England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		Royal Courts of Justice Rolls Building, 7 Rolls Buildings London EC4A 1NL
		23 May 2014

Mr. Justice Edwards-Stuart:

1. This Part 8 claim is brought for a declaration as to the proper interpretation of a clause in a partnering contract between the Second Claimant ("Connaught") and the Defendant ("Merton"). Neither the First Claimant nor Merton was an original contracting party, but this action is not concerned with any question about the validity of the arrangements by which rights and liabilities have been transferred to the First Claimant and Merton. For the purposes of this judgment I shall refer to Connaught and the First Claimant as "the Claimant".
2. The form of contract, the ACA Standard Form of Contract for Term Partnering 2005, amended in 2008, was specifically devised for situations where one party requires the other to carry out a series of relatively minor but repetitive or cyclical tasks over a substantial period ("the Term"): for example, as in this case, to carry out building, repair or related services for a local authority. The employer, referred to in the contract as "the Client", would place orders for particular "Tasks" during the Term and the contractor, referred to as the "Service Provider", would carry them out and submit valuations at the end of each calendar month for payment. The contract provided that it would terminate automatically if either party became insolvent or was placed into administration.
3. The question before the court is whether, and if so to what extent, the Service Provider is entitled to any further payment for work carried out after it has become insolvent or been put into administration or liquidation. This is because, in that event, clause 13.9 of the contract provides that the Client "… shall not be bound to make any further payment" to the Service Provider.
4. Merton says that the Claimant is not entitled to any further payment whatsoever and that, following a termination caused by insolvency, absent bad faith, any loss lies where it falls. However, Merton asserts that it would be entitled to make a claim after termination against the Service Provider for defective work.^[1]
5. The Claimant's case, at least as refined during argument, is that the relevant provision in clause 13.9 serves to suspend the operation of the contractual machinery for payment and instead to leave the parties to pursue their rights under the contract either by adjudication or litigation.

The facts

6. For the purposes of this application, these can be stated the briefly. It seems to me that the contract was made on 30 June 2008. The court has not been told the date on which the Claimant actually began to provide the services - principally building and repair work - under the contract, but it appears to have been well before that date because by the time the contract was terminated the Claimant had submitted several applications amounting to a substantial sum of money.
7. Administrators were appointed over Connaught on 8 September 2010. For the purposes of the argument on this application only, that date has been treated as the date when the contract was automatically terminated (although, in practice, it must have been at some earlier date).

The relevant terms of the contract

8. The clause at the heart of this claim is clause 13. The relevant provisions of that clause are as follows:

"13.5 If any Partnering Team Member …

(b) being a body corporate ... has an administrator appointed (whether by the Court or otherwise) ...

then, in any such case, the appointment of that Partnering Team Member under the Partnering Contract shall automatically terminate that Contract or, if that Partnering Team Member is the Client, then the appointment of all other Partnering Team Members shall automatically terminate with immediate effect.

13.6 In the event that any Partnering Team Member shall breach the Partnering Contract so as to have a demonstrable adverse effect on the implementation of the Term Programme or any Task and shall not remedy such breach within ten (10) Working Days from the date of notice from another Partnering Team Member specifying the breach then, after notifying the Core Group and allowing a period of ten (10) Working Days from the date of such notification to receive and consider their recommendations, the notifying Partnering Team Member (if it not the Client) may terminate its own appointment under the Partnering Contract or, (if it is the Client) may terminate the appointment of the Partnering Team Member in breach, in each case by notice with immediate effect.

13.7 If stated in the Term Partnering Agreement that this Clause 13.7 applies, the Client shall be entitled to terminate the appointment of any other Partnering Team Member by notice with immediate effect if that Partnering Team Member gives any payment or other reward the receipt of which is an offence under Section 117(2) of the Local Government Act.

13.8 In the event of termination in accordance with Clauses 13.2, 13.3 or 13.4 or by reason of Client bankruptcy or insolvency under Clause 13.5 or by any Partnering Team Member of its own appointment in accordance with Clause 13.6 the relevant Partnering Team Member(s) shall be entitled to payment in accordance with Clause 7 of the total amount(s) properly due up to the date of termination.

13.9 In the event of termination of any other Partnering Team Member's appointment by reason of its bankruptcy or insolvency under Clause 13.5 or by the Client in accordance with Clauses 13.6 or 13.7 the Client shall not be bound to make any further payment to that Partnering Team Member and may complete all Tasks using others in place of that Partnering Team Member.

13.10 Termination of the appointment of any Partnering Team Member shall not affect the mutual rights and obligations of the Partnering Team Members accrued at the date of termination."

9. It is common ground that a "Partnering Team Member" includes both the Claimant and Merton. It is also common ground that there has been no termination under clauses 13.2, 13.3, 13.4 or 13.7, or by reason of Client bankruptcy or insolvency under Clause 13.5 or by any Partnering Team Member of its own appointment in accordance with Clause 13.6.
10. The machinery for discharging the obligation to pay the Service Provider or any consultant is found in clause 7. The provisions for interim payments are set out in clauses 7.3 - 7.6. The effect of these is that the Service Provider is to submit an application for payment at the end of each month. Within five days of receipt of the application, the Client's Representative is to issue a valuation specifying the proposed payment. That valuation is to constitute a notice pursuant to section 110(2) of Housing Grants Construction and Regeneration Act 1996 and its date is the due date for payment. The final date for payment is 15 days later (subject to receipt of any required VAT invoice).
11. The provision relating to final payment at the end of the contract Term is found in clause 7.13. This provides that within 40 days of the end of the Term the Client's Representative is to issue a Final Account which, if agreed, becomes conclusive evidence of the balance due between the Client and the Service Provider, which then becomes payable 15 days after the issue of the Final Account valuation.
12. If the Final Account is not agreed within 40 days of its issue, either the Client or the Service Provider may implement the dispute resolution process in clause 14 of the contract or refer the dispute to adjudication.
13. It is important to note that clause 7.13 does not require the client to make any further payment to the Service Provider unless it is prepared to agree the Final Account. A result under the dispute resolution procedure in clauses 14.1-14.3 is again dependent on agreement by the Client and the Service Provider. The only non-consensual means of compelling payment is by way of adjudication (or litigation or arbitration). Thus clause 7.13 is not one under which an automatic right to payment can arise.

The interpretation of the contract - the submissions of the parties

14. I was referred to the decision of the Supreme Court in Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900, where Lord Clarke said at paragraph 14, citing Lord Neuberger in Pink Floyd Music Ltd v EMI Records [2011] 1 WLR 770):

"… the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant."

15. Mr. Simon Lofthouse QC, who appeared for the Claimant together with Mr. Edmund Neuberger, submitted that the primary payment obligation in the contract is to be found in clause 6.3, which provided that the Service Provider was to:

"... undertake and complete the Task in accordance with each Order and the other Partnering Documents, in consideration for which the client shall pay to the Service Provider the relevant Task Price ... ."

16. He submitted that clause 7 simply set out the contractual machinery for giving effect to this primary obligation. The effect of clause 13.9, said Mr. Lofthouse, was to deprive the Service Provider of any right to insist on any further payment under clause 7 following an automatic termination on insolvency. He submitted that the effect of clause 13.10 was that clause 13.09 did not deprive either party of its accrued rights up to the date of termination, which could be enforced subsequently by way of adjudication or litigation.
17. For Merton, Mr. Jonathan Acton Davis QC submitted that the words of clause 13.9 meant exactly what they said and that the Client did not have to make any further payment to the Service Provider following an automatic termination of the contract when the Service Provider was put into administration.
18. In the absence of clause 13.10, I would have agreed with Mr. Acton Davis that Merton would have had a strong case for contending that the words "shall not be bound to make any further payment" in clause 13.9 mean what they say: see Melville Dundas Limited v George Wimpey [2007] 1 WLR 1136, at [3], per Lord Hoffmann.
19. However, as I have said, that is exactly what Merton does contend notwithstanding the presence of clause 13.10. Mr. Acton Davis submits that in the light of the clear wording of clause 13.9 the "mutual rights and obligations" referred to in clause 13.10 do not extend to rights confined solely to the payment of money. He submits that it concerns other matters, such as claims for defective work, entitlement to confidentiality, rights under TUPE and so on.
20. Mr. Lofthouse submits that clause 13.10 contains no such limitation and is clear and unequivocal. He submitted that clause 13.9 can be given effect by reading it as restricting any further right to payment under the contractual machinery, in contrast to the concluding words of clause 13.8 which, on the insolvency of the Client, give the Service Provider an entitlement to payment in accordance with clause 7 (which, in the absence of an express provision, it might not necessarily have after termination).
21. An example of how the rival contentions might operate in practice can be derived from some assumed facts of this case. Suppose that at the end of August 2010 the Claimant had submitted a valuation in the sum of £100,000. Suppose further, that in compliance with clause 7 the Client Representative (acting in good faith) had issued a valuation within five days in the sum of £70,000. In the absence of insolvency the Claimant would become entitled to payment of £70,000 15 days later.
22. However, the Claimant was placed into administration on 8 September 2010. Mr. Lofthouse submits that the effect of clause 13.9 is that, since this is a case of insolvency of the Service Provider, Merton does not have to make any further payment to the Claimant under clause 7. However, he submits, this does not prevent the Claimant from seeking to recover the payment by way of adjudication or litigation. But, of course, in any such adjudication or litigation Merton would be entitled to set off against the Claimant claim any cross claim for, say, damages for defective work.
23. By contrast, Mr. Acton Davis submits that the effect of clause 13.9 is that the Claimant simply has to forego its claim for £70,000. However, he submits also that nothing in clause 13.9 prevents Merton from taking separate proceedings to recover damages for defective work carried out prior to termination (although it will not recover the additional cost of completing unfinished work or the additional cost of employing a fresh contractor to carry out other Tasks that would have been carried out and completed by the Claimant if the contract had not been terminated).

My conclusions and reasons

24. This is a short point and I prefer the submissions of Mr. Lofthouse for the following reasons:

i) Mr. Acton Davis's interpretation of clause 13.10 involves reading into the clause words that are not there.

ii) Clause 13.10 is a freestanding clause. It is not made subject to clause 13.9 by the introduction of words such as "Subject to clause 13.9 ...".

iii) I consider that clauses 13.8 and 13.9 have to be read together. They are addressing different insolvency situations, and it makes commercial sense that clause 13.8 should confer a right to swift payment under clause 7 where it is the Client, and not the Service Provider, who is insolvent. Clause 13.9, by contrast, concerns the situation where the Service Provider is the party who is insolvent and it is quite logical that it should provide that it should not have the benefit of the swift payment machinery under clause 7 which gives the Client no further right of set-off following the prior issue of its valuation. It does not seem to me to be stretching the language to treat the words "any further payment" in clause 13.9 as a reference to a payment under the contractual machinery, being one that can arise as of right once certain conditions are fulfilled.

iv) There is no saving provision in clause 13.9 to permit payment of money that has already fallen due for payment but which has not been paid, or where there has been a course of previous undervaluation. As Lord Hoffmann said in Melville Dundas (supra), at [13]:

"A provision such as clause 27.6.5.1, which gives the employer a limited right to retain funds by way of security for his cross-claims, seems to me a reasonable compromise between discouraging employers from retaining interim payments against the possibility that a contractor who is performing the contract might become insolvent at some future date (which may well be self-fulfilling) and allowing the interim payment system to be used for the purpose for which it was never intended, namely to improve the position of an insolvent contractor's secured or unsecured creditors against the employer."

In that case clause 27.6.5.1 gave the contractor the right to recover sums which the employer had unreasonably not paid and which had been outstanding for 28 days before the date of termination. Conversely, there was no provision in that contract that was the equivalent of clause 13.10.

v) The effect of depriving clause 13.10 of any application to an accrued entitlement to the payment of money under clause 7 would have the effect of preferring other creditors of the Service Provider over the Client, thereby undermining the general principles of insolvency. Instead of the Client being able to retain the amount of the valuation against any loss it may have suffered by reason of defective work carried out by the Service Provider, it would have to pay it straight out so that it would become part of the assets available for general distribution to the Service Provider's creditors. This was a factor that influenced the majority of the members of the House of Lords in Melville Dundas, and I can see no reason why the same approach should not apply here.

vi) While I can see that in some situations there may be no commercial objection to devising a scheme that leaves a loss to lie where it falls in the event of one party's insolvency, it is not all obvious that this would reflect the intention of the parties if it extended to accrued rights to sums which had fallen due for payment but which had remained unpaid. Mr. Acton Davis said that this objection could be met by the application of the well-known principle in Alghussein Establishment v Eton College [1998] 1 WLR 587, that a party cannot be allowed to take advantage from his own breach of contract. Whilst this principle can be invoked to prevent this, there is very good authority for the proposition that it can also be deployed as a rule of construction: see Alghussein, per Lord Jauncey at 593G-H; Lewison on The Interpretation of Contracts, Fifth Edition, at paragraph 7.10. It seems to me that this is a further reason for not construing clause 13.9 in a manner such that, in a situation where the Client's Representative had made persistent undervaluations of a Service Provider's applications, the Client would (assuming that its representative had acted in good faith) escape any liability to pay a proper amount in respect of those applications following the appointment of an administrator over the Service Provider.

25. Mr. Acton Davis accepted that on his construction clause 13.9 operates as a blunt instrument that may produce arbitrary results, but he submitted that that is consistent with the overall purpose of this type of contract, namely to have a simple contractual framework that is capable of economical administration. Whilst I am prepared to accept this premise to some extent, Mr. Lofthouse's solution provides an equally simple and straightforward outcome that in my view is more consistent with the overall purpose of the contract.

Disposal

26. For these reasons I reject Merton's submissions as to the true meaning of clause 13.9.
27. In my view, the Claimant is entitled to a declaration along the following or similar lines:

"On its true construction the reference to 'any further payment' in clause 13.9 refers to any further payment to which the Service Provider would or might otherwise be entitled pursuant to the contractual provisions relating to payment under clause 7 of the contract. The clause does not prevent the Service Provider from pursuing separately, by way of adjudication, arbitration or litigation, any rights or obligations that had accrued by the date of termination."

28. This declaration is not quite in the form sought by the Claimant and so I will hear counsel for the parties on the appropriate form of relief and on any questions of costs that cannot be agreed.

Note 1    At paragraph 19 of its skeleton argument Merton said this: “... The Employer is at liberty to complete the work using others. The balancing fact is that the Contract does not contain a clause permissive of recovery of the inevitable consequential costs to the Employer arising out of the termination under Clause 13.5. Thus, absent a claim for breach of contract, no right of set-off arises out of such costs.”    [Back]