms of the subcontract.

Raubex entered into a contract with Eskom to carry out construction works. A portion of the works were subcontracted by Raubex to Peakstar 133 (Pty) Ltd t/a Dolphin Construction (Dolphin).

The relevant part of the guarantee reads as follows:

‘2. Each demand by the Main Contractor shall certify:

  1. That the signatory is the Main Contractor authorised representative
  2. That the Subcontractor is in breach of his obligations under the Subcontract and that the Main Contractor is entitled to be paid amounts for which the Subcontractor is liable under the Subcontract; and
  3. That the amount demanded, which amount the certificate shall specify:
    1. Does not exceed the amount of Retention monies which, but for this Guarantee, would have been retained by the Main Contractor as Retention monies in terms of the Subcontract at the date of the certificates, less the aggregate of the amounts, if any, of retention money and other securities actually retained or held by the Main Contractor in terms hereof; and
    2. Does not exceed a good faith estimate of the costs to the Main Contractor of having the breach referred to in paragraph (b) remedied less the aggregate of any amounts withheld by the Main Contractor by reason of the breach referred to, and any amount of Retention money actually held by the Main Contractor save to the extent that same had been deducted from any previous demand in terms hereof’

Raubex sought payment under the guarantee of an amount of R1 409 726.11 and interest. The issue in the case was whether Bryte Insurance Company Limited (“Bryte”) was obliged to make payment to Raubex under the guarantee.

In the estimate provided in the certificate by Raubex, it was clear that many alleged defects which formed the basis of the estimate, were discovered and dealt with before the practical completion envisaged in the subcontract and were thus not costs covered by the guarantee. A very large proportion of the costs claimed are alleged to have been incurred by a third-party electrician remedying defects, but on closer inspection, were revealed to be in relation to costs already incurred in respect of Raubex itself, in the form of past expenses such as salaries, cellphone charges, diesel costs, accommodation and travel costs. Raubex conceded that the estimate could not be said to be a proper estimate of the costs to remedy the alleged breaches.

Bryte’s contention is that when Raubex made the claim against the guarantee it had knowledge that it was not entitled to the payment inter alia because Raubex’s estimation of the costs of having Dolphin’s alleged breaches remedied was not bona fide. Bryte argues that the lack of bona fides constituted fraud and Bryte had no obligation to comply with the demand.

Bryte argued that the demand did not comply with the requirements of clause 2(C )(ii) above requiring a certificate that the amount demanded did not exceed a good faith estimate of the costs of having the breach rectified.

This was denied by Raubex who argued that the lack of veracity in relation to the estimate was irrelevant because the guarantee only requires that the demand be made in the terms specified. They contend that they complied with the requirements of the guarantee and the payment obligation was triggered.

The court held that the parties, by inserting in the guarantee the element of good faith, clearly intended to eliminate and avoid a false or mala fide estimate. It was thus not enough for Raubex to show that there had been a formal certification of good faith: it also had to show that the certification was, in fact, made in the honest belief that it was a correct estimate of what it was entitled to be paid under the guarantee and Raubex failed to do so.

With regard to the fraud element, the court found that there can be no inference other than the claim and certification was made with knowledge that there was no entitlement thereto and none was suggested by on behalf of Raubex.

The appeal was upheld and the decision of the court a quo set aside and substituted with “The application is dismissed with costs”.

North Midland Building Ltd v Cyden Homes Ltd 2017 EWHC 2414 (TCC)

On 2 October 2017, at the High Court of Justice, Queen’s Bench Division, Technology and Construction Court, the honourable Justice Fraser handed down judgement, in the matter between North Midland Building Limited (“North Midland”) and Cyden homes Limited (“Cyden”). North Midland (contractor) and Cyden (employer) agreed to certain bespoke amendments to the Joint Contracts Tribunal (“JCT”) Design and Building Contract 2005 standard form contract. The court was faced with the contractual interpretation of one of the clauses, which concerned the way in which extensions of time would be dealt with in certain circumstances. The contract was for the construction of a sizeable house in the Midlands.

Clause 2.25.1.3(b) as amended by the parties on 21 September 2009, read as follows:

“2.25.

1. any of the events which are stated to be a cause of delay is a Relevant Event; and
2. completion of the Works or of any Section has been or is likely to be delayed thereby beyond the relevant Completion Date,
3. and provided that
(a) the Contractor has made reasonable and proper efforts to mitigate such delay; and
(b) any delay caused by a Relevant Event which is concurrent with another delay for which the Contractor is responsible shall not be taken into account then, save where these Conditions expressly provide otherwise, the Employer shall give an extension of time by fixing such later date as the Completion Date for the Works or Section as he then estimates to be fair and reasonable.”

Sub-clause (3) was the part added by the parties to the standard clause. The clause as amended added into the extension of time machinery the proviso that, in assessing an extension of time, “any delay caused by a Relevant Event which is concurrent with another delay for which the Contractor is responsible shall not be taken into account”.

The works were delayed, and the claimant applied for an extension of time for a variety of reasons. In the application, they included various other notices of delay, which relied upon different causes, or Relevant Events. Cyden’s response stated:

“Whilst no consideration has been made with regards to ‘reasonable and proper efforts to mitigate such delay’, the delays resulting from Delay Events 1 and 9 have been consumed by culpable delays attributable to North Midland Building, this reducing entitlement to an award of an Extension of Time”.

Cyden maintained that, if there were two delaying events, Event X and Event Y, occurring at the same time and causing concurrent delay to completion of the works, with Event X otherwise allowing the claimant to an extension of time, and Event Y being “another delay for which the Contractor is responsible”, then the contractor, North Midland, would not be entitled to an extension of time in respect of those two delaying events. North Midland disagreed with this interpretation.

North Midland relied upon the doctrine of prevention. Fraser J noted that in Multiplex Construction (UK) v Honeywell Control Systems Ltd [2007] BLR 195, Jackson J (as he then was) considered the relationship between the prevention principle and time at large, and explained that:

“Essentially the prevention principle is something that arises where something occurs, for which it is said the employer is responsible, that prevents the contractor from complying with his obligations, usually the obligation to complete the works by the completion date.”

It was further stated that the failure to complete the Works by the completion date or the extended completion date, will usually entitle the employer to deduct liquidated and ascertained damages (“LADs”).

Fraser J noted that, North Midland had relied on the principle of concurrent delays as well the prevention principle, in order to justify the granting of the declarations sought. North Midland argued that as a consequence of the first two propositions time was at large.

“…the concept of ‘time at large’ does not mean that the contractor has an indefinite time to complete the works. If the completion date in the contract, and the mechanism for having that extended by means of awarding so many weeks to an originally agreed completion date, are inoperable or for some other reason no longer applicable, in general terms the contractor’s obligation becomes one to complete the works within a reasonable time. That is what the shorthand expression ‘time at large’ is usually understood to mean.”

Fraser J referred to Multiplex and stated that Jackson J had considered the relationship between the prevention principle and time at large and stated:

(i) Actions by the employer which are perfectly legitimate under a construction contract may still be characterised as prevention, if those actions cause delay beyond the contractual completion date;
(ii) Acts of prevention by an employer do not set time at large, if the contract provides for extension of time in respect of those events;
(iii) Insofar as the extension of time clause is ambiguous, it should be construed in favour of the contractor.

North Midland argued that the employer’s response in respect to the application for extension of time was unfair, and not in accordance with the contract. North Midland reasoned that an extension of time ought to be granted without taking account of concurrent delays for which the claimant is responsible, and disallowing those latter periods. Nevertheless, Fraser J maintained that the prevention principle did not simply arise in this case.

Fraser J agreed with the defendant, and confirmed that the amendments and the meaning of the words used were “crystal clear” and agreed to by the parties. He further confirmed that, where the clause (or contract) specifically provides that, if the contractor was responsible for a concurrent delay at the same time as that caused by a Relevant Event, then the delay caused by the Relevant Event would not be taken into account when assessing the extension of time, and the contractor would ultimately be excluded from claiming an extension of time in respect of that Relevant Event.

Fraser J held that, both parties were free to agree to any terms they wished, in respect of the manner in which concurrent delays would be dealt with, and that there was no rule of law which prevented the parties from agreeing that concurrent delay be dealt with in any particular way.

It was further held that, there was no authority, statutory or otherwise to accept that the LADs would not be applicable in this case. Fraser J conclusively referred to the case of Jerram Falkus Construction Ltd v Fenice Investments Inc (No.4) [2011] EWHC 1935 (TCC), which Coulsen J stated that:

“Accordingly, I conclude that, for the prevention principle to apply, the contractor must be able to demonstrate that the employer’s acts or omissions have prevented the contractor from achieving an earlier completion date and that, if that earlier completion date would not have been achieved anyway, because of concurrent delays caused by the contractor’s own default, the prevention principle will not apply.”

Fraser J held that, where the parties have agreed to variations to the standard form contract, there is little room for interpretation later on, as parties will have to enforce what was contractually agreed upon. Therefore, parties can exclude the contractor’s entitlement to extension of time in respect to concurrent delays.

An Interesting Decision from the TCC

The Technology and Construction Court (TCC) is a specialized group of UK courts which handle disputes about building, engineering and surveying. Of interest is the recent decision of the TCC in the matter of Jacobs UK Limited v Skanska Construction Ltd [2017] EWHC 2395 (TCC), handed down in September 2017.

The parties in this matter had entered into an agreement for the provision of design services, in respect of a project for the design and replacement of street lighting in Lewisham and Croydon, England.

A dispute arose as to the adequacy of the design services provided by Jacobs, which was referred to adjudication by Skansa. Agreement was reached regarding the procedural rules and the timetable for the adjudication, the adjudicator was appointed and the initial submissions made. Skansa’s counsel, however, was unavailable and Skansa was, therefore, unable to timeously file its reply to these submissions. Both Jacobs and the adjudicator refused it an extension to do so. Skansa, therefore, withdrew its reference to adjudication and invited the adjudicator to resign, which he did.

Two months later Skansa submitted substantially the same dispute to a second adjudication. Jacobs then made application to the TCC for an injunction (similar to an interdict in South African law) restraining Skansa from proceeding.

The court found that although there is no principle of abuse of process in adjudication, subjecting a party to serial adjudications in respect of the same claim and requiring them to incur irrecoverable costs could amount to unreasonable and oppressive behavior.

In this case, however, the terms under which the adjudication was conducted made allowance for the reference of a dispute to a second adjudication, should the adjudicator resign. While it was unreasonable for Skansa to withdraw and reinstate its claim due to the unavailability of its counsel, this did not deprive the new adjudicator of jurisdiction.

As the dispute referred to the second adjudication was substantially similar to the first dispute, Jacobs would be able to make use of it previously drafted submission. The changes to Skansa’s version would most likely have been raised in its reply in the first adjudication, thus, in any event, entitling Jacobs to seek an opportunity to file a rejoinder. The inconvenience and additional costs suffered by Jacobs as a result of the second adjudication were not, therefore, considered to be so severe or exceptional so as to warrant intervention by the courts by way of injunctive relief.

The outcome may well have been different, however, had the parties been operating under an adjudication procedure which places a time bar upon the referral of a dispute to adjudication, such as that contained in Option W1 of the NEC3.

Primat Construction CC / Nelson Mandela Bay Metropolitan Municipality (1075/2016) [2017] ZASCA 73 (1 June 2017)

The case dealt with the issue of whether a party to a contract, who has elected not to accept a repudiation of the Contract by the other party, may, in the face of persistent and unequivocal intention of the other not to be bound, change its stance and cancel and sue for damages for breach of contract.

The facts of the matter were as follows:

  1. The parties had entered into a contract, pursuant to a tender, in terms of General Conditions of Contract for Construction Works (2004), for the upgrade of roads in Motherwell, Port Elizabeth and Primat was required to attend to the reconstruction of the road and supply materials;
  2. The works were scheduled to commence in April 2010 and end in November 2010, however, as a result of delays including severe storm damage, late payment of an insurance claim to Primat for the damage and non-payment by the Municipality against monthly payment certificates, the completion date was therefore extended to November 2011;
  3. As a result of the non-payment of their certificates, Primat suspended the work. The Employer was not happy with the suspension and wrote to Primat purporting to terminate the contract with immediate effect. It is common cause that the letter did not constitute a proper termination and Primat argued that the letter amounted to a repudiation of the contract by the Municipality and such repudiation was not accepted by Primat.
  4. The Municipality maintained that the contract was terminated and requiring Primat to vacate the site. Primat was adamant that they intend to remedy any alleged breaches by it but they were denied access to the site and despite their continued engagement with the municipality, the Municipality insisted that the contract had been terminated and that they will procure other contractors to finish off the works.
  5. As a result of the Municipality’s persistence that the contract had been terminated, Primat gave notice of its election to now accept such repudiation and cancelled the contract and that they intend to sue for damages in the sum of R22 million.
  6. The Municipality argued that once Primat elected not to accept the repudiation, it was precluded from changing its election and could not therefore cancel and claim damages.

The court found that:

  1. Generally, an aggrieved party must choose between the different remedies and is bound by his or her election. The remedies are inconsistent. The choice of one excludes the other, he cannot approbate and reprobate. Once he has elected to pursue one remedy, he is bound by his election and cannot resile from it without the consent of the other party (Bekazazu Properties (Pty) Ltd v pam Golding Properties (Pty) Ltd 1996 (2) SA 537 (C ) at 542E-F);
  2. However, the court held that the Municipality’s argument failed to take account of the fact that the doctrine of election is not inviolable. An aggrieved party is allowed to claim in the same action specific performance and in the event of non-compliance, cancellation and damages. The aggrieved party gives the defaulting party the opportunity to repent and if the defaulting party refuses or fails to perform, the aggrieved party should then be entitled to change its election, and cancel and claim damages. despite the opportunity to relent, the aggrieved party may elect to cancel;
  3. Where the defaulting party is clearly determined not to purge the breach, and shows an unequivocal intention not to be bound by the Contract, the aggrieved party may abandon his or her futile attempt to claim performance and change the election, claiming cancellation and damages.
  4. The Municipality argued that to allow a change of election would negate the fundamental principle that on breach, an aggrieved party must make an election and is then bound by it.

The court found that, the Municipality persisted in its repudiation and showed in no uncertain terms that it would not comply with its obligations and would not allow Primat to continue to perform. The court confirmed that Primat was therefore entitled to change its election and proceed to cancel the contract and claim damages.

This case highlights a very important point. Had the court confirmed the Municipality’s stance, Primat would be stuck with a contract where they are not able to perform and remedy the alleged breach and sustaining damages that they cannot recover which would not make any sense at all.

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