Please find below Clyde & Co's latest projects and construction law update from November 2017
Does s. 111 of the Construction Act apply to both interim and final payment applications?
Adam Architecture Ltd v Halsbury Homes Ltd  EWCA Civ 1735
While some may have considered this point already decided, the recent case of Adam Architecture v Halsbury Homes should leave no doubt in anyone's mind that section 111 of the Housing Grants, Construction and Regeneration Act 1996 (the Act), which deals with the requirement to pay the notified sum and the issue of pay less notices, applies to both interim and final payments. Unfortunately for Halsbury, this was not the outcome it was hoping for.
Halsbury Homes Ltd (Halsbury) engaged Adam Architecture Ltd (Adam) to provide the design work on a project to build 200 homes. The contract between Adam and Halsbury incorporated the RIBA Conditions of Appointment and the wording in relation to Payment Notices was very similar to that included in the Act.
Adam began work in relation to the project, but around six weeks it became apparent that the parties had very different views about how the services would be delivered. After this issue was raised by Adam, Halsbury instructed it to cease work and Adam subsequently invoiced Halsbury for the services it had provided to that date. Halsbury failed to issue any payment or pay less notice in response and Adam launched an adjudication claiming the entirety of its invoice. The adjudicator found in Adam's favour.
Halsbury took the matter to the TCC who refused enforcement on the basis that the contract had come to an end (i.e. Halsbury had repudiated the contract and Adam had accepted the repudiation). As the contract had been discharged, neither party was required to perform its primary obligations. This included Halsbury's obligation to serve a pay less notice under the contractual payment mechanism. Additionally, the TCC took the view that Adam's invoice represented a final account or a termination account, such that the invoiced sum was not the 'notified sum' for the purposes of the contract.
Adam appealed this decision to the Court of Appeal on the basis that even though the contract only required a pay less notice in respect of interim applications, s. 111 of the Act required it in relation to both interim and final applications. Briefly, s. 111 of the Act sets out a paying party's obligation to pay the relevant notified sum, unless it has issued a pay less notice in accordance with the section. Halsbury argued that s.111 of the Act only applied to interim payments. The Court of Appeal gave Halsbury's argument short shrift pointing to the clear wording of the Act and the line of case authority that s.111 of the Act applies to both interim and final payments. Considering the language of the Act, Jackson LJ stated that 'it seems to me clear that section 111 relates to all payments which are "provided for by a construction contract", not just interim payments. I do not think that it is permissible to read into that perfectly sensible and workable provision words which are not there'.
In relation to the repudiation point, the court also held that Adam's invoice did not amount to an acceptance of Halsbury's repudiation, meaning it could claim through the contractual provisions. As such, Adam was due the full amount of its invoice.
This judgement does not create any new law but should put beyond doubt that the payment regime of the Act applies to both interim and final payments. This of course will be welcomed by contractors as it confirms the underlying object of the Act. For employers, it emphasises the importance of being organised in respect of notices, particularly pay less notices. For guidance as to the requirements of a pay less notice, read our update below regarding the case of Muir Construction Limited v Kapital Residential Limited.
What needs to be included in those Pay Less Notices?
Muir Construction Limited v Kapital Residential Limited  CSOH 132
This month appears to be the month for decisions relating to pay less notices. In this Scottish case, further guidance was provided as to what information should be included in a pay less notice. The pay less notice served simply valued the work at zero without providing evidence or supporting calculations as to how that had been reached. The court confirmed that this evidence was necessary so as to allow the reasonable recipient to understand how the relevant sum had been calculated.
Kapital Residential Limited (Kapital) engaged Muir Construction Limited (Muir) to design and build a new housing complex. A number of disputes arose and a settlement agreement was entered into. Further issues arose under the settlement agreement which resulted in Kapital issuing a pay less notice to Muir valuing the sum due at zero but giving no reasons.
The contract required any pay less notice to state the sum due and the basis on which the sum was calculated (aligning with the requirements of section 111 of the Housing Grants, Construction and Regeneration Act 1996 (the Act)). Accordingly, Muir argued the pay less notice was invalid due to the lack of supporting calculations. Kapital argued the calculations had been explained in other correspondence and the amount of detail required should depend on the circumstances of each case.
In finding for Muir, the court affirmed the general rule that any pay less notice needed to contain enough evidence to allow the reasonable recipient to work out the basis on which the sum had been calculated. It went on to state that a valid pay less notice must contain at least the grounds for withholding the sums in question and the sum applied to each of those grounds with, at a minimum, an indication of how the said sums were arrived at. Accordingly, Kapital had served an invalid pay less notice.
This decision will likely be considered persuasive by English courts as it relates to a point of general application and given the clear facts and common sense approach taken in the judgement. Employers should be careful to ensure that pay less notices are drafted to meet the requirements above.
How well do you know your termination provisions?
Interserve Construction Limited v Hitachi Zosen Inova AG
This case is a helpful reminder of the pitfalls of misinterpreting contractual termination provisions and failing to comply with conditions precedent to termination.
Hitachi Zosen Inova AG (HZI) was the main EPC contractor on an energy from waste plant project. Interserve Construction Limited (Interserve) was engaged as one of its subcontractors. A dispute arose as to the quality of Interserve's work and delays on the project. HZI elected to terminate the contract immediately. Interserve disputed the validity of HZI's termination, arguing it was required to give Interserve a 7 day cure period.
The relevant provisions in question were clause 43.1 and clause 43.1A. Clause 43.1 set out the applicable termination events and, subject to clause 43.1A, gave HZI the right to terminate 'forthwith by notice'. Clause 43.1A stated:
"In the case of a default by the Contractor under heads (h), (p) or (q) of Sub-Clause 43.1, the Purchaser may (at its absolute discretion) notify the Contractor of the default and if the Contractor fails to commence and diligently pursue the rectification of the default within a period of seven (7) Days after receipt of notification, the Purchaser may by notice terminate the employment of the Contractor..."
Interserve argued that because HZI was relying on termination events (h) and (q), the provision of a 7 day cure period was a condition precedent to HZI being able to terminate the contract. HZI disputed this arguing that the 7 days' notice was at its 'absolute discretion' and could not be a condition precedent for termination.
In deciding the dispute, Jefford J considered the relevant principles for construing the provisions to be to look for the objective meaning of the contractual language, in the context of the contract as a whole, giving more or less weight to the context depending on the nature, formality and quality of the drafting and, if there are rival interpretations, reach a view that is most consistent with business common sense. Applying this, she held that Interserve's interpretation was correct. If HZI had intended to terminate under one of the default options that clause 43.1A applied to, it had to serve a notice in accordance with that clause.
An important part of her reasoning was that the wording which made clause 43.1A conditional for certain default options would have no meaning if it did not have to be complied with by HZI when it sought to terminate. HZI used the same rational to argue that the words 'absolute discretion' would have no meaning if they did not mean it could decide whether to give notice or not. This was rejected on the basis that, elsewhere in the contract, the words 'absolute discretion' simply emphasised that whether to do something or not was HZI's choice not obligation and, in some cases, expressly clarified that HZI's acts would not have any adverse consequences such as the waiver of rights.
Accordingly, Jefford J held that the words 'absolute discretion' simply emphasised that 'whether to give such a notice and commence the termination process is a matter for HZI and that failure to do so will not have adverse consequences, such as an argument that the absence of a notice evidences the absence of default or the waiver of its right to rely on the default'.
The declaration sought by Interserve that notice was a condition precedent to HZI's right to terminate was granted.
This case is a useful reminder for parties who are considering exercising their termination rights to carefully review the requirements of the contract in question. The consequences of invalidly terminating a contract are significant, as doing so will constitute repudiatory conduct, entitling the other side to terminate instead and claim damages. Where provisions are unclear, the courts will take an iterative approach to construing the provisions, placing more weight on the literal meaning of the words, then considering these in terms of context and commercial common sense. A cautious approach to termination should always be adopted.
Release of the 2017 FIDIC Books
FIDIC users will be waiting with baited breath this morning to get their hands on copies of the 2017 editions of the Yellow, Red and Silver Books. The Books are being released today at the FIDIC International Contracts Users' Conference.
Today, FIDIC is releasing the much anticipated 2017 versions of the Yellow, Red and Silver Books at its annual International Contracts Users' Conference. Members of the Clyde & Co Projects and Construction team are attending the conference and will shortly be releasing an update summarising the key changes to the Yellow Book.
Anthony Albertini and David Brown, partners in our London and Paris offices respectively, together with Driver Trett, will be delivering the workshop on Advanced Dispute Resolution Techniques on the fourth day of the Conference.
Following the release of the new Books, Clyde & Co will be offering bespoke training to clients eager to get up to speed on the changes and to see how these will impact their businesses. Training sessions will be available from mid-January 2018. Watch this space!
Phillip Hammond delivered the Autumn budget this month, with a number of positive announcements for the construction industry.
On 22 November 2017, the Chancellor, Phillip Hammond, delivered the Autumn 2017 budget, the first since the general election earlier this year.
He announced an increase in the National Productivity Investment Fund (NPIF) from £23 billion to £31 billion, to support innovation, upgrade the UK's infrastructure and underpin the government's modern Industrial Strategy
Mr Hammond recognised the skills shortage in the construction industry and announced that, to address this, the National Retaining Partnership will oversee certain short-term action and there will be money to train a workforce to build new homes. Mr Hammond stated that the government would provide £34 million to scale up innovative training models across the country. He also announced that the government will invest £30 million to test the use of AI and innovative EdTech in online digital skills courses.
CLYDE & CO 'IN THE NEWS'
Liz Jenkins, Partner, featured in multiple publications this month, commenting on alternatives to PFI and the Autumn Budget. To read Liz's insights into the PFI market, click here.
To read her comments on the Autumn Budget, click here.
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