M T Hojgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Limited and Another
This is a judgment of the Supreme Court. It is a very high-level decision.
There have been several previous cases where the Courts had to consider a contract which includes two terms, one requiring the Contractor to provide an article in accordance with a specified design, the other requiring that article to satisfy specified performance criteria and where the performance criteria cannot be achieved by complying with the specified design.
The Supreme Court noted that each individual contract has to be interpreted in its own commercial context.
The Supreme Court noted that there is not necessarily an inconsistency between the above two terms saying that, “In many contracts, the proper analysis may well be that the Contractor has to improve on any aspects of the prescribed design which would otherwise lead to the product falling short of the prescribed criteria”.
However, the Supreme Court said that the Courts are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed performance criteria even if the Employer has specified or approved the design.
The Supreme Court said, “It is the Contractor who can be expected to take the risk if he agrees to work to a design which would render the item incapable of meeting the criteria to which he has agreed”.
So where the contract provides for a particular performance criteria which cannot be met by the specified design, it is the Contractor who takes the risk. He will be liable if he cannot meet the performance criteria.
The case highlights the importance to the Contractor, of checking the design and the performance criteria and ensuring that the specified design will meet the specified performance criteria.
The Contractor generally has a duty to warn, if it is something of which he should have been aware, that the design is not capable of meeting the performance specification. In many contracts, he will have an express duty to warn of inconsistencies and discrepancies in the contract documents.
Systems Pipework Limited v Rotary Building Services Limited
This is a Decision of Coulson J in the Technology and Construction Court.
He decided that a Contractor had not given a Sub-Contractor notice of the proposed Final Account validly, under the Sub-Contract. The Sub-Contract required that notification to be given of the proper amount due for payment. The Notice given did not provide that information.
Coulson J acknowledged that his approach was strict. However, he pointed out that if the Sub-Contractor failed to challenge the Notice, that would fix the sum due to the Contractor and that was a serious consequence.
Coulson J stated, “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 pre-requisite 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”.
Under the Contract in dispute, the Contractor was entitled to notify the Sub-Contractor of “the proper amount due for payment in respect of the Sub-Contractor’s Final Account”.
Coulson J decided that the clause required the Contractor to undertake a two-part exercise, the first part of which was the assessment/valuation of the total amount payable for all the Sub-Contract work, while the second was the deduction of previous payments and any continuing retention.
The Notice which the Contractor had served in this case was simply an assessment of the Final Account. That was only one part of the process. Deductions shall have been made and the net balance notified.
So the lessons to be learnt from this case are:
- In general, be careful to observe meticulously all the contractual requirements when notifying Final Account assessments.
- Specifically refer to the contract term under which you serve the Notice.
- Check whether you have to notify the gross value or net value. If the latter, ensure you deduct previous payments and if the Contract allows you to continue to withhold retention – that too.
Grove Developments Limited v S&T (UK) Limited
We have previously provided a newsflash on this case.
Briefly, by way of background, the person being paid under a construction contract will secure an automatic right to be paid where the contract regime for serving Payment Notices and Pay Less Notices has not been complied with by the payer. In the absence of a contract regime, the payee will have an entitlement to be paid if the payer has not complied with the regime for Payment Notices and Pay Less Notices under the Scheme for Construction Contracts.
In the absence of such notices, the payee can go to adjudication under what has become known as a “smash and grab” adjudication and enforce his entitlement to payment.
In a series of cases, including ISG v Seevic and Galliford Try v Estura, the Courts have said that the Adjudicator’s Decision in the smash and grab adjudication, ordering payment to the payee could not be challenged by a subsequent adjudication to establish the true value of an interim payment application.
In the Grove v S&T case, Coulson J seems to have turned the previous case law on its head, deciding that where an Employer failed to serve a valid Pay Less Notice, it was entitled, nevertheless, to adjudicate to determine the true value of the interim account. Coulson J said that it was clear that an Adjudicator has power to open up, review and revise certificates issued. Neither the Housing Grants, Construction and Regeneration Act 1996 nor the Scheme for Construction Contracts preclude an Adjudicator from deciding what was the true value of the interim application.
It remains to be seen whether “smash and grab” adjudications are now pointless because an adjudication can immediately be commenced to establish the true value of the interim application in response to such a smash and grab adjudication.
At the time of writing, permission has been given to appeal. Pending that appeal, there is a period of uncertainty.