Call 01277 280760

Fast recovery of money in construction contracts

In November 2011 I uploaded a power point presentation that I had presented to clients concerning the key changes that had been made in 2009 legislation amending the  Construction Act. To read these slides please follow this link

I was in 2011 of the opinion that the most significant change was the consequences where a party failed to respond to a Default Payment Notice; in such situation the amount claimed was  the amount due – no argument, no defence, it had to be paid.

In 2013 I wrote about having just completed an adjudication based on this new law. No response to a Default Payment Notice had been given and Responding Party simply paid all of what we requested within the adjudication – no argument, no defence, it had to be paid. To read this post follow this link.

The law on this point really was in our opinion quite straightforward.  In the right circumstances the changes to the Construction Act could be used to gain maximum advantage – secure full payment on what was basically a technicality. There was no need to request a valuation of the account or indeed even submit paperwork to enable a valuation – just demand payment of what was due under the contract. As our friendly meerkat would say “simples”.

In early 2014 ago a client was confronted with a threat of a winding up petition on the basis that they had not responded to a Default Payment Notice; “pay now” screamed the solicitor on the other side or risk your client being wound up (the legitimacy of abusing the insolvency legislation to recover debts is not something that I advocate as it usually ends in tears- but a story for another day!). The solicitor on the otherside referred me to the case of  R & S Fire and Security Services Limited v Fire Defence  which he said was authority for the proposition that absent a response to a Default Payment Notice the amount claimed was due. I had not read the said case previously and so duly considered what was put to me thinking that the solicitor on the otherside must be very clever indeed – only he wasn’t. Whilst R & S did support such proposition it did not prevent a  set-off being  applied pursuant to insolvency legislation – the fact that my client had not responded to a Default Payment Notice did not in the particular circumstance mean that the payment was due (an argument I have now used on more than one occasion when clients have been threatened with insolvency legislation). In addition I suggested to the solicitor that he may want to actually read the contract because in fact the payment to his client had not even fallen as due!

But the arguments that I put forward in 2011 and repeated in 2013 remain very simple and good arguments when used properly. What was perhaps surprising was the amount of lawyers jumping to report upon the case of ISG Construction Limited v Seevic College[ 2014] EWCH 4007 (TCC) when Mr Justice Edwards-Stuart reaffirmed the principle that absent a Payment Notice or Notice to Pay Less in response to a valid payment application submitted, the amount applied for in the interim application must be paid. I was conducting an adjudication in late December 2014 against a well known construction law firm when they sent me their newsletter referring to the above case. I was going to ask the question how could they therefore defend the current adjudication because in effect they would have to argue against themselves but I never had to – their client just conceded defeat.

Timing however is everything. The client came to me on the above adjudication and said that they thought they could succeed on a payment notice technicality. I looked at their papers and their construction contract and said to them that they may well succeed in such an adjudication in a months time, but not now. We simply deferred taking any action until such time as we knew we could succeed.

What amusement I had therefore  in January 2015 when a different client presented me with a letter from another leading construction law firm telling them that they had failed to respond to Default Payment Notices and therefore if they did not pay they would be subjected to an adjudication. So again the first thing I ask of the client is to see their contract and details of the valuation.  If the other side had actually bothered to read the contract before writing to my client they would have realised nothing yet was due – they should have kept quite and waited to see if my client did actually fail to respond to notices. The effect of the letter from said firm was to prompt my client into serving the requisite notices thereby ensuring that they had complied with their Construction Act requirements and that nothing was due – certainly not on a technicality. To be honest as I had some years previously drafted the contract terms of my client I doubted very much that they had fallen foul of their own contract and I suspected that in the other solicitor’s eagerness to impress his client he had written a letter without actually analysing whether what he was saying would stand up to scrutiny.

In given circumstances the 2009 Construction Act amendments that came into force in 2011 can be used to ensure prompt recovery of payment at minimal cost – i.e without the need for your account to be assessed by the adjudicator. Of course it does not prevent the otherside subsequently seeking a review of the account on a later valuation date and seeking repayment of any overpayment, but in my experience the dynamics of the case have totally changed at this point – he who holds the money is king.

In my opinion the law in this matter is very straightforward although too frequently I have seen lawyers get it wrong – perhaps too eager to impress their client or alternatively the matter is delegated to the most junior lawyer in the team. Should you have any queries on this subject matter then I would be delighted to assist.

 

Matthew Dillon, Principal, MJD Solicitors

February 2015

Matthew Dillon has been undertaking adjudications since the year 2000. His first adjudication was as  an in-house lawyer for FTSE 250 pfi &  construction company Jarvis plc and now his firm, MJD Solicitors, undertakes numerous adjudications each year for their clients. Whilst  the need for enforcement of our adjudications is rare, Matthew also has experience of conducting enforcement cases within the TCC in London. MJD Solicitors guide to adjudication can be accessed and printed by following the link below. To assist we repeat the article below the link.

 

A guide to Adjudication

 

Adjudication – Frequently asked questions

1      What is Adjudication?

Adjudication is a fast and relatively cheap way of resolving disputes in the construction industry, whereby an impartial third party decides the issue between the parties. The decision reached by the adjudicator is usually binding on the parties until such time as the decision is overturned by a judge or arbitrator following a trial. In the vast majority of cases the parties just accept the decision of an adjudicator and move on.

 

2      When can I go to adjudication?

Under the Housing Grants, Construction and Regeneration Act 1996 (as amended by The Local Democracy, Economic Development and Construction Act 2009 (commonly referred to as the Construction Act), a party has the right to refer a dispute arising under a construction contract to adjudication at any time. However, the dispute must have ‘crystallised’, meaning a dispute must exist prior to commencing an adjudication – if there is no ‘dispute’ the adjudicator will not have the requisite jurisdiction to decide the issue.

In the past the issue of ‘crystalisation’ was quite complex but the courts have adopted a pragmatic approach and the threshold to cross for there to be a dispute is not high. However, before embarking on adjudication it is important to ensure that the other side have had sufficient time to respond to the issue or through their conduct a dispute can be inferred – the premature issuance of an adjudication with the intent of ambushing your opponent is likely to backfire and should be avoided.

 

3      How fast is Adjudication?

The answer is very fast. The first document to be prepared is the Notice of Adjudication which sets out in brief the particulars of the dispute. Notwithstanding the brevity of the document, it is arguably one of the most important documents as it sets out the jurisdiction of the adjudicator – get it wrong and there will be consequences.

Following service of the Notice of Adjudication the next step is to get the adjudicator appointed within 7 days of the date of the Notice of Adjudication. Also within 7 days the Referral Notice has to be served on the other side and filed with the adjudicator; the Referral Notice essentially comprises the case and evidence which will form the backbone of the case to be considered by the Adjudicator. Due to time constraints the Referral Notice needs to be prepared and ready to go prior to the Notice of Adjudication being issued. Indeed, experienced advisors will not even prepare the Notice of Adjudication until after the Referral Notice has been completed.

The intent of parliament was that the dispute would be resolved within 28 days of the date of the Referral Notice – i.e a binding decision is received within 28 days. This is frequently extended to 42 days with the consent of the party who has commenced the adjudication and can be longer if all parties agree.

Anybody who has issued court proceedings will know to have a decision in 28 or 42 days is extraordinarily fast. If you want to issue legal proceedings on a construction contract expect to be wrapped up in the Pre-Action Protocol for Construction and Engineering Disputes for at least two or three months and then, unless you are able to issue in the High Court, your case will be swallowed by the County Court Claims Centre for about three months before even getting to the stage when directions are issued.

 

4      How much does adjudication cost?

The cost of the adjudication will depend upon the size, nature and complexity of the dispute. The following needs to be considered:

The fees and expenses of the adjudicator

We are seeing most adjudicators charging between £240 – £300 plus vat an hour for their appointment. This usually translates into a final fee of between £8,000 – £15,000.There is limited scope to challenge adjudicator’s fees. Perversely the fees can even be due if the adjudicator issues an invalid decision or even just got things totally wrong. The reality is that you have little control over an adjudicators fees because often the Referral Notice is served even before you know what fees the adjudicator is demanding; by carrying on with the adjudication you are accepting his appointment on the terms that he stipulates.It is important to appreciate that whilst the adjudicator will usually order which party is to pay his fees, it is not as simple as the losing party picking up the bill. Whilst some adjudicators will simply direct that the losing party must pay the adjudicators fees, it is not uncommon for adjudicators to apportion their fees between the parties; if a party overstates their claim or raises issues which they have lost, the adjudicator may direct that a winning party picks up part of the bill. Perhaps unfair, but the courts often do the same. The real concern, we believe, however, is this. The parties are joint and severally liable for the adjudicators fees and so therefore regardless of how they are directed to be split, if one party does not pay then the adjudicator will come calling on both party’s doors for his fee – a real problem if one party is tinkering on insolvency. If the Responding Party says that the adjudicator’s decision is invalid he can simply refuse to pay the same, leaving the Referring Party having to go to court to get an order to compel the Responding Party to pay. If the court agrees that the decision is invalid then the Referring Party will be picking up the Adjudicator’s fees notwithstanding the fact he thought he won the case and notwithstanding the adjudicator having issued a worthless decision. It is vital therefore that proper advice is taken at the outset and all of the risks understood

 

The cost of the nominating body

A small fee will be paid if you have to ask somebody like the RICS or RIBA to nominate an adjudicator. The fee is usually around £250 – £350 plus vat and you will not get this fee back even if you win the adjudication.  

 

Your professional fees

Generally speaking each party bears their own legal and professional fees unless the parties agree otherwise. The costs of representation in adjudication can be high but will be determined by the issues in stake. As a benchmark, our fees (based on an hourly rate of £220 an hour) for a simple adjudication conducted by an experienced construction lawyer will be in the region £5,000. If the matter proceeds on a fully contested basis then fees in the region of £8,000 – £10,000 on disputes with a value less than £150,000 are common. We can usually agree to fix costs to provide you with certainty, but need to understand the issues in the case before we do this.  

It is worth pointing out that if your contract contains a provision that says a party must pay the other side’s costs or an adjudicator’s costs in any event then such provision is probably invalid as the Construction Act 2009 amendments that came into play in 2011 outlawed such provisions.

 Is it viable to adjudicate?

Sometimes it is not. You need to take a view on the likelihood of success, the likely recovery, the costs you are going to incur and the risks that you are going to be exposed to. Often on claims less than £35,000 we believe it is preferable to just litigate. Often we see claims consultants who encourage adjudication as the solution when in fact litigation makes more sense on the basis that costs can be recovered and the risk of the non-paying party picking up the tab for legal costs persuades it to settle. Sometimes parties are willing to risk losing an adjudication but not litigation.

We should add however that the matter is going to become a little more complex with the ridiculous decision to increase the court fees so that a 5% levy has to be paid on whatever is being pursued (recoverable from the other side  if you win).The government is hoping to plug the shortfall in the public purse by increasing court fees to a level that is unsustainable for most – the reality of course is that it will dissuade many businesses from using the courts and make adjudication/arbitration the preferred route.

 

5      How do I nominate an adjudicator?

If your contract nominates a specific adjudicator or nominating body then you must follow the contract otherwise the appointment will be invalid. If no such adjudicator or nominating body is specified then you are free to choose which nominating body to go to and in this situation thought should be given as to the desired professional background of the adjudicator.

 

6      Do I need a written contract to adjudicate?

To comply with the Construction Act, your contract must contain certain adjudication provisions. If your contract does not contain all of these provisions or there is no reference to adjudication at all, you can use the ‘fall back’ adjudication procedure in the Scheme for Construction Contracts.

Prior to the 2011 amendments to the Construction Act, the Scheme was only of application when a construction contract was in writing. There was much case law on the issue of whether the whole contract had to be in writing or just part of it. However the amended Construction Act means that there can now be adjudication on oral contracts. The only “get out” now appears to be where  there was no contract at all. Where there is an oral contract then the parties can adjudicate; where there is no contract they cannot.

It is worth thinking about matters further if your contract is with a homeowner. If the homeowner or his advisor produced the contract and it contains an adjudication provision then you should be able to adjudicate. If the Contractor produced the contract then the adjudication provision is probably invalid as it is an unfair term. We are not quite sure why any homeowners would agree to an adjudication provision in their contracts; from our experience it is simply because their architect or contract administrator has used a standard form and has omitted to delete the adjudication provision.

 

7      Can I adjudicate on more than one dispute at a time?

It is possible to start any number of adjudications to run concurrently. However, you can only refer one dispute in each adjudication so, if you have more than one dispute on a contract, you will either have to get the other party to agree to combine them all in one adjudication or start multiple adjudications.

Often however by phasing the referral in generic terms it does become possible to adjudicate on a wide issue that encompassing several sub-issues – i.e how much money are we entitled to?

 

 

8      How will the adjudication progress?

After the Notice of Adjudication has been served and the adjudicator nominated, the Referring Party should then serve their Referral Notice. The adjudicator will then invariably gives directions which will include a direction that the other party serves a Response. It is now quite common for there to be a further exchange of written submissions and indeed the Referring Party may, on occasions, even plan to put the majority of its case in its second submission by responding to the defence advanced by its opponent. There may also be arguments as to whether the adjudicator has been lawfully appointed or whether he is acting outside of his jurisdiction. Some adjudicators will convene a meeting to discuss issues and may allow further submissions thereafter. The adjudicator should then issue his decision in a  written judgement.

 

9    What next?

Adjudication can be rough justice. The majority of adjudicators are relatively good at their job, but mistakes do happen – we have seen shocking decisions from adjudicators, including dual qualified barristers charging £400 per hour! The general approach is to “pay now argue later”, i.e. the decision of the adjudicator should be complied with even if it is incorrect, even on grounds of fact or law. The decision cannot in itself be appealed but it can be overturned by a body of higher authority, e.g. court or arbitration. However, the consequences of the adjudicator’s decision stand for the time being. The vast majority of adjudicator’s decisions are complied with.

If a decision is not complied with then you can enforce it by going to court and applying for ‘summary judgment’. It is the practice of the Courts to generally enforce adjudicators’ decisions, even when they are factually or legally incorrect.  There are only limited grounds on which an enforcement of a decision will be resisted, which includes “jurisdictional” arguments and where there has been a breach of “natural justice; the consequence of this are why it is so important to commence the adjudication on the correct footing and to try to ensure the adjudicator does not take any action throughout the adjudication that could render it invalid.

The process of seeking summary judgment should take no more than 28 days including a short hearing of up to half a day (depending on the number of issues raised).

If the court agrees that the decision of the adjudicator should be complied with then the court will order that the losing party comply with the decision by way of summary judgment and also award legal costs. If the decision has been found to be invalid then the court will not enforce the decision; the consequences of this and that the Referring Party is back where he was prior to commencing the adjudication and  has a liability for all of the costs of the adjudication, the adjudicator and the court hearing.

It is said that the cost of enforcement are comparatively low when compared to full trial. For large disputes with city law firms or indeed complex delay disputes this is doubtless correct. Although adjudication is often to be preferred to litigation, careful consideration should always be given to the route to be taken – frankly adjudication is not suitable for all clients.

MJD Solicitors – February 2015

 

BEWARE THE COURT FEE HIKE

It is our understanding that the civil court service is generally self-financing without support from the tax payer. Essentially the revenue from court fees is sufficient to fund the court service with the exception of the family division.

There was a significant hike in recent years for court fees but the government has now announced further substantial and totally unmerited fee increases. If you want to start a claim for recovery of money then the new fee will be 5% of what you are seeking to recover for claims over £10,000. If you are owed £50,000 then the fee will be £2,500; if you are owed £100,000 then you must pay £5,000 and if you are seeking £500,000 then expect a fee of £25,000. Many in the legal profession, including senior  judges, have severely criticised this move and have stated that it will frustrate access to justice and play into the hands of the big corporations, banks and insurance companies; but the government will  not listen. The government is determined to proceed with this quite outrageous fee hike.

The introduction of fees in the employment tribunal reduced claims by about 75%. There was some merit in the introduction of these fees – the user of services should not get a free ride particularly claims that were little more than a “try on”. But there is no justification or indeed credible explanation for increasing civil fees. The government is either trying to frustrate access to justice or to simply generate tax through the back door.

It has been said it is the small business that will be most affected by these increases. The small business may not be prepared to fund the court fee and will prefer just to write off the debt. Rather than increasing revenue through higher court fees, we believe there will be a reduction in revenue both as a consequence of organisations choosing not to litigate and also writing off debts thereby paying less corporation tax. The government presumably is aware of this and so we are concerned that there is a hidden agenda to frustrate access to justice and to unfairly favour the “mega business” of banks and insurance companies. Indeed all of the reforms made to the civil justice sector within the last five years have favoured the larger organisation and have seemingly created barriers to justice.

What this new tax on access to justice does is raise the prospect of private dispute resolution again becoming the preferable option. Is it now better to adjudicate on small sums of money? Should we revert to arbitration rather than litigation? Should parties try harder to reach an amicable solution through mediation? I am of the view that actually this new tax has nothing to do with the recoverability of revenue – it is actually trying to discourage people from using the courts. In my view the decision makers behind this new tax either  have no idea of the consequences of what they have  done (because they are career politicians and removed from the real life) or  it is a cynical ploy to undermine the civil justice system. Also I have no doubt that this new tax on justice will remain whoever gets into power in May 2015.

Construction Act Notices

In November 2011 I uploaded a power point presentation that I had presented to clients concerning the key changes that had been made to the Construction Act. To read these slides please follow this link

I was in 2011 of the opinion that the most significant change was the consequences where a party failed to respond to a Default Payment Notice; in this situation the amount claimed is the amount due – no argument, no defence, it has to be paid.

Default Payment Notice are served by a contractor when an employer fails to comply with his obligation to advise of an amount due. The contractor basically says I consider the amount due as [£100,000] and should go on to explain why; the Construction Act sets out exactly what the Default Payment Notice has to contain in order to be valid. If a valid “Pay Less” notice is not served by the employer in response then the amount contained in the Default Payment Notice has to be paid regardless of whether the contractor’s claim has merit or not. The employer has to pay that which has fallen due and reclaim any overpayment in subsequent valuations.

It is important to note that if the contract entitles the contractor to make application for payment (many standard forms and bespoke forms do) then this application is capable of amounting to a Default Payment Notice where the employer fails to advise of the amount due. The wisdom of bespoke terms providing for applications is therefore questionable unless an employer has adequate procedures to ensure he can respond to each application served. Conversely if you are the party being paid then you should always ensure that applications are submitted in a format that are capable of amounting to Default Payment Notices.

It is also worth bearing in mind contracts which are governed by the Scheme. It may well be that the contract is oral or there are no formal recorded terms save price, scope and programme; in this situation the contractor would be entitled to rely on the Scheme to serve its Default Payment Notices and again the amount applied for would be the amount that has to be paid.

Does it matter in the situation where there are interim payments and the amount can just be clawed back in subsequent applications? I think it does and particularly so as you approach the end of the programme. The employer is not only at risk of never seeing its money again but also the dynamics of any final account discussions can be altered because the contractor and not the employer holds the cash.

With all the above in mind my only surprise is that it has taken nearly 18 months before I have seen a dispute exactly on this matter. We recently advised a client to adjudicate simply on the fact that there was no Payless Notice and therefore the amount due in the Default Payment Notice was due. My advice was to not even bother putting forward a substitute argument of asking the adjudicator to value the application: why incur the cost of inviting the adjudicator to consider something that was not necessary? Why incur the cost of having to respond to the other side’s valuation when this was not necessary?

The other side realised the futility of resisting the adjudication and just paid up!

Matthew Dillon

Employment Tribunal Fees

The Employment Tribunals and the Employment Appeal Tribunal Fees Order 2013, is set to end the practice of “no fees” being charged in the Employment Tribunals.

Any person who has ever issued a claim in court will know that fees must be paid at each stage, i.e upon issue, upon allocation to track, upon an application being made and upon the matter being listed for trial. The effect of this is that if a matter proceeds to trial fees of several thousand pounds are often incurred. The losing party will be ordered to pay the fees. Certain people on very low incomes do not need to pay fees.

The position in the Employment Tribunals and the Employment Appeal Tribunal has historically been that no fees whatsoever have been charged. It has been a totally free service. This is a peculiarity that the government in these times of austerity has decided to rectify and fees will very shortly be charged in the Employment Tribunal just as they are in courts.

There is some logic to this step. It costs much money to maintain the tribunal service and so why should its service be free to end users? Those who are on low incomes (which will include those who have lost jobs because of unlawful conduct of employer for example where an employee has been unfairly dismissed) will not have to pay fees, but most others will. If an “employee group” such as a trade union issues proceedings on behalf of a large group of employees then significant fees will have to be paid; why shouldn’t they?

The practice of paying fees may bring an end to vexatious litigants and claims with little merit and I suspect particularly those pursued by “employment consultants” who conduct employment claims on a “no win no fee basis”. The requirement to pay a fee is a good indication of whether somebody genuinely believes in their case or not. There may be some small impact upon employers but I doubt the liability to pay fees of a successful claimant will really be of much significance; I would expect employers in any negotiation to say that employees must pay the fees out of their damages and some employees will test the nerve of employees to see whether they are really willing to pay a trial fee.

The size of the fee is interesting. A letter from Jason Latham, Tribunals Deputy Director at Her Majesty’s Courts and Tribunals Service, suggests the fees will be set as follows:

“For single claims in the employment tribunal, a ‘Level 1’ claim will have an issue fee of £160 and a hearing fee of £230, and a ‘Level 2’ claim will attract an issue fee of £250 and a hearing fee of £950. For multiple claims, the issue fees range from £320 to £1,500 and the hearing fees range from £460 to £5,700. There are a further five fees, ranging from £60 to £ 600, for certain applications once a claim has been accepted, such as an application to dismiss following settlement or to issue a counterclaim.

In the EAT, the fee to lodge an appeal is £400 and £1,200 for it to progress to hearing.”

The exact fees will be known once the bill is published. It is understood it will come into force in the early summer (possibly late July 2013). It will not have retrospective effect and so will only apply to claims started after this date; the message is therefore clear – if you have a claim or an appeal get it in before the cut off date otherwise you will end up having to pay a fee at each stage of the claim.

In our opinion the costs of the fees will discourage many from issuing and many more from proceeding to trial. If the trial fee is refunded in the event of a trial not proceeding (as in the County Court) there would certainly be much merit in an employer waiting to see if an employee actually pays the fees before deciding to settle. Save for high earners, questions of reputation and the most serious types of discrimination, it has always in our opinion been questionable whether commencing an employment claim in the tribunal is commercially viable. These changes implemented by the government will only serve to increase further the doubt as to whether such claims are viable. There is a clear attack by the coalition government on the rights of employees (as is seen by the changes to legislation already made and the quite ridiculous employee shareholder scheme (which we shall comment upon next week)) in the guise of restoring equilibrium between employers and employees; whether or not you support the change really will depend upon whose camp you are sitting in.

Matthew Dillon

Subject to contract negotiations and letters of intent – don’t walk off site before checking it out

The general rule is that letters of intent described as being “subject to contact” will not result in a binding contract having been reached because these words mean that a formal agreement between the parties will not come into existence until a formal contract is agreed.

An example of this is to be found in the Court of Appeal decision of Whittle Movers Limited v Hollywood Express Limited [2009] EWCA Civ 1189 in which it was decided that there had been no contract concluded after examining an interim agreement, “subject to contract” negotiations and the parties conduct. The Court of Appeal overturned a decision of a High Court Judge who had decided that a formal contact had come into existence even though the negotiations had been described as “subject to contract”. The facts showed that the terms of performance were still under negotiation. This meant that all of the negotiations towards reaching an agreed contract were “subject to contract” and that no binding arrangement was to come into existence until a formal contractual document was signed.

However in exceptional circumstances the court might find that a contact has been reached between the parties even though the words “subject to contract” have been used in a letter of intent.This is because the court might find, depending on the facts of the case, that each party has carried out those things that the letter of intent contemplated for the benefit of the other. This was found to be the case in The Rugby Group Ltd -v- Proforce Recruit Ltd [2005] EWHC 70, where it was decided on the facts of the case the parties had agreed to be contractually bound even though the words “subject to contract” had been used in the contractual negotiations and even though a formal contract had not been drawn up and signed.

This approach was followed in the Supreme Court decision of RTS Flexible Systems Limited v Molkerei Alos Muller Gmbh & Company KG (UK Production) [2010] EWCA Civ 26 where it was decided that the parties had agreed to be bound by the agreed terms without the necessity of a formal written contact being drawn up even though the words “subject to contract” had been used in negotiations. The court decided that the parties had by their conduct agreed to waive the need to draw up a formal contract and to waive the requirement that contractual negotiations were “subject to contract”.
This means that if the court was to find that a binding contact had been entered despite the use of the words “subject to contract” in a letter of intent, because the facts of the case lead to the conclusion that the parties waived the need for a formal written contract being entered into or that the conduct of the parties show that a contract has been agreed without a written contract being entered into, what does this mean for contractor who wants to walk off the job because he has not been paid by the employer? The answer is that there is an element of risk that a court may later find, despite these words being used, that a contract has been agreed and by walking off site the contractor has repudiated the contract and can be sued by the employer for damages for breach of contract. If the court finds later on that a binding contract exists they will also find that an absolute refusal to carry out work or an abandonment of the work by the Contractor before it is substantially completed without any lawful excuse is a repudiation by him.

Before you make such a drastic decision to walk off site and all you have in writing is a letter of intent marked “subject to contract”, talk to us at MJD first and we will check it out and your paper work, so that you are in a better position to know when to make the call of downing tools in response to non payment.

Anthony Philpott

An “iffy” contract – What to do if there no contract or if work is carried out and is agreed outside of the scope of the contract?

In the construction industry it is commonplace that the builder has not entered into a formal contract because one has been prepared but it has not been signed or the parties have chosen not to commit an agreement into writing or there is no evidence of even an oral agreement that will stand up in court. In other words the builder is asking to be paid under an “iffy contract”.

If the court finds that a contract did not come into existence because the price was not agreed or because essential terms were not agreed or if work was carried out outside of the terms of the contract then the builder can argue that they are able to establish an entitlement to be paid a reasonable sum by way of quantum meruit for the work carried out. Quantum Meruit is broadly a reasonable remuneration for work done or goods supplied where there is no agreement as to price, including where a contract never becomes binding or is later discovered to be void.

An entitlement of the builder to be paid for a reasonable amount earned by way Quantum Meruit will be relevant if it is found that the parties have:

(i) not agreed a contract or not agreed all the terms, including the price of the work;

(ii) made an agreement to pay a reasonable sum for the work done; or

(iii) agreed a scope of work under the original contract and the work falls outside that scope and the parties did not have or did not use a variation procedure in the contract, as in this case.

The circumstances where there may be an entitlement to a reasonable sum is as follows :-

(i) There is an express agreement to pay a reasonable sum,

(ii) There is no fixed price, namely where work is done under a contract express or implied and no price is fixed by the contract, there is an entitlement to be paid a reasonable sum for labour and materials supplied pursuant to an implied term. In this respect the builder can rely upon Section 15 of the Supply of Goods and Services Act 1982 to argue that they are entitled to be paid a reasonable sum where a price has not been specified and agreed.

(iii) There is a quasi contract, which may occur where there is failed negotiation, whereby work is carried out while negotiations as to the terms of the contract are proceeding but agreement is never reached upon essential terms,
“Iffy” Letters of Intent

In British Steel v Cleveland Bridge [1984] 1 All ER 504, at 509 to 511 the court said that :

(i) while parties are negotiating a contract under which they will, if the contract is concluded and they enter into reciprocal obligations binding each other as to future performance, it is highly unlikely that by conduct they will conclude in the interim an executory contract where they contain terms that are still the subject of negotiation

(ii) it is more likely that they will have entered into what Robert Goff J referred to as an “if” contract, that is a contract, that is a contract under which if one party supplies, the other agrees to pay a reasonable remuneration

(iii) even an “if” contract will not have been entered into if important terms such as those relating to standard of performance, are still under negotiation, and in such cases the proper answer is no contract, but a restitutionary remedy to the extent that one party has been unjustly enriched.
In Bendetti -v- Sawaris [2010] EWCA Civ 1427 the Court of Appeal confirmed that when compensating the Claimant for the value of the benefit received by the paying party, the court should look to the “market value” of that benefit. The court ruled that there was no distinction between an abandoned agreement and one that simply failed for some technical reason to become binding on the parties. In the absence of any prior agreement on price in the context of other communications between the parties, the court should rely on expert evidence on market value. Mr Benedetti claimed damages by way of restitution for the unjust enrichment of the value of the work. Overall what mattered was the market value (or range of values) and not simply what was “reasonable”, although reasonableness might come into the exercise of the discretion as to where in the range of market values the quantum meruit should be fixed.

Restitutionary claim
Where no contract comes into existence or the contract between the parties is or becomes unenforceable the obligation to pay for the work done or goods supplied will be governed by the law of restitution, not the law of contact. In the case of services where the benefit takes the form of the end product of the services that end product must be valued. Where the benefit takes the form of the services themselves then it is the value of the services that must be valued, on the basis of the reasonable value of the services at the time at which they were rendered.

In Kleinwort Benson Ltd -v- Lincoln CC [1992] 2 AC 349 it was decided that it is necessary to establish that the Defendant has been unjustly enriched, including where the benefit has been transferred at his own request or that the Defendant may have been enriched as a result of his own wrongdoing. The burden of proof of causation is lower than in the claims for damages in that if the Claimant’s own carelessness contributed to the enrichment this will not mean that the enrichment is unjust (Gibb -v- Maidstone Tunbridge Wells NHS Trust [2010] EWCA Civ 678). Therefore the fact the Builder has not committed discussions with the client to writing should not count against them.

The Builder is able to pursue a claim for quantum meruit in the event that the court concludes that negotiations have failed and work was carried out whilst negotiations as to the terms were ongoing but agreement was reached upon the key terms in accordance with the principles contained in British Steel -v- Cleveland Bridge [1984] 1 AER 504. In these circumstances the contractor is entitled to be paid a reasonable sum for the work outside the contract on the basis of an implied contact, and this is to be calculated n the basis of the market rate.
It is of crucial importance that your claim in the courts for quantum meruit is well put together and is water tight. We at MJD have experience of this and have conducted cases in the courts where such claims come under scrutiny by the Judge and we know how to ensure that they will stand up in court. We can help you to make sure that you give yourself the best possible chance of recovering your hard earned money through this experience.

By Anthony Philpott

No Win No Fee – The end of an era

It is no April fools joke. On the 1 April 2013 conditional fee agreements as we know them no longer exist.

The premise behind conditional fee agreements was that the solicitor could charge an uplift on his fees (the “success fee”) in the event that the case was won, but got paid nothing if he lost. The success fee was paid by the losing party. Further, it was possible to take out insurance against an adverse costs order in the event of losing a case and likewise that insurance policy was also paid by a losing defendant. So, a party who found himself on the wrong side of a claim funded by a conditional fee agreement was not only liable for the standard costs of losing, but also a success and the cost of an insurance premium; these additional costs frequently added 100% to the potential costs liability.

It is in our opinion difficult to argue that it was fair that the Defendant was liable for these additional costs. Why should the Defendant be in a worse position just because the Claimant has decided to fund his case in such a manner? Indeed when conditional fees were first introduced it was the Claimant who was liable for his own success fee, not the Defendant. The changes that came about on the 1 April just take us back to the position that existed when CFA’s were first introduced.

So, No win No fee still exists. It is just that the Claimant must pay the success fee and not the Defendant. It essentially means that the quid pro quo of the Claimant entering into a CFA with his lawyer is that if he wins he will have to pay a contribution towards costs from his damages as opposed to claiming back from the other side. What this means is that when Claimants enter into a CFA with their lawyer, they should be prepared to negotiate on the level of the success fee as they have a direct interest in the same.

In addition to CFA’s there are now DBA’s – damages based agreements which means the lawyer can recover fees by reference to the damages recovered. It is hard to see how these could be preferred to a CFA as it may mean the lawyer recovers less costs, but time will tell.

CFA’s entered into prior to the 1 April will be regulated by the old rules. The new regime applies only to CFA’s entered into after 1 April.

We think Conditional Fee Agreements will survive and certainly “partial Conditional Fee Agreements” will continue to be popular, i.e the lawyer agrees to discount his fees pending success but if successful the client will be obliged to pay a higher fee.

There will be few businesses who are not aware of The Late Payment of Commercial Debts (Interest) Act 1998, although in our experience it is a much under utilised piece of legislation.

To summarise the Act enables you to claim interest at 8% above the prevailing base rate on all late debts and further to claim compensation, at a set level of between £40 and £100 for invoices that are not paid on time. The compensation was designed to reflect the costs of recovering payment and is in addition to court fees and solicitors costs that can be claimed when proceedings are issued.

The payment of interest and compensation can be claimed at any time within the statutory limitation period, normally 6 years. So, in theory, even after the debt has been paid you can go back to the debtor and demand these extra payments.

There was some debate as to whether compensation is per invoice or not. This is important because if you supply numerous small value items to a single customer then the entitlement to compensation could be significant and disproportionate to the amount in each invoice.

For a guide on claiming under the Act we suggest the following publication be read which explains all that there is to know about claiming interest and compensation, albeit the document possibly goes into too much detail.

http://www.berr.gov.uk/files/file37581.pdf

So what is changing?

The Late Payment of Commercial Debts Regulations 2013 came into force on the 16 March 2013 (the “Regulations”) and they make a number of important changes. They do not have retrospective effect.

(A) where a public authority purchases goods or services, interest starts to accrue on outstanding payments 30 days after the latest of (i) receiving the supplier’s invoice, (ii) receiving the goods or services, and (iii) verification or acceptance of the goods or services (where provided for by statute or contract);

(B)where a business purchases goods or services similar provisions to those above apply where the contract is silent on these matters. However, the parties can agree a due date for payment of up to 60 days after the latest of the events listed above, and, if the extension is not “grossly unfair” to the supplier, can expressly agree to extend the due date for payment beyond that. We have little idea what “grossly unfair is likely to be and the guidance issued is itself devoid of meaning.

(c) Perhaps the most important amendment is that in addition to the fixed charge that a supplier may claim as compensation for the cost of recovering a debt referred to above, the supplier can also claim any other reasonable costs of recovery. Any attempt to exclude or limit this right is made subject to the reasonableness test under the Unfair Contract Terms legislation (regardless of whether the contract concerned is on written standard terms, or a individually negotiated agreement). What is a reasonable cost of recovery? We would expect it to include reasonable solicitors costs, reasonable being the operative word. We have seen debt recovery agents charging thousands of pounds to try to recover a debt when a solicitor would charge no more than £100; we doubt this would be reasonable!

On the 1 April 2013 the small claims track will apply to all claims under £10,000,an increase from the previous threshold of £5,000 that was set in 1999. Surprisingly the fast-track remains for claims under £25,000 with the multi-track applying for claims over £25,000.

Bearing in mind the retail price index has increased by about 40% since 1999 the increase is long overdue. What it means however is if there are any clients who require representation on claims that fall between the old threshold of £5,000 and the new threshold of £10,000 then it is vital that these are issued now otherwise legal costs will not be recoverable.

The increase in the threshold probably means that most disputes concerning individuals are now destined to be resolved in the small claims court which provides access to justice without a party facing potentially ruinous legal costs. As virtually all of the disputes that we assist in are in excess of £10,000 (and indeed the mooted increase to £15,000)we believe the increase in the threshold will have minimal impact for our clients.

However, there are unintended consequences that have not been thought through by those in government making the laws: there are certain contractors that will use the increase in the small claims track to create bogus excuses for non payment knowing that even if they lose litigation then the cost of losing will be minimal and worth the risk. The advice to a client will go something like “so long as you reduce the debt to below £10,000 (or £15,000 if the limit is extended) then even if the other side bothers to sue you and even if you lose, the additional costs will be minimal,therefore you may as well not pay“. Likewise a claimant who has a claim with no real merit can litigate knowing that the cost risk it faces is non existent. Far from the government trying to cut down on the amount of litigation, the work load of district judges could actually increase rapidly.

Finally what about retentions? They are hard to get released at the best of times with main contractors raising numerous excuses as to why they should not get paid. For contracts where the second half of retention is less than £10,000 the subcontractor could well be left trying to recover in a small claim court in which he faces not recovering costs and hoping that the deputy district judge knows a little about commerce and is not simply a divorce lawyer when not being a part time judge.