Adjudication
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KEYWORDS: |
Adjudication, Housing Grants Construction and Regeneration Act 1996, JCT With Contractor's Design, Clause 27.6.5, Clause 30.3.0, interim payment, Section 111, withholding notice, receiver, determination, Inner Crt Session. |
The judgment of the Inner Court of Session in Melville Dundas Ltd v George Wimpey UK Ltd [2005] decided on 15 December 2005 is concerned with the inter-relationship between Section 111 HGCR Act 1996 and the provisions of a contract following determination of the employment of the contractor. In the instant case receivers were appointed, but the issue of insolvency as a bar to recovery was not an issue.
On 7 and 26 March 2002 Melville entered into a contract with Wimpey for the design, construction and completion of a residential development at Ayr Road, Whitecraigs, Glasgow.
The form of contract was the JCT 1998 with Contractor's Design 1998 Edition, with JCT Amendment 1 dated June 1999 and JCT Amendment 2 dated January 2000, and the Scottish Supplement for Sectional Completion issued by the SBCC.
By Clause 4 of the contract the firm Robinson Low Francis were to be agents of Wimpey for the purpose of receiving or issuing applications or notices under any of the conditions of the contract.
Melville commenced the works and on 2 May 2003 submitted to Francis an application for interim payment for the work done by them from the time of a previous application for interim payment down to 30 April 2003.
On the same day Francis issued a valuation certificate for the work done by Melville between the date of the previous interim certificate and 30 April 2003. The amount was £396,630, exclusive of VAT. Melville invoiced Wimpey for payment of that sum, which in the circumstances attracted no VAT.
No notices were served by Wimpey, or anyone on their behalf, in terms of Clause 30.3.3 or 30.3.4 of the contract. The final date for payment in terms of Clause 30.3.6 was 16 May 2003.
On 22 May 2003 at the invitation of the board of directors of Melville, the Bank of Scotland appointed receivers for the whole property and undertaking of Melville.
On 30 May 2003 Wimpey, by notice in terms of Clause 27.3.4, determined the employment of Melville. The earliest date when Wimpey could have done this was 22 May 2003.
Wimpey proceeded with the contract work after determination.
Melville considered they were entitled to payment from Wimpey of the above sum. Lord Clarke in a decision on 22 October 2004 in Melville Dundas Ltd v George Wimpey UK Ltd [2004] held that having considered the relevant provisions of the contract and of the Housing Grants, Construction and Regeneration Act 1996, in the circumstances which had occurred, Melville was not entitled to claim payment of the sum and accordingly dismissed the action. He did so on the basis that the final date for payment had not yet arrived on the following analysis of the contract terms:
"Section 109, section 110 and section 111 of the 1996 Act are, in my judgment, concerned with, and directed, at cash-flow questions, arising during the course of a continuing, non-determined construction contract. I agree with the defenders, and third party, that the provisions of clause 30 reflect the requirements of section 110 and section 111. Clause 27, however, is concerned, with a quite different situation i.e. where the contract is legitimately determined by the employer. In my opinion, the legislative provisions were not intended to regulate that situation. ... The parties' continuing freedom of contract is expressly recognised in section 109(2) and, even more importantly, for present purposes, in section 110(1) where it is provided as follows: 'The parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment.' ...
... the parties were free to agree that the original date for payment of sums due under the contract, could be altered in the event of the contract being determined so that 'the final date for payment' of the sum in question, has not, by reason of the contractual provisions yet arrived. In that situation section 111 upon which the pursuers base their case has no relevance."
Melville commenced a reclaiming motion against the decision in the instant case in Melville Dundas Ltd v George Wimpey UK Ltd [2005] decided on 15 December 2005.
The issue for the Inner Court was whether the Lord Clarke's interpretation of the statutory and contractual provisions and the inter-relation of Clauses 27, 30 and Section 111 of the 1996 Act was correct.
The Contract contained provisions at Clause 30.3 in relation to interim payments and at Clauses 30.3.4 and .5 for the effects of withholding notices and the lack thereof. Clause 30.3.5 provided:
"Where the Employer does not give any written notice pursuant to clause 30.3.3 and/or to clause 30.3.4 the Employer shall pay the Contractor the amount stated in the Application for Interim Payment."
Clause 30.3.6 provided for the final date of payment in the following terms:
"The final date for payment of an amount due in an Interim Payment shall be 14 days from the date of receipt by the Employer of the Contractor's Application for Interim Payment."
Melville conceded that there was no issue that if the 1996 Act had not been passed, Melville could not recover the sums sued for.
Melville argued that if freedom of contract were to remain uninhibited by the Act, it would be pointless, for contractors would simply contract for the waiver of the provisions of the Act and thus render it a dead letter. On its true construction the Act prohibited freedom of contract save to the extent that it expressly permitted it. Sub-section 109(2) allowed the parties only to agree the instalments or stage payments which would fall due, and the interval to elapse before they became due following the last payment. The intention underlying the legislation was to secure cash flow. This was not less important to the contractor in receivership, than to the contractor in danger of it. The language of the statute did not suggest that its provisions were restricted to contracts which were on foot and undetermined.
Melville also argued that Section 110(1) of the 1996 Act allowed the parties to decide a period of time that might elapse before a sum which had become due reached its final date for payment: and the parties had provided for this period in Clause 30.3.6. Melville argued that Clause 27 did not select a final date for payment, but sought to relieve the employer of the obligation to make payment under Clause 30.3.5 until the works had been completed.
Clause 27.6.5.1 provided:
"Subject to clauses 27.5.3 and 27.6.5.2 the provisions of this Contract which require any further payment or any release or further release of Retention to the Contractor shall not apply; provided that clause 27.6.5.1 shall not be construed so as to prevent the enforcement by the Contractor of any rights under this Contract in respect of amounts properly due to be paid by the Employer to the Contractor which the Employer has unreasonably not paid and which, where clause 27.3.4 applies, have accrued 28 days or more before the date when under clause 27.3.4 the Employer could first give notice to determine the employment of the Contractor or, where clause 27.3.4 does not apply, which have accrued 28 days or more before the date of determination of the employment of the Contractor."
Clause 27.6.5.2 provided:
"Upon the completion of the design and construction of the Works and the making good of defects as referred to in clause 27.6.2... then within a reasonable time thereafter an account in respect of the matters referred to in clause 27.6.6 shall be set out in a statement prepared by the Employer."
Melville argued that insofar as it entitled the employer to withhold sums due and payable, in the absence of notices required by the 1996 Act, this was consistent with the Act. What Wimpey was seeking to do was to withhold money, although the final date for payment had passed. The policy of the Act was clear and should not be thrown over by a hard case.
Wimpey argued that the parties had agreed, in terms of Clause 27, that the final date for payment was to be the date on which a positive balance was found to be due to the pursuers after the works had been completed. Clause 27 was not disapplied or otherwise struck at by the 1996 Act.
Wimpey did not go so far as the Lord Ordinary in arguing that sections 109 to 111 of the 1996 Act did not apply to a situation in which "the contract is legitimately determined by the employer". Clause 30.3.6 had to be read in light of Clause 27, which had a retrospective effect. If the contractor was not entitled to be paid until the balancing exercise following completion of the works produced a positive balance, it could not be said that the final date for payment was any earlier.
Wimpey argued that once the employment of the contractor had been determined, following receivership, the final date for payment was ipso facto changed to a date on which a positive balance was found to be due to the contractor, if ever. The final date for payment was changed by virtue of the contractual provisions: the possibility of this change was inherent in the provisions of Clause 27.
Wimpey argued that by Section 109(2) 1996 Act the parties could regulate the circumstances in which a payment became due in the event of a receivership. There was no statutory obstacle to the parties' agreeing that in the event of determination of the employment of the contractor on the grounds of receivership, the period between which a sum became due and the final date for payment was that necessarily indefinite period provided for by Clause 27.6.5.2. The issue was not when a sum became due, but what was the final date for payment.
The third parties to the action argued that Sections 109 to 111 1996 Act were concerned with an ongoing contract. If the employer was not entitled to withhold payment in circumstances such as the instant case, there was nothing for the employer to be able to use to balance what would almost inevitably be greater costs incurred in completing the works.
Lord Nimmo Smith delivering the opinion of the Court held that what Clause 27.3.4 provided for was not determination of the contract (a concept which is not further explained by the Lord Ordinary), but determination of the employment of the contractor under the contract. Clause 27 contained a number of provisions which showed that the contract was intended to remain in force after the determination of the employment of the contractor and to regulate the rights and obligations of the employer and contractor after that event, not least Clause 27.6.5.1 and 27.6.5.2.
It was held that that SL Timber Systems Ltd v Carillion Construction Ltd [2002] SLT 997 was to be distinguished because the contractual arrangements were materially different from those in the instant case. In that case, there was no more than a claim for payment, without a system of certification which would determine the sum due.
Lord Nimmo Smith agreed with the approach to the issue by Sheriff Taylor in Clark Contracts Ltd v The Burrell Co (Construction Management) Ltd [2002] SLT (ShCt) 103 in which he stated:
"There was no dispute that the architect had issued an interim certificate. It therefore seems to me that the defenders became entitled to payment of the sum brought out in the interim certificate within 14 days of it being issued. In my opinion that is an entitlement to payment of a sum due under the contract. In order to reach the figure in the interim certificate one has made use of the contractual mechanism. To use the words deployed by Lord Macfadyen in para 20, the issue of an interim certificate was the occurrence of 'some other event on which a contractual liability to make payment depended'. This situation falls to be contrasted with the position in SL Timber Systems where, before the adjudicator, there had been no calculation of the sum sued for by reference to a contractual mechanism and which gave rise to an obligation under the contract to make payment. There had been no more than a claim by the pursuers which claim had not been scrutinised by any third party. Thus, in my opinion, if The Burrell Co (Construction Management) Ltd wished to avoid a liability to make such payment because the works did not conform to the contractual standard they would be withholding payment of a sum due under the contract. In order to withhold payment they would require to give a notice in terms of s.111(1) of the Act. No such notice was given.
The interim certificate is not conclusive evidence that the works in respect of which the pursuers seek payment were in accordance with the contract (see cl 30.10). That however does not preclude the sum brought out in an interim certificate being a sum due under the contract. The structure and intent of the Act, as I understand it, and accepted by the solicitor for the defenders, is to pay now and litigate later."
Lord Nimmo Smith agreed with the view expressed in the Court of Appeal in England Rupert Morgan Building Services (LLC) Ltd v Jervis etc. [2003] E.W.C.A. Civ. 1563, [2004] BLR 18 that section 111(1) was a provision about cash flow, with the advantages set out in the passage of Jacob L.J. below:
"Sheriff Taylor's analysis, once articulated, is obviously right. And it has a series of advantages:
(a) It makes irrelevant the problem with the narrow construction - namely that Parliament was setting up a complex and fuzzy line between sums due on the one hand and counterclaims on the other - a line somewhere to be drawn between setoff, claims for breach of contract which do no more than reduce the sum due and claims which go further, abatement and so on.
(b) It provides a fair solution, preserving the builder's cash flow but not preventing the client who has not issued a withholding notice from raising the disputed items in adjudication or even legal proceedings.
(c) It requires the client who is going to withhold to be specific in his notice about how much he is withholding and why, thus limiting the amount of withholding to specific points. And these must be raised early.
(d) It does not preclude the client who has paid from subsequently showing he has overpaid. If he has overpaid on an interim certificate the matter can be put right in subsequent certificates. Otherwise he can raise the matter by way of adjudication or if necessary arbitration or legal proceedings.
(e) It is directed at the mischief which section 111(1) was aimed at. This mischief is mentioned in Keating. A report called the Latham report had identified a problem, namely that 'main contractors were abusing their position to wrongfully withhold payment from sub-contractors who were in no position to make any effective protest'. Actually the provision has gone further than just dealing with the position between main and sub contractors since it covers the position between client and main contractor too - but the main contractor will need paying himself so he can pay the sub-contractor. And he may have his own cash flow needs too. Incidentally section 109 (requiring stage payments for long contracts) is part of the same legislative policy.
15. The principal disadvantage of the statutory scheme from the client's point of view is that if he has overpaid he is at risk from insolvency of the builder. But the risk is one which he can avoid by checking the certificate and giving a timeous withholding notice. No doubt a good architect would inform a lay client about the possibility of serving such a notice - indeed the architect may (I express no opinion) have a duty to do so. Moreover the client may (again I express no opinion) have a remedy against the architect if the latter negligently issues a certificate for too much."
Lord Nimmo Smith then proceeded to analyse the contract terms on the concession that, in the absence of the statutory provisions, Clause 27.6.5.1 of the contract would, in the circumstances of the instant case, entitle Wimpey to withhold payment of the sum sued for until the completion of the works and the preparation of the account provided for by Clause 27.6.5.2.
Lord Nimmo Smith observed that while, in terms of section 110(1), the parties were free to agree how long the period was to be between the date on which a sum became due and the final date for payment, by Clause 30.3.6 they had provided that it should be 14 days from the date of receipt by the defenders of the pursuers' application for interim payment. It was not in dispute therefore that, in the circumstances of the instant case, the final date for payment of the sum sued for was 16 May 2003. Not only was that sum overdue for payment after that date, the pursuers could have taken immediate steps to enforce payment.
Lord Nimmo Smith held that even if the statute permitted it, it would require a very clear contractual provision to have the effect, contended for by Wimpey, of retrospectively altering the final date for payment and of depriving Melville of a right which had already accrued to enforce immediate payment. There was no such provision in Clause 30, or indeed in Clause 27. Clause 30.3.6 did not provide that the final date for payment was subject to alteration in the events provided for by Clause 27. All that Clause 27.6.5.1 provided was that the provisions of the contract which required any further payment to the contractor should not apply, with the exception of amounts which had accrued 28 days or more before the date of determination of the employment of the contractor. Clause 27.6.5.2 went no further than to provide for the preparation of an account after the completion of the works.
Lord Nimmo Smith held that the difficulty of Wimpey's interpretation was that it was impossible to discover what the final date for payment would then be, and indeed that it might never arrive.
Lord Nimmo Smith held that the contract provisions permitted the employer to withhold, in certain circumstances, an amount due after the final date for payment thereof, not to alter retrospectively the final date for payment. Sections 109 to 111 1996 Act continued to apply even after the employment of the contractor has been determined by the employer. It followed that section 111(1) applied to prevent Wimpey relying on Clause 27.6.5.1.
Lord Nimmo Smith held considered that this conclusion was consistent with the view that section 111(1) was a provision about cash flow. The sum sued for represented payment for work which had already been done by Melville, no doubt with the financial support of the Bank of Scotland at whose instance the receivers were appointed shortly afterwards. In many cases, not only would there be bankers with an interest in a contractor's cash flow, there would be sub-contractors awaiting payment. Inevitably, where a contractor became insolvent, there would not be enough money to go round and losses would have to be borne.
Lord Nimmo Smith held that held that Parliament had provided that in circumstances such as the istant the losses should be borne by employer under the contract, hence the provisions of section 111(1). The final date for payment of the sum sued for under the contract had passed without any effective notice of intention by Wimpey to withhold payment, so Wimpey was prohibited from withholding payment thereafter.
The reclaiming motion was allowed and the interlocutor of the Lord Ordinary recalled. It was not in dispute that as a result Melville was entitled to decree de plano as concluded for and the Court granted decree for payment to Melville by Wimpey of the sum of £396,630, together with interest thereon at the rate of 83/4% per annum from 17 May 2003 until payment.
It is suggested that the key to the judgment is that the contract was not "determined" but only the employment of the contractor. In that case the contract continued to regulate the obligations of the parties including on the issue of payment. On that basis it follows that Melville was entitled to payment because that right had already accrued before the determination and the contract expressly preserved that right.
It is by no means clear that without the HGCR Act 1996 that Melville would have lost its right to payment, although this point was conceded by Melville.