Education Matters – Summer of construction

The summer term is now in full swing, and it’s not just students who are looking forward to the summer break. Many of our clients operating within the education sector, including local authorities, have been diligently preparing their respective ‘summers of construction’.

Undertaking construction works within the summer break brings with it a string of issues which are not always found in the private sector, not least a tight timeframe with an immovable deadline.

Ensuring these construction projects have the necessary contracts in place and understanding those contractual obligations can be a daunting task, but is a must. A failure to have sufficient contractual provision and/or an inability to understand the obligations imposed by the contract can lead to costly and unnecessary disputes – as these two cases illustrate in the context of rights to payment.

ISG Construction v Seevic College [2014]

Seevic College instructed ISG to carry out works at the college and duly entered into a JCT Design and Build Contract 2011. Under the terms of the contract, ISG were entitled to interim payments – a standard feature of construction contracts that cannot be contracted out of where works are likely to take more than 45 days. ISG duly submitted its interim application for payment ‘No. 13’ in the sum of £1,097,696. Seevic disputed that valuation, thinking that nothing was due. But it failed to serve a pay less notice detailing that. 

ISG referred the matter to adjudication where it was decided that ISG were entitled to the full amount of nearly £1.1m, plus interest (the ‘first award’). Adjudication is a construction specific dispute resolution method which can see a decision reached in 28 days or less (extremely speedy for the law…), and parties to a construction contract cannot avoid it. The first award was focussed solely on the payment mechanisms in the contract and the lack of pay less notice – a procedural tactic that is known as a ‘smash and grab’ adjudication.

In response to the first award, Seevic commenced a new adjudication asking the same adjudicator to carry out a proper valuation of ISG’s works. The adjudicator decided that the true value of the works was £315,450 (the ‘second award’).

ISG disputed Seevic’s ability to rely on the second award though. It argued that the first award trumped the second award, and was successful in doing so. The court stated that by failing to issue a pay less notice, Seevic had effectively agreed to the value of the works claimed in interim application for payment ‘No. 13’. This prevented Seevic from claiming that the true value of the works was less than £1,097,696. The court said the second adjudication was merely an attempt by Seevic to “frustrate or reduce the impact” of the first award.

Leeds City Council v Waco UK [2015]

Similar to Seevic, Leeds City Council (LCC) instructed Waco UK to construct a new modular classroom building and entered into a JCT Design and Build Contract 2005 (rev 2 2009) (the ‘contract’). Again, the contract provided that Waco would make interim applications for payment.

Throughout the course of the contract, Waco had made a large number of irregular applications, generally a few days late. Neither LCC nor the contract administrator had objected to these, and duly paid the sums applied for. Following practical completion, Waco made an application for payment, in the sum of £484,759.50, this time earlier than the contract said. LCC did not pay and Waco referred the matter to adjudication, with the dispute eventually been referred to the court. 

The court had to decide on the validity of the early payment application made by Waco. It stated that an application for payment would ordinarily be invalid if served out of time. However, by the time the disputed application came around, the parties had established a course of dealing which meant late payment applications would be accepted. This was an ‘unavoidable inference’ from what had occurred.

There was, however, no basis to rely on the same course of dealing to establish the same ‘unavoidable inference’ in respect of an early payment application. The court, therefore, agreed with LCC and said that the application was invalid, so there was nothing to pay. 

Conclusion

Because of the failure to issue the right notices, Seevic had to pay out nearly £800,000 more than the ‘true value’ of the works – and couldn’t recover that overpayment on an interim basis (while the law has since been clarified to allow earlier recovery, it would still require payment of any ‘smash and grab’ award first, causing potential cash flow issues). As well as that, it had the distraction value of proceedings to deal with, and professional fees. All of this had a substantial effect on its budget, which could have been avoided had the right notices been issued – a requirement that exists by law in almost every construction contract, and was clearly set out in the contract that had been agreed.

Unlike Seevic, LCC ‘got away with it’. But it was a close run thing, and its failure to exercise the strict terms of the contract earlier, were nearly its undoing. Had it not been lucky, it would have left it, like Seevic, having to pay out a large sum of unbudgeted money because of the simple failure to get the right notices served.

It might be said that at least Seevic and LCC had contracts in place – that isn‘t always the case, and where there isn’t a contract, payment and other obligations can exist by implication, placing parties at even more risk. But fundamentally, both cases show that schools, academies, universities, colleges, and other public authorities are held to the same standard as the private sector. A failure to exercise due diligence when entering into a construction contract or, at the very least, to understand what is required of them can have costly, but easily avoidable, consequences.

For further information on the contents of this article or for general construction advice please contact a member of our Construction and Engineering Team.

This article is from the spring 2019 issue of Education Matters, our newsletter for our clients and contacts in the education sector. To download the latest issue, please visit the newsletter section of our website. Law covered as at May 2019.

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