Construction Matters

Late payment of liquidated damages, a qualified debt?
17 February, 2017

In Mailbox (Birmingham) Limited v Galliford Try Construction Limited [2017] EWHC 67 (TCC), Galliford challenged the validity of the adjudicator’s decision to determine Mailbox was entitled to the enhanced interest on the liquidated damages awarded pursuant to the Late of Commercial Debts (Interest) Act 1998 (Late Payment Act).

The background

GTC agreed to carry out refurbishment works of a mixed use office and retail space in Birmingham under a JCT Design and Build Contract (2011 edition) as further amended by the parties. Mailbox then purported to determine GTC’s employment and a dispute arose between the parties as to responsibility for the delay, liability of liquidated damages, the proper valuation of the final account and lawfulness of the termination by Mailbox.

It was determined by the adjudicator that Mailbox was entitled to liquidated damages, interest on the sums awarded in adjudication pursuant to the Late Payment Act and an order for Mailbox to pay 25% of the adjudicators fees and expenses with GTC to foot 75% of the bill.

Decision

The main challenge was actually whether the adjudicator’s decision that an initial assignment and subsequent re-assignment of the contract between Mailbox and the Security Trustee were valid – they were as the assignment was an equitable assignment pursuant to Section 136(1) of the Law of Property Act 1925 and the re-assignment was also valid and took place on or before the date of the commencement of the adjudication proceedings.  Therefore the adjudicator did have jurisdiction to determine the dispute and this decision was valid.

However, an interesting point to note here is how the court determined the interest for the late payment of liquidated damages. The Court considered Section 1(1) of the Late Payment Act and more particularly Section 3(1) which provided that a qualifying debt is, ‘a debt created by virtue of an obligation under a contract to which this act applies.. .’

Jervis v Harris [1995] EWCA Civ 9, shed light on the difference between a debt and damages for breach of contract. In that case a debt was defined by a two limb test (i) the sum payable must be fixed and (ii) the trigger must be a primary duty under contract (i.e. a duty to perform the promises in the contract) and not secondary (a party failing to perform their duties under the contract). This two limb test read in conjunction with the Late Payment Act makes it clear that as liquidated damages are generally for a party failing to perform their duties under contract, they will rarely be considered a debt.  

The parties agreed that liquidated damages did not amount in this case to a qualifying debt but Mailbox submitted that GTC should still have to pay at the increased rate under the act and interest could not be claimed under the act for failing to pay the liquidated damages assessed in the adjudication.  The Court decided that is was not unreasonable for GTC to dispute jurisdiction and so it should not be punished by having to pay an enhanced rate of interest.


Construction Notices: Substance over form
2 February, 2017

As we all know the process of contractors being able to serve interim payment notices and employers being required to serve pay less notices is a creature of statute, derived from the mandatory requirements of the Housing Grants, Construction and Regeneration Act 1996.  Both provide assistance to contractors in getting paid for work during the currency of a contract and an element of certainty over any potential challenge to a contractor’s entitlement to be paid.

What Constitutes an Interim Payment Notice

In Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Limited the court had to consider whether an excel workbook called “ESH724-Logan Interim Payment Notice – Valuation No.24 – 20092016.xlsx” containing a worksheet called “Interim Payment Notice” could constitute an interim payment notice in circumstances where it was sent by email in the context of final account discussions and was not referred to by the contractor as constituting an interim payment notice under the contract until the last date for the employer to serve a pay less notice in respect of it (if it was a valid interim payment notice) had passed.  Notwithstanding the fact that the contractor did not make clear at the time its intention that the document was served as an interim payment notice the court found for the contractor.  Viewed objectively the document was sufficiently clear and free from ambiguity to stand as an interim payment notice.  The fact it was produced in the context of a final account discussion did not affect that assessment.

What Constitutes a Pay Less Notice

This being the case the court had to consider whether a document which on its face had the appearance of a final certificate could stand as a pay less notice in response to the interim payment notice.  If it could,  it was common ground that it would be sufficient to prevent the sums set out in the interim payment notice from becoming due.  While the document did not on its face indicate that it was a pay less notice (which was understandable given the employer did not view the spreadsheet as requiring a pay less notice to be served) the court determined that the final certificate satisfied all the requirements of a pay less notice.  It made clear how much the employer thought was due and why.  That being the case the question the court had to consider was whether if the sender of the document did not intend it to stand as a pay less notice, could it be treated as such.  The Court determined the reasonable recipient would have understood it to be a direct response to the documents provided within the excel spreadsheet.  It being determined that the excel spreadsheet stood as an interim payment notice, the response could be treated as a pay less notice in response to it.

What this means

The overriding theme of the decision is that the parties should be prepared to look at the substance of documents against the contractual framework in order to interpret their potential effect.  That a document is not overtly described as a pay less notice or indeed an interim payment notice does not mean it cannot stand as such, if all of the legal formalities are otherwise satisfied and it is sufficiently clear (to a reasonable recipient) what purpose the document is intended to serve


Consequential and Indirect Losses
27 January, 2017

Readers will have seen clauses which attempt to exclude liability for ‘consequential and indirect losses’ and, indeed, indemnity clauses which try to impose liability for ‘consequential and indirect losses’.

But what does ‘consequential and indirect loss’ mean?

There is a famous case, Hadley v Baxendale [1854], which says that where there has been a breach of contract, the guilty party must pay “direct” losses and “indirect/consequential” losses.  Direct losses are those which any reasonable person might expect to follow from the breach.  Indirect or consequential losses are those that it would only be reasonable for the parties to the contract themselves to expect, because of their knowledge of the special circumstances surrounding the contract. 

Hadley v Baxendale has become so ingrained in the legal profession that it is usually assumed (including by the courts) that ‘consequential and indirect loss”, wherever it appears in a document, must have the meaning given to it by that case.

Recently, the courts have hinted that perhaps ‘consequential and indirect loss’ may mean more, namely any type of loss that follows from a breach of contract, whether it was in the contemplation of the parties or reasonably foreseeable by a third party, or not. 

In December 2016, the High Court decided in Star Polaris v HHIC that, at least in that case, the phrase ‘consequential or special losses, damages or expenses’ should have its natural meaning.  When considered in the context of the rest of the contract, it meant that the shipbuilder was responsible only for the cost of repair to a faulty engine and not for the other losses incurred by the claimant ship owner because of the defective engine. 

The contract made clear that, if the ship proved faulty, the only thing the shipyard had to do was make good the defects. To ram the point home, other wording said that the shipyard was not liable for any ‘consequential or special losses’ etc. 

The court refused to interpret that phrase in the Hadley v Baxendale way – to mean that the only losses excluded from the shipyard’s liability were those relating to matters both parties should have had in mind in the special circumstances of this particular ship construction. If it had been interpreted in the Hadley v Baxendale way, the shipyard might have found itself responsible for all the losses incurred by the ship owner provided they were reasonably foreseeable to any reasonable person.   

Because of the long and distinguished history of the 1854 Hadley v Baxendale case, this sort of argument could still run and run in the courts for years to come.  However, it looks like the courts will, in future, be more inclined to interpret ‘consequential and indirect loss’ to mean what any reasonable person would think the words mean – if that is what the context and wording of the contract make clear.


Topics in construction law: Assignment
23 January, 2017

Welcome to the next in our occasional series concentrating on topics in construction law.

Recently we wrote about novation. This week we will talk about the basics of transferring interests in documents.

During the life and use of a building project, the original construction contract and professional appointments will often need to be transferred to another party.

This transfer of an interest between parties is known as “assignment”. Often this takes the form of the benefit of the construction contract being transferred to a new party such as a subsequent purchaser of the completed development.

An assignment may be legal or equitable. The person taking the benefit of the document i.e. the “assignee” would generally prefer a legal assignment as this is more certain.  A legal assignment must be in writing, absolute and on notice.

An assignment may only transfer a benefit of a construction document. This contrasts with a novation (which also transfers a contract) which can transfer both the “benefit” (or the right to receive the services) and the “burden” (typically the obligation to make payment).

To avoid confusion, the right to make such transfers should be dealt with expressly in the document, either by prohibiting it absolutely or only allowing it subject to certain conditions or qualifications, depending upon the parties’ position. It is also common for the different parties to be under different obligations.  For example, an architect’s appointment may provide that the developer can only do so with the architect’s consent (such consent not to be unreasonably withheld or delayed) and the consultant cannot do so at all.

Developers must watch out as most standard forms of building contract and professional appointment are too restrictive for normal commercial practices. Most developers will need to be able to assign the benefit of the construction document and therefore the standard form must be amended.  Ideally, this should be freely assignable but a possible compromise would be to allow it to be assigned to a funder, company in the same group or a buyer of the completed development.

The assignment would be effected by a deed of assignment which is a contract that assigns the benefit of a document from one party to another.

Our next article on this topic will consider the more difficult issues such as what happens if parties try to transfer rights or interests that they cannot assign and whether a “black hole” has been created by the rule that the party receiving the benefit of the document may not recover more than the original party could?

 


Second Chances – Adjudication Update
16 January, 2017

Further to my blog on 23 December 2016 (see http://www.cripps.co.uk/construction-matters/25458/) the recent 2016 case that confirms an employer can bring a second adjudication to seek a declaration of the true final account figure (even if an earlier adjudication has determined that an employer must pay the full amount in a contractor’s final account application, due to the employer or its agents failing to provide a payment notice or pay less notice) has been applied in another case [1], this time with an NEC building contract.

In the present case, the sub-contractor commenced an adjudication for full payment of an interim application on the basis that the contractor had failed to serve any valid payment notice or pay less notice.  Full payment was awarded by the adjudicator.

Eleven months later the contractor issued a payment notice and pay less notice despite the sub-contractor having not initiated an interim payment cycle by submitting a payment application.  An adjudication was then commenced by the contractor to assess the proper sum due under the sub-contract as at the date of the contractor’s latest payment notice and pay less notice.

The sub-contractor disputed that the second adjudicator had jurisdiction on the basis that he was asked to answer the same dispute that had already been decided by the first adjudicator.  The TCC disagreed as the valuation was up to a different date, which ultimately was a date after a defects certificate had been issued confirming that there were no defects in the completed sub-contract works.  This opened up the ability for the second adjudicator to decide on the correct value of the sub-contract works.

 

1 Universal Piling & Construction Ltd v VG Clements Ltd [2016] EWHC 3321 (TCC)

 


1 2 3 15