Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MR JUSTICE STUART-SMITH
Between :
GROVE DEVELOPMENTS LTD | Claimant |
- and - | |
BALFOUR BEATTY REGIONAL CONSTRUCTION LTD | Defendant |
Alexander Nissen QC and Mr William Webb (instructed byMacfarlanes LLP) for the Claimant
Steven Walker QC (instructed by Pinsent Masons LLP) for the Defendant
Hearing dates: 20 January 2016
Judgment
Mr Justice Stuart-Smith:
Introduction
This judgment follows the trial of the Claimant’s Part 8 claim seeking declaratory relief in respect of two issues of construction of a contract.
The Claimant [“GDL”] is a developer. The Defendant [“BB”] is a building contractor. By a contract made between GDL and BB (then known as Mansell Construction Services Limited) dated 11 July 2013 [“the Contract”], GDL employed BB to design and construct a hotel and serviced apartments adjoining the O2 Complex at Greenwich Peninsular, London. The Contract Sum was £121,059,632.
The Contract was based on the JCT Design and Build Contract 2011 as amended by a series of bespoke amendments, some of which are relevant and will require to be mentioned below. Pursuant to the Contract, works began in July 2013. The defined Date for Completion of the Works was 22 July 2015. The works were not completed by 22 July 2015 and have still not been completed, for reasons which are in dispute between the parties but do not matter for present purposes.
It is common ground that the parties agreed a Schedule [“the agreed Schedule”] of 23 valuation and payment dates covering the period from September 2013 to July 2015, which governed the making of interim applications and payments during that period. On 21 August 2015, after the period covered by the agreed Schedule, BB issued an application for a further interim payment [“IA24”]. The sum claimed by way of payment was £23,166,425.92 plus VAT. As set out below, GDL served documents described as a Payment Notice and a Pay Less Notice. BB’s case is that it was entitled to serve IA24 and that GDL failed to serve either a Payment Notice or a Pay Less Notice within the applicable time limits. In consequence, BB asserts that GDL is liable to pay £23,166,425.92. GDL contends that BB had no contractual right to issue or be paid in respect of IA24 and, on that basis, the notice regime is irrelevant. Alternatively, GDL contends that on a proper construction of the Contract the final date for payment was 18 September 2015 which would mean that the Pay Less Notice which it issued on 15 September 2015 was issued in time and effective.
Both of GDL’s contentions raise questions of construction and law that are to be determined by way of declarations in these Part 8 proceedings. The questions to be determined are:
Did BB have a contractual right to make IA24 (or any subsequent application) and to be paid in respect thereof?
If so, on a proper construction of the Contract what date was the final date for payment in respect of such application(s) and did GDL serve a valid Pay Less Notice?
GDL seeks declarations in respect of those questions as follows:
BB has no contractual right to make IA24 (or any subsequent application) and no right to be paid in respect thereof;
Not applicable. Alternatively, 28 days from the due date which, in the case of the August 2015 application, was 18 September 2015 and GDL’s Pay Less Notice of 15 September 2015 was a valid Pay Less Notice. Alternatively, if the last date for service of a Pay Less Notice was earlier than 15 September 2015, GDL’s Payment Certificate constituted a valid Pay Less Notice.
BB commenced adjudication proceedings claiming payment of £22,726,922.61 plus VAT and interest. The Notice of Adjudication was issued on 19 November 2015. The Referral was issued on 26 November 2015. GDL does not accept that the Adjudicator was properly appointed and it participated in the adjudication without prejudice to that reservation of its position. On that basis, GDL served a Response in the adjudication on 4 December 2015 and issued these proceedings on 10 December 2015. The intention was that these Part 8 proceedings should finally determine key questions of construction and law which arose in the adjudication and render any decision by the adjudicator that was adverse to GDL otiose. On 11 January 2016 the adjudicator issued his decision, which was that GDL, having already paid £439,503.31 of the sum claimed, should pay a further £2million.
The Factual and Contractual Background
The Contract incorporates the terms of the JCT Design and Build Contract 2011 edition as amended by a series of specific amendments.
Clause 4.7 provides as follows:
“Issue and amount of Interim Payments
4.7 .1 Interim Payments shall be made by the Employer to the Contractor in accordance with section 4 and whichever of Alternative A (Stage Payments) or Alternative B (Periodic Payments) is stated in the Contract Particulars to apply.
.2 The sum due as an Interim Payment shall be an amount equal to the Gross Valuation under clause 4.13 where Alternative A applies, or clause 4.14 where Alternative B applies, in either case less the aggregate of:
.1 any amount which may be deducted and retained by the Employer as provided in clauses 4.16 and 4.18 (‘the Retention’)
.2 the cumulative total of the amounts of any advance payment that have then become due for reimbursement to the Employer in accordance with the terms stated in the Contract Particulars for clause 4.6; and
.3 the amounts paid in previous Interim Payments.”
The Contract Particulars in respect of Clause 4.7 elected for stage payments in accordance with Alternative A and deleted, by striking through, the option of periodic payments in accordance with Alternative B. In respect of the stages referred to in Clause 4.8.2, the parties agreed and wrote: “TO BE AGREED WITHIN 2 WEEKS FROM DATE OF CONTRACT”. The space for a brief description of stages and the cumulative value was then left blank. At the end of that space, footnote 15 said “Cumulative value of final stage must be equal to the Contract Sum.” Where appropriate details could then have been entered if Alternative B (Periodic Payments) had been adopted, the following words were crossed out “The first date is …. And thereafter the same date in each month or the nearest Business Day in that month.” There is no footnote or other provision equivalent to footnote 15 relating to Periodic Payments where Alternative B is selected.
Clause 4.8 as amended provides as follows:
Contractor’s Interim Applications and due dates
.1 In relation to each Interim Payment, the Contractor shall make an application to the Employer (an ‘Interim Application’) in accordance with the following provisions of this clause 4.8, stating the sum that the Contractor considers to be due to him and the basis on which that sum has been calculated.
.2 Where Alternative A applies, an Interim Application shall be made as at completion of each stage specified in or by the Contract Particulars for Alternative A. Following the application in respect of the last stage, such applications shall be made at intervals of 2 months (unless otherwise agreed), the last such application being made upon the expiry of the Rectification Period or, if later, the issue of the Notice of Completion of Making Good (or, where there are Sections, the last such period or notice). The due date for payment (the ‘due date’) in each case shall be the later of the date of completion of the stage (or, when applicable, the 2 monthly date) and the date of receipt by the Employer of the Interim Application.
.3 Where Alternative B applies, for the period up to practical completion of the Works, Interim Applications shall be made as at the monthly dates specified in the Contract Particulars for Alternative B up to the date of practical completion or the specified date within one month thereafter. Subsequent Interim Applications shall be made at intervals of 2 months (unless otherwise agreed), the last such application being made upon the expiry of the Rectification Period or, if later, the issue of the Notice of Completion of Making Good (or, where there are Sections, the last such period or notice). The due date in each case shall be the later of the specified date and the date of receipt by the Employer of the Interim Application.
.4 Interim Applications may be made before, on or after completion of the relevant stage or the monthly date and shall be accompanied by such further information as may be specified in the Employer’s Requirements and Contractor’s Proposals.
Clause 4.9 as amended provides as follows:
“Interim Payments – final date and amount”
4.9 .1 The final date for payment of an Interim Payment shall be 28 days14 days from its due date.
.2 Not later than 5 days after the due date the Employer shall give a notice (a ‘Payment Notice’) to the Contractor in accordance with clause 4.10.1 and, subject to any Pay Less Notice given by the Employer under clause 4.9.4, the amount of the Interim Payment to be made by the Employer on or before the final date for payment shall be the sum stated as due in the Payment Notice.
.3 If the Payment Notice is not given in accordance with clause 4.9.2, the amount of the Interim Payment to be made by the Employer shall, subject to any Pay Less Notice under clause 4.9.4, be the sum stated as due in the Interim Application.
.4 If the Employer intends to pay less than the sum stated as due from him in the Payment Notice or Interim Application, as the case may be, he shall not later than 3 5 days before the final date for payment give the Contractor notice of that intention in accordance with clause 4.10.2 (a ‘Pay Less Notice’). Where a Pay Less Notice is given, the payment to be made on or before the final date for payment shall not be less than the amount stated as due in the noticePay Less Notice.
.5 If the Employer fails to pay a sum, or any part of it, due to the Contractor under these Conditions by the final date for its payment, the Employer shall, in addition to any unpaid amount that should properly have been paid, pay the Contractor simple interest on that amount at the Interest Rate for the period from the final date for payment until payment is made. Interest under this clause 4.9.5 shall be a debt due to the Contractor from the Employer.
.6 Acceptance of a payment of interest under clause 4.9.5 shall not in any circumstances be construed as a waiver of the Contractor’s right to proper payment of the principal amount due, to suspend performance under clause 4.11 or to terminate his employment under section 8.
Clause 4.10 as amended provides as follows:
“Payment Notices, Pay Less Notice and general provisions
4.10 .1 Each Payment Notice under this Contract shall specify the sum that the Party giving the notice considers to be or have been due at the due date in respect of the relevant payment and the basis on which that sum has been calculated.
.2 A Pay Less Notice:
.1 (where it is to be given by the Employer) shall specify both the sum that he considers to be due to the Contractor at the date the notice is given and the basis on which that sum has been calculated;
.2 (where it is to be given by the Contractor) shall specify both the sum that he considers to be due to the Employer at the date the notice is given and the basis on which that sum has been calculated.
.3 A Payment Notice or a Pay Less Notice to be given by the Employer may be given on his behalf by the Employer’s Agent or by any other person who the Employer notifies the Contractor as being authorised to do so.
.4 In relation to the requirements for the giving of notices under section 4 and the submission of a Final Statement, it is immaterial that the amount then considered to be due may be zero.
.5 Any right of the Employer to deduct or set off any amount (whether arising under any provision of this Contract or under any rule of law or equity) shall be exercisable against any monies due or to become due to the Contractor, whether or not such monies include or consist of any Retention.
.5 Notwithstanding his fiduciary interest in the Retention as stated in clause 4.16, the Employer is entitled to exercise any rights under this Contract of withholding or deduction from sums due or to become due to the Contractor, whether or not any Retention is included in any such sum under clause 4.18.”
Clause 4.12 provides that following practical completion of the Works the Contractor shall submit the Final Statement to the Employer, which leads to the final payment due to the Contractor. The due date for the final payment is one month after the last occurring of the end of the Rectification Period, the date stated in the Notice of Completion of Making Good, or the date of submission of the Final Statement. The Rectification Period is 24 months for the apartments and 12 months for the hotel.
Despite the stated intention of the parties that the stage payments were to be agreed within 2 weeks of the date of contract, that did not happen. Instead, it is common ground that the parties agreed the agreed Schedule, which was a schedule of valuation numbers, the months of the particular valuations, and various other steps leading to payment (as set out below) during the period from September 2013 until July 2015. The agreed Schedule included above the table of dates the words “Greenwich Hotel and Apartments/ Interim Valuation/Payment Dates 2013-2015/ Valuation Application on Third Thursday of the month”. The table was in the form below (with entries for each column for each month during the period):
Valuation no. | Val month | Mansell Application Submission Date to Grove | Valuation Date | Grove Certificate Issued (3 working days) | Payment made by Grove by (30 days from Val date) |
JUL | |||||
AUG | |||||
1 | SEPT | 19/09/2013 | 20/09/2013 | 25/09/2013 | 20/10/2013 |
2 | OCT | 17/10/2013 | 18/10/2013 | 23/10/2013 | 22/11/2013 |
3 | NOV | 14/11/2013 | 15/11/2013 | 20/11/2013 | 20/12/2013 |
4 | DEC | 19/12/2013 | 19/12/2013 | 24/12/2013 | 23/01/2014 |
… | … | … | … | … | … |
20 | APR | 16/04/2015 | 17/04/2015 | 22/04/2015 | 22/05/2015 |
21 | MAY | 21/05/2015 | 22/05/2015 | 27/05/2015 | 26/06/2015 |
22 | JUN | 18/06/2015 | 19/06/2015 | 24/06/2015 | 24/07/2015 |
23 | JUL | 16/07/2015 | 17/07/2015 | 22/07/2015 | 21/08/2015 |
It is common ground that the agreed Schedule regulated the interim payment process from September 2013 until July 2015. The parties are in dispute about what effect, if any, it had thereafter.
From about May 2015 the parties entered into correspondence and discussions concerning future interim payments. BB identifies what it considers to be contractually relevant discussions and correspondence as follows:
Towards the end of May 2015 there was a conversation between Mr Edwards of GDL and Mr Peach of BB when, according to Mr Peach, Mr Edwards asked him to produce a list of further dates for interim payments beyond July 2015;
On 26 May 2015 Mr Peach emailed Mr Edwards “Also, as discussed, we will formulate a revised interim payment list for further and future interims throughout 2015.”;
On 27 May 2015 Mr Hawtree of BB emailed Mr Edwards “For future payments could I bring to your attention that the Contract payment terms are 28 days and not 30 days as noted in the valuation schedule … .”;
Later that day Mr Peach emailed Mr Edwards saying “Further to discussions regarding Interim Valuation Date/Payment Periods, etc. can I suggest an update to the current schedule as attached… .” The attached schedule proposed dates for valuations 21 to 23 that differed from those set out in the agreed Schedule and proposed dates for valuations 24 and 25 in August and September, but not beyond. The heading was much the same as the agreed Schedule except that the heading did not now include the words “Valuation Application on Third Thursday of the month”. The column headings to the table were changed, as set out below;
On 1 June 2015 Mr Edwards replied to Mr Hawtree and Mr Peach “Please see attached, which is more in line with current payments and is 28 days from Due date not valuation date”. He attached a revised version of the document he had been sent by Mr Peach. He made further changes to the column headings as set out below. He amended Mr Peach’s proposed BB Application Submission Dates for Valuations 22 and 23, the Payment dates for Valuations 21-23, and Mr Peach’s proposed BB Application Submission Dates and the Payment dates for Valuations 24 and 25. The effect of his changes to Mr Peach’s proposals for valuations 24 and 25 was that the date for payment by GDL would be 28 days after GDL issued its certificate and 35 days after the valuation date, whereas under Mr Peach’s proposal the date for payment by GDL would be 21 days after GDL issued its certificate and 28 days after the valuation date. Under the agreed Schedule, the date for payment by GDL was said to be 30 days after GDL issued its certificate and 35 days after the valuation date;
On 2 June 2015 Mr Peach queried the changes made by Mr Edwards, emailing “We see what you have done with the dates but isn’t the “due date” the valuation date in this case? This would then accord with our schedule sent to you.”;
Mr Edwards replied on 5 June 2015 “Not that I am aware of as the Final payment date is the key date so have to work back from this to tie in with the funding agreements.”
The changes to the column headings show the development of the providers’ thinking. As set out above, the column headings for the agreed Schedule were:
Valuation no. | Val month | Mansell Application Submission Date to Grove | Valuation Date | Grove Certificate Issued (3 working days) | Payment made by Grove by (30 days from Val date) |
I highlight the entries that were changed from the previous version in italics below. The column headings for Mr Peach’s schedule on 27 May 2015 were:
Valuation no. | Val month | BB Application Submission Date to Grove by | Valuation Date | Grove Certificate Issued by | Payment made by Grove by (28 days from Val date) |
The column headings for Mr Edwards’ responsive schedule on 1 June 2015 were:
Valuation no. | Val month | BB Application Submission Date to Grove by | Valuation Date | Grove Certificate Issued by Due Date | Payment made by Grove by (28 days from Due date) |
No further correspondence or discussions that are alleged to be contractually relevant occurred before BB issued IA24 on 21 August 2015 in the sum of £23,166,425.92 plus VAT. After that, the following events occurred that are said to have been relevant by one side or the other:
On 28 August 2015 GDL’s agent McBains Cooper issued a document entitled “Payment Certificate” in the sum of £2,349,504, together with substantial supporting documentation showing how that figure was calculated. It was sent under cover of a letter which said “Please find attached Payment Certificate 24 … . In accordance with the contract, you are notified that the Employer may withhold or deduct liquidated damages.”;
On 1 September 2015 Mr Edwards emailed Mr Hawtree “to avoid the monthly confusion I suggest the Final Date for Payment being 25th September 2015. Please confirm agreement.” There was no reply;
On 4 September 2015 Mr Peach sent a letter to GDL in which he referred to the 28 August Payment Certificate, giving details of a bank account into which the monies should be paid, and stating “We enclose our invoice … and we shall be pleased to receive your remittance in settlement of this amount certified in accordance with the terms and conditions of our agreement.” The attached invoice was in the sum of £2,349,504 plus VAT. It stated under the heading “Project Details” “Due date of Payment: 21-Aug-2015 Final Date of Payment 18-Sep-2015”. These dates were consistent with the dates that had been proposed for Valuation 24 by BB on 27 May 2015 but not with GDL’s proposal on 1 June 2015, under which GDL’s payment date would have been 25 September 2015;
There was a conversation between Mr Edwards and Mr Hawtree on 8 September 2015, after which Mr Edwards emailed Mr Hawtree “confirming” Mr Hawtree’s agreement that 25 September 2015 was the Final Date for Payment of the August application. Mr Hawtree replied saying that he had not agreed to the date, whereupon Mr Edwards accused him of reneging on what he had said;
On 10 September 2015 Mr Hawtree sent a long email in which he recorded that Mr Edwards had suggested 25 September 2015 as the Final date for payment and set out his view on the correct date. He referred back to Mr Edwards’ schedule of 1 June 2015 and wrote “I … understand that we both agree that the final date for payment is 28 days after the due date. The difference between us is that you are using the Grove Certificate date as the due date while we think that the valuation date is the due date.” On that basis he calculated that payment was due by GDL on 18 September 2015;
On 15 September 2015 GDL issued a document headed “Revised Certificate for Payment/Payless Notice” in the sum of £439,503 exclusive of VAT. It stated that the Payment Date was 25 September 2015, which was consistent with the line that Mr Edwards had been taking. According to a witness statement from Mr Edwards, the contents of which have not been challenged by BB in these proceedings, it had become clear to him that agreement could not be reached and so “[he] decided to work on the basis that [BB] was correct, that the final date for payment was 28 days after the due date and that 18 September 2015 was the final date for payment, which was based on Mark Hawtree’s email of 10 September 2015 and [BB’s] invoice of 4 September 2015. … As a result, I calculated that a Pay less Notice would have to be served by no later than 15 September 2015.”;
On 18 September 2015 GDL paid BB the amount set out in the Pay Less Notice, namely £439,503 exclusive of VAT;
On 30 September 2015 Mr Hawtree sent a letter to Mr Edwards in which he asserted that GDL’s Payment Certificate and Payless Notice were invalid and of no effect. BB claimed to be entitled to £22,726,922 or, alternatively, £2,000,000. The stage for the present dispute was thus set.
It is of interest to note the basis upon which BB advanced its claim by Mr Hawtree’s letter of 30 September. It gave an account of its understanding of the contract and the agreed schedule which included that “in broad terms” the schedule provided that BB were to make interim applications on the third Thursday of each month, the due date (or valuation date) was (generally speaking) 1 day after the date of their interim application, a payment notice (payment certificate) was to be served within 5 days of the due date, a pay less notice was to be served 3 days before the final date for payment, and the final date for payment was to be 30 days after the due date (or valuation date). It then suggested that the correct course was to “revert to the terms which remain extant under the original Sub-Contract, and supplement those with the 1996 Act (and associated Scheme) where appropriate.” Adopting this approach it said that the relevant period under the Act occurred every 28 days. Adopting 16 July 2015 (i.e. the Application Date for IA23) as the starting point, it calculated that the end of the next period would be 13 August 2015. It then said that the due date would be the later of 7 days after that date (i.e. 20 August 2015) or the date of BB’s application. Although not stated in the letter, this was apparently a reference to and reliance on paragraph 4 of the Scheme. Since IA24 was issued on 21 August 2015, BB took that as the due date. BB then said that a payment certificate (payment notice) must be served within 5 days of the due date which, on the basis that 21 August was the due date, was 26 August 2015. The source of the 5 day period was not stated, but is consistent with paragraph 9(2) of the Scheme or Clause 4.9.2 of the Contract. The effect of this calculation was that GDL’s payment certificate, having been issued on 28 August 2015, was said to be out of time and invalid. BB then went on to assert that under the Act and the Scheme the final date for any payment is 17 days after the due date. That would have meant that the final date for payment was 7 September 2015. BB went on to say that any Payless Notice should have been given not less than 3 days before the final date for payment. This apparently was a reference back to Clause 4.9.4 of the Contract, as paragraph 10 of the Scheme requires Payless Notices to be given not later than 7 days before the final date for payment. BB’s analysis led to the conclusion that GDL’s Payless Notice was not issued 3 days before the final date for payment: since it was issued on 15 September 2015 it was, if BB’s analysis was correct, issued 8 days after the final date for payment.
It can readily be understood why this analysis would have come as a surprise to GDL:
BB had not advanced the analysis before 30 September;
Although BB had proposed 21 August 2015 as the valuation date for IA24 on 27 May 2015, it had in that schedule proposed that the final date for payment by GDL would be 18 September, not 7 September 2015;
On 4 September 2015 BB had issued its invoice which stated that 18 September 2015 was the Final Date for Payment; and
On 10 September 2015 (by which time, on the basis of his later analysis, the final date for payment had passed) Mr Hawtree had represented to GDL that payment was due on 18 September 2015, adopting a different analysis from that deployed in his letter of 30 September.
In the meantime and subsequently:
On 18 September 2015 BB submitted Interim Valuation Application 25. McBains Cooper issued a payment certificate on 25 September 2015 which was amended and reissued on 29 September 2015;
On 23 October 2015 BB submitted Interim Valuation Application 26. GDL issued a payment certificate on 28 October 2015, which was subsequently revised on 3 November 2015;
On 22 October 2015 Mr Hawtree asked Mr Edwards to agree “a valuation date for November” and suggested 20 November “to run in with the sequence of previous valuation dates” to which Mr Edwards agreed on 28 October 2015. Interim Valuation Application 27 was issued on 20 November 2015;
On 19 November 2015 BB issued its Notice of Adjudication, which was followed on 26 November 2015 by its Referral Notice;
On 3 and 9 December 2015 the parties agreed that a December valuation date would be 18 December 2015 but GDL qualified its agreement by saying that it was without prejudice to its argument in the adjudication that BB was not entitled to make any further interim applications or to receive any further interim payments.
No sums have been paid to BB since 18 September 2015. GDL has been issuing Payless Notices deducting liquidated damages. BB contends that it is entitled to an extension of time and challenges the lawfulness of the deductions of liquidated damages.
The Applicable Principles
Interpreting commercial contracts
It is, once again, unnecessary to record more than the list of familiar authorities that were put forward by the parties as containing relevant principles of construction of commercial contracts. The bundles provided to the Court included James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583, Wickman Machine Tool Sales Ltd v L Schuler AG [1974] AC 235, Arbuthnot v Fagan [1995] CLC 1396, Charter Re v Fagan [1997] AC 313, Mannai Investments v Eagle Star [1997] AC 749, ICS v West Bromwich BS [1998] 1WLR 896, Gan Insurance v Tai Ping [2001] CLC 1103, Chartbrook v Persimmon [2009] AC 1101, Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, Andrew Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd [2015] EWCA 839, Marks and Spencer v BNP Securities Services Trust [2015] UKSC 72 and Arnold v Britton [2015] AC 1619.
The particular nuance that Mr Walker QC, for BB, wished to emphasise was that commercial common sense is relevant to the construction of contracts; and that one needs to look at the question of common sense as at the time that the contract was made. Both Counsel referred specifically to Arnold v Britton at [19]-[20] which also includes timely reminders that “the mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language”; and “a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight.”
While it is undoubtedly right that commercial common sense is often deployed at some stage (or stages) in the iterative process of interpretation of commercial contracts, it has been emphasised many times by the highest authority that the Court should treat what it considers to be “business common sense” with caution, because what appears to be business common sense may depend upon the standpoint from which the question is asked. Where words are capable of more than one meaning, the Court should consider the implications of the rival constructions as part of the interpretive process and is entitled to prefer a construction which is consistent with business common sense and to reject one that is not. But the Court should not strain to find ambiguity where none exists.
Beyond this, it is not necessary to embark on a restatement of the well-known principles expounded by high authority in the cases to which I have referred above.
How the Scheme fits with Existing Contracts and the place of Interim Payments Under the Act and Scheme
Two questions arise. The first is how and to what extent the Scheme fills gaps left by, or takes the place of, the provisions of a Construction contract as defined by the Housing Grants, Construction and Regeneration Act 1996 (“the Act”).
Ss. 109 and 110 of the Act provide:
109.— Entitlement to stage payments.
(1) A party to a construction contract is entitled to payment by instalments, stage payments or other periodic payments for any work under the contract unless—
(a) it is specified in the contract that the duration of the work is to be less than 45 days, or
(b) it is agreed between the parties that the duration of the work is estimated to be less than 45 days.
(2) The parties are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they become due.
(3) In the absence of such agreement, the relevant provisions of the Scheme for Construction Contracts apply.
(4) …
110.— Dates for payment.
(1) Every construction contract shall—
(a) provide an adequate mechanism for determining what payments become due under the contract, and when, and
(b) provide for a final date for payment in relation to any sum which becomes due.
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.
…
(3) If or to the extent that a contract does not contain such provision as is mentioned in subsection (1), the relevant provisions of the Scheme for Construction Contracts apply.
In Yuanda (UK) Co Ltd v WW Gear Construction [2010] BLR 435 at [55]ff Edwards-Stuart J contrasted the words of s. 108 of the Act (which incorporates the Adjudication provisions of the Scheme) with those of ss. 109, 110 and 113 (which incorporate the Payment provisions of the Scheme). He concluded at [62] that, where s. 108 of the Act applies to bring the Scheme’s provisions concerning adjudication into play, it implements all of those provisions of the Scheme. At [63]-[64] he contrasted the position pursuant to s. 108 relating to Adjudication provisions with the position pursuant to ss. 109 and 110 relating to the Payment provisions of the scheme and expressed his agreement with the reasoning of the Outer House in the Scottish Case of Hills Electrical & Mechanical v Dawn Construction Ltd [2004] SLT 477. In Hills, Lord Clarke decided on the basis of the wording used in ss 109 and 110 that the approach of the legislature when dealing with the Payment provisions of the Scheme was not automatically to incorporate all of the Payment provisions but was to import the appropriate provision or provisions of the Scheme in order to make up for their omission or inadequacy in the Construction contract.
I also respectfully agree with the reasoning and decision in Hills Electrical. It follows that where s. 109 or s. 110 is engaged, the provisions of the Scheme as to Payment will only be imported and apply so as to govern the legal relations of the parties to the extent that they have not already concluded binding contractual arrangements that can remain operative. They will not automatically or necessarily be imported in their entirety. It is of course possible that the existing arrangements under a given contract are not capable of forming part of a payment scheme when read with the relevant provisions of the Scheme. If that were the case it may be necessary to import the Scheme’s Payment provisions as a whole. But that is not a necessary or correct outcome if the existing contractual arrangements are capable of co-existing with some of the Payment provisions of the Scheme to form a coherent whole.
The second issue arises from BB’s submission that s. 109(1) requires instalment payments to be made for all work under a Construction contract lasting 45 days or more. This would be a draconian restriction on the freedom of commercial parties to contract on terms of their choosing even in the absence of s. 109(2), and I do not accept that it is the effect of s. 109(1). While it is probably true that many if not most Construction contracts of a significant duration make provision for interim payments (whether as stage payments, instalment payments or other periodic payments) at predetermined intervals, the effect of s. 109(2) is clear. Pursuant to s. 109(2), it would be open to the parties to agree stage payments by reference to stages that would be concluded at highly irregular intervals and require highly variable amounts to be paid. Equally, it would be open to the parties generally to adopt any amount and any interval even on BB’s interpretation. So, on the face of s. 109(2) it would have been open to GDL and BB to agree front loading of payments in advance of the value of the work done (as often happens, for sound commercial reasons) or (for equally sound commercial reasons) to agree that payments would be withheld until very late on. There is also nothing in the terms of s. 109(2) (or elsewhere in the Act) to prevent the parties from agreeing that the amount of a payment shall be nil.
When pressed with specific examples, Mr Walker QC was forced to submit that it would be impermissible in the light of s. 109(1) for parties to a contract set to last 50 days to agree that there would be one interim payment after 25 days and no further interim payments, so that the next payment would be the final contract payment; and to submit that, if stage payments were the adopted mechanism, it would be impermissible for parties to a contract of similar length to agree that there would be a payment at some intermediate stage but no other interim stage payment. While I can accept that the default position if the Scheme provisions on Payment are imported and apply in full may be that interim payments will continue throughout the carrying out of the works so as to cover the work as it is done during the entirety of the contract period, that does not affect the ability of the parties to contract on a different basis if they chose to do so.
I respectfully agree with and endorse the observation of the learned editors of Keating on Construction Contracts 9th Edn at 18-057 about the effect of s. 109 of the Act:
“Further, there is no requirement as to when such payments are to be made; any arrangement which satisfies the definition will be sufficient. Thus a contract prescribing one periodic payment, even of an insignificant amount, would it seems, meet the requirements.”
It follows that if the parties enter into an agreement about the amounts of the payments and the intervals at which, or circumstances in which, they become due, the mere fact that the agreement does not provide for interim payments covering all of the work under the contract is no reason to import the provisions of the Scheme to supplement their agreement so as to generate interim payments covering the work that their agreement does not cover.
Issue 1: Did BB have a contractual right to make and to be paid in respect of IA24 (or any subsequent application)?
Despite what was stated in the contract, the Parties did not agree the details of stage payments within two weeks or at all. Had nothing else happened, s. 109(3) would have operated to import the relevant terms of the Scheme. But the parties did enter into an agreement for periodic payments by agreeing the agreed Schedule, the effect of which was to act as a specific amendment to the Contract. It necessarily meant that the parties had now agreed not to have stage payments as originally provided for in the Contract: Alternative A (Stage Payments) was therefore no longer the chosen alternative under the agreed Schedule. The parties’ agreement was clear and provided for 23 interim payments on the dates set out in the agreed Schedule and no more. The agreed Schedule, by providing that Grove was to make those 23 payments on dates that were 30 days after the valuation date also meant that, to that extent Clause 4.9.1 was amended.
Subject only to the amending effect of the agreed Schedule, the original contract terms had already established the parties’ agreement on such matters as the due date for payment (Clause 4.9.1) and the timing of Payment Notices (Clause 4.9.2) and Pay Less Notices (Clause 4.9.4). By the agreed Schedule, read in conjunction with the surviving terms of the contract, the parties agreed the intervals at which payments would become due and identified the mechanism (i.e. submission of valuations, payment certificates and so on) by which the amounts were to be calculated. Its effect was therefore that s. 109(3) no longer had any application to the contract because the parties had agreed the amounts of the payments and the intervals at which, or circumstances in which, they became due.
What the agreed Schedule did not do was to make any express provision for further interim payments after valuation 23. Mr Walker QC at one point appeared to be arguing that the inclusion of the words “Valuation Application on Third Thursday of the Month” meant that the agreed Schedule expressly provided that the dates for valuations 1-23 were no more than examples and that the true (express) meaning of the Schedule was that it continued on ad infinitum (or at least until the conclusion of the works). That is an impossible submission given the specificity of the rest of the agreed Schedule which, on its proper construction, was a list of all the interim payments that were agreed.
Nor is it possible to construe the Contract (either as originally agreed or on the subsequent agreement of the agreed Schedule) as including an implied term that interim payments would continue to be made after valuation 23. The first reason is that such an implied term would be inconsistent with the express terms of the contract as amended by the agreed Schedule, which were that there should be 23 valuations as there set out. Second, there is no proper basis for implying a term in any event. BB founds its argument on the proposition that it would be contrary to commercial common sense for progress payments to cease before the completion of the works because it would leave the contractor to finish the Works without the benefit of interim payments. It is to be remembered that, when the agreed Schedule was agreed, the contractual date for Practical Completion was 22 July 2015. It would have been readily foreseeable that if Practical Completion was not achieved on that date (for whatever reason) there would be a period after July 2015 for which no interim payments would be available and that this might have a commercially disadvantageous impact on BB. BB could have negotiated for terms that would have given it a right to further interim payments in such circumstances, but it did not do so (it being BB’s case that there was no discussion about what would happen if the Works were not complete in July 2015). Had BB raised the issue it would no doubt have wished to negotiate protective terms; and its failure to do so is now seen as regrettable. But that is no sufficient basis on which the Court could conclude that such a result is commercially nonsensical. As Mr Nissen QC, for GDL pointed out, it would have been commercially sensible for GDL to have refused further interim payments as a means of exercising pressure on BB to finish on time. BB’s only counter to this is to allege that the fact of delay may have been out of its control and in the control of GDL. This does not change the overall commercial realities or sensibilities of the alternative hypothetical negotiating positions. Applying the well-established principles on using commercial common sense as an aid to interpretation, I reject BB’s submission that commercial common sense demands or justifies the implication of a term that there would be further interim payments after July 2015.
BB’s next submission is that the terms of the agreed Schedule were subsequently varied so as to give BB a contractual right to further interim payments including that claimed under IA24. I have set out at [16]ff above the facts upon which BB relies as having contractual relevance. They show an absence of agreement at all material times. BB attempts to get round this difficulty by submitting that the agreement that was reached was one that interim payments should be made, even if the parties did not agree any further terms about how, when and in what circumstances the payments should be made. This submission must also fail.
As a starting point, I accept that in principle parties may enter into contractual arrangements in stages: “Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condition to a concluded and legally binding agreement.”: RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH [2010] BLR 337 per Lord Clarke at [45]. However, that is not what was happening in this case. As the correspondence shows, the prospect of further interim payments was inextricably linked with agreeing the terms on which they would be made. GDL was not prepared to agree (and did not agree) to make interim payments on the terms proposed by BB, and vice versa. The proper analysis of what the parties were doing and did is that both were open to the prospect of further interim payments, and they were working towards an agreement that would entitle BB to further interim payments if they could agree the terms on which such interim payments were to be made. But in this case agreement on the terms on which such interim payments were to be made was a pre-condition to a concluded and legally binding agreement.
As a final alternative, BB submits that GDL is estopped from contending that BB was not entitled to make IAs 24-27, it being accepted that the qualification issued by GDL on 9 December 2015 prevents the operation of any estoppel in relation to IA 28. It submits that both parties were operating on the mistaken assumption that BB was entitled to receive further interim payments and relies upon GDL’s issuing of Payment Certificates as being communications of that mistaken assumption that crossed the line. In my judgment this submission fails for two reasons that can be shortly stated. First, it is a classic example of an attempt to set up an estoppel that is to be used as a sword rather than a shield. Second, the issuing of Payment Certificates is equivocal: it is consistent with GDL going along with BB’s issuing of applications because it did not wish to alienate a contractor who was already in delay. This interpretation is supported by BB’s suggestion in another context that the consideration for a change in the contractual arrangements for the period after valuation 23 was that “GDL would obtain practical benefits from maintaining [BB’s] cash flow (see Williams v Roffey [1991] 1 QB 1).”
For these reasons, I find that BB had no contractual right to make or be paid in respect of IA24 (or any subsequent application).
Issue 2: If BB had a contractual right to make or be paid in respect of IA24 (or any subsequent application) what date was the final date for payment in respect of such application(s) and did GDL serve a valid Pay Less Notice?
Because of my conclusion on Issue 1, this issue does not arise. Since it has been fully argued, I will deal with it as if my conclusion on Issue 1 had been different. I will assume that it would have been different because there was a contractual right to be paid and not on the basis of estoppel by convention.
BB contends that the due date for payment of IA24 was 21 August 2015. I accept that for the sake of argument. There are then two possible routes to the final date for payment:
If the correct analysis was that the agreed Schedule was to continue in force, then the final date for payment would be 30 days from the valuation date (taken in the agreed schedule as the date of the Grove certificate which is 3 working days after the date in the valuation date column): 35 days from 21 August 2015 would be 25 September;
If the correct analysis was that the agreed Schedule no longer determined the date of the final date for payment, then it no longer served to amend Clause 4.9.1, which provided that the final date for payment would be 28 days from the due date. There is no justification for resorting to the Scheme in circumstances where (a) s. 109(3) is not applicable and (b) the contract already makes provision for determining the final date for payment. Taking 21 August 2015 as the due date leads to a final date for payment of 18 September 2015.
Clause 4.9.4 of the contract provided for Pay Less Notices to be given not later than 3 days before the final date for payment. Nothing occurred to justify supplanting that agreed provision with a provision based upon the Scheme. If the final date for payment was 25 September 2015, the Pay Less Notice had to be given on or before 22 September 2015. If the final date for payment was 18 September 2015 the Pay Less Notice had to be given on or before 15 September 2015. It was in fact given on 15 September and was therefore in time.
For completeness, I merely state that the analysis put forward in Mr Hawtree’s letter of 30 September was wrong, for the reasons I have already given. However, if his analysis had otherwise been contractually justifiable, I would have held that BB was estopped from asserting that the applicable dates were those set out in the letter. On 4 and 10 September 2015 BB represented to GDL that the final date for payment was 18 September 2015. On the first occasion, when BB issued its invoice, it would still have been open to GDL to give a Pay Less Notice, even on Mr Hawtree’s subsequent retrospective re-analysis of the dates. Mr Edwards’ unchallenged evidence is that he relied upon those representations in giving the Pay Less Notice when he did. In those circumstances it would be unconscionable for BB to insist on its later analysis as being the correct contractual framework governing the final date for payment and the last date for giving a Pay Less Notice.
It is therefore not necessary to decide if GDL’s Payment Certificate could have been pressed into service to act as an operative Pay Less Notice, and I do not do so.
For these reasons GDL is entitled to the declaration it seeks under Issue 2 save that I will not make a declaration either way on the question whether GDL’s Payment Certificate constituted a valid Pay Less Notice as I have not decided that point.