In the first of a new series, the construction and engineering team at solicitor Berwin Leighton Paisner apply themselves to everything you always wanted to know about construction law, but were too afraid to ask. Help is at hand …
Can we adjudicate several matters at once?

Q: I work for a small subcontractor that carries out most of its work for one large main contractor. Some time ago there was a dispute about payment and the main contractor has since then refused to pay anything on a number of contracts. Can we include all our claims in one adjudication? If not, then we are told we can arbitrate but we may have to put up security for the main contractor's costs, as we are now effectively insolvent because of the main contractor's actions. Is this correct?

A: So far as adjudication is concerned, section 108(1) of the Construction Act refers to "a dispute" and "the contract", so in the absence of consent it will not be possible to include all your claims in one single adjudication. You may be able to get the same adjudicator appointed by an adjudicator nominating body, but there is no guarantee of this. As regards arbitration, again separate arbitration notices would need to be served, but there is a greater chance that a single arbitrator would be appointed to deal with all the disputes. You need not worry unduly about having to put up a bank guarantee or cash deposit. If you can prove that your company's impecuniosity was caused directly by the main contractor's failure to pay you, then the court will normally decline to order security if it would have the effect of stifling an otherwise arguable claim.

Do we have a contract or not?

Q: We are contractors who submitted a quotation for work based on a specification. Our quotation was accepted by the client on a purchase order saying its standard terms applied. We protested but nonetheless started work. Are we bound by the client's terms?

A: A contract is formed when there is an "offer" and "acceptance" of that offer. Your quotation was an offer. The client's purchase order was not an acceptance of your offer but another offer. You did not accept his offer.

If you and the client subsequently performed the works as if the client's standard terms had applied from the outset, the circumstances may show that an agreement was eventually reached, by conduct, which incorporated the client's standard terms. If no agreement was ever reached on the terms you may still have a "simple" contract with your client that relates to the scope of work and the price only.

How can we ensure payment?

Q: My company recently tendered successfully for a major project for an established UK client. We have now been told that, for reasons associated with its financing, our employer will not be the UK parent but a subsidiary company based in Jersey. What steps can we take to ensure that we get paid?

A: There is no guaranteed route to payment, but there are a number of steps that you can take to improve your position. These include:

  • Asking the funder to make direct payment – they will often do so, but usually on a discretionary basis only.
  • Asking the UK parent to provide a payment guarantee.
  • Negotiating more favourable payment terms (such as advance payments or a shorter payment period)
  • Ensuring that any retention is held in a separate trust account.

You may also be able to obtain insurance against the risk of bad debts – ask your broker.

How can we get work started?

Q: We have selected a contractor for our project, but we have not yet agreed all the price and specification details. However, we need him to start preparatory work urgently in order to maintain our programme. Should we issue a letter of intent?

A: There is nothing wrong with using a properly drafted letter of intent in the right circumstances. However, they should be used sparingly and should never be seen as a pretext to avoid or delay entering into a formal contract. A properly drafted letter of intent should:

  • Authorise the carrying out of specific tasks only – a general instruction to "proceed with the works" is dangerous.
  • Be of limited duration.
  • Contain a cap on the employer's financial liability.
  • State clearly that it is not a contract for the whole of the works.
  • Specify the terms on which any authorised activities are to be carried out.
  • Allow the employer to terminate the instruction at any time, on payment of reasonable costs incurred.

Can they withold payment?

Q: We have started adjudication proceedings against a main contractor for non-payment of an application for payment. The contractor says that, even though it failed to serve a withholding notice, the work has not been carried out properly and was completed late, exposing it to liquidated damages. They claim that the adjudicator must take both these issues into account when assessing what money, if any, is due under the application for payment. Are they right?

A: Yes and no. There is, unfortunately, a difference of opinion between the judges as to whether an adjudicator can take into account defective work when no withholding notice under the Construction Act has been served. You can certainly cite several cases in support of the position that the adjudicator cannot reduce the application for payment because of defective work in the absence of a withholding notice, but it appears that not all judges (in England and Scotland) agree on this. Happily, the position regarding liquidated damages is clearer. If no withholding notice is served, then there is no doubt that the adjudicator should not take this into account. The main contractor's remedy is to make a separate claim under the contract.

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