Snatching defeat from the jaws of victory: Construction claims, employers and contractors beware!

ORJ Solicitors’ construction claims partner, Michael Smyth, warns that employers and contractors must take great care to ensure they have properly substantiated and mitigated their position, before asking a Court for Judgement and / or an indemnity from a third party.

Construction Claims, a recent case study

In a recent trial before HHJ Grant sitting in the Birmingham Technology and Construction Court, ORJ represented a sub-contractor defendant facing a claim for the re-mediation of allegedly defective works.  Liability was agreed but quantum remained in dispute.

The employer commenced arbitration proceedings against the main contractor, but agreed that those proceedings would be stayed to allow the completion of an investigation into the allegedly defective works and the determination of court proceedings between the main contractor and primary sub-contractor; which was alleged to be responsible for the defects.

The decision to stay the arbitration was presumably based upon the desire of the employer and main contractor to ensure that there would be no recovery shortfall and that the entire costs of any necessary remediation would be met by the sub-contractor.  The sub-contractor had an appropriate insurance policy and although solvency is always a relevant consideration, it was not an issue here.

Investigations continued for more than two years, however, the main contractor failed to establish the full extent of the potential remedial works and what additional claims, if any, it might choose to pursue against the defendant (based upon the employer’s additional claims against it).  Instead of ensuring the completion of all investigative works, the main contractor instead elected to rely upon incomplete expert evidence (including provisional sums to be finalised by carrying out further investigations) and to seek an open ended indemnity, which would have required the sub-contractor to be responsible for any and all third party claims brought against the main contractor.

At the beginning of the trial, after hearing submissions from both parties’ representatives, HHJ Grant determined that it would not be practical to adjourn only part of the claim to allow investigations into the provisional elements (which accounted for around 25% of the total value) to be completed.  He also confirmed that it was inappropriate to seek an open ended indemnity given that the employer’s arbitration claim could have been determined before the court claim came to trial.  The main contractor unilaterally chose to stay the arbitration pending the result of the court claim, which the judge described as a clear case of “putting the horse behind the cart!”

The claimant had only two options, both of which were highly unattractive:

1.  Abandon the elements of the claim relating to provisional sums and the indemnity, and proceed to determine the remaining claim;
2. Apply to adjourn the entire trial and face the costs consequences of doing so.  

Perhaps unsurprisingly, the claimant chose option two (given that the total value of the provisional items and the indemnity could account for more than half of its total claim value).  The trial was adjourned and the claimant was ordered to pay all of the defendant’s costs.

In a case where the claimant’s position should have been a winning one, it is something of a disaster to be on the wrong side of a costs order; particularly in circumstances which were entirely avoidable.

Where did the Contractor go Wrong?

1. Arbitration;

By agreeing to an arbitration clause and not including one of the major subcontractors, the employer and main contractor were always exposed to this potential problem when dealing with sub-contractor default.

It needn’t have been fatal, however, particularly where cooperation exists between employer and main contractor.  They could agree to waive the arbitration clause and then include the sub-contractor as an additional defendant to court proceedings between employer and main contractor.  Subject to such proceedings being conducted properly, they would be at the sub-contractors expense and would leave no prospect of a recovery shortfall in respect of either the employer’s or main contractor’s claims.

Where claims involve three or more parties, employer, main contractor, sub-contractor and so on, the sensible course is to ‘begin at the top, work downwards and wherever possible, deal with claims simultaneously’.  There should be good reason to depart from this approach, particularly where the order is to be reversed by working from the bottom up; as this opens a serious risk that the employer / main contractor could face a recovery shortfall.

In multi-party actions, contractors should try and ensure that employer’s claims against them are entirely back to back with their claims against sub-contractors.

In this case, the main contractor was unable to join the sub-contractor to the arbitration proceedings and was therefore forced to instigate a separate court claim.  Instead of staying the arbitration, it should have determined that action leaving the court case against the sub-contractor to follow (as closely as possible).  It could have sought to agree with the employer that there would be a stay of execution following the conclusion of the arbitration.

2. Proof;

The ‘standard of proof’ in civil courts is the balance of probabilities, which means that the judge must decide which version of facts is more likely than not to be true.
Generally, the ‘burden of proof’ belongs to the claimant, which means that it must assert a positive case that a particular set of facts is correct in order to obtain judgment.  To the extent that a claimant fails to establish a positive argument (supported by sufficient evidence) that any particular element of its claim is more likely than not to be true, that element will fail; regardess of whether the defendant has presented any evidence of its own in relation to it.