Machenair Ltd v Gill & Wilkinson Ltd

MR JUSTICE JACKSON: This judgment is in eight parts, namely:

This case is in essence a dispute about a final account, which I am trying at the Technology and Construction Court in Leeds. The claimant is Machenair Ltd., to whom I shall refer as "Machenair"; the defendant is Gill and Wilkinson Ltd., to whom I shall refer as "Gill". The main contractor on the project with which this court is concerned was Totty Construction Group PLC, to whom I shall refer as "Totty".

Gill was engaged by Totty as mechanical and electrical sub-contractor. Gill, in turn, engaged two sub-sub-contractors, namely Machenair for the mechanical works, and D. and G. Technical Services Ltd. for the electrical works. I shall refer to the latter company as "D. and G.". It is the final account on the mechanical works which has given rise to the current litigation.

During the course of the present trial I have heard the oral evidence of six witnesses. Let me introduce them at this stage. Mr. Tommy Friend was employed as contracts manager by Machenair throughout the relevant period; Mr. Arthur Edwards was the foreman employed by Machenair; Mr. Michael Rowley was a contracts manager employed by an associated company of Machenair.

Let me now turn to the defendant's witnesses. Mr. Mark Popely was employed by Gill as business development manager from February 2003 onwards; Mr. Neil Jacklin was employed by Gill as mechanical projects manager from 1st July onwards; Mr. Kevin Davies is an electrician employed by D. and G.

I found all six witnesses to be honest, and they all gave me considerable assistance. Mr. Friend and Mr. Edwards had the advantage of being more closely involved in the relevant events than any of Gill's witnesses. Mr. Neil Jacklin, who was Gill's principal witness, had the disadvantage of not coming on board until a late stage of the project.

This is, I believe, a sufficient introduction to the case. It is now time to outline the facts.

During 2002 and 2003 Totty was carrying out the complete refurbishment of Macaulay Hall, which is part of the campus of Leeds Metropolitan University. Totty had been engaged by the university as main contractor on a form of contract which has not been put in evidence, but which provided for a completion date of 17th August, 2003. By a sub-contract dated 24th January, 2003 Totty engaged Gill as sub-contractor to design, supply and install the mechanical and electrical installations at Macaulay Hall. The sub-contract provided that Gill should complete installation by the 29th June, and should complete commissioning and clear the site by 13th July. Gill engaged Machenair as sub-sub-contractor to carry out mechanical works on the project.

Three separate purchase orders were placed by Gill:

It can be seen from Gill's three purchase orders (which accepted Machenair's quotations) that in large measure Machenair was engaged as labour only sub-sub-contractor. There was, however, a small amount of materials which Machenair contracted to supply. Collectively, Machenair's three quotations and Gill's three purchase orders constituted the sub-sub-contract between the parties.

Machenair duly commenced work in February, 2003. Mr. Tommy Friend was Machenair's contract manager responsible for this job. Mr. Arthur Edwards was the working foreman. Mr. Ray Power was Gill's project manager who dealt with Macaulay Hall.

Since Gill was providing materials for Machenair to install, there needed to be regular liaison between the two companies about what items were required and when. The system adopted has been described by Mr. Friend and Mr. Edwards in their evidence, and is not in dispute. In the early period Machenair supplied to Mr. Power lists of items required. Mr. Power obtained quotations from different suppliers, and then placed his orders. This procedure was unwieldy and caused delays. The parties then switched to a simpler system. A firm called Bancroft was appointed as sole supplier. Machenair would regularly telephone Bancroft and itemise the materials needed. Bancroft would then send a quotation to Gill for those materials, which Gill would accept. Mr. Friend very fairly accepted in cross-examination that this new procedure worked quite well. Machenair generally got the pipes and fittings which they wanted within 24 hours. The problem of delays caused by late materials was effectively overcome by mid March 2003.

Throughout the course of the project a number of variation instructions were issued by Gill to Machenair. On some occasions these variation instructions were properly documented and prices were agreed for the extra work. On other occasions the documentation maintained by both companies was unsatisfactory.

In early April Mr. Mark Popely, who was Gill's business development manager, replaced Mr. Power as project manager on this job. The site minutes show that there was a period of overlap between these two men.

By April 2003 delays were developing on the project, and Gill applied to Totty for an extension of time under its sub-contract. By a letter dated 19th May Totty at that stage refused to grant any extension of time. Totty gave the following four reasons for its refusal:

This letter has been the subject of some attention during the trial. As Gill accepts, paragraph (3) identifies a cause of delay for which Gill was responsible. Paragraph (4) has generated some controversy. Gill relies upon this paragraph as evidence that Machenair was providing insufficient labour on site. Machenair contends that there was only a limited amount of work available to be done. Machenair always had enough labour on site to do the work which was available. Having weighed up the evidence of Mr. Friend and Mr. Edwards on the one hand, and the evidence of Mr. Popely and Mr. Davies on the other hand, and bearing in mind the contemporaneous documents, I have come to the conclusion that Machenair's evidence is correct in respect of the period up to mid May. In general terms, Machenair had enough labour on site to do the work which was available.

During June and July two new causes of delay emerged. These were: (1) delays by the joiners in installing the IPS system; (2) delays by Gill in procuring the water heaters. A further significant event during this period was that on 1st July Mr. Neil Jacklin became employed by Gill and took over the role of project manager.

Let me deal first with the IPS system. The IPS system comprised cubicles, backboards, vanity bars, and so forth. These needed to be installed in the toilet and washing areas before Machenair could install the sanitary ware. The IPS system was not installed until late July.

I turn now to the water heaters. Unfortunately the original type of water heater produced by Gill was not acceptable to the university, and was rejected by the clerk of works. Gill then set about finding an alternative model. One was identified and approved in mid July. The water heaters for installation were delivered on dates between 22nd July and 31st July. Mr. Jacklin told me the date of delivery of each water heater. I accept that evidence, supported, as it is, by delivery notes.

On the 1st August Totty sent to Gill a stiff letter protesting at delays on the sub-contract works. This letter listed 30 items which were outstanding, each marked with a bullet point. In addition, Totty pointed out that testing and commissioning still had to be done.

Mr. Friend was referred to this letter in detail during cross-examination. Mr. Friend demonstrated to my satisfaction that the vast majority of items in that letter could not be blamed upon Machenair for one of two reasons: (1) many items in the letter were the responsibility of other sub-contractors or sub-sub-contractors; (2) many items could not be done by Machenair because they were awaiting work to be done or items to be delivered by others.

Let me now move on to events in August. Machenair completed the heating system on or about the 4th or 5th August. The water heaters which I have mentioned earlier formed part of the plumbing system, not the heating system. The installation of plumbing was delayed both by the late arrival of the water heaters and also by the late installation of the IPS system. A bar chart prepared by Mr. Jacklin for the purpose of this litigation shows that the installation of the plumbing system was completed by 15th August. I find that the bar chart is correct in this regard. The precise date when Machenair left site (after commissioning works, clearing up, and so forth) emerged as a source of controversy at a late stage in the trial. In the end, however, both counsel agreed that the date stated in paragraph 38 of Mr. Popely's witness statement, namely 21st August 2003, was correct. That seems to fit with the documents. I shall therefore take the 21st August as the date when Machenair left site.

The other principal sub-sub-contractor who carried out works for Gill was the electrical contractor D. and G. I do not know on what date D. and G. completed its work.

Following completion of all sub-contract works Gill had to sort out its final account with Totty. Totty maintained that delays by Gill had caused Totty a delay of three weeks, namely from 18th August to 7th September 2003. After some negotiations Gill agreed to pay Totty £14,045.32, plus VAT, as damages for delay. Gill then added a 15 per cent mark-up to this sum, and sought to recover it in equal proportions from Machenair and D. and G.

Let me now to turn to Machenair's final account. On 29th August Machenair submitted an invoice for £80,864 (less sums previously paid). The build up of this sum is shown at pages 336 to 337 of Bundle 1. I shall refer to this version of the final account as "Version 1". During November 2003 there were negotiations between Machenair and Gill with a view to arriving at a sensible commercial compromise of disputed issues In the course of these negotiations Machenair produced a revised version of its final account, which Machenair would be prepared to accept as the basis of settlement. I shall refer to this version of the final account as "Version 2". Version 2 appears at pages 351 to 353 of Bundle 1. The total sum claimed in Version 2 is £75,206 (less sums previously paid).

Unfortunately, no compromise could be reached by negotiation. Accordingly, Machenair prepared a final version of its final account, in which Machenair withdrew its earlier concessions and did a recalculation of the sums due. As a result of this exercise the value of some items in the final account increased, and the value of other items in the final account went down. This final version, which I shall refer to as "Version 3", appears at the front of Bundle 5/1. The total sum shown as due in Version 3 is £91,173.10 (less sums previously paid).

By the beginning of 2004 it was clear to all concerned that the differences between the parties could not be amicably resolved. Accordingly, Machenair commenced the present proceedings.

By a claim form issued on 10th February 2004 Machenair claimed against Gill the outstanding balance due on two contracts, namely the Wildlife Trust Centre and Macaulay Hall. In relation to the Wildlife Trust Centre the parties have never been far apart, and this contract only played a subsidiary role in the litigation. In relation to Macaulay Hall Gill defended the action on the basis that the sums claimed by Machenair were excessive. Gill also set up a counterclaim in respect of delay and certain other matters. This action was transferred to the Technology and Construction Court in Leeds, and it duly proceeded to trial. Since the difference between the parties on the Wildlife Trust Contract was only £300, the parties very sensibly agreed to split the difference. Thus it became common ground that the sum owed by Gill to Machenair in relation to that contract was £4,782, plus VAT of £836.85. That makes a total of £5,618.85. In the light of this agreement the present trial has been focused upon, and limited to, the Macaulay Hall project.

The trial began on Thursday 10th March. By the end of the second day (Friday 11th March) the evidence of all witnesses had been heard, and closing speeches were complete. I said that I would consider the issues over the weekend and give judgment on Monday morning. This I now do.

Each of the three purchase orders sent by Gill to Machenair had a note at the bottom stating, "This order is placed subject to our conditions of purchase, a copy of which is available upon request." Mr. Christopher Dodd, who appears for Gill, contends that this note had the effect of incorporating Gill's standard conditions into the contract. Mr. Anthony Edwards, who appears for Machenair, contends that Gill's standard conditions were not incorporated. He points out that on the first two purchase orders the crucial words were substantially obliterated by the fax header. In response to this last point Mr. Dodd contends that a hard copy of the purchase orders was also sent to Machenair. Furthermore, the obliteration was only partial.

In relation to this issue my conclusions are as follows:

For all these reasons I conclude that Gill's standard conditions were not incorporated into the sub-sub-contract. Furthermore, I do not see anything in the previous course of dealings between the parties which had that effect.

If everything which I have said so far is wrong, then it should be noted that the principal part of Gill's standard conditions upon which Mr. Dodd relies is Clause 14. In my view, that reliance is misplaced. Machenair was properly to be characterised as a "labour only sub-contractor". Accordingly, it was only Clause 13 and not Clause 14 which could be applicable to the present case.

Let me now turn to the crucial contract documents. These comprise three quotations from Machenair and three purchase orders from Gill. It can be seen from these documents that the express terms of the sub-sub-contract were sparse. Much was left to be implied. On the first two purchase orders Mr. Ray Power had written the following note, "Please liaise with Totty Construction via Craig Pease, site manager, concerning specific programming of the project, also myself."

In my judgment, on a proper construction of this sub-sub-contract, alternatively by implication, Gill's obligation was to complete the mechanical works within a reasonable time. In determining what constitutes a reasonable time it is necessary to have regard to the main contractor's programme, and also to all the other circumstances.

Let me now turn to the matter of variations. The sub-sub-contract contained no provision as to valuation of variations. Accordingly, there must have been an implied term that, where the price of variations was not agreed in advance, a reasonable sum would be paid for any additional work which Machenair carried out at Gill's request.

In relation to the valuation of variations there are two issues which frequently recur: (1) What mark-up should be applied? (2) In relation to a number of items, was it reasonable for the work to be done by a foreman and charged at a foreman's rate?

In relation to the first of these issues Version 3 of Machenair's final account has been priced using a mark-up of 150 per cent. In cross-examination Mr. Dodd suggested that 150 per cent was top of the range, a more reasonable mark-up would be 110 per cent. Mr. Friend accepted that suggestion. In the light of this evidence I hold that the proper mark-up to apply to variations is 110 per cent.

In relation to the second issue I find that it was reasonable for many of the items of work to be done by a foreman and to be charged at that rate. It was entirely proper for Machenair to have a working foreman on this job.

There are three other issues of principle which arise on the variations, namely: (1) Are Machenair entitled to claim for attending meetings? (2) Is it reasonable to value variations on a time basis rather than a measured basis? (3) Is Machenair entitled to extra payment for working weekends?

As to the first issue, Machenair originally claimed £960 for attending meetings. By the time of Version 3, however, this head of claim had increased substantially. In evidence Mr. Friend said that Machenair had to attend site meetings during the interregnum period between Mr. Power's departure and the arrival of Mr. Popely. It subsequently emerged, however, that Mr. Friend's evidence was mistaken in this regard. There was no such interregnum period. My conclusion on this issue is that Machenair is not entitled to claim for attending meetings. In so far as Machenair did attend any meetings, this was part of the liaison process required by the original purchase orders.

In relation to the second issue, in my view, Machenair cannot be criticised for valuing variations on a time basis. A complete remeasurement of the mechanical works would be a laborious exercise and would be of dubious value. This was not a contract with a priced bill of quantities, it was a labour only sub-sub-contract. Furthermore, although Gill now maintains that there should have been a remeasurement, it should be noted that Gill never carried out that exercise, although it had ample opportunity to do so.

In relation to the third issue, I note that the claim for weekend working did not feature in Version 1 or Version 2 of the final account. This claim first appeared in Version 3. Furthermore, the contract between the parties did not provide for weekend working to be paid extra. I have come to the conclusion that this claim should be rejected.

Let me now turn from general considerations to the individual variation items. There are 42 items to consider. They appear in Version 3 of Machenair's final account, and bear the numbers 4 to 45. I shall adopt the same numbering system as is used in Version 3 of the final account.

Machenair's case in relation to the individual items is set out in Bundles 5/1 and 5/2. These two bundles comprise almost 900 pages. Gill's case in relation to the individual items is set out in narrative form in Mr. Jacklin's third witness statement, and in tabular form at Mr. Jacklin's exhibit "NJ6". During the course of the trial, at my request, both parties have recalculated their respective figures to show the effect of taking a mark-up of 110 per cent. The arithmetic is agreed on both sides. I am grateful to the parties for their assistance in this regard.

I shall now go through the variation items and give my decision on each one. Since I have already dealt with the main issues of principle, I shall simply state the figure which I award, and only add further comment when that is necessary.

On the basis of the above figures I assess the value of variations on this contract (exclusive of VAT) at £24,411.

The first issue which arises is whether Gill is entitled to pursue its counterclaim at all. This issue arises because, following receipt of Machenair's various applications for payment, Gill failed to serve a withholding notice in accordance with section 111 of the Housing Grants Construction and Regeneration Act, 1996. Mr. Dodd accepts that Gill did not serve any withholding notice within the prescribed period. He submits, however, that this does not shut out the counterclaim. Mr. Edwards, on the other hand, contends that the counterclaim is absolutely barred.

On this issue I accept the submissions of Mr. Dodd. It seems to me that the effect of section 111 is to exclude the right of set off. It does not bar for all time any otherwise valid claims which might exist against a contractor or sub-contractor. This interpretation of the Act is supported by paragraph 17-70 of the seventh edition of Keating on Building Contracts.

The principal head of counterclaim in this case is damages for delay. I have come to the conclusion that Gill's counterclaim for delay fails, because Machenair completed its work within a reasonable time. Machenair endeavoured to carry out its work in accordance with the various programmes and revised programmes produced by Totty. However, circumstances beyond Machenair's control made this impossible. I reach these conclusions for four reasons:

Let me now turn to the other heads of counterclaim. The first item is a claim for £1,150 in respect of damage to ducts. It is clear that damage was caused to ductwork, and that Totty charged Gill £1,000 for removing, repairing and replacing ducts. However, Gill's witnesses failed to prove that Machenair caused this damage. Mr. Jacklin was not on site at the relevant time; Mr. Popely in his evidence did not say that Machenair had damaged the ducts. The best evidence in relation to ductwork came from Mr. Rowley, who oversaw the ventilation installations at Macaulay Hall on behalf of Machenair. Mr. Rowley said that the ductwork was damaged by other trades. This evidence is corroborated by Mr. Rowley's fax to Ray Power dated 4th June, 2003. Having considered all the oral and written evidence, I am quite satisfied that Machenair were not responsible for the damage caused to ductwork.

The second item in the counterclaim relates to replacing handrails in the roof space. In relation to this item Mr. Jacklin said that he was not on site at the relevant time. Mr. Popely said that he did not himself see any handrails removed. However, it was drawn to his attention at a site meeting that handrails had been removed on two occasions in order to enable work to be done. Mr. Friend said in cross-examination that the taking down of handrails was not done by Machenair. I have come to the conclusion on the present state of the evidence that Machenair cannot be held liable for this item.

The third and fifth items in the counterclaim relate to the cutting of holes. In total, £2,300 is claimed under this head. The basis of this claim is the allegation that Machenair failed to mark out correctly where they required holes to be cut. In cross-examination Mr. Jacklin said that he did not recall Machenair marking out holes wrongly. Mr. Popely, who was recalled to deal with this item, was unspecific in his evidence. He also said that there was no documentation to show that holes had needed to be redrilled. I have come to the conclusion that this head of counterclaim is not made out.

The fourth head of counterclaim relates to clearing up and the removal of rubbish. Totty appear to have charged Gill £1,000 in this regard. Mr. Friend accepted in cross-examination that on a building site everyone leaves some mess. Since Gill had two sub-sub-contractors, it would be reasonable for Machenair to pay half of the sum charged by Totty. I think that this was a proper concession. I award to Gill £500 under this head. However, the additional mark-up of 15 per cent claimed by Gill is not recoverable as damages.

Let me now draw the threads together. The only part of the counterclaim on which Gill succeeds is Item 4. Under this head the court awards £500, plus VAT, as damages.

The case which I am currently dealing with is typical of many which come before the Technology and Construction Court ("the TCC"). Two perfectly reputable companies have been unable to reach agreement on the final account between them and on certain contra charges at the end of a construction project. There are of course many forms of dispute resolution available to contractors and sub-contractors in that situation. The options include mediation, arbitration, adjudication and litigation. Each of these procedures has its place, and each has its own particular advantages. In the case of litigation the advantages are that the decision is binding rather than persuasive, and the avenues of appeal are limited. In short, litigation has the advantage of finality. A further advantage of litigation is that there is a specialist court, namely the TCC, which is available to manage and try all actions concerning the construction industry. The chief disadvantage of litigation is the level of costs which will be run up if the parties and their lawyers do not exercise the utmost vigilance.

With this in mind I wish to make three observations arising from the present case:

I hope that none of my observations in this case are taken as personal criticism. They are certainly not intended as such. Both counsel responded constructively and with good humour to my efforts to confine this trial to its proper length. What I say in this part of the judgment is intended to give guidance for future cases.

There is one other point which I should make about cases like this. Once the trial starts, the parties have already incurred substantial costs. It is to be presumed that sensible attempts to settle have been made and have failed. What the parties want at this stage, and what the parties are entitled to, is the decision of the court. It is not generally a wise use of time or resources during the trial to send the parties out into the corridor to negotiate on the basis of some judicial indication of view.

Next may I say something about the TCC in Leeds. The Court Centre in Leeds designates three fortnights in the year for shorter TCC cases. During these fortnights TCC cases are listed back to back. Indeed, I shall be starting the next TCC trial later this morning. It not only saves costs, but also assists other litigants, if TCC trials can be confined to their estimated lengths. Furthermore, both the parties, the witnesses and counsel plan their diaries on the basis of the trial dates and estimates of length which have been given. The longer TCC cases in Leeds may be heard at other times of the year. These cases are assigned special fixtures.

The construction sector is a major contributor to this country's economy. It produces about 10 per cent of the gross domestic product. The TCC is the specialist court of the construction industry. The TCC provides an essential service to the industry in resolving its disputes. Very many of those disputes are like the present case. The sums in issue are modest in comparison with the potential costs. Both the court and the profession must be constantly examining the procedures which we use, in order to achieve justice in construction litigation at a proportionate cost. This is in accordance with the overriding objective contained in Part 1 of the Civil Procedure Rules. These observations are just as true in Leeds as they are in London. Leeds is a major financial and commercial centre, with a flourishing construction industry.

Let me now draw together the threads of the present case. On the Macaulay Hall project the total contract sum is £54,272, the value of variations is £24,411. The total of these two figures is £78,683. From this sum there must be deducted the value of the counterclaim, namely £500. The resultant figure is £78,183. Ignoring VAT, the sums so far paid by Gill to Machenair amount to £55,004. Accordingly, the net balance owing to Machenair amounts to £23,179. VAT on this sum amounts to £4,056. Thus the total sum owed by Gill to Machenair on the Macaulay Hall project is £27,235. The agreed sum which is owed by Gill to Machenair on the Wildlife Trust Centre project is £5,619. Accordingly, the total sum owed by Gill to Machenair is £32,854. I give judgment for the claimant in that sum.

It has been agreed that all questions of interest will be dealt with at the end of the trial. I invite the parties to check my arithmetic in relation to the principal sum, and also to see what they can agree in relation to interest. I can then hear argument on any outstanding issues.