Cost of small claims

Away from the large, headline-grabbing disputes, parties that fall to arguing over smaller amounts of money should look to settle early or go to adjudication, writes Daniel Atkinson.

IT'S ALWAYS the large multi-million pound projects that capture the headlines. Any dispute on one of these projects tends to involve complicated issues and a lot of money.

But the construction industry depends on relatively low-value contracts and the reality for most subcontractors is far removed from the headline image.

Disputes on most small projects involve more modest sums and the costs of dispute resolution are relatively high. In most cases it is important that the parties take a realistic view and attempt to settle.

A case that addresses the common problems and provides useful lessons for subcontractors is Machenair v Gill and Wilkinson, decided by Mr Justice Jackson in the TCC.

The main contract was the refurbishment of Macaulay Hall, part of the Leeds Metropolitan University campus. In January 2003 Gill was engaged as subcontractor to design, supply and install the mechanical and electrical installations. Gill, in turn, engaged Machenair as a labour-only subsubcontractor to carry out the mechanical works. Gill issued Machenair with three separate purchase orders totalling £54,272.

Throughout the course of the project Gill issued a number of variations. In some cases prices were agreed for the extra work.

In other cases the documentation by both firms was poor.

During June and July 2003 delays occurred due to other trades in the toilet and washing areas. Machenair could not install the sanitary ware. There was also a delay due to Gill's procurement of water heaters.

Eventually Machenair completed the work and left site on August 21, 2003.

Machenair prepared a number of versions of its final account, with the total sum in the final version being £91,173. But Gill paid only £55,004 and the difference was disputed.

The first issue before Judge Jackson was whether Gill's standard terms had been incorporated in the sub-sub-contract. Gill relied on a note at the bottom of the purchase orders that referred to its standard terms. But the purchase orders, which had been faxed, did not include the standard terms. Instead the note stated that a copy was available on request.

Unfortunately the note was substantially obliterated by the fax header received by Machenair. The judge held that it was unreasonable to expect Machenair to decipher the words and the terms were therefore not incorporated.

That was sufficient to decide this issue, but Judge Jackson went on to consider the terms themselves. There is considerable case law on 'incorporation by reference' and it is not necessary that the conditions themselves should be set out in the document, provided reasonable notice of them is given.

Where a particular term or condition is unusual, it must be brought to the other party's attention. Judge Jackson decided that the nature of Gill's standard terms was such that the notice in the Purchase Orders was not sufficient to incorporate them in the sub-sub-contract. The terms were extensive, were not one of the standard forms used in the construction industry and were never supplied to Machenair. Also the note on the purchase orders did not provide a summary of the terms.

Because of this, much had to be implied.

On the matter of time the judge held that Gill's obligation was to complete the mechanical works within a reasonable time. In deciding a reasonable time it was necessary to have look at the main contractor's programme and all other relevant circumstances. Judge Jackson held that Machenair had completed within a reasonable time.

On the matter of valuation of variations the judge decided that, in the absence of express terms, and where the price of variations was not agreed in advance, Gill should pay a reasonable sum for any additional work that Machenair had carried out at its request. Judge Jackson valued the variations at £24,411.

Not surprisingly, Gill had a counterclaim.

But was it entitled to pursue it? Gill had failed to serve a withholding notice in accordance with Section 111 of the Construction Act and Mechanair argued that the failure barred the counterclaim. Judge Jackson would have none of this. The effect of Section 111 is to exclude the right of setoff, he said, and it did not bar any otherwise valid claims. But he still rejected most of the counterclaim for lack of evidence. Only a claim for the removal of rubbish was allowed - the judge awarded £500 to Gill.

Judge Jackson awarded the net balance owing of £23,179, which considering the trial lasted nearly two days is a small sum.

Costs could have been reduced if, at an early stage, the parties had set out each of their contentions on variations in a schedule. He also observed that much relevant evidence had been omitted from the statements of the six witnesses resulting in prolonged oral examination.

This case leaves the lingering question of whether there was not a better procedure to achieve justice at a proportionate cost. The judgement does not indicate whether this case was eligible for adjudication under the Act, or whether it went before an adjudicator whose decision was then rejected.

But given the relatively small sum at stake, it would have made more sense if the parties had agreed to accept the decision of an experienced professional at adjudication.

Key points

Disputes on most small projects involve relatively modest sums and the costs of dispute resolution are high in comparison.

In disputes over variations, costs can be reduced if, at an early stage, the parties set out each of their contentions on variations in a proper schedule.

When relatively small sums are at stake, it makes sense for the parties to agree to accept the decision of an adjudication by an experienced professional.