England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN`S BENCH DIVISION
TECHNOLOGY & CONSTRUCTION COURT
The Hon. Mr. Justice Coulson
[2008] EWHC 526 (TCC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		06/11/2008

Lord Justice Hughes :

1. London & Regional (St George's Court) Ltd ("L & R") took a lease from the freeholders, the Crown Estate Commissioners ("CEC"), of an office building in central London, with a view to refurbishing it and subletting to the Ministry of Defence ("MoD"). L & R engaged builders, Shepherd Construction Ltd ("Shepherds") to carry out the work. The consequence was three principal associated contracts, all concluded within a few days of one another in March 2001. They were:

i) A building agreement ("BA") between CEC and L & R, under which L & R agreed to carry out the main refurbishment;

ii) An agreement for a lease ("AFL") between L & R and MoD; and

iii) A building contract ("BC") between L & R and Shepherds.

The AFL, which is principally here in issue, refers to both the other contracts. The BC refers to both the BA and the AFL, and both were provided to Shepherds. We were given to understand that there was also some related agreement between MoD and the freeholders CEC. Although we have not been shown the BA, it seems plain that each contract was entered into in contemplation of, and in the context of, the others.

2. As well as agreeing with MoD to carry out the principal refurbishments (described in the AFL as 'Landlord's Works'), L & R agreed to incorporate into the works any additions or variations ('Tenant's Variations') reasonably requested by that Ministry. Unlike the principal refurbishments, these Tenant's Variations were to be paid for by MoD. The present litigation centres upon the terms of the agreement to pay for them. Coulson J was invited by agreement between the parties to determine certain preliminary issues. MoD challenges his conclusions upon some of them.
3. In due course, disagreements arose about what fell to be paid for by MoD as Tenant's Variations and also between L & R and Shepherds as to various other parts of the works. In May 2004, Shepherds and L & R largely settled their differences and entered into a written contract of settlement ("the settlement agreement"). Shepherds and L & R wished to settle the issues between them other than those relating to Tenant's Variations, which they wished to preserve for future resolution. By one of the terms of the settlement agreement, L & R gave Shepherds conduct in the name of L & R of any further dispute with MoD as to payment for Tenant's Variations. Thus it came about that the present action takes the form of an action brought by L & R against MoD, but is in reality conducted by Shepherds.
4. The particulars of claim contend that three categories of work (space planning, construction of certain rooms and alterations to a staircase) were Tenant's Variations. The claim is not for quantified costs of such work, but for declarations that these were indeed Tenant's Variations. By its defence MoD contends that only part of the space planning work constituted Tenant's Variations and that L & R have been paid all that was due in respect of that part. As to the other two categories of work, it says that no Tenant's Variations were involved at all. But MoD also contends (i) that the effect of the settlement agreement is that L & R can no longer be liable to Shepherds for anything and thus cannot incur any expense which can be claimed from MoD and moreover (ii) that in any event it has no liability to pay anything except as certified by L & R's agent, Messrs Tweeds and that none of the claimed work has been the subject of such certification. Those last two contentions, together with some others not now pursued, gave rise to the agreed preliminary issues put before the Judge.
5. As the hearing of the appeal progressed the questions before us were somewhat refined. It is common ground that the issues which now remain upon MoD's notice of appeal relate to (a) the effect of the settlement agreement and (b) the role of a "certificate" under the AFL.
6. As stated for the Judge below, the relevant settlement issue is:

"6. Whether the effect of the Settlement Agreement is that no further sum is due from the Claimant to Shepherd with the result that the Claimant has incurred no cost or expense as defined by Clause 4.2 AFL and therefore has no entitlement to claim against the defendant under that clause ?"

This settlement agreement issue has been referred to in shorthand as the 'no loss' issue. It is the principal issue before us. If MoD is correct, that is an end of the case against it.

7. As to the role of a "certificate", there were two linked issues:

"1(b) Are certificates within the meaning of clause 2.7 and/or 4.2 AFL binding as to the fact and amount of a Tenant's Variation ?"

"1(c) Is a certificate a condition precedent to the Defendant's obligation to make payment to the Claimant under Clause 4.2 AFL ?"

Logically, 1(c) comes before 1(b).

The AFL and the BC

8. The provision of the AFL dealing with Tenant's Variations is to be found in clause 4. The first part of clause 4 provided for MoD to be entitled to seek such variations. Payment was dealt with by clause 4(2) as follows:

"4.2 The Tenant will pay the costs and incidental expenses of the Tenant's Variations (including without limitation the cost of any delay to the Landlord's Works and any professional fees for the Landlord or the Superior Landlord giving their consent to the Tenant's Variations) as they are incurred as to which:

(a) in respect of the costs of the Tenant's Variations payment is to be made against the Employer's Agent's certificates of the costs and incidental expenses within 30 days of delivery of the certificates to the Tenant and

(b) in respect of incidental expenses and professional fees payment is to be made within 30 days of written demand

(c) if payment is not made within 30 days of delivery of the certificate the Tenant will pay interest on so much of the expenditure as for the time being remains unpaid at the prescribed rate calculated from the date on which payment was due."

The 'Employer's Agent' there referred to was defined in clause 1.14 of the AFL as Tweeds, who were building consultants acting for L & R throughout the development.

9. The definition section of the AFL contained at clause 2.7 the following:

"2.7 Any certificate issued by the Employer's Agent shall save in the case of manifest error be final and binding."

10. The AFL contained no other material provision relating to certification. It contained no provisions for anyone to claim payments, whether interim or final, nor for how Tweeds were to approach the issue of any certificates, for example by indicating whether they were to exercise their judgment or otherwise. It contained no means by which MoD could make representations as to what ought to go into a certificate. It contained no provisions for challenge to any certificate.
11. MoD did not initially plead in its defence what these certificate(s) were intended to be. But it conducted the preliminary hearing before the Judge on the basis of the contention that the tenth edition of a schedule of works, prepared by Tweeds during the operations, was the certificate and dealt finally with what Tenant's Variations there had been and what was due. The Judge rejected that contention. The schedule was simply a running log of work under discussion amongst the three principal parties, L & R, MoD and Shepherds, and a record of stances taken. Its tenth edition was no more a determination of money due than the preceding nine editions had been. There is now no appeal from that finding, which if I may say so was plainly right.
12. The BC also contained no provision for certification. It was basically a standard form JCT contract, with contractor's design, 1998 edition. Tweeds were stated to be the agents of L & R (the employer) under this contract. But they were given no determining role in relation to payment. The word 'certificate' does not appear anywhere in the contract in relation to payment. Interim payments were, under clauses 30.3.1 and 30.3.3, to be made by the contractor applying for payment, and by the employer issuing a 'notice' of what he intended to pay. If he issued no notice, he was bound by clause 30.3.5 to pay the interim amount claimed. Articles 5 & 6B, with clauses 39A and 39C, permitted dispute resolution by adjudication or litigation. Clause 30.5-30.8 then provided for final payment (including no doubt the correction of any under- or over-payment in the interim) to be resolved by one or other party submitting an account for agreement or disagreement by the other, and (with articles 5 & 6B and clauses 39A and 39C) again contained provisions for resolution of any dispute by adjudication or litigation.
13. It appears that a number of employer's notices as contemplated by clause 30.3.3 had in fact been issued by Tweeds on L & R's behalf, indicating what L & R was thus far intending to pay, and for which work. These documents were sometimes described as 'certificates'. The Judge held that the reference to certificates in clause 4.2 of the AFL must be a reference to these documents, anticipated to be issued as between L & R and Shepherds under the BC. It is now common ground between the parties that this part of the Judge's ruling was correct.
14. The Judge, however, held that clause 4.2 did not mean that such certificates were a pre-condition to payment, nor were they meant to be conclusive. Rather, he held, the clause simply provided for the timing of payments due. In this court, whilst MoD now adopts his ruling that the documents referred to in clause 4.2(a) of the AFL are employer's notices issued under clause 30.3.3 of the BC, it challenges the remainder of his conclusion about them. In other words, it now argues that BC 'certificates' issued by Tweeds were an indispensable pre-condition to any liability of MoD to pay for Tenant's Variations, and, since none has been issued containing anything referable to the disputed variations, that is an end of the claim. Further it contends that although these documents had no conclusive or binding effect under the BC, as between L & R and Shepherds, when it comes to the AFL they are conclusive as between L & R and MoD.
15. In the court below L & R raised the contention that there was an estoppel by convention based upon a common assumption amongst those operating the AFL that there was no regime under which Tweeds were vested with authority to make conclusive certification of what was due. But it is clear that the Judge was invited to consider this argument only insofar as he might hold that edition number 10 of the schedule was the certificate contemplated by clause 4.2. Since he did not so hold, and since no one now contends that the Schedule was the relevant document, estoppel is accepted no longer to figure in the argument.

The settlement agreement

16. The key provisions of the settlement agreement were these:

"2.1 Within 14 days…the Employer shall pay to the Contractor without any deduction or set-off the sum of £1,286,117 plus VAT in full and final settlement of:

2.1.1 Sums due from the Employer and

2.1.2 Sums due from the Contractor."

"1.1 'Sums due from the Employer' means any and all sums due from and/or payable by the Employer to the Contractor pursuant to the Building Contract and Supplemental Agreement apart from any sums due and/or payable in respect of the MoD Claims.

'MoD Claims' means the claims (or potential claims) against the MoD briefly described in the Schedule to this Agreement."

The Schedule lists as 'the MoD Claims' the three categories of alleged Tenant's Variations now claimed in this action, together with claims arising from the Ministry being let into possession during the currency of the works.

"4.1 Henceforth the Contractor shall be entitled to pursue, prosecute and if necessary enforce the MoD claims against the MoD in lieu of the Employer. The Contractor shall be entitled to use the Employer's name in …[doing so]."

….

5.1 Subject to clause 5.2 below the Contractor shall be entitled to the proceeds from any compromise or settlement reached with the MoD in relation to the MoD Claims and/or the proceeds from any award or judgment…..

5.2 The Employer shall be entitled to the first £200,000 of any proceeds recovered by the Contractor from the MoD.

….

6.1 Receipt of proceeds from the MoD Claims pursuant to clause 5.1 above will be in full and final settlement of any and all sums which might otherwise be due and/or payable by the Employer to the Contractor in respect of the MoD Claims…"

17. Further, by clause 3 of the settlement agreement, L & R warranted that, except for identified correspondence, it had not said or done anything which might adversely affect the pursuit of the MoD claims and it undertook that it would not do so in future.

Issue 6; 'no loss' ?

18. For MoD, Miss Barwise QC accepts that the intention of L & R and Shepherds was to preserve the ability of Shepherds to recover from MoD whatever was properly due in respect of Tenant's Variations. But her contention is that the settlement agreement fails to do so. Her argument runs as follows. Clause 4.2(a) of the AFL is an indemnity clause under which MoD agrees to indemnify L & R against liability to Shepherds in respect of the cost of Tenant's Variations. Under the settlement agreement L & R's liability to Shepherds is discharged in return for the provisions of the agreement, and henceforth it is only Shepherds who can pursue MoD. The BC is over, because issues arising under it have been settled. Only the AFL remains. But because there is no further liability of L & R to Shepherds under the BC, there is nothing which can be recovered under clause 4.2 of the AFL as cost or expense incurred by L & R. The settlement agreement thus creates a vicious and unbreakable circle. Read as a whole, she submits, the purpose of the settlement agreement was to free L & R from further involvement and in particular to provide that it could not be sued by Shepherds. Clause 6.1, she submits, demonstrates the point; it contains an executory promise by Shepherds to accept whatever it can get from MoD as final satisfaction, and that stands in place of the right which Shepherds formerly had against L & R under the BC.
19. The Judge rejected that contention. In my view he was plainly right to do so. He was right because the settlement agreement does not provide for L & R's liability to Shepherds to be altogether discharged. On the contrary, by clause 2.1, read with 1.1, the liability in relation to Tenant's Variations was expressly preserved, and was to be pursued. For that reason, the suggested circularity is absent. It may well have been hoped that any litigation could be carried on directly between Shepherds (in the name of L & R) and MoD. Whether that is possible or not depends in part on the answer to issue 1(c). But whether that can be done or not, since the liability of L & R to Shepherds is preserved, Shepherds could still, if necessary, sue L & R under the BC. The advantage to L & R of the arrangement was that, although it might yet be sued by Shepherds, its potential liability to Shepherds was limited to whatever could be passed on to MoD and there was no risk of falling between two stools; moreover it ought to be able to take little part in any dispute, in effect interpleading between Shepherds and MoD. That was a real advantage even if L & R might still have to be sued by Shepherds, particularly in the context of potential disputes over whether work was a true Tenant's Variation or the responsibility of Shepherds under their design obligations. The settlement agreement is, as the Judge said, a perfectly sensible one and of a kind not infrequently reached in cases of chains of contracts. The object was to give control of any claim in relation to Tenant's Variations to the party which would be the principal ultimate beneficiary if there was any money properly payable by MoD, namely the contractor who did the work. Clause 6.1 is perfectly consistent with this; its terms demonstrate that as and when any sums are recovered from MoD (but not before) the liability of L & R to Shepherds is settled.
20. Hydrocarbons Great Britain Ltd v Cammell Laird Shipbuilders (1991) 53 BLR 84 does not help Miss Barwise. In that case there was a chain of contracts for the supply of equipment and a potential claim passing along the chain for breach arising out of the failure of components. Parties C and D reached a settlement. D admitted that it was liable to C to indemnify C against B's claim. But C and D agreed that D's liability under that indemnity was to be limited to what it might recover from E or F further down the line, and C agreed to accept such sums in full and final satisfaction of its claim against D. The potential problem in that case was that D's claim against E and F was itself a claim for an indemnity against liability of D to C. There too, it was contended that the agreement created a vicious circle in that D had been released from liability to C except insofar as D recovered from E and F, but there was no longer any basis for any claim against E or F because of that release. The argument was summarised by Nicholls LJ as: "A liability to indemnify against a liability which no longer exists is a contradiction in terms." This court rejected the argument based upon circularity for reasons differently expressed by its three members. All, however, agreed that such a construction of the agreement would defeat the plain intention of the parties. Nicholls LJ aptly described such a construction as an absurdity. I do not agree that the outcome of that case depended upon there being an admission of D's liability to indemnify C (subject to the limitation) nor upon the fact that C's claim had a ceiling in any event of £5m as a result of the terms of settlement between C and B. The outcome of the case depended on the fact that the liability of D to C was preserved, albeit limited. So here. There, the admission demonstrated that the liability was preserved; here it was preserved expressly. Moreover, although the distinction is not critical, I do not think that this is a case where MoD's liability to L & R is properly described simply as an indemnity, although part of it had the same effect as an indemnity; it is a primary contractual duty to pay L & R the costs which L & R has incurred in carrying out Tenant's Variations; some of those costs will take the form of money due from L & R to Shepherds, whilst others will take the form of L & R's in-house costs or payments out other than to Shepherds. That may be why the first £200,000 of anything properly due from MoD is to go to L & R.

Issues 1(c) and (b); "certificates"

21. Miss Barwise submits that clause 4.2(a) of the AFL means that the presentation of a "certificate", namely the BC employer's notice issued by Tweeds under BC clause 30.3.3, is a condition precedent to L & R's entitlement to payment. No cause of action arises in L & R, she submits, until that document is presented to MoD. That follows, she argues, from the decision of this court in Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850; [2005] EWCA] Civ 814. She goes further and contends that in the absence of such a "certificate" there cannot be an obligation on MoD to pay under clause 4.2(a). She uses the expression 'condition precedent' as carrying this additional meaning, and it was to that suggested meaning that the Judge addressed himself.
22. I agree with Miss Barwise that the scheme of clause 4.2(a) of the AFL is to provide a means of ascertaining when the liability of MoD to pay L & R for Tenant's Variations will arise. I agree that its effect is that ordinarily the liability will not arise until MoD is presented with the BC employer's notice issued under BC clause 30.3.3 and here referred to as a certificate. The provision in clause 4.2(c) for interest to run from 30 days after presentation of such "certificate" reinforces that view. But it does not follow that the absence of such certificate is, in all cases, fatal to recovery of payment for Tenant's Variations under clause 4.2(a).
23. The status of the "certificate" is as explained by Dyson LJ in Henry Boot. The context in that case was a formal certification regime under the ICE standard contract (6^th ed), under which the engineer was required to exercise his judgment at both interim and final stages and there was provision for any disputes to be resolved by arbitration. The issue in the case was limitation, which required decision as to when the contractor's cause of action for payment arose. This court held that the cause of action arose when the certificate was issued, or ought to have been issued, and that time did not begin to run until then. Dyson LJ said this at paragraph 23:

"In my judgment, on the true construction of this contract, certificates are a condition precedent to Boot's entitlement to payment under clause 60(2)(4) and they are not merely evidence of the engineer's opinion. By "condition precedent" I mean that the right to payment arises when a certificate is issued or ought to be issued, and not earlier. It does not, however, follow from the fact that a certificate is a condition precedent that the absence of a certificate is a bar to the right to payment. This is because the decision of the engineer in relation to certification is not conclusive of the rights of the parties, unless they have clearly so provided. If the engineer's decision is not binding, it can be reviewed by an arbitrator…or by the court. If the arbitrator or the court decides that the engineer ought to have issued a certificate which he refused to issue, or to have included a larger sum in a certificate which he did issue, they can, and ordinarily will, hold that the contractor is entitled to payment as if such certificate had been issued and award or give judgment for the appropriate sum."

24. I construe clause 4.2(a) similarly. Its object is plainly to ensure that L & R cannot recover the cost of Tenant's Variations in advance of being obliged to pay Shepherds, but can do so without delay once Shepherds are being paid. In the ordinary way, sight of the employer's notice under BC 30.3.3 will demonstrate to MoD that Shepherds are being paid and that will trigger the right of L & R to recover from MoD. But, just as in Henry Boot, there are, under this BC, other ways in which payment to Shepherds by L & R might arise. One is if a dispute arose under the BC and was resolved either by adjudication or litigation directing payment to Shepherds. Neither would involve the issue of an employer's notice but the effect would as surely demonstrate that the time for payment had arrived. Similarly, it might happen that on receipt of an application by Shepherds for interim payment involving Tenant's Variations, L & R, through Tweeds, might opt to accept the claim and fall liable to pay it under BC 30.3.5 without issuing any employer's notice, or might simply overlook the need for such a notice, with the same consequence. In both those situations, Shepherds would have to be paid by L & R, and, consistently with the plain purpose of the AFL, L & R should then be paid by MoD.
25. The only reason why this should not be so is if the true meaning of clause 4.2(a), with clause 2.7, is that Tweeds were given, by the AFL, a power conclusively to determine, for all purposes, when and what MoD were liable to L & R, whether or not L & R had to pay Shepherds. I do not overlook clause 2.7, but that, I am satisfied, is not the meaning of the AFL. Clause 2.7 expressly applies only unless inconsistent with the context. It is unnecessary to investigate whether clause 2.7 might bite upon snagging certificates or certificates of practical completion, for even if it could not I am satisfied that a construction which vests in Tweeds the conclusive power suggested is indeed inconsistent with the context. A certification regime, as the Judge rightly said, is well known to contracts involving building operations. It may sometimes be a conclusive certification regime, although that is much less common and requires the clearest possible terms – see Boot at paragraphs 36-37 where Dyson LJ makes clear that to assert that a certificate (a) is a condition precedent to a right of action but (b) is not conclusive since it can be reviewed by an arbitrator or court is not to advance inconsistent propositions. But any certification regime will ordinarily be attended by provisions designed to ensure fairness, such as what exactly the certifier is to decide, what information he is to have, and what opportunity the potential payer is to have to make representations or provide information. All are wholly absent here. Moreover, it is plain that the document here contemplated (the employer's notice) will be generated under a BC regime in which it had no kind of conclusive effect and was no more than a statement of L & R's stance. I regard it as in the highest degree unlikely that the parties intended that Tweeds could, by agreeing on behalf of L & R to pay Shepherds, conclude the question of what was owing from MoD to L & R. If that were so, it would mean that in relation to Tenant's Variations L & R had only a very limited interest in ensuring that no more was paid to Shepherds than was truly due, because they could pass on any sum they chose to pay to MoD, whilst the ultimate payer, MoD, would have no opportunity whatever to have any input into the questions what truly constituted variations and what they were worth. And it would mean that in relation to Tenant's Variations the function discharged by Tweeds when issuing an employer's notice would be quite different from its function in relation to the rest of the contents of the notice. Even assuming a high level of professional duty on the part of Tweeds, that would present them with an immediate conflict of interest and moreover an absence of the basic material required to make a reliable decision.
26. That construction is also supported by consideration of clause 4.2(b). It is plain that the two limbs of clause 4.2 ought to be read consistently with one another. But it cannot possibly have been the intention of the parties that in relation to costs incurred by L & R other than by way of payment to Shepherds the mere presentation of a demand left MoD with no option but to pay whatever was sought.
27. The true effect of clause 4.2 and 2.7 is, as it seems to me, that what the presentation of the employer's notice did was to "certify" that Tweeds, as the agents of L & R, had accepted that payment was due to Shepherds for what appeared to be Tenant's Variations, and thus that time for payment by MoD had arrived. Payment was not due until that document was presented to MoD, alternatively payment was being made to Shepherds under BC 30.3.5 without such a document, alternatively a competent adjudicator or court ruled that payment was due to Shepherds. To that extent, their "certificate" was one trigger which gave rise to the obligation to pay. It was not to be challenged that payment was being made; to that extent it was binding. But it had, as Lord Hoffman said of the certificates in Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd [1999] 1 AC 266, a "provisional validity": see Boot at paragraph 36. It could be challenged by litigation if it did not correctly state what was due. And it was not the only trigger which might give rise to the obligation in MoD to pay. Although I have expressed that conclusion in terms which are not precisely the same as those adopted by the Judge, it seems to me substantially the same in effect as his proposition that the role of the "certificate" went to the timing of payments and was not a condition precedent in the particular sense advanced by MoD. I differ in expression from him only because, to the extent that I have set out, I conclude that the clause 4.2(a) document was one of a number of provisional triggers which would give rise to the obligation to pay.
28. I am comforted in that conclusion by the Judge's findings of fact that this is how the contract was actually operated by the parties. He made those findings after considering the correspondence and documents and hearing the evidence of the two persons most actively concerned for MoD in the execution of these operations. They were relevant in the court below to the case upon estoppel by convention, which is now immaterial. The Judge found that the various professionals involved had none of them proceeded upon the basis that there was a regime under which Tweeds were vested with the authority to make binding determinations of what was due for Tenant's Variations. In particular, the MoD's building engineers and consultants, their quantity surveyors and their in-house representatives had proceeded on the basis that it was necessary to negotiate the issue and, indeed, that MoD would refuse to accept some items being advanced as Tenant's Variations by Tweeds on behalf of L & R. That is of course wholly inconsistent with Tweeds having a conclusive determining role.

Conclusion

29. My answer to issue 6 is

"No; the claimant (L & R) is entitled to bring the claim under the AFL."

That is the answer reached by the Judge. By obvious typographical error his answer has been recorded in the order as

"Yes; the claimant has an entitlement to bring the claim under the AFL."

Subject to correction of the error by substituting 'No' for 'Yes', I would dismiss the appeal in relation to issue 6.

30. My answers to issues 1(c) and (b) are:

"(c) A certificate is one trigger giving rise to a cause of action in L & R against MoD; the others would be actual payment by L & R to Shepherds under the BC in respect of Tenant's Variations and an order of a competent adjudicator or court that payment be made in such respect."

"(b) No; the certificates were not binding as to the fact and/or amount of a Tenant's Variation."

My answer to (b) is as given by the Judge. My answer to (c) more fully expresses the position but is largely to the same effect as that of the Judge. Accordingly, subject to that modification of his order, I would dismiss the appeal in relation to issue 1.

Lord Justice Richards:

31. I agree.

Lord Justice Waller:

32. I also agree.