Mahon

ADVANCING “GLOBAL CLAIMS” UNDER CONSTRUCTION CONTRACTS IN ADJUDICATION HEARINGS – by Don Mahon

MGAdvocate Adjudication, Arbitration, Construction Law, FIDIC, JBCC, NEC , , , , , , , , , ,

The shortest distance between two points is under construction – Noelie Altito

It has become common internationally, and in some countries by legislation, for disputes to be resolved provisionally by adjudication.  In Macob Civil Engineering Ltd v Morrison Construction Ltd  [1999] B.L.R. 93 at 97, cited in Keating on Building Contracts 9th Ed. para 18-018, adjudication was described as:

“A speedy mechanism for settling disputes under construction contracts on a provisional interim basis, and requiring the decision of adjudicators to be enforced pending the final determination of disputes by arbitration, litigation or agreement. … But Parliament has not abolished arbitration and litigation of construction disputes. It has merely introduced an intervening provisional stage in the dispute resolution process.”

Hudson’s Building & Engineering Contracts 12th Ed. at 968, para 6-080, relying on Holland Construction & Engineering (Pty) Ltd v Kvaerner RJ Brown (Pty) Ltd (1996) 82 B.L.R 83 at 89 and 91 observes that under New Zealand construction legislation, adjudication “is regarded as essentially a cash flow measure implementing what has been colloquially described as a “quick and dirty” exercise to avoid delays in payment pending definitive determination of litigation”.

It is apparent, therefore, that the primary aim of the adjudication procedure is to provide a cash flow measure in order to avoid delays in payment pending definitive determination of litigation.

However, it is not merely an exercise in determining how much a contractor requires to be paid in order to continue with the project.  The adjudicator must attempt to resolve the dispute between the parties insofar as it might be possible to do so.

The standard of proof in dispute board hearings is a balance of probabilities and the established principles that assist judges and arbitrators to arrive at a conclusion are equally applicable to dispute adjudication boards (See Chern on Dispute Boards, p196).

These principles dictate, inter alia, that:

a)     a person who makes an allegation has the burden of proving that allegation on the basis of the balance of probabilities.  If he fails to satisfy the adjudicator, then the adjudicator will find against him;

b)    a statement made by one party, which is not denied by the other party, is accepted as being correct;

c)     inferences may be drawn from the conduct of the parties, for instance, if one party refuses to bring a staff member conversant with the contract to a hearing, a board member can ask him or herself why the request was rejected.

In all the circumstances, the adjudicator is required to adopt a pragmatic approach in light of the fact that a full hearing with cross-examination is generally not available to him or her.  However, the adjudicator, where certain facts can simply be proved by the provision of available evidence, will require such evidence before considering such allegation to be proved.  Axiomatically, the adjudicator is enjoined to draw negative inferences from a party where evidence which is available to it, is not presented.

Bearing these principles in mind, the question arises as to how an adjudicator (as opposed to an arbitrator or a judge) should approach a global claim.

A global claim or total cost claim has been defined as a claim where “the causal connection between the matters complained of and their consequences, whether in terms of time or money, are not fully spelled out” (See Hudson, supra).

A global or total cost claim is simply, as its name implies, one in which the cost of the work incurred by the contractor in its execution is compared with a tender or contract allowance for that work to arrive at the claimed amount.

The adjudicator is then invited to infer that the entirety of the cost overrun is the result of the breaches by the employer or events for which it is responsible.

Hudson points out that there are three obvious objections to such a claim, namely:

a)     It will only be appropriate for the tribunal to make such an inference where it can be satisfied that there are no other reasons apart from the employer’s breach for the cost overrun;

b)    the approach assumes in the contractor’s favour that the tender allowance was adequate, that the contractor proceeded with an appropriate degree of expedition and efficiency in the circumstances in which it found itself and that there were no other matters affecting progress than those for which the employer was responsible;

c)     the total cost approach tends to subvert the basis on which the contract was awarded.  It converts a lump sum or re-measurement contract into a cost reimbursable one.

According to Hudson:

“Given the difficulties of proof, it is rare for a true total cost claim to be advanced.”

Thus, in the past, the approach adopted has been to dismiss such claims for want of evidence in substantiation thereof sufficient to discharge the claimant’s burden of proof, save in those cases where, for whatever reason, the requisite documentation was unavailable to the claimant.

This approach appears, however, to have been altered by virtue of the decision of Walter Lilly & Co Ltd v Giles Patrick Mackay [2012] EWHC 1773 (TCC) in which Mr Justice Akenhead attempts to provide comprehensive guidance on the approach to global claims.

According to Justice Akenhead, the appropriate approach is as follows:

a)     Subject to any express contractual requirements, the claims by contractors for loss and expense must be proved as a matter of fact (Para 486 (a));

b)    the contractor must establish that:

i)      events occurred which entitled it to loss and expense;

ii)    those events resulted in delay and/or disruption; and

iii)   such delay and/or disruption caused it to incur loss and expense;

c)     the contractor can prove the three requirements by whatever evidence will discharge the burden of proof.  A claim “may be supported or even established by admission evidence or by detailed factual evidence which precisely links reimbursable events with individual days or weeks of delay or with individual instances of disruption and which then demonstrates with precision to the nearest penny what that delay or disruption actually cost” (Para 486 (c));

d)    although global claims faced evidential difficulties, there is nothing in principle to make them impermissible.  A contractor will generally have to establish that its loss would not have been incurred in any event (Para 486 (d)). This will involve showing that its tender was adequately priced so that it would have made a net return.  Although the burden of proof does not shift to the party defending the clam, that party may seek to show that the accepted tender was so low that the loss would have occurred in any event or that other events at the contractor’s risk caused some or all of the loss (Para 486 (d));

e)     if events other than those relied upon by the contractor, or which are at the contractor’s risk, caused or contributed to the total loss, the contractor’s claim does not necessarily fail except to the extent that those other events caused the loss.   Mr Justice Akenhead gave the example of a ₤1 million global claim where it could be proved that, except for an unpriced item of ₤50 000 in the accepted tender, the contractor would probably have made a net return. In those circumstances, the global claim would not fail in its entirety.  The global loss would simply be reduced by ₤50 000 (Para 486 (e));

f)     the tribunal may treat a global claim with more scepticism if the more conventional approach of proving a direct linkage is available but has not been adopted. This does not, however, mean that the global approach should automatically be rejected (Para 486(f)).

Applying these principles, a claimant in a construction dispute would be well advised to do whatever is necessary in order to:

a)     link any reimbursable events with individual days or weeks of delay or with individual instances of disruption;

b)    establish that its loss would not have occurred in any event;

c)     establish that individual items of delay, disruption or loss are attributable to the defendant.

If a claimant fails to do so, its claim should be treated with circumspection and, applying the relevant and appropriate approach to adjudication proceedings, should be dismissed, save to the extent that it has been shown that any individual items of delay, disruption or loss are attributable to the defendant’s conduct.

WHEN DIRECTORS PARALYSE A COMPANY – DIRECTORS’ ABILITY TO PREVENT THE CONVENING OF SHAREHOLDERS’ MEETINGS By Don Mahon

MGAdvocate Commercial Law, Company Law, meetings, shareholders , , , , , , ,

“Meetings are indispensible when you don’t want to do anything.” 

– John Kenneth Galbraith

The New Companies Act, 71 of 2008 (“the Act”) brought with it material changes to the machinery by which shareholders can convene shareholders’ meetings.  In terms of the previous Companies Act, two shareholders could convene a shareholders’ meeting by delivering notice of the meeting to the other shareholders (section 180 of the Companies Act 61 of 1973) .

In terms of the New Act, the procedure is a bit more complicated.

Section 61(1) of the Act provides that “the Board of a company or any other person specified in the company’s Memorandum of Incorporation or Rules, may call a shareholders’ meeting at any time”.

Section 61(3) states that “… the Board of a company or any other person specified in the company’s Memorandum of Incorporation or Rules, must call a shareholders’ meeting if one or more written and signed demands for such a meeting are delivered to the company, and –

(a)  each such demand describes the specific purpose for which the meeting is proposed; and

(b)  in aggregate, demands for substantially the same purpose are made and signed by the holders, as of the earliest time specified in any of those demands, of at least 10% of the voting rights entitled to be exercised in relation to the matter proposed to be considered at the meeting.”

Therefore, in terms of the New Act, a shareholders’ meeting cannot be convened by a shareholder but must be convened by “the Board of a company, or any other person specified in the company’s Memorandum of Incorporation or Rules”.

Whilst it is true that certain resolutions may be adopted by the shareholders without the holding of a shareholders’ meeting (see section 60(1)), there are certain instances where a shareholders’ meeting is required.  Take the following example:

Let us assume that a company has two directors, one of whom is the sole shareholder and the other is a rogue director who intends utilising his position on the board to act to the detriment of the company and its shareholders (for the purposes of this example, we shall call him Mr X).

If the shareholder in the company wants to remove Mr X as a director, he requires a meeting of shareholders to be convened in terms of section 71(1).

Section 71(1) states that “Despite anything to the contrary in a company’s Memorandum of Incorporation or Rules, or any agreement between a company a director, or between any shareholders and a director, a director may be removed by an ordinary resolution adopted at a shareholders’ meeting by the persons entitled to exercise voting rights in an election of that director, subject to subjection (2).”

Therefore, in order for the shareholder of the company to remove Mr X as a director, it would need to convene a shareholders’ meeting by following the machinery provided for in section 60(1) of the Act.  Thus, the shareholder would be required to send a demand to the company that a meeting be convened for that purpose.

However, before the meeting can be convened, the Board of Directors would have to call for the shareholders’ meeting.

Naturally, in the example provided, Mr X would, no doubt, refuse to vote in favour of a resolution by the board to convene a meeting of shareholders which is to be convened for the purposes of removing him as a director.

Thus, if the relevant sections of the Act are strictly interpreted, Mr X would be able to simply block any resolution of the board to convene the meeting at which he is to be removed.

The absurdity which arises from this state of affairs is self-evident.  A strict application of the sections of the Act allowed a rogue director to effectively paralyse the functioning of the company and prevent his removal.

However, the provisions of section 61(1) and 61(3) are peremptory in that, upon receipt of a demand by a qualifying shareholder to convene a shareholders’ meeting, the board of a company “must call a shareholders’ meeting”. [My emphasis]

The limited grounds upon which it would seem that the board can elect not to convene the meeting are those provided for in section 61(5) which provides that “a company, or any shareholder of the company, may apply to a court for an order setting aside a demand made in terms of sub-section (3) on the grounds that the demand is frivolous, calls for a meeting for no other purpose than to reconsider a matter that has already been decided by the shareholders, or is otherwise vexatious”.

In S v Cooper and Others 1977 (3) SA 457 (T) at 476, the Court held that “… the word ‘frivolous’ in its ordinary and natural meaning connotes an application characterised by lack of seriousness, as in the case of one which is manifestly insufficient … these words have been used according to the decided cases in respect of pleadings and actions which were obviously unsustainable or manifestly groundless or utterly hopeless and without foundation”.

In Bisset and Others v Boland Bank Ltd and Others 1991 (4) SA 603 (D) at 608 the Court held that “vexatious” means “frivolous, improper, instituted without sufficient ground, to serve solely as an annoyance to the defendant”.

This section would, however, have limited application in the example provided as it would be unlikely that the board, upon considering the demand to convene the meeting, resolved to bring an application to court to set the demand aside on this basis.

So what is the solution where Mr X is able to paralyse the board by procuring a deadlock situation upon the consideration of a demand to convene the shareholders’ meeting?

The right to participate in a meeting and the right to vote are rights inherent in the ownership of shares and it is thus not competent for the Board of Directors to frustrate or impede that right by not holding a shareholders’ meeting (see Cassim et al: “Contemporary Company Law”, 2nd Ed. at p371 and authorities cited therein).

In the example provided, Mr X would clearly have a conflict of interests when considering a demand to convene a meeting of shareholders which seeks to have him removed as a director.  Perhaps therein lays the solution.

Section 76(2) of the Act provides that:

  “A director of a company must –

(a)  not use the position of director, or any information obtained while acting in the capacity of director –

(i)             to gain an advantage for the director, or for another person other than the company or a wholly owned subsidiary of the company; or

(ii)           to knowingly cause harm to the company or a subsidiary of the company.”

Thus, it is arguable that the patent conflict of interest which Mr X would have in the consideration of a resolution to convene a shareholders’ meeting by the Board of Directors, would require Mr X to recuse himself from any consideration of the resolution to be adopted.

Therefore, the only solution appears to be for the other director to adopt the view that Mr X, due to his conflict of interest, is not entitled to vote on a board resolution to convene a meeting upon the shareholders’ demand.  If that is so, the other director would be entitled to exercise the sole vote in favour of convening the shareholders’ meeting which, in light of Mr X’s conflict of interest, would be valid and binding upon the company.

Once the board of the company, through the vote exercised by the director who is also a shareholder, has resolved to convene the meeting, it would merely be a question of delivering a notice to convene the shareholders’ meeting on the company letterhead.

Despite what is set out above, practitioners would be well advised, when drafting a Memorandum of Incorporation for a company to be formed, to make provision for the convening of shareholders’ meetings by any qualifying shareholder, rather than simply relying on the provisions of section 60(1).