In this recent case, the TCC held that an agreement reached with a surety under a bond could not be classed as an ‘assessment’ under the related building contract for the purposes of assessing the value of the final account.

Key facts:

In 2013, ML Hart Builders Ltd (the “Contractor”) and Swiss Cottage Properties Limited (the “Employer”) entered into a JCT form of contract for the design and construction of a number of residential apartments (the “Building Contract”). The Building Contract provided that the Contractor should procure a performance bond in favour of the Employer in the value of 10% of the contract sum.

Clause 8.7.4 of the Building Contract provided that:

"If the Contractor's employment is terminated under clause 8.4, 8.5 or 8.6…

following the completion of the Works and the making good of defects in them (or of instructions otherwise, as referred to in clause 2.35), an account of the following shall within 3 months thereafter be set out in a statement prepared by the Employer:

• the amount of expenses properly incurred by the Employer, including those incurred pursuant to clause 8.7.1 and, where applicable, clause 8.5.3.3, and of any direct loss and/or damage caused to the Employer and for which the Contractor is liable, whether arising as a result of the termination or otherwise;
• the amount of payments made to the Contractor; and
• the total amount which would have been payable for the Works in accordance with this Contract."

Following the execution of the Building Contract, the Employer subsequently entered into a guarantee bond with Aviva Insurance Limited (the “Surety”). The bond stated (among other things) that in the event of the Contractor’s breach of contract or insolvency, the Surety would:

"...satisfy and discharge [damages sustained by Swiss Cottage] as established and ascertained pursuant to and in accordance with the provisions of or by reference to the Contract and taking into account all sums due or to become due to [Hart].“

In 2015, the Contractor entered into a Creditors Voluntary Liquidation. The Employer submitted a statement of final account claiming £435,175.39 from the Contractor. However, the Contractor alleged that approximately £200,000 was in fact due to it. In compromise of such claims, in 2017, the Employer and the Surety entered into an “Acceptance Agreement” under which the Surety agreed to pay sums to the Employer pursuant to the bond. The Contractor was not party to the Acceptance Agreement.

The Adjudication: 

Subsequently, the Contractor initiated adjudication proceedings. There were two issues put before the Adjudicator:

• did the Acceptance Agreement, setting out sums  payable under a guarantee bond, prevent assessment of the termination account under clause 8.7.4 of the Building Contract? (“Issue 1”); and
• if not, what decision should be reached in respect of that assessment? (“Issue 2”)

On Issue 1, the Adjudicator determined that the terms agreed with the Surety in the Acceptance Agreement amounted to an assessment of the Contractor’s entitlement under clause 8.7.4. Given the Adjudicator’s decision on Issue 1, the Adjudicator declined to make a decision on Issue 2.

In response, the Contractor made an application to the court under Part 8, seeking a declaration that the decision of the Adjudicator was wrong and therefore not binding upon the parties.

The TCC Judgment: 

The court held that agreement between the Surety and Employer as to sums due under the bond could not be classed as the assessment of the final account as required pursuant to clause 8.7.3 of the Building Contract, nor did it contain such an assessment. In his judgment, Mr Roger Ter Haar QC stated:

“Clause 8.7.4 contemplates a statement having primary efficacy as between the parties to a construction contract. An agreement between the Employer and the Surety settling liability under the Bond is not an agreement on its face having efficacy between the parties to the construction contract”

As a result of this decision, there was a question for the court on whether the Contractor was entitled to launch a fresh adjudication on the matter. The Employer argued that they could not, because of the effect of paragraph 9(2) of the Scheme of Construction Contracts 1997, which prevents two adjudications being heard on the same dispute. The paragraph requires an adjudicator to resign if the dispute is the same, or substantially the same as a dispute which was previously referred to adjudication.

The court held that a second adjudicator was free to decide Issue 2 on its merits. In making this decision, the court considered the following passage from Coulson on Construction Adjudication:

“If the dispute is the same or substantially the same as one which has previously been referred to adjudication, and a decision has been taken in that earlier adjudication, then paragraph 9(2) is unequivocal: in such circumstances, the adjudicator must resign. Doubtless as a result of this finality, there have been a large number of reported cases in which the responding party has sought a declaration or a finding that the adjudicator should have resigned and that, in consequence, he had no jurisdiction to give the decision that he did …

Perhaps unsurprisingly, the majority of the reported cases dealing with what might be called attempted readjudication demonstrate a general desire to find that the disputes in question were not the same or substantially the same ….”

However, the court also quoted the authority of Hitachi Zosen Inova AG v John Sisk & Son Limited [2019] which stated:

“In my judgment the dispute referred to in the eighth adjudication was also not “substantially the same” as the dispute decided in the second. It is important to bear in mind that the comparison to be made is between what was referred in the eighth adjudication and what was decided in the second. Once it is recognised that there was no valuation decision at all in the second adjudication, it become clear that, in the matter of the value to be attributed to and recovered for Event 1176, there is no overlap at all …”

BS Comment

This judgment highlights two key points:

• a third party agreement, to which the contractor is not party, to is unlikely to be capable of replacing the assessment upon termination mechanism in a building contract (unless your contract states otherwise); and
• when determining whether a given issue is the same or substantially the same as a dispute which has already been referred to adjudication, one should not only look at the first dispute referred to the adjudicator in isolation, but should also consider what was actually decided. In this case, as the Adjudicator originally declined to reach a decision on Issue 2, the Contractor was free to launch a second set of adjudication proceedings on this issue in order to make an assessment of the final account under clause 8.7.4. What is deemed to be the same or substantially the same issue, will be a question of fact.

Link to the judgment here: https://www.bailii.org/ew/cases/EWHC/TCC/2022/1465.html

This post was written by Orlaith Mallen and Jessica Evans