C Spencer Ltd v M W High Tech Projects UK Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Coulson,Lord Justice Baker |
| Judgment Date | 06 March 2020 |
| Neutral Citation | [2020] EWCA Civ 331 |
| Date | 06 March 2020 |
| Docket Number | Case No: A1/2019/2597 |
| Court | Court of Appeal (Civil Division) |
[2020] EWCA Civ 331
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
TECHNOLOGY AND CONSTRUCTION COURT (QBD)
MRS JUSTICE O'FARRELL DBE
Royal Courts of Justice
Strand, London, WC2A 2LL
SENIOR PRESIDENT OF TRIBUNALS
Lord Justice Coulson
and
Lord Justice Baker
Case No: A1/2019/2597
Alexander Nissen QC and Matthew Finn (instructed by Gosschalks Solicitors) for the Appellant
Simon Hargreaves QC and Tom Owen (instructed by Clyde & Co LLP) for the Respondent
Hearing date: 22 nd January 2020
Approved Judgment
INTRODUCTION
The twin purposes of the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 (together referred to as “The Act”) was to improve cash flow in the construction industry, and to streamline its dispute resolution process. The former aim was achieved through mandatory provisions relating to interim payments, payment notices and the like, and the latter through a new, compulsory scheme of construction adjudication. The Act has been, on any view, a considerable success.
Unfortunately, the Act is not as comprehensive as it might have been. It was suggested during the Parliamentary debates that the then Government was (in the words of Lord Howie of Troon) 1 “got at by some big, powerful, important interests in what are called the process industries. They yielded to those pressures and in so doing lost sight of the aim of the Bill.” Whatever the reason for it, many contracts for works which, on any sensible definition, are construction operations, were excluded from the ambit of the Act. To make matters more complicated, the Act recognised that this might create what have subsequently been called hybrid contracts, that is to say contracts providing both for construction operations (which were therefore expressly covered by the Act) and for operations which were expressly said not to be construction operations (and excluded from the Act). In the last 20 years, much too much time and judicial resource has been spent grappling with the problems created by such hybrid contracts, of which this appeal is but one example. But until the Act is amended to do away with these unnecessary distinctions, the courts have to do their best to resolve the resulting, self-inflicted problems.
Although this case is, in many ways, a typical example of the genre, it raises a point which has not arisen for decision before. The issue is whether, in the case of a hybrid contract (which therefore provides for the execution of both construction operations within the Act and construction operations outside the Act), a valid payment notice is required to identify separately the sum due in respect of construction operations only, along with the basis on which that sum has been calculated. O'Farrell J (“the judge”) answered that question in the negative, but she recognised the wider significance of the points and gave the appellant (“CSL”) permission to appeal against her ruling.
Although the underlying issue might appear somewhat dry, the wider importance of the point was stressed by both leading counsel. On behalf of the Court, I should express at the outset our gratitude to them, and those behind them, for the excellence of their written and oral advocacy.
THE FACTUAL BACKGROUND
By a contract dated 20 November 2015 the respondents (“MW”) were engaged as the main contractor to design and construct a power plant capable of processing refuse-derived fuel produced by commercial and industrial waste and municipal solid waste. By a sub-contract dated 20 November 2015 (“the sub-contract”), CSL was engaged
by MW to design and construct the civil, structural and architectural works for completion of the facility. The sub-contract price was £35,650,398The principal elements of the sub-contract works were construction operations, within the definition of s.105(1) of the Act. But the works also included the assembly of plant, and erection of steelwork to provide support or access to plant and machinery. Such operations are expressly said not to be construction operations and are therefore excluded from the Act pursuant to s.105(2)(c). It is therefore convenient to call them ‘non-construction operations’ (despite the nature of the work involved). This was thus a hybrid contract.
The sub-contract made provision for periodic interim payments, as envisaged by the Act. Those payments were in a form typical of the process industry, namely milestone payments. Those payments did not require a detailed valuation mechanism to arrive at the amount due at each milestone: the amount of each such payment was set out in the sub-contract to reflect the completion of a particular stage or element of the works. Until almost the end of the work on site, the parties operated the payment provisions of the sub-contract without any regard to the definition of construction operations in s.105 of the Act, or any perceived need to identify separate sums for construction and non-construction operations.
There was a good reason for that. The sub-contract contained a series of detailed provisions relating to payment. They are set out extensively at [24] of the judge's judgment ( [2019] EWHC 2547 (TCC)) and are not repeated here. On their face, those payment provisions reflected the mandatory requirements of the Act. The judge summarised the contractual regime at [25] as follows:
“25. Thus, the contractual regime for interim payments under the Subcontract is as follows. CSL is entitled to make an application for an interim or instalment payment on a monthly basis upon completion of each milestone. Each application submitted by CSL must set out CSL's assessment of the amount due in respect of completed milestones and any other amounts to which CSL considers itself to be entitled, together with the basis of calculation of the sum claimed and supporting documentation, less sums previously certified. Each instalment payment becomes due sixteen days after the date of CSL's application (“the Payment Due Date”). The contract manager issues a certificate sixteen days after the application, setting out his response to the application, including the basis on which the certified sum has been calculated. MW is obliged to pay the sum due nineteen days after the Payment Due Date (“the Final Date for Payment”). If MW intends to pay less than the sum due, it must issue a pay less notice no later than one day before the Final Date for Payment. Subject to any pay less notice, the sum due is (a) the amount certified for payment in the contract manager's certificate or, in the absence of such certificate, (b) the amount assessed by CSL as due in its application.”
I adopt that summary, which was not disputed by either party on appeal.
In 2018, a dispute arose between the parties in respect of interim payment application 31. Neither the application for payment submitted by CSL, nor the payment notice issued by MW, separated out the sums due in respect of construction operations from the sums due in respect of non-construction operations. As had been their practice, both sides had identified a single figure in their application/notice. There was, however, a significant difference between the two sides' respective figures.
In July 2018, CSL gave notice of their intention to refer to adjudication the dispute that had arisen as to the sum due pursuant to application 31. At that point, MW raised a jurisdictional challenge in respect of the proposed adjudication, pointing out that the adjudicator could only deal with disputes in respect of construction operations and not disputes in respect of non-construction operations. MW said that, in circumstances where the dispute framed by CSL in their adjudication notice failed to distinguish between the two, the adjudicator did not have the necessary jurisdiction to decide the dispute. In the face of that challenge, CSL withdraw its adjudication claim.
In my view, MW's challenge was in accordance with the terms of the sub-contract. Clause 44.1 of the sub-contract, which set out the provisions in respect of adjudication, made plain that either party's right to refer a dispute to adjudication applied “only to the extent (if any) required by the Act”. In other words, if the dispute was in respect of non-construction operations, the Act did not require a reference to adjudication, so that (absent express consent) any adjudicator appointed to deal with disputes about non-construction operations would have had no jurisdiction. In addition, the challenge was in accordance with the authorities: MW's underlying contention that, in the case of a hybrid contract, it was for the claiming party to demonstrate that any reference to adjudication was limited to construction operations, was based foursquare on the judgments of Ramsey J in Cleveland Bridge (UK) Limited v Whessoe-Volker Stevin Joint [2010] EWHC 1076 (TCC), [2010] BLR 415, and of Stuart-Smith J in the first round of Severfield (UK) Ltd v Duro Felguera UK Limited [2015] EWHC 2975 (TCC).
On 4 February 2019, CSL issued its application for interim payment 32 in the sum of £3,353,219.22 plus VAT. The covering letter explained that, because MW had drawn the distinction between construction and non-construction operations, CSL were now making that distinction themselves in their own application. Accordingly, the application for payment specified the amount of £2,683,617.09 plus VAT as being the sum allocated by CSL to construction operations. The breakdown that was attached explained how this figure, and the larger figure of £3.3 odd million for the works as a whole, had been calculated.
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