A cautionary tale: Adjudications, Project Manager, Repudiation, Expert Evidence and Costs

28 September, 2017
by: Cripps Pemberton Greenish

On 12 July, the High Court issued its judgment on liability in the case of Imperial Chemical Industries Limited v Merit Merrell Technology Limited.  ICI was suing Merit for breach of contract and return of monies they claim were overpaid.

 

In late 2012, Merit contracted with ICI to carry out steelwork as part of the construction of a new paint factory in Northumberland.  The instructed work increased substantially and involved great quantities of welding.  The total sums paid to Merit exceeded £20m.

 

AkzoNobel, the owners of ICI, had imposed an internal limit on what they wished to spend on the factory and they became very concerned about increasing costs.  Members of the UK ICI team were replaced by personnel from AkzoNobel from late summer 2014.  From October 2014, no more payments were made by ICI to Merit and Merit (except pursuant to adjudications) and Merit were instructed to cease welding but were instructed to start limited work again in January 2015.

 

Also in October 2014, a representative of AkzoNobel emailed the Project Manager under the NEC3 contract, to instruct him not to issue any Project Manager instructions without approval by named AkzoNobel people.  The Project Manager understandably considered that this instruction removed their power of independent certification and therefore resigned.  AkzoNobel then purported to appoint one of their own staff as Project Manager.

 

There were four adjudications.  In the first, in January 2015, ICI was ordered to pay Merit £7m, being the amount of Merit’s interim application for payment of November 2014.  Merit did not get the money until Spring 2015.  On the very day that the sum was received from ICI, Merit’s bank, having by then lost confidence, withdrew its lending facilities.

 

On 17 February 2015, ICI wrote to Merit alleging various breaches of contract and claimed these amounted to repudiation of the contract by Merit.  Merit denied the breaches but left the site, as instructed.

 

In early 2017, Merit went into creditors’ voluntary liquidation but the liquidator decided to fight ICI’s proceedings.

 

In court, ICI claimed that the welding was seriously defective in many cases.  The welds were tested using a dye penetration technique.  However, ICI were adamant that the contract required radiographic testing which, when used, revealed more defects.  ICI accepted at the trial that the contract only required dye testing.  The court therefore decided that only those found defective by the dye testing, approximately 5% of the welds, should be considered defective.  The experts agreed that was a fairly normal percentage of defects.

 

ICI instructed two expert witnesses in relation to the welding and Merit one.  The judge said that on all matters where they held different views, he preferred Merit’s expert, whose advice he found to be “wholly impartial and his independence to be uncompromised.  His conclusions were sensible and did not seek to advance the case of the party instructing him.”  The judge felt he could not say the same for ICI’s experts.  This is yet another case emphasising that the courts expect expert witnesses, even though appointed by one party, to give impartial evidence to help the court.

 

The court held that the purported appointment as Project Manager under the NEC3 contract of an AkzoNobel employee failed – he was not independent.

 

The judge also found that it was, in fact, ICI that had repudiated the contract by its letter of 17 February 2015.  This did not mean that Merit was entitled to be paid as though all the welds it carried out were free of defects but of course did mean that Merit is not liable for the costs incurred by ICI in completing the outstanding works to reach practical completion.  ICI is entitled to recover the amount it would have cost Merit to repair defects to the 5% of welds which the Judge held to be defective. 

 

ICI is also entitled to pursue its argument, in the coming quantum trial, that it paid far too much to Merit by way of interim payments for the work it did.  Of course, the sums awarded to Merit at two adjudications are not finally binding – they are open to timely appeal to the court.

 

In a separate judgment of 26 July, the same judge awarded Merit the higher, indemnity, level of costs against ICI in relation to the liability trial, but in respect of only 95% of its costs.  The judge made the 5% deduction because ICI won its argument that it is still entitled to argue for recovery of any overpayments made to Merit.

 

The judge then gave some instructions in relation to the next trial, which is to assess quantum – who owes how much to the other.  Merit asked that the judge at the quantum hearing should hear Merit’s claim for various losses caused by ICI’s actions, as well as ICI’s claims, which include for the return of any overpayments and the cost of remedying defects.  The judge cut down the heads of losses that Merit can argue for on the basis that some should have been raised in the liability trial but has ordered that others should be considered at the next trial.

 

The case emphasises some important legal and practical points.

 

A party wishing to claim that the other party has effectively repudiated the contract must have very sound grounds for doing so; otherwise its own purported acceptance of that “repudiation” may itself be a repudiation and could lead to severe consequences.  However, even though it was ICI that repudiated the contract, it is still entitled to the return of any sums the court might hold in the quantum trial to have been overpaid to Merit during the course of the contract and to a sum equivalent to the amount it would have cost Merit to repair the 5% defective welds, had it been permitted to do so.

 

It will not normally be appropriate to appoint an employee of the Employer as Project Manager under an NEC contract, because of the lack of independence.  The same will apply to many other forms of building contract.

 

Experts must act impartially or risk the whole of their evidence being undermined in the opinion of the court.

 

Adjudication, although quick, does not mean that payment will quickly follow the adjudicator’s award.  Rapid enforcement through the courts might be required otherwise the “winning” party could find itself with severe cash flow problems.  Decisions of adjudicators are also, of course, open to appeal.