Systems Pipework Ltd v Rotary Building Services Ltd

INTRODUCTION

Prior to the Housing Grants (Construction and Regeneration) Act 1996 (“the 1996 Act”), there was a perceived problem in the construction industry that employers and main contractors were failing properly to answer sub-contractors’ claims for payment. Because they were not specifically obliged to do so, they often delayed in giving any answer at all and, even when they did, they would offer only vague reasons for non-payment. One of the beneficial effects of the 1996 Act is that paying parties are now required to identify early on what (if anything) they say is due and why. Standard forms of contract now require notices and cross-notices to be supplied within days, and contain provisions adumbrating the draconian consequences of a failure to issue a timely and/or detailed challenge.

But in the usual way, there is a concern that the pendulum has swung too far the other way. These rigorous contractual terms have been extended to cover, not only interim payments (which was the primary aim of the 1996 Act), but the permanent rights and obligations that arise out of dispute resolution procedures and the settlement of the final account. Thus, in Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319 (TCC), I was recently obliged to find that one party’s right to make a claim through adjudication and subsequent arbitration had been lost for all time, because that is what the standard form of contract said. In this case, the court is concerned with a similar situation: on the defendant’s case, the claimant lost its right to make its own Final Account claim because it failed to challenge the defendant’s assessment/valuation of that Final Account within 14 days.

The parties first argued their respective cases as to the correct interpretation of the contract in an adjudication. The adjudicator decided in favour of the defendant. In these CPR Part 8 proceedings, the claimant seeks to challenge that decision. I deal with the points that now arise in this way. In Section 2, I set out the relevant terms of the contract. In Section 3, I set out a brief chronology. In Section 4 I identify the three issues between the parties and the relevant principles of law. Thereafter, in Sections 5, 6 and 7 I address each of those three issues. There is a short summary of my conclusions in Section 8. I am extremely grateful to both counsel for the excellence of their written and oral submissions.

THE CONTRACT

By a sub-contract dated 18 December 2014, the defendant engaged the claimant sub-contractor to supply and install the steam, condensate, chilled water and cooling water systems at the Davidstow Creamery in Cornwall. The defendant was the main mechanical and electrical contractor at that site.

The sub-contract documentation contained a number of appendices, including the defendant’s standard conditions of sub-contract. These are loosely based on terms in standard forms of sub-contract.

The relevant terms of the sub-contract dealing with the claimant’s Final Account were as follows:

A BRIEF CHRONOLOGY

The claimant carried out the sub-contract works between December 2014 and the end of May 2016. For administrative convenience, the parties called the works done up to 31 January 2016 the “DC1” Works, and the works carried out after that date were referred to as “DC2” works. This distinction was not reflected in the terms of the sub-contract itself, or in any of the sub-contract documents.

On 17 May 2016, the claimant emailed the defendant a “revised final account for DC1” and asked for “review and comment”. On 22 May, the claimant made an interim application in respect of the DC2 Works. That was not paid.

On 2 September 2016, the defendant provided the claimant with a lengthy document. The covering letter described that document as “our final account assessment for the works carried out on the above project by your company”. This is said by the defendant to be a notification under clause 28.6, an assertion which the claimant disputes. That debate lies at the heart of the present dispute.

Behind the defendant’s covering letter of 2 September there was a lengthy final account assessment. The first page broke the final account assessment down into a number of different headings: the sub-contract order value; variations; daywork instructions; and daywork valuations by the defendant. Each of these compared figures put forward by the two sides. At the bottom of those relevant columns it identified a figure put forward by the claimant of £3,284,424.62 and a figure put forward by the defendant of £2,643,212.58.

During the course of argument, it was the defendant’s position that the 2 September document was, in part, an assessment of the claimant’s claim of 17 May in respect of the DC1 Works (under the first sentence of clause 28.6), and partly a final account valuation of the DC2 Works (which had never been the subject of a final account claim, and was therefore a valuation under the second sentence of clause 28.6). The document itself contained no such identification or reference.

On 16 September 2016, the claimant commenced an adjudication in respect of its entitlement to payment for the works carried out after 31 January 2016 (i.e. the DC2 works). The adjudication notice identified the dispute as being “over sums payable to [the claimant] in respect of its interim applications for payment numbers 1, 2, 3 and 4 in relation to phase 2 of the works (DC2)”. The subsequent referral notice set out the detail of that dispute. That confirmed, at paragraph 2.3, that “DC1 works do not form part of this Referral”.

On 14 November 2016 the adjudicator decided that the defendant was liable to the claimant in the sum of £249,217.43. In other words, the challenge in respect of the DC2 Works was successful. That sum was belatedly paid by the defendant and no further issue arises out of that adjudication.

Back on 20 September 2016, the defendant started a second adjudication seeking a declaration that, pursuant to clause 28.6, the claimant was bound by the final account assessment of 2 September 2016. I note that, on the defendant’s case, this was just 4 days after the claimant’s time for challenging that assessment had expired. On 15 November 2016, the same adjudicator concluded that the claimant was not bound by the total of the 2 September assessment (in so far as he had already arrived at a different, higher figure for the DC2 Works), but was bound by the remainder of the 2 September assessment. Although the immediate consequences of that decision have been complied with, in accordance with the sub-contract, the claimant now seeks contrary declarations in these proceedings, saying that the adjudicator was wrong to reach the conclusions which he did.

THE ISSUES AND THE RELEVANT PRINCIPLES

The issues between the parties are therefore threefold:

As to the general principles of construction, I follow the well-known guidance set out most recently by the Supreme Court in Arnold v Britton [2015] AC 1619 and Wood v Capita Insurance Co [2017] UKSC 24. What matters is what a reasonable person, having all the background knowledge available to the parties, would have understood the words of the contract to mean, using the language in its commercial and factual context.

In addition, there have been a number of authorities which have considered the new breed of provisions in construction contracts relating to time limits, and the permanent loss of rights (as outlined in paragraphs 1 and 2 above). Amongst others, these cases include:

I consider that these principles apply to clause 28.6 and the defendant’s Final Account assessment in the present case. Indeed it might be said that they apply a fortiori, because in this instance, the court is dealing, not with an interim application which might be capable of subsequent adjustment or modification, but a final account entitlement which, on the defendant’s case, would be lost to the claimant for all time if there has been a valid notification and no dissent.

ISSUE 1: WHAT NOTIFICATION IS REQUIRED?

Pursuant to clause 28.6 (first sentence), the defendant/contractor is undertaking an assessment of the Final Account provided by the claimant/sub-contractor. Pursuant to clause 28.6 (second sentence) the defendant is undertaking a valuation because there has been no Final Account provided by the claimant. In either case, the defendant, in its discretion, was entitled to assess/value “the proper amount due for payment in respect of the Sub-Contractor’s Final Account.” Pursuant to the third sentence of clause 28.6, in the absence of dissent, that amount was then the subject of an actual or a deemed agreement.

On the face of it, therefore, what was required was the notification of the amount due for payment. To that extent, therefore, this requirement is similar to the need to identify the amount due for payment by way of an interim assessment, which was the subject of the decision in Severfield, and a number of the other authorities referred to at paragraph 17 above.

In my view, that reading of clause 28.6 is consistent with clauses 28.3 and 28.4, and also clauses 28.13 and 28.14 of the sub-contract. These all dealt with interim payments. Clauses 28.3 and 28.4 explained that the sums due were calculated by a gross valuation less sums previously paid and, if appropriate, retention. Clauses 28.4, 28.13 and 28.14 each identified an obligation to pay “the notified sum”. And clause 28.7, which was concerned with the claimant’s Final Account, stated in terms that “the amount due in respect of the Final Account shall be the amount in the Final Account Statement” less 50% of retention and the sums previously paid.

Accordingly, the sub-contract drew a distinction throughout between a gross valuation, on the one hand, and the sum due and payable, on the other. They are manifestly not the same thing.

In typically clear terms, Ms McCafferty submitted that clause 28.6 envisaged the assessment/valuation of the Final Account by the defendant, not the identification of any particular payment which, she said, would come later in the process. She said that this was because the clause was designed to achieve clarity and finality. But the difficulty with that argument is that it is not what the clause says. Both the first and second sentences state that what is to be notified is the proper amount due, not the overall valuation. It would have been easy for clause 28.6 to refer to “the proper value” rather than “the proper amount due for payment”, if that had been the parties’ intention. But it does not say that. Her construction would also mean that “the amount due” would have a different meaning in clause 28.6 compared to clause 28.7, which cannot be right either.

Ms McCafferty sought to counter this by saying that, if clause 28.6 was concerned with the amount actually due, it would render clause 28.7 redundant, because that was where the calculation of the amount due was set out and explained. But I do not accept that. Clause 28.7 only came into play at all if, pursuant to clause 28.6, there was an actual or deemed agreement to “the notified figure”, which itself was a reference back to “the proper amount due for payment”. Moreover, clause 28.7 was administrative only; as Ms McCafferty rightly accepted, it was a provision which did not affect the rights and obligations of the parties. Following actual or deemed agreement to the payment due under clause 28.6, the position could not be modified in any way by either side under clause 28.7.

Accordingly, I am satisfied that, on a consideration of the sub-contract as a whole, the assessment/valuation under clause 28.6 of “the proper amount due for payment in respect of the Final Account” was an exercise which consisted of two parts: the assessment/valuation of the total amount payable for all the sub-contract work, less previous payments, and any ongoing retention.

ISSUE 2: WAS PROPER NOTIFICATION PROVIDED?

Having identified what was required by clause 28.6, it is plain to me that the document of 2 September 2016 was not a proper notification of the amount due for payment in respect of the claimant’s Final Account. There are a number of reasons for that conclusion.

First, neither the accompanying letter, nor the bulky document which it attached, said that it was the notification of an amount due. Instead, both the letter and the attachment described themselves as a Final Account assessment.

Secondly, neither the letter nor the attachment contained any identification anywhere of a particular sum which was said to be due and payable from the defendant to the claimant (or vice versa). It was a purported assessment of the value of the works carried out, no more and no less. It was therefore one half of the necessary exercise only.

Thirdly, nowhere in the 2 September documents was there any reference to clause 28.6. Neither the letter nor the attachment said that it was a notification under clause 28.6, much less that it was (on the defendant’s case now) actually a notification under two different parts of clause 28.6. In my view, if a notice under a certain clause has a draconian effect pursuant to the contract, the notice should make clear that it has been issued under that clause.

Fourthly, and perhaps most important of all, it is clear from the defendant’s own evidence in this case that the documents of 2 September 2016 were not the notification of “an amount due”. Ms King’s witness statement accepts that the documents were a Final Account assessment only, valuing the entirety of the sub-contract works, without more.

It is right that Ms King then goes on to say that the claimant could have used that assessment to calculate the amount due for payment, by referring to other figures, from other sources. Of course, Ms King was obliged to make that argument, because it is plain to all that the 2 September 2016 documents did not identify, for example, what the defendant said had already been paid, or what the defendant said had been deducted and/or was now payable by way of retention. As Mr Sareen put it at paragraph 13 of his skeleton argument, if the 2 September documents had notified the amount due, it would have been quite unnecessary for the claimant to have to do any calculation at all.

Thus, on any application of the principles identified in Section 4 above, the answer to Issue 2 is clear-cut. As a matter of form, the 2 September assessment was a final account assessment, and not a notification of an amount due. There was no reference to the amount due in the 2 September assessment. Neither was there any reference to clause 28.6.

As a matter of substance, the document was plainly a valuation of the whole of the sub-contract works, with no identification of any balance due. Sums previously paid, retention and the like, are nowhere to be found. Neither would the reasonable recipient have regarded the documents as a notification of the sum due: for it to be that, the minimum that was required was the actual identification of the sum due, and an express reference to clause 28.6.

There is one final point that needs to be made in relation to Issue 2. I have already said that the fact that the claimant might have been able to work out or otherwise calculate what the sum might be is nothing to the point, because calculation of that kind is the very thing which clause 28.6 seeks to obviate. But I also think that Mr Sareen is right to point out that the documents to which Ms King refers in her witness statement, in support of her argument that the claimant could have worked out the sum due for themselves, include documents which postdate the 2 September assessment. Moreover, some of those documents are the defendant’s own documents, rather than a document emanating from the claimant.

All of this simply goes to confirm the basic principle that, if X is supposed to be notifying Y that a sum is due, under a clause that provides for a deemed agreement that binds the parties unequivocally, then it is a prerequisite of the arrangement that the sum due and the clause are clearly set out in the relevant notice. It is not good enough to say that the recipient could have worked it out for themselves; it manifestly fails to meet the necessary test when the alleged calculation that it is said could have been done by the recipient relied on later documents, some of which were not even in the recipient’s possession.

I acknowledge that this might be said to be an overly-strict interpretation of the sub-contract. But that has to be set against the fact that the defendant knew that the claimant valued the DC1 Works at a figure that was much higher than theirs (as their own 2 September assessment acknowledged) and knew that DC2 was the subject of a separate dispute anyway (see below). So this is a case where the claimant is attempting to bypass the arguments on the merits by taking advantage of the provisions of clause 28.6. They might well have been able to do so, if they had gone about things in the right way, and with proper transparency. In my view, they did not do either.

For all those reasons, therefore, I conclude that proper notification was not provided. I therefore answer Issue 2 in favour of the claimant.

ISSUE 3: IF PROPER NOTIFICATION WAS SENT, WAS THERE DISSENT?

Assuming that I am wrong, and there was proper notification of the amount due, did the claimant dissent from it within 14 days? The adjudicator found that the claimant did dissent from the notification, because it had commenced adjudication 1. The issue is whether that dissent was sufficient to stop the notification under clause 28.6 from taking effect at all, or whether the dissent was partial only.

If I am wrong and there was proper notification, then I consider that there was the necessary dissent to allow the claimant to pursue all Final Account claims. Again, there are a number of reasons for that view.

First, the words of clause 28.6 state that the notified figure “will be deemed to have been agreed and will be binding on the parties”, but only in circumstances where the notification “is not dissented from in writing”. It must be accepted by the defendant that the notification was dissented from in writing by the notice of adjudication of 16 September; that is what the adjudicator decided. On that basis, the part of clause 28.6 dealing with the agreement and the binding nature of the notified figure never came into force.

That can be tested in this way. Clause 28.6 envisaged an actual or deemed agreement between the parties. On the facts of this case, that would have to be in the sum of £2,643,212.58 (the amount notified as the Final Account assessment on 2 September). But there was no actual or deemed agreement to that figure because the challenge pursued in adjudication 1, and the result of that adjudication, meant that under the sub-contract, a larger sum was due. There was and could never have been an actual or deemed agreement in the sum notified on 2 September.

Secondly, the deemed agreement was as to the value of the claimant’s Final Account. Because the claimant dissented from the defendant’s valuation of the Final Account, there was no deemed agreement as to the valuation. So the last part of clause 28.6 could not operate.

The third reason concerns the defendant’s submission that a partial dissent, and therefore a partial agreement, was possible. Ms McCafferty said that the dissent only operated in part, such that other parts of the notified figure were deemed to have been agreed and became binding. But there is nothing in clause 28.6 which suggests that this process was capable of being triggered only in part and that notification and/or dissent and/or the deemed agreement and/or the binding nature of that agreement were somehow capable of being infinitely divisible. It is, as Mr Sareen correctly put it, a binary question. Anything else would have been difficult, if not impossible, to operate and would run counter to the alleged clarity brought by this provision.

Fourthly, the defendant’s attempted reliance on the division between DC1 Works and DC2 Works is inappropriate in all the circumstances. The defendant’s Final Account assessment (which on this assumption was a proper notification) made no attempt to divide between DC1 Works and DC2 Works. If it was a notified figure, then it was a notified figure in the singular, for everything, and that only became binding if it was not dissented from. It was dissented from, and there is no scope now for saying that the binding nature of the alleged agreement should apply to everything except the DC1 works. I agree with Mr Sareen that, if there had been a separate notification of sums due for DC1 Works and DC2 Works, and the dissent had related to one notice only, then the position might be different, but that was not the case.

Ms McCafferty said that it was not enough for the claimant to say that it dissented; they had to say what they dissented from, and why. But that is not what the contract says. And although she rightly said that the purpose of clause 28.6 generally was to ensure clarity and to avoid delay, that cannot override the words of the sub-contract.

Again, I consider that this approach is entirely in accordance with the authorities noted in Section 4 above. Again, the need for clarity in cases of this sort would be lost if partial notification or partial dissent (neither of which are referred to in the relevant clause) were somehow permissible. I also repeat my observation in paragraph 36 above: the potentially draconian consequences that flow from the defendant’s interpretation mean that the contract has to be strictly interpreted.

Again, therefore, I decide Issue 3 in favour of the claimant.

CONCLUSIONS

For the reasons set out in Section 5 above, in relation to Issue 1, I conclude that what had to be notified was “the proper amount due for payment in respect of the Final Account”. An assessment of the value of the final account was only one part of that process.

For the reasons set out in Section 6 above, in relation to Issue 2, I conclude that the 2 September 2016 assessment was not a proper notification of the amount due, in form or fact or substance. On the defendant’s own case it required a calculation, by reference to other figures and other documents. It could not therefore have been a notification that £X was due.

For the reasons set out in Section 7 above, in relation to Issue 3, I find that if, contrary to my primary finding, there was a proper notification by the defendant to the claimant, then the claimant’s dissent (by the service of the adjudication notice) prevented the notified sum from being the subject of actual or deemed agreement. The binding provision at the end of clause 28.6 never came into force. The contract did not envisage and did not provide for partial dissent.