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

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN MANCHESTER
TECHNOLOGY AND CONSTRUCTION COURT (QB)

		Manchester Civil Justice Centre 1 Bridge Street West Manchester M60 9DJ
		8th June 2021

COVID-19: This judgment was handed down remotely by circulation to the parties' representatives by email. It will also be released for publication on BAILII and other websites. The date and time of hand-down was 10.00am on 8^th June 2021.


 


HH Judge Eyre QC :


 


1. The Defendant operates Drax Power Station at Selby in North Yorkshire. This case involves a dispute as to the correct interpretation of the contract under which the Defendant engaged the Claimant to perform works in relation to the conversion of four of the six generating units at that power station to operate on biomass fuel.
2. That project comprised two elements. The first, "the Ecostore Works", involved the design, engineering, installation, and commissioning of a facility ("the Ecostore") for the unloading of the biomass fuel from rail wagons and the subsequent handling and storage of that fuel together with a conveyor system for transporting it to the boiler distribution system. The second element, "the BDS Works", involved the design, engineering, installation, and commissioning of the boiler distribution system which was to convey the biomass fuel from the Ecostore to silos for intermediate storage and thence to the mills from which the boilers were to be fed.
3. By a contract largely following the standard form of the FIDIC Plant and Design-Build Contract First Edition 1999 ("the Contract") the Claimant was engaged in March 2012 to undertake the Ecostore Works for the sum of £149,970,559. In October 2012 the Contract was varied to provide for the engagement of the Claimant to undertake the BDS Works in addition and as a consequence the contract price was increased to £240m. It is common ground that the Ecostore Works and the BDS Works are separate construction exercises and that the Defendant could have engaged different contractors to undertake the different works or that the Claimant and the Defendant could have entered into a separate contract in relation to them. However, it is also common ground that the Ecostore Works and the BDS Works are interrelated and form part of the same project. The BDS Works enable the biomass fuel stored in the Ecostore to be transported to the boilers. It follows that the works cannot be operated separately. In addition the Claimant does not challenge the Defendant's contention that it was only after the BDS Works had been completed and the boiler distribution system was operational that it was possible fully to test the operation of the Ecostore.
4. Taking Over Certificates were issued for the Ecostore Works in September 2014. In relation to those works the final Milestone Payment (which was the last part of the Retention Money relating to the Ecostore Works) was made on 31^st December 2014.
5. The Taking Over Certificate for the last part of the BDS Works was issued in July 2017 and the Defects Notification Period in relation to those works expired in July 2018.
6. In February 2019 the Claimant made Interim Payment Application 35A seeking payment of £1,283,765 being the balance of the Retention Money in respect of the BDS Works. The Defendant sought to make twelve deductions from that sum by reference to Clause 14.9.6 of the Contract. Of those deductions four in sums totalling £1,002,737 net of VAT relate to amounts said to be due as the cost of remedying defects in the Ecostore Works. The key element of the current dispute relates to the withholding of those sums. The Claimant says that on its correct interpretation the Contract does not entitle the Defendant to deduct from the Retention Money due in respect of the BDS Works sums relating to the remedying of defects in the Ecostore Works. The Defendant's case is that its right under Clause 14.9.6 to withhold sums from the BDS Works Retention Money is not so limited and that it is entitled to withhold the cost of any unexecuted works arising under the Contract's Defects Liability provisions whether those works relate to the Ecostore Works or the BDS Works. The dispute had been referred to adjudication. The adjudicator was Mr. Christopher Hough and he had concluded the Contract provided for a right of set off between the Ecostore Works and the BDS Works. For the Defendant Mr. Winser QC not only contended that Mr. Hough had reached the correct conclusion but also made reference to Mr. Hough's considerable experience in construction disputes. The latter point was not at the forefront of Mr. Winser's submissions and cannot assist me in the task I have to undertake. This is particularly so as Mr. Hough's conclusion was set out at paragraph 17 of his decision in the shortest of terms simply recording his conclusion and stating that it was based on reading the Contract and "viewing the matter objectively".
7. The Defendant advances two supplementary lines of argument. The first is that Interim Payment Application 35A was in any event not a valid payment application under Clause 14.9.5 of the Contract because it failed to take account of the reduction to be made in respect of the Defendant's claim to make a deduction from the Retention Money. The Claimant says that it was valid because it did take account of the claims made by the Defendant but because those claims were not accepted it did not make a deduction in respect of them and was not required to do so. Finally, the Defendant says that even if Clause 14.9.6 does not provide for the withholding of sums relating to the Ecostore Works from the BDS Works Retention Money the Contract does not exclude the Defendant's rights of abatement or set off and that the deductions in relation to the Ecostore Works can be made pursuant to those rights. In response the Claimant says that the Contract was effective to limit the rights which the Defendant would otherwise have had so that there could not be abatement or set off of sums allegedly due in respect of the Ecostore Works against the Retention Money for the BDS Works.

The Issues.

8. It follows that there are three issues to be addressed. The first is the correct interpretation of Clause 14.9.6 and the question of whether sums due for the remedying of defects in the Ecostore Works can be withheld from the Retention Money relating to the BDS Works. The second is whether even if Clause 14.9.6 does not provide such a right of withholding the Defendant can nonetheless withhold sums relating to the defects in the Ecostore Works by way of a set off or a common law abatement. Finally, I have to determine whether Interim Application 35A was a valid application pursuant to Clause 14.9.5.

The Relevant Terms of the Contract.

9. In its original form the Contract was dated 1^st March 2012 and related solely to the Ecostore. There were variations in October 2012, September 2013, and November 2016. The October 2012 variation provided for the Claimant to undertake the BDS Works. This variation identified a number of different phases and sections of the Project by numbers. Of these Sections 1, 1A, and 2 related to the Ecostore while Sections 3, 4, and 5 comprised the BDS Works. The variations in September 2013 and November 2016 did not amend any of the terms which are relevant for current purposes other than, in September 2013, adding Section 1B to the works in relation to the Ecostore.
10. Two provisions of the Contract in its original form are to be noted. The first is that Clause 12 was "not used". The second is that Clause 14.9 provided as follows in respect of the retention bond:

"14.9.1 The final Milestone Payment shall be paid to the Contractor in accordance with and subject to Clause 14 following the issue of the Taking-Over Certificate in respect of the whole of the Works and delivery of the Retention. Bond to the Employer in the form set out at Schedule 7 to the Contract Agreement (with such amendments as the Employer may agree (acting reasonably) and in an amount equal to 2.5% of the Contract Price in pounds sterling. No amount shall be due to the Contractor in respect of the final Milestone Payment until the Engineer has issued the Taking-Over Certificate in respect of the whole of the Works and received the Retention Bond. and any application for payment which seeks payment of the final Milestone Payment by the Contractor prior to such Taking-Over Certificate being issued and the Retention Bond being provided to the Employer as required by the Contract shall not be a valid Interim Statement and shall be deemed not to be submitted to the Engineer under the Contract.

14.9.2 Promptly after the latest of the expiry dates of the Defects Notification Periods, the Contractor shall be entitled to apply for payment of the outstanding balance of the Retention Money in the next Statement which amount shall, subject to Clause 14, be paid to the Contractor.

14.9.3 However, if any work remains to be executed under Clause 11 (Defects Liability) or Clause 12 (Tests after Completion), the Employer shall be entitled to withhold the estimated cost of this work until it has been executed and to deduct the same from amounts otherwise due to the Contractor until such time as the work is completed."

11. It will be noted that reference was made at Clause 14.9.3 to work remaining to be executed under Clause 12 notwithstanding that that clause was not being used at that stage. Although as will be seen Mr. Hughes QC prayed in aid the sophistication of the drafting of the Contract he accepted that this reference had been an error resulting from the adoption of the FIDIC form without cross-checking all the references.
12. The following provisions of the Contract as varied are relevant^[1].
13. The "BDS Works" became a defined term although there remained no equivalent definition in respect of those works relating to the Ecostore.
14. The "Defects Notification Period" was defined as:

"the period for notifying defects in the Works or a Section (as the case may be) under Clause 11.1 (Completion of Outstanding Work and Remedying Defects). This shall be a period of twelve (12) months (with any extension under Clause 11.3 (Extension of Defects Notification Period)), calculated from the date on which the Works or Section is completed as certified under Clause 10.1 (Taking Over of the Works and Sections), except in relation to the Silo Bottoms (and in so far as they cannot sensibly be separated from the Silos, the Silos) where the period for notifying defects under Clause 11.1 shall be a period of twelve (12) months (with any extension under Clause 11.3 (Extension of Defects Notification Period)) calculated from the date on which Section 5 is completed as certified under Clause 10.1 (Taking Over of the Works and Sections)."

15. The "Retention Bond" was defined as the bond referred to in Clause 14.9.1 and 14.9.4. The "Retention Money" was defined as the accumulated retention monies retained under Clause 14.3 (dealing with applications for interim payment) and payable under Clause 14.9. The percentage of retention was to be:

"(i) In relation to. the Works comprising and relating to Sections 1,1A and 2 only:

(a) 5%; until

(b) the Taking-Over Certificate has been issued in relation to Section 1, whereupon the percentage of retention shall be 3%; until

(c) the Taking-Over Certificate has been issued in relation to Sections 1,1A and 2,

whereupon the percentage of retention shall be 2.5%;

(ii) in relation to the Works comprising and relating to Sections 3,4 and 5:

(a) 5%; until

(b) the Taking-Over Certificate has been issued in relation to Section 3, whereupon the percentage of retention shall be 3%; until

(c) the Taking-Over Certificate. has been issued in relation to Sections 3, 4 and 5, whereupon the percentage of retention shall be 2,5%;

and the limit of Retention Money shall be 5% of the Contract Price."

16. "Works" was a defined term being the "Permanent Works" and the "Temporary Works" or either of them. The former were the permanent works to be undertaken under the Contract and the latter were "all temporary works of every kind … required on Site for the execution and completion of the Permanent Works and the remedying of any defects".
17. As I have already noted it was not disputed that the interrelation between the different elements of the works meant that it would only be after later works had been completed that it would be possible (at least in some instances) to know whether the earlier works were operating properly. This was addressed at Clauses 9.1.13 and 9.1.14 with particular emphasis on the silos and silo bottoms. The former of these clauses provided, at (a), that the Tests on Completion in relation to the Section 4 works should also measure the performance of the Section 3 works to operate concurrently with the Section 4 works and, at (b), that Tests on Completion for the Section 5 works should similarly measure the concurrent operation of the Section 3, 4, and 5 works. Clause 9.1.14 provided that even though the silos and silo bottoms would have been constructed at an earlier stage in the works they were to be regarded as parts of Section 4 and Section 5 for the purposes Clause 11 and of the tests referred to in Clause 9.1.13. It also provided that the Defendant was entitled to treat any failure or defect associated with the silo bottoms or silos as a failure or defect of the Section 4 or Section 5 works as the case may be.
18. Clause 10 addressed the Defendant's Taking Over of Sections of the Works and the issuing of Taking Over Certificates.
19. Defects Liability was provided for at Clause 11. Clause 11.1 provided for the Claimant to undertake the work necessary to remedy such defects or damage as were notified by the Defendant before the end of the relevant Defects Notification Period. Clause 11.4 addressed the consequences of a failure by the Claimant to remedy notified defects and included provision for the Defendant to recover the cost of remedying the defect or to require a reduction in the Contract Price in respect of such defect.
20. Clause 12 was used in the varied Contract and provided for Tests after Completion in respect of Sections 3, 4, and 5 (ie the BDS Works).
21. The Retention Bond provisions were markedly expanded and Clause 14.9 became:

"In relation to the Works comprising and relating to Sections 1, 1A, and 2:

14.9.1 Subject always to the Contractor's compliance with Clause 5.6.4 of the Contract in relation to Sections 1, 1A, and 2 the final Milestone Payment in relation to Sections 1, 1A, and 2 shall be paid to the Contractor in accordance with and subject to Clause 14 following the issue of the Taking-Over Certificate in respect of the whole of the Works Sections 1, 1A, and 2 and delivery of the Retention Bond to the Employer … and in an amount equal to 2.5% of the part of the Contract Price relating to Sections 1, 1A, and 2 … No amount shall be due to the Contractor in respect of the final Milestone Payment in relation to Sections 1, 1A, and 2 until the Engineer has issued the Taking Over Certificate in relation to Sections 1, 1A, and 2 and received the related Retention Bond, and any application for payment which seeks payment of the final Milestone Payment in relation to Sections 1, 1A, and 2 by the Contractor prior to such Taking-Over Certificate being issued and the related Retention Bond being provided to the Employer … shall not be a valid Interim Statement …

14.9.2 Promptly after the latest of the expiry dates of the Defects Notification Periods for Sections 1, 1A, and 2 the Contractor shall be entitled to apply for payment of the outstanding balance remaining part of the Retention Money referred to in limb (i)(c) of the definition `Retention Money' (taking into account any reduction in said amount by way of any claim or deduction by the Employer in relation to the Works) in the next Statement which amount shall, subject to Clause 14, be paid to the Contractor.

14.9.3 However, if any work remains to be executed under Clause 11 (Defects Liability) or Clause 12 ( Tests after Completion) the Employer shall be entitled to withhold the estimated cost of this work until it has been executed and to deduct the same from amounts otherwise due to the Contractor until such time as the work is completed.

In relation to the Works comprised and relating to Sections 3, 4, and 5:

14.9.4 Subject always to the Contractor's compliance with Clause 5.6.4 of the Contract in relation to Sections 3, 4, and 5, the final Milestone Payment in relation to Sections 3, 4, and 5 shall be paid to the Contractor in accordance with and subject to Clause 14 following the issue of the Taking-Over Certificate in respect of Sections 3, 4, and 5 and delivery of the Retention Bond to the Employer … and in an amount equal to 2.5% of the part of the Contract Price relating to Sections 3, 4, and 5 … No amount shall be due to the Contractor in respect of the final Milestone Payment in relation to Sections 3, 4, and 5 until the Engineer has issued the Taking Over Certificate in relation to Sections3, 4, and 5 and received the related Retention Bond and any application for payment which seeks payment of the final Milestone Payment in relation to Sections3, 4, and 5 by the Contractor prior to such Taking-Over Certificate being issued and the related Retention Bond being provided to the Employer … shall not be a valid Interim Statement …

14.9.5 Promptly after the latest of the expiry dates of the Defects Notification Periods for Sections 3, 4, and 5 the Contractor shall be entitled to apply for payment of the remaining part of the Retention Money referred to in limb (ii)(c) of the definition `Retention Money' (taking into account any reduction in said amount by way of any claim or deduction by the Employer in relation to the Works) in the next Statement which amount shall, subject to Clause 14, be paid to the Contractor.

14.9.6 However, if any work remains to be executed under Clause 11 (Defects Liability) or Clause 12 ( Tests after Completion) the Employer shall be entitled to withhold the estimated cost of this work until it has been executed and to deduct the same from amounts otherwise due to the Contractor until such time as the work is completed."

The Interpretation of Clause 14.9.6.

22. The approach to be taken to the construction of contracts in general terms was uncontentious between the parties. The relevant principles were enunciated in the Supreme Court decision of Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173 explaining the effect of that court's decisions in Rainy Sky v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 and Arnold v Britton [2015] UKSC 36, [2015] AC 1619. In ABC Electrification Ltd v National Rail Infrastructure Ltd [2020] EWCA Civ 1645, [2021] BLR 97 at [17] – [20] Carr LJ set out a distillation of those principles and I will endeavour to apply the approach set out there. I will address in the next section of this judgment the contention of Mr. Winser QC for the Defendant that the approach is to be modified when considering whether a contractual provision has excluded a party's right of abatement at common law or of equitable set off.
23. The dispute between the Claimant and the Defendant turns on the correct interpretation of the words "any work" in Clause 14.9.6. Is that term unqualified, as the Defendant contends, so as to include work necessary to remedy defects in the Ecostore Works as well as the BDS Works? Alternatively, as the Claimant contends, is it to be read as qualified by the words "In relation to the Works comprising and relating to Sections 3, 4, and 5" and so confined to work necessary to remedy defects in the BDS Works?
24. I am satisfied that the Defendant's interpretation is the correct one and that Clause 14.9.6 entitles the Defendant to withhold from the sums due for the BDS Works the estimated cost of any work remaining to be executed under Clause 11 or Clause 12 regardless of whether that work relates to the Ecostore Works or the BDS Works. No single factor is determinative of the question of interpretation which is to some extent a matter of the overall impression resulting from considering the language used in the context of the Contract as a whole and the surrounding circumstances. The following are the factors which have combined to cause me to reach that conclusion.
25. The first and most important is the wording of Clause 14.9.6. The reference is to "any work". This is not put forward as a defined term and is qualified only by the requirement that the work is to be unexecuted under Clause 11 or Clause 12. It would have been possible for there to have been a qualification in Clause 14.9.6 referring back to the preamble or expressly to the BDS Works. Thus to achieve the effect for which the Claimant contends the clause could have referred to "any such work" or "any of the said Works" either of which terms would have indicated that reference was being made to the preamble to Clauses 14.9.4 – 6 and to the limitation there to the BDS Works. Alternatively there could have been an express reference to Sections 3, 4, and 5 as there was in Clauses 14.9.4 and 14.9.5. The absence of any such express qualification is a powerful indication that the reference is not limited in the manner asserted by the Claimant.
26. That indication is reinforced by the use of the word "however" at the start of the clause. This word supports the view that the clause stands in distinction to the provisions in Clauses 14.9.4 and 14.9.5. It is strongly suggestive that the clause is a distinct provision to be construed primarily by reference to its own language (albeit read in context) and weakens the inferences which the Claimant says can be made by reference to the wording of the preamble.
27. This impression is supported by the difference between the language of Clause 14.9.5 and that of Clause 14.9.6. The former clause provides that an application for the balance of the Retention Money is to take into account "any reduction in said amount by way of any claim or deduction by [the Defendant] in relation to the Works". In that clause "Works" is used as a defined term. The words I have quoted are manifestly a reference back to the preamble to this division with the effect that the claim or deduction in question has to be one in respect of the DBS Works. It would have been possible to have used similar terms in Clause 14.9.6 but instead that clause uses different language providing for withholding "if any work remains to be executed under Clause 11… or Clause 12…". The use of "work" in a general sense and the presence of "however" indicates that the withholding under Clause 14.9.6 is not simply of sums arising in respect of the BDS Works. The combined effect of Clauses 14.9.5 and 14.9.6 is that by virtue of the former claims or deductions relating to the BDS Works are to be taken into account when determining how much of the Retention Money is due to be paid but that the latter provides for a further withholding (in addition to deductions relating to the BDS Works) if any work remains outstanding under Clauses 11 or 12.
28. For the Claimant Mr. Hughes placed considerable emphasis on the "bifurcation" (as he characterised it) present in Clause 14.9. He drew attention to the division between sub-clauses 14.9.1 – 3 and 14.9.4 – 6 and to the preambles to each of those divisions providing that the following sub-clauses were "in relation to" particular parts of the project. Mr. Hughes said this was a "careful demarcation" such that each set of provisions was a "complete code" governing the release of the retention monies for the respective works. There was, indeed, such a bifurcation and a distinction between the treatment of the Ecostore Works and the BDS Works. However, the acknowledgement that there was such a distinction is only the start of the exercise and it then becomes necessary to assess the language used in each division to determine the extent of the distinction and to see in what ways the Ecostore Works and the BDS Works were being treated differently and those in which the same provisions applied to each. The fact of the bifurcation means that the question of the sums which can be withheld against the money due for the BDS Works is to be considered separately from that of the sums which can be withheld against the money due for the Ecostore Works because those matters are governed by separate clauses (14.9.3 and 14.9.6). The bifurcation necessitates that separate consideration but does not provide the answer to the resulting interpretation exercise.
29. Each of Clauses 14.9.4, 14.9.5, and 14.9.6 deals with a different matter. 14.9.4 deals with the timing and amount of the final Milestone Payment. 14.9.5 governs the question of the date when the Claimant would be entitled to apply for payment of the remaining part of the Retention Money. I remind myself of the caution to be exercised by the court in having regard to the apparent commercial sense or otherwise of a provision. However, I am persuaded that it made commercial sense for Clauses 14.9.4 and 14.9.5 to be limited to the BDS Works. Indeed, it is apparent that the purpose of the division between the Ecostore Works and the BDS Works in Clause 14.9 was to enable the release of the Retention Money in respect of the Ecostore Works to precede the conclusion of the BDS Works. Clause 14.9.6 is dealing with a different question namely the amount to be withheld from the money due for the BDS Works. The same considerations do not apply there. In particular there is no a priori reason why the amount to be withheld from the final payments in respect of the BDS Works should be limited to the cost of the outstanding defects liability works in respect of those works when other sums remain due to the Defendant under the same contract. I was not persuaded that it would make commercial sense for the Claimant to be entitled to the full amount due in respect of the BDS Works at a time when it had received payment for the Ecostore Works but when work remained to be executed by way of Defects Liability in respect of the latter works. Instead the contrary interpretation advocated for by the Defendant appears to me to accord with commercial common sense.
30. The parties were agreed that although they were interrelated and were part of the same project the Ecostore Works and the BDS Works were separate construction exercises. They could have been performed by different contractors or could have been governed by two separate contracts between the Claimant and the Defendant. It is, in my judgement, significant that the Claimant and the Defendant provided for them to governed by the same contract. When the Claimant was engaged to perform the BDS Works in October 2012 that engagement was effected by a variation of the existing contract. The unqualified reference in Clause 14.9.6 to "any work" remaining to be executed under Clause 11 or Clause 12 is, accordingly, a reference which is made in a single contract governing both the Ecostore Works and the BDS Works and where those works are identified as phases or sections of the same project.
31. For the Claimant Mr. Hughes pointed to the duplication of the language of Clauses 14.9.3 and 14.9.6. He said the fact that those were in identical terms was to be seen as an indication of the compartmentalisation of the provisions relating to the Ecostore Works and those relating to the BDS Works with no cross-over between them. In essence Mr. Hughes says that the duplication of these two clauses points to separate and self-contained regimes as between the Ecostore Works and the BDS Works. He adds that if the Defendant's interpretation is correct then the duplication of the clauses is redundant. I disagree and I regard the duplication as an indication supporting the Defendant's interpretation of the provisions. Clauses 14.9.3 and 14.9.6 are in identical language and are, as I have already indicated, in unqualified terms. The most natural reading of that language and of the duplication is as spelling out that both in respect of the Ecostore Works and the BDS Works there could be withholding of the estimated cost of any work remaining to be executed under Clauses 11 and 12 regardless of whether that work arose from the Ecostore Works or the BDS Works. Clauses 14.9.3 and 14.9.6 are, indeed, governed by their separate preambles but are making provision in respect of each division of Clause 14.9 that there can be a withholding in respect of the cost of any work under Clause 11 or 12. The same effect could have been achieved by having three divisions rather than two in Clause 14.9. There could have been, first, a division relating to the Ecostore Works and governing the timing and amount of the final Milestone Payment and providing the date when the Claimant would be entitled to apply for payment of the remaining part of the Retention Money; second, a division providing for the same matters in respect of the BDS Works; and, third, a division expressly governing both the other divisions and providing for withholding. Although it would have been possible to achieve the result for which the Defendant contends by such drafting it was not necessary for such a structure to be used and in, my judgement, the same result follows from the use of the identical unqualified wording in each division.
32. In addition to those I have already considered Mr. Hughes advanced a number of arguments or rather pointed to factors which he contended supported the Claimant's interpretation. Elegantly expressed though the arguments were they did not, for the following reasons, persuade me that the Claimant's interpretation of Clause 14.9.6 was correct.
33. Mr. Hughes contended that the Contract should be regarded as the product of sophisticated drafting and that this meant that considerable weight should be given to the bifurcation in Clause 14.9. The drafting of the Contract was, however, not without error. Thus in the Clause 14.9.3 of the Contract in its original form there was reference to work remaining to be executed under Clause 12 even though Clause 12 was not used at that time. Mr. Hughes accepted that this appeared to be the result of the adoption of the FIDIC standard form without adequate cross-checking. Moreover, that reference to work remained to be executed under Clause 12 was retained in Clause 14.9.3 of the Contract as varied in October 2012. The effect of the Claimant's interpretation of Clause 14.9 was that Clause 14.9.3 related only to the Ecostore Works and so again there could be no work remaining to be executed under Clause 12 in relation to those. In order to maintain the consistency of his interpretation of the Contract Mr. Hughes had to contend that this was again an error. In any event I do not find reference to the sophistication or otherwise of the drafting of the Contract of assistance. As I have already explained it is apparent that Clause 14.9 creates a division between the provisions relating to the Ecostore Works and those relating to the BDS Works but the question remains one of the extent and consequences of that division. Typically regard is had to the quality of the drafting of a contract or to the care which has been taken with the drafting where the court is considering an argument that for reasons of commercial common sense or context or otherwise the language used does not accurately reflect the intention of the parties. When such an argument is raised it can be relevant to consider the care taken with the drafting on the footing that where a contract is clearly the product of careful drafting then the court is more likely to conclude that the language used accurately reflects the parties' intentions even if it turns out subsequently to have unusual or inconvenient consequences. This, however, is not such a case. Here neither side is saying that the language used does not accurately reflect the parties' intention. Rather they differ as to the proper interpretation of that language in context. It follows that having regard to the quality of the drafting does not materially advance matters. However, to the extent that it is relevant it is an argument operating against the Claimant. I have concluded that read in context Clause 14.9.6 has the meaning for which the Defendant contends. That being so the contention from Mr. Hughes that the Contract was the result of sophisticated drafting is a reason for giving effect to the meaning of the language used and so for giving effect to the Defendant's interpretation.
34. Mr. Hughes contended that the division in Clause 14.9 combined with the wording of the preambles meant that the first three sub-clauses were concerned only with the Ecostore Works and the latter three only with the BDS Works. In the light of that the reference in Clause 14.9.6 to "any work" remaining to be executed must, Mr. Hughes, said be read as being governed by the preamble and so as limited to work which is part of the "Works comprising and relating to Sections 3, 4, and 5." There is, indeed, a division in Clause 14.9 between the sub-clauses relating to the Ecostore Works and those relating to the BDS Works. However, the questions I have to address are the effect of that division and the meaning of the language used in Clause 14.9.6 and it does not necessarily follow from that division that the withholding provided for in that clause is to be limited to unexecuted aspects of the BDS Works.
35. Next Mr. Hughes said that I was to look to the "genesis" and the "aim" of the October variation of the Contract namely the circumstances leading to the variation with a view to identifying the purpose of the transaction and having regard to that as part of the context in which the language used was to be interpreted. To that extent the proposition was uncontroversial and the law as stated in Chitty on Contracts (33^rd edn) at 13-052 was not in issue. Again it was not contentious that the purpose of the variation was to provide for the performance of the BDS Works by the Claimant. Mr. Hughes proceeded further and invited me to take account of email exchanges leading up to the variation of the Contract. Thus on 1^st August 2012 the Defendant's solicitors sent a draft of the proposed varied contract saying, inter alia, that the Defendant had assumed that the Claimant would wish to split the retention between the projects (sc the Ecostore Works and the BDS Works) so as not to delay payment of the Ecostore retention and that changes to that effect had been made. Then on 4^th October 2012 the Defendant's solicitors provided a further draft saying that it was possible that the BDS Works and the Ecostore Works "may get out of synch" and that they had "created a formula which enables the position under the Ecostore sections … to be considered independently of the position under the BDS sections …". Mr. Hughes contended that I should have regard to this as an indication of the purpose of the transaction and in particular of the bifurcation in Clause 14.9. I should then, he argued, take account of that as indicating that the payment provisions for the Ecostore Works and the BDS were to be kept entirely separate.
36. I do not accept that contention. Mr. Winser submitted that the email exchanges were inadmissible for this purpose and I agree. Mr. Hughes was inviting me to rely on what was said in the pre-contractual negotiations for the purpose of drawing inferences about what the Contract meant. That was the very course said to be impermissible in the passage from Chitty at 13-052 (citing, inter alia, Merthyr (South Wales) Ltd v Merthyr Tydfil CBC [2019] EWCA Civ 526) on which Mr. Hughes had relied. I do not find that it makes any difference to that position that the emails came from the Defendant's solicitors. Even if that view were to be mistaken and it were to be appropriate to have regard to these emails they do not materially advance matters. The purpose to which reference is made is ensuring that payment of the sums due for the Ecostore Works is not delayed until the conclusion of the BDS Works. That purpose is achieved whichever of the competing interpretations of Clause 14.9.6 is adopted. This is because the BDS Works were not due to be completed until after the time for payment of the Ecostore Works Retention Money. It follows at that time there could be no liability in respect of the BDS Works under Clause 11. Similarly the Defendant's entitlement to undertake the Tests after Completion under Clause 12 would not yet have arisen and there could not have been any works remaining to be executed by the Claimant in respect of the BDS Works. The question I have to address is the withholding from the sums due for the BDS Works of sums relating to the Ecostore Works in a context where the Retention Money in respect of the Ecostore Works has already been released. That is an entirely different question and one on which no light is thrown by the desire to avoid a delay in paying for the Ecostore Works.
37. Mr. Hughes drew my attention to Clause 9.1.14. He said that it was an illustration of the sophistication of the drafting of the Contract as varied. He proceeded from that to contend that the fact that express provision was made for the Silos to be treated for the purposes of testing and defects liability as parts of subsequent sections of the Works was an indication that liability under Clause 11 was "otherwise to be confined to the specific section to which the relevant works relate". I have already indicated that sophisticated though the drafting may have been it was not, even on the Claimant's case, free from error and that the reference to the quality or otherwise of the drafting does not advance matters here. There is a further difficulty with this element of Mr. Hughes's argument which is that it does not address the point in issue. The Defendant is not contending that a defect in respect of the Ecostore Works is to be treated as a defect in respect of the BDS Works. Mr. Hughes is right to say that where a provision to that effect is intended Clause 9.1.14 indicates that express provision is made. The Defendant's argument is a different one namely that the unqualified use of the term "any work" in Clause 14.9.6 provides for the withholding from the BDS Retention of the cost of any works remaining outstanding under Clause 11 regardless of the phase or section of the Contract to which they relate and the reference to Clause 9.1.14 is not an answer to the Defendant's arguments in that regard.
38. In their skeleton argument Mr. Hughes and Mr. Frampton made reference to the nature of a retention. They contended that it is to be seen as a security to ensure that an employer has a sum available to indemnify itself against a failure by a contractor. Stated so generally that is not a controversial proposition. However, they proceed from that to say that unless the security is against a liability in respect of the same part of the Works as that for which the payment is due then the retention "goes beyond an indemnity and becomes a cross-claim." It would be open to the parties to make provision for such a cross-claim entitling an employer to deduct from a retention sums due in respect of a different contract but I accept that such would be an unusual provision and clear words would be needed to achieve that effect. The difficulty for the Claimant is that the liability on which the Defendant relies for the withholding here arises under the same contract as the Claimant's right to the retention albeit under a different part of that contract. I do not regard the Defendant's interpretation of Clause 14.9.6 as being inconsistent with the nature of a retention nor as giving rise to an arrangement of such an unusual or unlikely kind that a strained interpretation should be given to the unqualified language of the clause so as to avoid that conclusion.

Was there Exclusion of the Defendant's Potential Claims by Way of Equitable Set-Off or Abatement?

39. The Defendant contended that even if Clause 14.9.6 did not entitle it to withhold sums arising from the Ecostore Works Defects Liability from the Retention Money in respect of the BDS Works it was still entitled to make the deduction by way of a legal set off (as to £372,542) or an equitable set off (as to the full sum of £1,002,737) or by way of exercise of a common law right of abatement. The Defendant's position was that the language of the Contract was not in sufficiently clear terms either to exclude or to limit those rights.
40. This question is academic in the circumstances here given the conclusion which I have reached as to the correct construction of Clause 14.9.6. However, the point was fully argued and I will set out my conclusions on it briefly in case a different view is taken as to the interpretation of Clause 14.9.6.
41. The parties are agreed that the question is one of construction.
42. The Defendant accepts that the rights of set off and abatement can be excluded by a sufficiently clearly drawn contract but says that there must be a clear indication before a contract can properly be interpreted as having that effect. Supporting that proposition in respect of a right of set off Mr. Winser relied on the decision of the House of Lords in Gilbert Ash v Modern Engineering [1974] AC 689 and the decisions of the Court of Appeal in NEI Thompson v Wimpey Construction UK (1987) 39 BLR 65 and Acsim v Danish Contracting (1989) 47 BLR 55. In relation to the right of abatement he referred me to the Court of Appeal decision in Mellows Archital v Bell Products (1997) 58 Con LR 22 and that of the House of Lords in NH International v National Insurance Property Development Company [2015] BLR 667.
43. Mr. Winser said that those authorities remain good law. Initially founding his argument on the speech of Lord Diplock in Gilbert Ash (in particular at 718E) and on that of Ralph Gibson LJ in Acsim at 69 - 70 he contended that there was a presumption that a right of set off existed and that clear express words were needed to rebut that presumption. In the course of argument Mr. Winser modified that position and accepted that it was not necessary for express words to be used but he maintained that the rights of set off and abatement could only be excluded where there was a clear indication to that effect in the contract in question. He maintained that there was no such clear indication in this case.
44. The Claimant said that the question was to be answered by applying the normal rules of contractual interpretation to the contract in question. Mr. Hughes said that the effect of the Contract here was clear. He contended that in undertaking the construction exercise it was relevant to note that the Contract did not seek entirely to exclude the Defendant's rights either of set off or abatement. Instead it made provision for the sums which could be deducted from the Retention Money relating to the BDS Works. It is immaterial whether the deduction is said to be by way of set off or abatement or otherwise. The effect of the Contract was that to the extent that there was to be deduction from the Retention Money due for the BDS Works it was to be of sums arising in relation to those works. That was a limitation rather than an exclusion of the relevant rights and was a limitation to which the court should give effect. In addition Mr. Hughes asserted that the effect of the bifurcation between the two divisions in Clause 14.9 was to separate the Ecostore Works and the BDS Works with the consequence that the two elements were not sufficiently closely connected for an equitable set off to arise. On that basis there was not an exclusion of the Defendant's right of equitable set off but the contractual arrangements were such that the right could not arise in the first place.
45. In my judgement the authorities to which Mr. Winser referred are to be seen for these purposes as setting out propositions as to the approach to contractual interpretation in particular circumstances. As such they must be read against the guidance provided in Rainy Sky v Kookmin Bank and Arnold v Britton as explained in Wood v Capita Insurance Services Ltd. That guidance is of general application (and I have already noted that the parties have accepted the value of Carr LJ's distillation of the guidance as set out in ABC Electrification Ltd v National Rail Infrastructure Ltd). There is no special approach to be taken to considering whether a right which would otherwise exist has been excluded by a particular contract. The question is one of the construction of the contract by reference to those general principles subject only to the need for the court to be conscious that the exclusion of a right which would otherwise and ordinarily arise is to that extent a departure from the norm. That has the consequence that it will be inherently less likely than otherwise that a contractual provision was intended to operate to exclude such a right unless it is clear from the language when properly interpreted in context that it has that effect.
46. This question only becomes of relevance if my interpretation of Clause 14.9.6 is wrong. If that interpretation is wrong then that clause and Clause 14.9.5 are to be seen, as Mr. Hughes contended, as parts of a "complete code" governing the release of the retention monies for the respective works involving a "careful demarcation" between the two divisions. On that footing the Contract would have to be read as spelling out the deductions which can be made from the Retention Money in respect of each division. The parties would have to be taken to have agreed that only those deductions flowing from the BDS Works were to be made from the Retention Money relating to those works. In those circumstances there would be considerable force in the Claimant's point that there is a significant difference between the complete exclusion of a right of set off or of abatement and a provision whereby the parties agree to limit the scope of such a right. The latter will more readily be found to have been intended than the former as being a lesser departure from the normally governing position than a total exclusion. On that footing the language used in the Contract would be sufficiently clear to have that effect.
47. It follows that if, contrary to the conclusion I have reached above, Clause 14.9.6 precludes the withholding of sums relating to the Ecostore Works then it would not avail the Defendant to seek to rely on rights of abatement or set off.

The Validity of Interim Payment Application 35A.

48. This issue turns on the correct interpretation of Clause 14.9.5 and in particular of the effect of the words in parenthesis "(taking into account any reduction in said amount by way of any claim or deduction by [the Defendant] in relation to the Works)".
49. Application 35A was accompanied by the Claimant's letter of 19^th February 2019 which explained the basis on which the application had been compiled. It said that account had been taken of the sum of £500,000 which the Defendant had paid on account and that there had been a deduction of £80,000 in respect of an element of the BDS Works, being an issue in respect of the conveying pipe rotation. It then said that the Claimant did not "consider or accept" that there was any basis for any further deduction. The Claimant stated:

"All your remaining purported `claims' or `deductions' in respect of the BDS Works remain unexplained and/or unsubstantiated and, as we have explained on a number of occasions, for the purposes of this application we refute (sic) the same".

50. The Defendant contends that the application was not valid because it failed to take account of claims or deductions which the Defendant had already asserted including those in relation to the Ecostore Works. The Claimant knew of those claims and should have taken account of them by reducing the amount for which it sought payment. In order to be valid, the Defendant submits, the application should have been limited to the balance remaining after the subtraction of the amount of the Defendant's claims and deductions.
51. The Defendant says that such an approach follows from the need to give effect to the reference in Clause 14.9.5 to "any claim or deduction by [the Defendant]". In the course of his oral submissions Mr. Winser accepted that those words could not be regarded as unqualified. The qualification which he said arose by implication or as a matter of interpretation was that the relevant claim or deduction had to be asserted by the Defendant in good faith and to be free of obvious error. Subject to that he maintained that the full amount of any claim asserted by the Defendant was to be deducted at the time of compiling the payment application for the application to be valid.
52. It was also contended by the Defendant that the Claimant's acceptance that deductions in the sum of £122,786 are in any event to be made from the amount of the payment application demonstrated that the application was for an excessive amount and accordingly invalid. That argument can be disposed of immediately. At [30] the Particulars of Claim say that the deduction had been agreed "on a commercial basis and without any admission of liability". This averment is borne out by the Claimant's letter of 8^th October 2019 which records that in relation to the matters therein including these deductions agreement had been reached "on a purely commercial basis" and that the parties agreed "that terms and settlements shall not be construed as any admission of liability by any party". It follows that this concession is not to be held against the Claimant when the court is considering the validity of application 35A.
53. The Defendant's argument turns on the need to give some meaning to the words in parenthesis and in particular to the reference to "any claim or deduction". I do not accept that either the interpretation for which the Defendant contends or the conclusion that any application for an amount greater than the balance remaining after subtraction of the amount of the claims or deductions made by the Defendant is invalid are correct.
54. The first factor is that, as Mr. Winser's modification of his position in his oral submissions demonstrated, in order for the provision as interpreted by the Defendant not to be commercially nonsensical some limitation or qualification would have to be read into the words "any claim or deduction". Mr. Winser accepted that it would not be tenable for the Clause to be interpreted as requiring the Claimant to omit from a payment application the amount of a claim made by the Defendant in bad faith or one which was manifestly erroneous. The impracticability of such a qualification would be a consideration against introducing it. All concerned need to be able to see whether the application is valid or invalid at the time a payment application is made. The necessary clarity would be lacking if validity were to depend on the bona fides or otherwise of the Defendant in making a claim. It is also to be noted that even on Mr. Winser's modified stance the Claimant would have to omit from the payment application the amount of a claim made by the Defendant even if that claim could be seen as highly likely to be lacking in merit provided that it was not manifestly erroneous and was put forward in good faith. That would be a surprising and unusual position. There is, however, a further and more important consideration which is that the fact that for the Defendant's interpretation of Clause 14.9.5 to avoid commercial nonsensicality the implication of a qualification is required indicates that the interpretation is unlikely to be the correct one if, as will appear below, the provision can properly be given effect without such an implication.
55. I was initially attracted by Mr. Hughes's argument that as Clause 14.9.5 provides for the application to be made in the "next Statement" this brought the provisions of Clause 14.3.1 into play. The latter clause makes it clear that the amount of an interim payment is to be of the amount which the Claimant considers to be due. On reflection, however, I am unable to see this as a complete answer. It is, indeed, illustrative of the general nature of the interim payment applications under the Contract. To that extent it is suggestive of what the parties intended in respect of such an application in relation to the Retention Money. It would, nonetheless, be possible for different provision to have been made in respect of the applications relating to the Retention Money (and the Claimant says that Clause 14.9 involves a carefully drafted regime in that regard) so the issue must be determined by looking at the language of Clause 14.9.5.
56. The question of the proper interpretation of Clause 14.9.5 is to be answered by having regard to the purpose of the provision for the making of a payment application. Such an application is the start of a process and involves the Claimant setting out the sum to which it asserts it is entitled. The Claimant is not ultimately to be paid more than is properly due but it is not precluded from applying for payment of the sum which it believes to be due. As Mr. Hughes rightly said the Defendant cannot be the judge of the amount for which the Claimant can seek payment. The Claimant is not limited to seeking payment of the amount which the Defendant concedes is owing. The remedy for the Defendant if the Claimant applies for payment of an amount greater than that which the Defendant believes is due is to serve a pay less notice. The resulting dispute could then be resolved by way a determination of the amount due rather than by reference to issues of the validity or invalidity of the payment application.
57. In my judgement the words in parenthesis in Clause 14.9.5 are to be read as governing the earlier words "the remaining part of the Retention Money". They are a provision that the amount ultimately due will be the amount after deduction of any valid claims or deductions by the Defendant. They do not, however, govern the validity of a payment application. The Claimant is entitled to apply for payment of the amount which it contends is due out of the Retention Money and does not have to subtract from the amount of the application an amount which is contested by reason of the Defendant having asserted a claim or deduction which is not accepted by the Claimant.
58. It follows that it is not necessary for the Claimant to rely on its submission that even if the phrase in parenthesis does govern the validity of the payment application it merely requires the Claimant to have taken account of the Defendant's claims and deductions in the sense of having considered them. The Claimant says that it had done this and had explained the extent that the amount of the application was being reduced as a consequence of some elements but not reduced by reason of others. There is a degree of force in this argument but if my interpretation of Clause 14.9.5 is wrong then it cannot resolve the problem. If my interpretation of the clause is incorrect then "taking into account any reduction" would have to be read as meaning that account was to be taken of the reduction attributable to the claims or deductions as a matter or arithmetic (ie of accounting) rather than by way of considering the same. That follows from the fact that it is the "reduction in said amount" which is to be taken into account rather than the claims or deductions themselves. This argument of the Claimant treating "taking into account" as meaning "having considered" would be tenable if it was the claims or deductions of which account were to be taken but the reading proposed cannot be correct when it is the reduction of which account is to be taken.
59. It follows that I reject the Defendant's interpretation of Clause 14.9.5 and conclude that Interim Payment Application 35A was validly made.

Conclusion.

60. Although Interim Payment Application 35A was a valid payment application the proper interpretation of Clause 14.9.6 is that the Defendant was entitled to withhold from the Retention Money in respect of the BDS Works the estimated cost of work remaining to be executed under Clause 11 in relation to the Ecostore Works. The effect of this is that the Claimant is not entitled to the relief sought and the Claim fails.

Note 1   In the varied Contract the additions are underlined. Other than showing the amendments the underlining is of no significance and is not repeated here.     [Back]