CONSTRUCTION CASE LAW DIGEST

2018/2019

Over the last 12 months, there have been a

number of notable cases with significant 15 FEBRUARY 2019
London
implications for construction law and practice.
As well as several adjudication cases, such as
the widely discussed Grove Developments, Table of contents
which untangled the conflicting authorities 1. True value adjudications 2
around true value adjudications, there were a
2. Adjudication involving a party in
number of cases that considered fundamental liquidation 3
issues of contract law, the findings of which will 3. Fraud allegations in the context of
be relevant to anyone involved in the staying adjudication enforcement
preparation and/or management of construction proceedings 5
contracts. 4. The prevention principle is not an
overarching rule of law 6
There were also cases that addressed core
5. Contractor's liability for defects
construction law issues, such as design post takeover – design v design
liability, construction insurance, liquidated implementation 8
damages, and the prevention principle which 6. Makdessi penalties test applied to
the courts have clarified is not an overriding rule construction contracts 9
of law. 7. Express contractual terms and
project insurance 10
Important lessons were also learnt in respect of
8. Importance of independent expert
the role of experts in construction disputes, as evidence 12
Fraser J's judgment in the long-running ICI
9. "No Oral Modification" clauses 13
dispute highlighted the importance
10. Pitfalls of terminating a contract 15
of independent expert evidence.
11. Contacts 16
In this construction case law digest, we have
selected some of the most noteworthy cases
from the past year, which will be of interest to
the construction and engineering industry. Each
case includes a summary of the factual Related links
background, decision(s), and the key practice Herbert Smith Freehills
points of each case.

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1. True value adjudications

S&T (UK) Limited v Grove Developments Limited [2018] EWCA 2488 (Civ)
Background: Grove Developments ("Grove") entered into an amended JCT Design and Build
Contract 2011 with S&T (UK) Ltd ("S&T") for the design and construction of a hotel at
Heathrow Terminal 4. The works were delayed and practical completion was not
achieved until more than five months after the original completion date.
A dispute arose between the parties in relation to, among other things, S&T's
entitlement to an extension of time and the validity of Grove's pay less notice with
respect to an interim payment application by S&T for a significant sum (the "interim
application").
A number of adjudications followed, the second of which determined that S&T was only
entitled to a partial extension of time. The third adjudication decided that Grove's pay
less notice in relation to the interim application was invalid; and, as a result, Grove
became liable to pay the amount stated in the interim application. Grove issued CPR
Part 8 proceedings, and S&T brought a counterclaim and separate enforcement action
in relation to the decision of the third adjudication.
Among other issues, the court considered whether, in principle, Grove could commence
a separate adjudication to challenge the 'true' value of the interim application.

TCC decision: Coulson J (as he was then) held that Grove was entitled to commence an adjudication
to determine the correct value of the works (a "true value adjudication").
This decision marked a departure from previous authorities stemming from ISG
Construction Limited v Seevic College [2014] EWHC 4007 (TCC), which clearly stated
that an employer's failure to serve a valid pay less notice essentially amounted to a
deemed acceptance of the value stated in the application (whether right or wrong), and
a subsequent true value adjudication was therefore prohibited.
In relation to the other issues, Coulson J found that Grove's pay less notice was, in fact,
valid. Grove was also found to have complied with its contractual notice requirements
and was entitled to recover liquidated damages for S&T's delay. S&T appealed the
decision to the Court of Appeal.

Court of Appeal The Court of Appeal upheld Coulson J's decision on all issues and dismissed the
decision: appeal.
In relation to the timing of a true value adjudication, the Court of Appeal added that such
adjudication could not be commenced until after the notified sum is paid. The Court of
Appeal found that, as a matter of statutory construction, the adjudication provisions in
section 108 of the amended Housing Grants, Construction and Regeneration Act 1996
(the "Construction Act") are subordinate to the payment provisions in section 111 of
the Construction Act. Therefore, the employer is prohibited from commencing a true
value adjudication until it has complied with its payment obligations.

Key practice • In practice, the outcome of this case is unlikely to hinder a contractor's ability to
points: bring – what is commonly known in the construction industry as – 'smash and grab'
adjudications, which seek to enforce payment applications in the event that the
employer fails to submit a valid and/or timeous pay less notice.
• Further, where such adjudications are brought, the onus remains on the employer to
commence a second adjudication if it wishes to correct any overvalued payment
applications that have been successfully enforced (unless it is willing to allow the
contractor to retain the overpaid sums until the next interim payment cycle or the

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S&T (UK) Limited v Grove Developments Limited [2018] EWCA 2488 (Civ)
final account).
• The Court of Appeal's decision has, however, clarified that an employer, whose pay
less notice is found to be deficient or out of time in an adjudication, can
subsequently seek, in a second adjudication, to dispute that the sum paid was the
true value of the works for which the contractor claimed. This principle applies to
both interim and final payment applications.
• Nevertheless, the employer cannot exercise its right to commence a true value
adjudication until after it has complied with its immediate obligation to pay the
contractor the notified sum in relation to which the employer failed to serve a valid
and/or timeous pay less notice.

2. Adjudication involving a party in liquidation

Bresco Electrical Services Limited (In Liquidation) v Michael J Lonsdale (Electrical) Limited
[2019] EWCA 27 (Civ)
Background: Michael J Lonsdale (Electrical) Limited ("Lonsdale") engaged Bresco Electrical Services
Ltd ("Bresco") to perform electrical installation works on an office in London pursuant to
Lonsdale's standard order form (the "Contract").
A few months after the Contract was signed, Bresco left the site in controversial
circumstances, and Lonsdale and Bresco each alleged wrongful termination of the
Contract against the other. The following year, Bresco became controlled by a liquidator
as a result of voluntary liquidation. Three years later, a notice of intention to refer a
dispute to adjudication was issued on Bresco's behalf alleging repudiatory breach
against Lonsdale, and seeking payment for work completed prior to termination and
damages for loss of profit.
Following the appointment of an adjudicator, Lonsdale invited both the adjudicator and
Bresco to discontinue the adjudication on the basis that the latter was in liquidation.
Bresco, however, declined to discontinue the adjudication; as did the adjudicator, who
instead went on to issue a "non-binding decision" in which he rejected the liquidation
issues and confirmed his jurisdiction to determine the dispute.
Lonsdale issued CPR Part 8 proceedings, seeking declarations and injunctive relief
against Bresco to prevent the latter from continuing the adjudication on the basis that
liquidation extinguished the claim(s) relied on by Bresco in the adjudication.

TCC decision: Fraser J held that the adjudicator had no jurisdiction to determine the dispute referred to
him, and granted an injunction preventing the continuation of the adjudication.
The judge found that, upon the liquidator's appointment, any subsisting financial claims
and cross-claims under the Contract ceased to be capable of separate enforcement.
This was because disputes arising from the Contract became a single dispute relating to
the account to be taken under the Insolvency (England and Wales) Rules 2016 (the
"Insolvency Rules") to determine the balance due to or from the company in liquidation
(i.e. Bresco). Such dispute arose in liquidation, not under the Contract; and this meant
that the adjudicator did not have jurisdiction.
Fraser J also suggested that an adjudication involving a company in liquidation (such as
Bresco) lacked utility, since the decision of the adjudicator would be incapable of

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Bresco Electrical Services Limited (In Liquidation) v Michael J Lonsdale (Electrical) Limited
[2019] EWCA 27 (Civ)
enforcement.
Bresco appealed to set aside Fraser J's decision.

Court of Appeal Coulson LJ, who gave the lead judgment, overturned Fraser J's finding in relation to the
decision: adjudicator's jurisdiction, but upheld his decision to grant the injunction.
Coulson LJ found that, if – as the parties agreed – the contractual right to refer a claim
to arbitration or litigation was not extinguished by liquidation, then the underlying claim
continued to exist for all purposes, including adjudication. As a matter of principle, the
choice of forum did not dictate whether or not the claim existed or was extinguished. As
far as jurisdiction was concerned, therefore, the contractual claim of the insolvent
contractor (i.e. Bresco) continued to exist following liquidation, and so could theoretically
be referred to adjudication.
There was, however, a basic incompatibility between adjudication and the Insolvency
Rules. This meant that a reference to adjudication of a claim by a contractor in insolvent
liquidation, in circumstances where there was also a cross-claim, would – save for in
exceptional cases – be incapable of enforcement and therefore "an exercise in futility".
In the present case, there was no reason why the adjudication should be permitted to
continue, and it was therefore just and convenient to grant the injunction.
Bresco's appeal was heard together with the appeal of Cannon Corporate Limited v
Primus Build Limited, which concerned an application by the employer to set aside an
order by which the first instance judge granted summary judgment to enforce an
adjudicator's decision in favour of the contractor and refused to grant a stay of
execution. The order was made notwithstanding the fact that the contractor was in a
company voluntary arrangement ("CVA") due to solvency issues.
The two appeals were conjoined because the first instance decisions give rise to
different outcomes. No order was ultimately made in respect of the Cannon appeal as it
settled shortly after the hearing. However, Coulson LJ stated that, had the case
remained live, the appeal against the judge's decision to grant summary judgment in
favour of the contractor would have failed, and no stay would have been granted.

Key practice • In a post-Carillion world where construction insolvency is on the rise, this is an
points: important decision that clarifies the relationship between the construction
adjudication process and the Insolvency Rules.
• Following this decision, it is likely that the courts will be less inclined to permit the
continuation of an adjudication involving a company in insolvent liquidation (and
facing a cross-claim) on the basis that such adjudication is unlikely to lead to a
meaningful result.
• However, it is worth noting how Coulson LJ sought to reconcile what he described
as the basic incompatibility between adjudication and the Insolvency Rules, and his
findings in relation to the Cannon appeal.
• In the context of the Cannon appeal, Coulson LJ drew a clear distinction between a
CVA and a situation in which the claimant company was in insolvent liquidation.
Whilst in the latter case, claims made by the company were part of a damage
limitation exercise, whereby liquidators endeavoured to pay dividends to creditors; a
CVA was designed to try to allow the company to trade its way out of trouble. In
those circumstances, Coulson LJ stated that the quick and cost-neutral mechanism

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Bresco Electrical Services Limited (In Liquidation) v Michael J Lonsdale (Electrical) Limited
[2019] EWCA 27 (Civ)
of adjudication could be "an extremely useful tool" to permit the CVA to work.
• Coulson LJ's obiter would therefore suggest that a CVA is one of the "exceptional
cases" in which the court would potentially consider there to be utility in permitting
an adjudicator's decision to be summarily enforced, despite the insolvency of the
claiming party.

3. Fraud allegations in the context of staying adjudication enforcement

proceedings
Gosvenor London Limited v Aygun Aluminium UK Limited [2018] EWCA 2695 (Civ)
Background: Aygun Aluminium UK Limited ("Aygun") engaged Gosvenor London Limited
("Gosvenor") pursuant to a (sub-sub-)contract to perform the labour element of the
cladding works in connection with a project to install a hotel façade in Southampton. The
works were delayed and disputes arose concerning Gosvenor's labour costs.
Gosvenor referred the dispute to adjudication and was awarded a substantial sum.
Gosvenor then applied for summary judgment in the TCC to enforce the adjudicator's
decision. In its defence, Aygun raised allegations of fraud against Gosvenor, claiming
that a substantial proportion of the sum awarded was based on fraudulent invoices that
did not reflect the true value of the work done. Aygun also sought a stay of execution.

TCC decision: Fraser J granted summary judgment in favour of Gosvenor. He held that Aygun could
have raised its fraud allegations at the adjudication, but had chosen not to and,
therefore, the allegations could not be relied on to defeat Gosvenor's claim for summary
judgment.
At the same time, however, Fraser J imposed a stay of execution on the grounds that a
clear inference as to a risk of dissipation of Gosvenor's assets could be drawn based on
the evidence. This included discrepancies in Gosvenor's accounts that had been
belatedly and radically changed without satisfactory explanation.
In this regard, Fraser J introduced the following new principle to be considered by a
court when exercising its discretion to stay adjudication enforcement proceedings:
"(g) If the evidence demonstrates that there is a real risk that any judgment would go
unsatisfied by reason of the claimant organising its financial affairs with the purpose of
dissipating or disposing of the adjudication sum so that it would not be available to be
repaid, then this would also justify the grant of a stay.”
He added, further, that a high test would be applied as to whether the relevant evidence
reached the standard necessary for the above principle to apply. Such test would be
broadly the same as the test for granting a freezing order.
Gosvenor appealed against the stay, including on the following grounds: (1) the alleged
fraudulent behaviour could have been raised as a defence in the original adjudication
(and therefore could not be relied on in support of an application for a stay); and (2)
there was no evidence to justify the inference drawn by Fraser J.

Court of Appeal The Court of Appeal dismissed Gosvenor's appeal.

In relation to ground (1), Coulson LJ in giving the lead judgment, held that, on an

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Gosvenor London Limited v Aygun Aluminium UK Limited [2018] EWCA 2695 (Civ)
decision: application to stay the enforcement of adjudication, the court can weigh up evidence and
decide whether or not it demonstrates a real risk of dissipation, regardless of what
happened (or could have happened) in the adjudication.
This was because the adjudication itself will not have been designed to test whether or
not there was a real risk of dissipation so as to justify a stay. This is an exercise that the
court would be undertaking for the first time; and when doing so, it must consider all the
relevant evidence regardless of whether or not it was or could have been raised in the
adjudication.
Coulson LJ further stated that it is for the judge in each case to assess the extent (if at
all) to which there is a material overlap between the evidence that was or could have
been deployed in the adjudication and the evidence deployed in support of the stay, and
to determine the consequences (if any) of that overlap.
On ground (2), Coulson LJ held that, in exercising his discretion to grant a stay of
execution in this case, Fraser J was right to draw an analogy with the test for granting a
freezing order, and he was entitled to come to the view that he did on the evidence in
respect of Gosvenor's accounts.

Key practice • This case demonstrates that, under certain circumstances, the court may take into
points: account evidence that could have been introduced in a previous adjudication to
decide whether or not it demonstrates a real risk of dissipation of assets, such that
an application to stay the enforcement of an adjudicator's decision should be
granted.
• The new principle introduced by Fraser J supplements those summarised in
Wimbledon Construction Co 2000 Ltd v Derek Vago [2005] EWHC 1086 (TCC), and
is expected to form a valid consideration for a court when exercising its discretion to
stay adjudication enforcement proceedings.
• Other principles that may be taken into account include the claimant's insolvency or
inability of the claimant to repay the judgment sum. These principles are not,
however, intended to be an inflexible list, and it remains the case that the relevant
principles to be considered by the court in connection with a stay application will
depend on the facts of each case.
• Further, where a stay application is supported by allegations of fraud, a high test will
be applied and solid evidence (e.g. of a real risk of dissipation) will be required to
support a conclusion that a stay is justified.

4. The prevention principle is not an overarching rule of law

North Midland Building Limited v Cyden Homes Limited [2018] EWCA 1744 (Civ)
Background: Cyden Homes Limited ("Cyden") engaged North Midland Building Limited ("NMB") to
design and build a large house and several outbuildings on a site in Lincolnshire. The
contract incorporated the JCT Design and Build 2005 Standard Terms and Conditions
with several bespoke amendments, including an amendment to clause 2.25.1.3, which
provided that:
"(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" (the "Concurrent

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North Midland Building Limited v Cyden Homes Limited [2018] EWCA 1744 (Civ)
Delay Clause").
"Relevant Events" included employer acts of prevention.
The works were delayed and NMB applied for an extension of time for various reasons.
Cyden allowed a partial extension of time, but rejected a full extension on the basis that
some of the delays were concurrent with delays caused by NMB, and under the
Concurrent Delay Clause, NMB was not entitled to an extension of time.
NMB brought CPR Part 8 proceedings seeking declarations that:
(i) the effect of the Concurrent Delay Clause was to make time "at large" where NMB
had a claim to an extension of time for a delay caused by a Relevant Event and that
delay was concurrent with another delay for which NMB was responsible. This was due
to the operation of the 'prevention principle'; and
(ii) in such circumstances, NMB must complete within a reasonable time and liquidated
damages are void.

TCC decision: Fraser J held that the Concurrent Delay Clause was 'crystal clear', and allocated the risk
of concurrent delay to NMB. The prevention principle did not arise in this case. Further,
there is no rule of law that prevents parties from agreeing that concurrent delay be dealt
with in any particular way.
NMB appealed on the basis that: (1) the Concurrent Delay Clause was contrary to an
overarching principle of law and ineffective; and (2) even if the Concurrent Delay Clause
was enforceable, there was an implied term preventing Cyden from levying liquidated
damages for concurrent delay.

Court of Appeal The Court of Appeal dismissed NMB's appeal.

decision: In relation to ground (1), Coulson LJ, who gave the lead judgment, agreed with Fraser J
that the Concurrent Delay Clause was unambiguous, and plainly sought to allocate the
risk of concurrent delay to Cyden. There were also no other express or implied
contractual terms or overarching principles of law, which would render the Concurrent
Delay Clause inoperable.
Ground (2) was also rejected on several grounds, including on the basis that extension
of time provisions and liquidated damages provisions were closely interlinked. This
meant that NMB could not argue a result in respect of liquidated damages that was
different from the result in respect of extensions of time.

Key practice • The Court of Appeal has finally clarified that the prevention principle is not an
points: overriding rule of public or legal policy, which prevails over an express contractual
provision that allocates the risk of concurrent delay between the parties. Rather, the
prevention principle operates by way of implied term. Therefore, it cannot be implied
into a contract if it contradicts an express term.
• It is also clear from the decision that parties are free to contract out of the prevention
principle. For example, they can contractually agree the manner in which concurrent
delay is to be dealt (e.g. by way of a concurrent delay clause).
• However, a concurrent delay clause should be drafted unambiguously, as otherwise
it may be construed in the contractor's favour. Further, an effective extension of time
mechanism – in particular, one that provides for employer acts of prevention –
remains crucial to preserve the contractual completion date and entitlement to delay
liquidated damages.

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5. Contractor's liability for defects post takeover – design v design

implementation
SSE Generation v Hochtief Solutions AG and Another [2018] CSIH 26
Background: This was a Scottish case in relation to the Glendoe Hydroelectric Scheme (the
"Scheme"). The contractor was Hochtief Solutions AG ("Hochtief"). The employer was
SSE Generation Ltd ("SSE").
The Contract was based on the standard form NEC Engineering and Construction
Contract (2nd ed.) and included Option M, which limited Hochtief's liability for defects in
the works due to its design so far as Hochtief proved that it used reasonable skill and
care to ensure that it complied with the works information. Among other things, the
works information provided for a 75 year design life for civil works.
As part of the Scheme, Hochtief was required to design and construct a tunnel, which
was a principal component of the civil works, through a fault zone with difficult rock
conditions. The design of the tunnel was agreed and accepted by the project manager,
and required a specified level of protection to be given to 'erodible rock' (i.e. where there
were poor rock conditions). Each party also engaged its own engineering geologists,
who, as the tunnel excavation proceeded, jointly identified which rock was erodible and
determined the support required based on the actual conditions found within different
sections of the tunnel.
A few months after takeover, but well before the expiry of the defects period, there was
a major collapse in the tunnel due to a combination of poor rock conditions and
insufficient support in the tunnel.
A dispute arose as to which party should bear the remedial costs. Hochtief argued that
the collapse constituted loss of, or damage to, the works taken over by SSE.
Accordingly, the event was an employer's risk under clause 80.1 of the Contract. SSE
argued that a defect had existed at takeover and the risk was a contractor's event.
One of the fundamental issues in dispute was whether the collapse was as a result of a
defect in Hochtief's design or the implementation of that design. There was also an
ancillary issue as to whether SSE was precluded from bringing proceedings against
Hochtief on the basis that the Contract provided for joint names insurance.

Previous Prior to this appeal, the dispute was subject to two judgments by the Outer House of the
decisions: Court of Session (as well as two preceding adjudications).
The first of the Outer House judgments established that the provision for joint names
insurance did not displace the parties' liability under the Contract, and SSE was not
barred from claiming against Hochtief.
In the second Outer House judgment, Lord Woolman held that, whilst Hochtief had been
obliged to repair the tunnel following its collapse (and was in breach of contract by
refusing to do so), it was not responsible for paying the remedial costs, as the tunnel
collapse was not due to a defect that existed at takeover. Rather, it was an employer's
risk event and SSE was responsible for paying the remedial costs under the Contract.
The Outer House also held that Option M of the Contract "placed an important brake on
liability" such that Hochtief had not guaranteed the works. Instead it had accepted the
lesser obligation of reasonable skill and care, which Hochtief had exercised. SSE
appealed.

Court of Session The Inner House allowed SSE's appeal by a majority of two to one.

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SSE Generation v Hochtief Solutions AG and Another [2018] CSIH 26

(Inner House) Lord Carloway, who gave the minority judgment, largely upheld Lord Woolman's
decision: decision. However, Lord Menzies and Lord Glennie held that the collapse of the tunnel
was due to a defect that existed on takeover, on the basis that it constituted:
(i) a part of the works not in accordance with the works information, since the tunnel
completely collapsed within the two year defects period following takeover. Given that
there was no intervening event after takeover, which might have caused or contributed
to the collapse, the non-conformity must have existed at takeover; and
(ii) a part of the works not in accordance with Hochtief's design which was accepted by
the project manager, as there was, in fact, an absence of protection in areas of erodible
rock.
The loss of, or damage to, the works by virtue of the collapse was therefore at Hochtief's
risk, and SSE was entitled to recover its remedial costs.
Importantly, the limitation of Hochtief's liability under Option M had no application in this
case since the cause of the collapse was not a defect due to Hochtief's design. Rather,
it was a disconformity between the relevant part of the works and the accepted design,
which had arisen due to Hochtief's failure to implement that design. This meant that the
fact that Hochtief had exercised reasonable skill and care was no defence to liability.

Key practice • Construction contracts do not typically define the concept of design or expressly
points: distinguish it from that of design implementation. In this case, however, that
distinction had significant financial consequences for Hochtief, who ultimately
became liable for over £100 million in remedial costs.
• An important lesson to be learnt from this case is that contractors cannot assume
that standard reasonable skill and care qualifications will provide a comprehensive
defence to design-related liability. This case has demonstrated that the courts may
not necessarily find that certain activities, such as the exercise of engineering
judgment which many would consider part of the design process, fall within the
definition of "design". When negotiating construction contracts, therefore,
contractors need to identify any such potential gaps by carefully assessing the
scope of the proposed contractual protections in light of the nature of the actual
activities to be undertaken on the project.
• Whilst this case is currently of persuasive authority, permission to appeal to the UK
Supreme Court has been granted by the Court of Session and the hearing is
expected to take place in 2019 (ref: UKSC 2018/0130).

6. Makdessi penalties test applied to construction contracts

(1) GPP Big Field LLP and (2) GPP Langstone LLP v Solar EPC Solutions SL (formerly known
as Prosolia Siglio XXI) [2018] EWHC 2866 (Comm)
Background: The issues in this dispute arose under five EPC contracts relating to different solar
power generation plants in the UK. The EPC contracts were entered into between one
or other of the claimants ("GPP"), as employer, and Prosolia UK Ltd ("Prosolia"), as
contractor.
As Prosolia subsequently became insolvent, it was the parent company of Prosolia
("Solar"), who defended the claim (and counterclaimed) in its capacity as guarantor

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(1) GPP Big Field LLP and (2) GPP Langstone LLP v Solar EPC Solutions SL (formerly known
as Prosolia Siglio XXI) [2018] EWHC 2866 (Comm)
and/or indemnifier of the contractor's obligations under the EPC contracts.
GPP's claim, in broad terms, was for damages (both liquidated and unliquidated) for late
and/or non-completion of the works under four of the EPC contracts. Solar also
counterclaimed against GPP for the balance of the sums, which were purportedly due
under all five of the EPC contracts.
There were various issues that arose from the parties' claims and counterclaims,
including whether Prosolia had been relieved of its obligation to achieve
"commissioning" by the contractual date due to force majeure. Another issue was the
nature of Solar's obligations as guarantor and/or indemnifier. However, one of the main
issues considered by the court was whether the delay liquidated damages provisions –
which were similarly drafted across all five EPC contracts – were penal, and therefore
unenforceable.

Decision: The court held that the delay liquidated damages provisions were not penal, and
therefore enforceable.
The court applied the test on penalties (as reformulated in Makdessi [2015] UKSC 67);
and found that the delay liquidated damages provisions did not exceed a genuine pre-
estimate of loss, and that the sums were not in any way extravagant or unconscionable
in comparison with the legitimate interest of the employer in ensuring timely
performance of the contracts.
This was despite the fact that these provisions expressly described the sums payable as
"the penalty". Further, the rate of delay liquidated damages across all of the EPC
contracts was stated to be the same, even though each of the plants had a different
output with varying expected electricity prices, and the extent of loss likely to be suffered
was dependent on the output of the plant and prevailing electricity price.

Key practice • In arriving at its decision, the court had regard to the "genuine pre-estimate of loss"
points: test from Dunlop (which was the main authority on penalties prior to Makdessi). This
suggests that, notwithstanding the reformulated penalties test in Makdessi, whether
liquidated damages are a genuine pre-estimate of loss, remains a relevant
consideration in determining whether or not they may be penal.
• This decision also lends support to the proposition that, under the Makdessi test,
delay liquidated damages that ensure timely performance of a contract will typically
be construed by the courts as serving and protecting a "legitimate interest" of an
employer in the context of a construction contract.

7. Express contractual terms and project insurance

(1) Haberdashers' Aske's Federation Trust Limited and (2) The Mayor and Burgesses of the
London Borough of Lewisham v (1) Lakehouse Contracts Limited and (2) Cambridge
Polymer Roofing Limited & Ors. [2018] EWHC 558 (TCC)
Background: Haberdashers' Aske's Federation Trust Limited ("Haberdashers") operated a school
situated in the London Borough of Lewisham ("Lewisham").
Lakehouse Contracts Limited ("Lakehouse") was the main contractor for works to
extend the buildings at the school, which were carried out pursuant to a design and build

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(1) Haberdashers' Aske's Federation Trust Limited and (2) The Mayor and Burgesses of the
London Borough of Lewisham v (1) Lakehouse Contracts Limited and (2) Cambridge
Polymer Roofing Limited & Ors. [2018] EWHC 558 (TCC)
contract. Cambridge Polymer Roofing Limited ("CPR") was the roofing subcontractor
engaged by Lakehouse.
Pursuant to the main contract, project insurance was obtained, with Lakehouse and its
"subcontractors" included as insureds. The subcontract between Lakehouse and CPR
separately required CPR to take out its own public liability insurance, which CPR
obtained for the agreed level of cover.
A fire occurred in an area of the works where CPR was undertaking "hot work" (i.e.
using a blowtorch to stick down roofing membrane), which caused extensive damage to
the school's buildings. Haberdashers and Lewisham claimed damages against
Lakehouse, who then sought a contribution from CPR. CPR, in turn, claimed against
Lakehouse's project insurers, and sought declarations to the effect that CPR was
entitled to the benefit of the project insurance, notwithstanding the existence of its own
public liability insurance cover.
CPR's grounds for arguing that it was a co-insured under the project insurance included
the assertions that: (1) Lakehouse had procured insurance from the project insurers as
CPR's agent; (2) the project insurers had made a standing offer to insure CPR, who was
a member of a class of insureds identified in the project insurance policy (i.e.
"subcontractors"); and (3) there had been acceptance by conduct on CPR's part to be
included in the project insurance.
CPR further claimed that, as a co-insured under the project insurance, an implied term
arose, which prevented Lakehouse from suing CPR; and the project insurers were also
prevented from claiming against CPR as they had agreed to waive their rights of
subrogation.

Decision: Fraser J acknowledged that the principle of standing offer would ordinarily be the correct
legal approach, in that, by executing the subcontract and accepting the project insurers'
standing offer, a term would be implied into the subcontract that would allow CPR to
claim under the project insurance policy.
However, on the facts of the case, he found that such implied term could not arise due
to the express term agreed in CPR's subcontract, which demonstrated the parties'
objective intention that CPR should have its own insurance, and that CPR would not rely
upon the project insurance. Such express term prevented CPR from being an insured
party under the project insurance because the term that would have to be implied for
CPR to obtain that status would be contrary to the express term agreed by Lakehouse
and CPR.
Fraser J also rejected CPR's other arguments, including in relation to agency and
acceptance by conduct.
Since CPR was not a co-insured under the project insurance, neither Lakehouse nor the
project insurers were precluded from bringing a claim against CPR for a contribution.
Fraser J, therefore, refused to grant the declarations sought by CPR.

Key practice • As mentioned in Fraser J's judgment, this is the first case in which the court has had
points: to decide how subcontractors in the construction industry come to participate in
project insurance policies.
• Whilst the decision may not have been favourable to CPR, this case does clarify
that a subcontractor can generally expect to benefit from project insurance that

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(1) Haberdashers' Aske's Federation Trust Limited and (2) The Mayor and Burgesses of the
London Borough of Lewisham v (1) Lakehouse Contracts Limited and (2) Cambridge
Polymer Roofing Limited & Ors. [2018] EWHC 558 (TCC)
identifies "subcontractors" as a class of insureds.
• However, subcontractors should not assume that they can automatically rely on the
terms of project insurance simply because the policy states that it covers the
interests of a defined class of insureds (of which it is ostensibly a member).
• The express terms agreed in the relevant subcontract will be of central relevance to
determining whether or not a subcontractor is, in fact, a co-insured under project
insurance further up the contractual chain. It is therefore important that parties
carefully consider the implications of insurance terms under a subcontract vis-à-vis
the project-wide insurance policy.

8. Importance of independent expert evidence

Imperial Chemical Industries Limited v Merit Merrell Technology Limited [2018] EWHC 1577
(TCC)
Background: Merit Merrell Technology Ltd ("MMT") was a specialist engineering piping manufacturer,
which entered into an amended NEC3 contract with Imperial Chemical Industries
Limited ("ICI") to perform works associated with the construction of a new paint
manufacturing facility in Northumberland (the "Project").
The Project ran substantially over the initial budget and was also in delay. ICI started to
withhold payments on the grounds of alleged defective work by MMT, and eventually
terminated MMT's employment under the contract on the grounds of alleged repudiatory
breaches on MMT's part.
ICI brought proceedings against MMT, which led to a long running series of proceedings
involving six High Court judgments (as well as four adjudications). The main issues in
dispute between the parties concerned mutual allegations of termination and
repudiation, alleged defects in MMT's work, and the value of the works performed by
(and paid to) MMT. An order was made for split trials on liability and quantum.
In the liability trial, Fraser J found that defects barely existed in MMT's work. He also
dismissed all of ICI's allegations of repudiatory breach against MMT and found, instead,
that ICI had repudiated the contract by wrongfully terminating MMT's employment. He
also held that the appointment of one of ICI's employees as project manager was invalid
in the context of a NEC3-based contractual mechanism.
The quantum trial to which this judgment relates concerned the value of the work carried
out by MMT as at the date of ICI's repudiation, and the damages which MMT was
entitled to recover as a result of ICI's repudiatory breach of contract. As at the date of
issue of the claim form in these proceedings, MMT had been paid approximately £20
million, but ICI claimed that MMT's works were only worth approximately £10 million.

Decision: Fraser J held in favour of MMT's valuation and found that the works were to be valued at
£22 million, with a balance overall of £2.2 million to be awarded to MMT.
Fraser J also made notable findings in relation to ICI's experts in relation to whom he
highlighted the "preponderance of lack of independence". Fraser J was highly critical of
ICI's experts, some of whom he noted had ignored earlier findings and direct evidence

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Imperial Chemical Industries Limited v Merit Merrell Technology Limited [2018] EWHC 1577
(TCC)
of fact, and had also attempted to construct a case on reliance by ICI, which was not
even pleaded.
The judge emphasised the need for experts to, and for instructing solicitors to ensure
that experts, comply with the duties of an independent expert, as set out in the judgment
in The Ikarian Reefer [2000] 1 WLR 603. The principles that govern expert evidence
(including those in CPR Practice Direction 35) need to be carefully adhered to, and if
experts are unaware of these principles, these should be explained to them by
instructing solicitors.

Key practice • Expert evidence tends to play a central role in construction disputes, not only in the
points: presentation of opinion evidence but also in the factual investigation.
• This case demonstrates a growing trend in judicial scrutiny over experts' compliance
with their duties of an independent expert, and the need for parties (and their
lawyers) to be cognisant of these duties, particularly in high value and/or technically
complex construction disputes for which expert evidence is crucial.
• Helpfully, Fraser J provided practical examples of the application of the governing
principles in practice. According to the judge's examples, compliance with an
expert's duties may be facilitated by, for example, ensuring that experts on both
sides have access to the same material, and encouraging experts to discuss and
agree on issues during joint expert meetings.

9. "No Oral Modification" clauses

Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24
Background: Rock Advertising Limited ("Rock") entered into a contractual licence with MWB
Business Exchange Centres Limited ("MWB") to occupy office space in central London
for a fixed term of 12 months. The licence included a clause, which provided that the
licence could not be amended unless in writing signed on behalf of the parties (the
"NOM clause").
After Rock accumulated arrears of licence fees, the parties engaged in discussions
regarding a revised schedule of payments. According to Rock, the parties orally agreed
that Rock could defer some payments and spread the accumulated arrears over the
remainder of the term. However, MWB eventually locked Rock out of the premises due
to its failure to pay the arrears, terminated the licence and then sued for the arrears.
Rock counterclaimed damages for wrongful exclusion from the premises.
This case gave rise to the following two fundamental issues of contract law:
(i) Whether a contractual term prescribing that an agreement may not be amended save
in writing signed on behalf of the parties is legally effective.
(ii) Whether an agreement whose sole effect is to vary a contract to pay money by
substituting an obligation to pay less money or the same money later, is supported by
consideration.

County Court At first instance, Judge Moloney decided in favour of MWB. He found that an oral
decision: agreement had been made to vary the licence. Further, he held that the variation was

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Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24
supported by consideration because it brought practical advantages to MWB as it
enhanced MWB's prospect of being paid. However, the variation was ineffective
because it was not made in accordance with the NOM clause.

Court of Appeal The Court of Appeal overturned the first instance decision. It agreed that the variation
decision: was supported by consideration, but considered that the oral agreement to revise the
payment schedule amounted to an agreement to dispense with the NOM clause. MWB
was therefore bound by the variation.

Supreme Court The Supreme Court allowed the appeal and restored the order of Judge Moloney.
decision: Lord Sumption, who gave the lead judgment, agreed with Judge Moloney's reasons for
finding that the oral variation in this case was invalid. This was on the basis that:
(i) The law should give effect to a contractual provision requiring specified formalities to
be observed for a variation.
(ii) To apply the principle of 'party autonomy', as the Court of Appeal did, would be to
override the parties' intentions (in this case, to bind themselves as to the form of a
variation). Party autonomy operates up to the point when the contract is made, but
thereafter only to the extent that the contract allows.
(iii) There are legitimate commercial reasons for agreeing to a clause like the NOM
clause; and the law does not normally obstruct the legitimate intentions of businessmen,
except for overriding reasons of public policy (which the NOM clause neither frustrated
nor contravened).
(iv) The reasons advanced in the case law for disregarding NOM clauses are entirely
conceptual.
(v) Whilst estoppel would safeguard potential injustices that may arise due to oral
variations being ineffective, Rock had not taken steps to support an estoppel defence.
At the very least, there would need to be some words or conduct unequivocally
representing that the variation was valid despite its informality, and it would need to be
something more than an informal promise.
Lord Briggs, who dissented as to reasoning, adopted a narrower approach than Lord
Sumption in relation to the effect of a NOM clause. Lord Briggs considered that a NOM
clause would continue to operate until the parties expressly (or by strictly necessary
implication) agreed to do away with it. Although unlikely, this would in theory leave open
cases where parties have the NOM clause in mind, and then agree to dispense with it
orally.
In relation to consideration, the Supreme Court decided that it was unnecessary to
address this issue.

Key practice • Modifications to contractual terms are commonplace in the construction industry,
points: particularly in the context of long term construction projects. In practice, however, it
is not always the case that the contractual requirements for effecting such
modifications are strictly adhered to, and disputes often arise as to whether or not
the terms of the relevant construction contract have been validly modified.
• This decision clarifies that the courts will give effect to 'no oral modification' clauses,
which prescribe that an agreement may not be amended, save in writing and/or
signed on behalf of the parties. Further, an oral agreement to vary the substance of
a contract does not amount to an implied agreement to remove such clause.

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Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24
• The case does leave open the possibility of parties agreeing to remove a 'no oral
modification' clause from their bargain orally if they expressly agree to dispense with
that clause (see Lord Briggs's judgment). In certain (limited) circumstances, an oral
modification may also be saved by 'necessary implication' or estoppel.
Nevertheless, this decision certainly renders it more difficult for contracts to be
amended informally or not in accordance with the procedure to be observed under
the contract.

10. Pitfalls of terminating a contract

Phones 4U Limited (In Administration) v EE Limited [2018] EWHC 49 (Comm)
Background: The trading relationship between Phones 4U Ltd ("Phones 4U") and EE Ltd ("EE") was
governed by a written agreement and an exchange of emails, which together contained
the terms of business between the parties relating to pay monthly contracts and pay as
you go connections (the "Contract").
From 2012, Phones 4U's business model faced mounting pressures, and in September
2014, EE notified Phones 4U that it would not renew the Contract when it expired. On
the same day, Phones 4U sought the appointment of administrators. A few days later, it
closed its retail shops and outlets and suspended online trading. This cessation of
trading became permanent.
Two days after Phones 4U ceased to trade, EE formally terminated the Contract in
accordance with clause 14.1.2, which entitled EE to terminate the Contract on the
appointment of administrators. In its termination letter, EE made no mention of any
breach by Phones 4U, but expressly reserved all rights and remedies under the
Contract.
Phones 4U brought proceedings against EE for unpaid revenue generated from its sales
of EE contracts. EE counterclaimed, primarily, for loss of bargain damages resulting
from the termination of the Contract. Phones 4U then applied for summary judgment to
dismiss EE's primary counterclaim.
Among the issues before the court was the question as to whether the terms of EE's
letter, which purported to terminate the Contract under an express contractual right to
terminate, defeated any claim by EE for damages for loss of bargain.

Decision: The court granted Phones 4U's application for summary judgment and dismissed EE's
counterclaim.
On a proper construction of EE's termination letter, the court found that EE had
communicated unequivocally that it was terminating in exercise of, and only of, its right
to do so under clause 14.1.2 of the Contract – this was a right independent of any
breach.
Phones 4U was not accused of breach and any rights in respect of breach had been
reserved by EE. In this regard, the court held that "a right merely reserved is a right not
exercised". EE could not re-characterise the events after the fact and claim that it had
terminated for breach when it had not. There was no causal connection between EE
choosing to treat itself as discharged from further performance of the bargain and
communicating that choice to Phones 4U. Accordingly, EE's claim for loss of bargain
damages failed.

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Phones 4U Limited (In Administration) v EE Limited [2018] EWHC 49 (Comm)

Key practice • Termination should remain a last resort for contacting parties given the grave
points: consequences of wrongful termination. This is particularly the case in relation to
high value construction projects for which the financial implications of wrongful
termination can be extreme.
• This case also serves as a useful reminder of the pitfalls of termination and
termination notices. In order to claim loss of bargain damages, a terminating party
needs to show that the termination of the contract – which creates the loss of
bargain – resulted from the repudiatory breach of the other party. This means that
the terminating party must show that the contract was terminated by its exercise of
its common law right to terminate for that breach.
• If a termination letter communicates clearly a decision to terminate only under an
express contractual right to terminate that has arisen irrespective of any breach
(including one that is later alleged), then the contract will not be regarded as having
been terminated for breach. Therefore, a claim for damages for loss of bargain at
common law cannot run.
• A terminating party therefore needs to exercise caution when specifying the basis
on which it is terminating the contract. Further, commonly used reservation of rights
language can have the effect of precluding the terminating party from subsequently
claiming certain remedies.

11. Contacts
James Doe, Partner Jake Reynolds, Associate
T +44 20 7466 2583 T +44 20 7466 2370
james.doe@hsf.com jake.reynolds@hsf.com

David Nitek, Partner Noe Minamikata, Professional

T +44 20 7466 2453 Support Lawyer
david.nitek@hsf.com T +44 20 7466 2838
noe.minamikata@hsf.com

Ann Levin, Partner Joanna Wilde, Trainee

T +44 20 7466 2398 T +44 20 7466 2368
ann.levin@hsf.com joanna.wilde@hsf.com

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© Herbert Smith Freehills LLP 2019
The contents of this publication, current at the date of publication set out above, are for reference purposes
only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about
your specific circumstances should always be sought separately before taking any action based on the
information provided herein.

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