Valuable lessons in valuation (and expensive lessons in conduct)

In June 2018, the Technology and Construction Court (likely) brought an end to what Fraser J could only describe as “some long running, and bitterly fought, litigation1 with his decision in Imperial Chemical Industries Limited v Merit Merrell Technology Limited.2 Ultimately, this dispute consisted of four adjudications and numerous judgments, including those resulting from a split trial (with one determining liability in 20173 and the other quantum in June 2018). 

The liability and quantum judgments serve as scathing guides as to “what not to do” both when completing a construction project and when appearing as a party to a court proceeding; making them important decisions not only for those in the construction industry, but also those who engage in litigation in general. The lessons arising from the recent quantum decision are summarised below. For analysis of the lessons coming out of the 2017 liability decision, please see Issue 206 (August 2017) of Fenwick Elliott’s Dispatch publication.

Background

Imperial Chemical Industries Ltd (“ICI”) engaged Merit Merrell Technology Ltd (“MMT”), a specialist engineering piping manufacturer, as part of the construction of a new paint manufacturing facility. The contract was an amended NEC3 contract and was originally valued at approximately £1.9 million. The works required increased quite considerably once the project commenced, however, and MMT had been paid £20.9 million at the time that the claim form for the proceedings was issued. In August 2014, ICI’s parent company, AzkoNobel, replaced the ICI personnel involved with the project and the relationships under the contract began to deteriorate rapidly. 

From mid-2014, payments to MMT slowed down and ICI directed that all welding cease on 16 October 2014. ICI alleged that there were a number of defects in the works carried out by MMT, and the parties met in an attempt to agree a resolution, though no agreement stuck. The independent project manager resigned on 9 October 2014, and was replaced by one of AzkoNobel’s employees. 

Although there were attempts made to restart the welding works in January 2015 on a limited basis, ICI wrote to MMT on 17 February 2015 and accepted what it described as MMT’s repudiation of the contract, terminating the contract and ejecting MMT from the site. 

The primary disputes between the parties concerned the termination of the contract and the valuation of the works.  Fraser J determined in the liability decision that ICI did not validly terminate the contract and, in purporting to do so on the grounds of repudiation, had repudiated the contract itself. In light of this, the further obligations of both parties under the contract had come to an end on 17 February 2015; however, any rights and obligations that they had at that time remained. The quantum trial was necessary to determine the value of MMT’s account and whether there was any payment to be made either to ICI or MMT. 

Revisiting assessments

During the course of the works, there had been a number of assessments made by the independent Project Manager, as well as agreements reached between MMT, the Project Manager and ICI as to the valuation of compensation events. One of the primary issues throughout the course of the quantum trial was whether there was any legal ability to revisit these assessments under the NEC3 contract terms (as amended, in this case). 

Turning first to the assessments made by a Project Manager under an NEC3 contract: option W2 provides at W2.3(4) that it is open to the Adjudicator to “review and revise any action or inaction of the Project Manager or Supervisor related to the dispute and alter a quotation which has been treated as having been accepted”. This amounts to an express confirmation that an Adjudicator has the power to revisit an assessment made by a Project Manager under the contract including, said Fraser J, a compensation event. Fraser J concluded that this consequently endorses the court’s ability to revisit such assessments outlining, at paragraph 64, that “the scope and extent of an adjudicator’s powers are not determinative of the court’s jurisdiction, but the court can certainly not have less power in this respect than an adjudicator.In coming to this conclusion, Fraser J also referred to the decision of Grove Developments Ltd v S&T (UK) Ltd,4 citing Henry Boot Construction Limited v Alstom Combined Cycles Limited.5

As for the ability to revisit agreements reached with ICI, the Project Manager and MMT, the basis upon which these could be challenged requires both legal and evidential assessment. In this case, unlike the assessments made by the Project Manager, the legal assessment is one of first principles and not the NEC3 contract terms. The evidence in this case was conclusive that the parties intended for the agreements they reached to be final agreements, and Fraser J held that they ought to be treated as such. 

Weight of previous assessments

Despite the fact that assessments made by the Project Manager can be revisited, they will not be easily displaced. The conclusions made by those involved in the project, with detailed and in-depth knowledge of the works, products, quantities and values at the time that the works were carried out, carry significant weight from an evidential point of view. To this end, Fraser J stated at paragraph 69: “There has to be some evidential basis for the court deciding to depart from the assessments reached at the time . . . Accordingly, although the assessments reached at the time do not conclusively determine ICI’s rights in this respect, they are of powerful evidential weight.

Correct approach to valuation 

In light of the above, any party attempting to challenge a valuation arrived at and agreed to during the course of the works will need to provide sufficient evidence that it is right to depart from this valuation. This may require both evidence of fact as to the valuation’s suitability from the time that it was carried out, as well as expert evidence as to the correct valuation. 

In this case, ICI was criticised for not presenting any evidence from the time the works were carried out (relying only on the witness evidence of an employee who joined the project late and did not have detailed knowledge of the project works) and for seeking to revalue the account in its entirety. The decision made by ICI’s quantum expert (or, perhaps, the instruction to the quantum expert) to ignore these agreed valuations and contract rates rather than use them as a starting point was one of the many criticisms made by Fraser J. This was not only because it departed from logic, but also because it amounted to an expert reaching a conclusion as to law and evidence (namely, whether these valuations were binding). 

The conclusion of Fraser J was that, where such valuations and assessments exist, they ought to be contemplated in expert evidence. 

Expert evidence   

ICI’s witness evidence drew significant criticism from Fraser J in both the liability and quantum trials. The witnesses of fact in particular were chastised for factual inaccuracy, inconsistency and bias. One important point made by Fraser J early in the quantum judgment was that, by virtue of the split trial, all issues of liability had already been decided and needed to be accepted by both parties as being the final position when dealing with the evidential matters in the quantum trial. Attempts by witnesses to speak to a position that Fraser J had previously dismissed at the liability trial were condemned. 

This, in addition to the apparent partisan rather than independent nature of the ICI expert evidence, and the fact that conclusions as to legal issues and causation were drawn, led Fraser J to set out in detail the duties held by expert witnesses and those instructing them. In particular, the court referred to CPR part 35, Practice Direction 35 and the six points contained therein. 

A criticism directed at the experts on both sides was the lack of cooperation between them in preparation of the Joint Statement by the Quantum Experts, which read essentially as a reiteration of each expert’s own view, the unnecessary provision of a Scott Schedule and late submission of further evidence. Fraser J highlighted the court’s dissatisfaction with a suggestion from counsel that the court write directly to the quantum experts for assistance where issues were still outstanding, and the submission of an “Agreed Expended List of Issues” the day after oral closing with an Explanatory Note. 

Fraser J pointed out that the approach taken was “. . . an extremely unhelpful approach. There were a total of four counsel instructed for this trial, and I consider that the court is entitled to greater assistance on such detailed matters and on the use and scope of the Scott Schedule – a document neither ordered by the court, nor approved – than it received in this case.” This serves as a useful reminder that, particularly where expert evidence is voluminous, detailed and there is little by way of agreement, counsel and experts should ensure that it is presented in an accessible way that is in accordance with the court’s orders and tied back to its relevance to individual items (such as PMIs) or issues. In particular, the presentation of evidence should not amount to the parties effectively saying, “the court has the trial bundle; here are the figures; please just get on with it”.

Conclusion 

The series of decisions in relation to this dispute, through both adjudication and litigation, provide valuable guidance as to the application of the NEC3 form, particularly as to defects, termination and valuation, as well as guidance for counsel, parties and witnesses as to preparation and presentation of a case before the court. 

Of particular relevance in the quantum decision is the fact that the court will be able to revisit assessments made by the Project Manager during the course of the works; however, there will need to be convincing evidence presented to show that these valuations ought to be departed from. As for agreements between the employer, contractor and project manager, first principles require that the intention of the parties in reaching these agreements be taken into account. In this case, the evidence confirmed that the parties intended their agreements to be binding and so they were treated as such. 

For these reasons, when conducting any valuation or revaluation exercise, the contemporaneous evidence as to agreed value or price will be convincing and ought to be considered, even if just in the alternative, by any expert. 

Finally, even outside of the field of construction, this judgment provides guidance to counsel, witnesses and parties to proceedings as to the importance of the preservation of evidence, the duties of expert witnesses (and those instructing them) when preparing and presenting witness evidence, and the need to be mindful of the prior decisions in a case that has a longer litigation history. 

With MMT being awarded indemnity costs less 5% following the liability trial, these mistakes as to conduct may be expensive ones to make. 

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  • 1. [2018] EWHC 1577 (TCC), paragraph 2.
  • 2. [2018] EWHC 1577 (TCC).
  • 3. [2017] EWHC 1763 (TCC).
  • 4. [2018] EWHC 123 (TCC).
  • 5. [2005] 1 WLR 3850.

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