Scottish Court of Session Decisions

Hills Electrical & Mechanical Plc v. Dawn Construction Ltd [2003] ScotCCS 107 (7 April 2003)

OUTER HOUSE, COURT OF SESSION
CA98/02	OPINION OF LORD CLARKE in the cause HILLS ELECTRICAL & MECHANICAL PLC Pursuers; against DAWN CONSTRUCTION LIMITED Defenders:   ________________

 

 

Pursuers: Logan; Fyfe Ireland, W.S.

Defenders: Connal, Q.C., Solicitor Advocate; McGrigor Donald

7 April 2003

Introduction

1. This action raises the question as to the interplay of contractual provisions in construction contracts and The Scheme for Construction Contracts (Scotland) Regulations 1998 (SI 1998 No. 687) enacted under the Housing Grants, Construction and Regeneration Act 1996. The pursuers seek payment of £93,364.93 with interest from 5 October 2000, as representing sums due to them under a construction contract entered into with the defenders. The contract is said to have been entered into on 2 June 2000. The pursuers were engaged by the defenders in the contract between them to carry out certain works as sub-contractors. It is a matter of admission that the employer under the main contract with the defenders entered into administration on or about 10 October 2000. The pursuers aver that the contract between the parties was formed by the incorporation of Minutes of a pre-incorporation meeting on 2 June 2000, a letter of that date and the defenders' standard terms and conditions headed "SUB-CONTRACT AGREEMENT". The pursuers' averments about what constituted the contract between the parties appear to be admitted by the defenders save for the fact that they refer to a pre-order meeting on 2 June and not a pre-incorporation meeting on that date.
2. The pursuers, after setting out the provisions of their contract with the defenders regarding payment of sums for work carried out by them, aver in Article 3 of condescendence that:

"The contract between the pursuers and the defenders therefore failed to provide dates on which the sub-contractor (i.e. the pursuers) should make applications for payment so that they could be incorporated into the defenders' application for payment under the Main Contract. It also contained a 'paid when certified' stipulation relating to the Main Contract. Both and either of these conditions do not comply with the statutory requirements of Section 110(1) of the Housing Grants, Construction and Regeneration Act 1996 ('the 1996 Act'). In the absence of a contract provision which complies with the 1996 Act, [the 1996 Act] stipulates that payment of interim payments shall be regulated under The Scheme for Construction Contracts (Scotland) Regulations 1998 ('the Scheme'). The Scheme regulates payment in this case."

3. The relevant statutory provisions in the 1996 Act are as follows. Section 109 provides:

"(1) A party to a construction contract is entitled to payment by instalments, stage payments or other periodic payments for any work under the contract unless -

(a) it is specified in the contract that the duration of the work is to be less that 45 days, or

(b) it is agreed between the parties that the duration of the work is estimated to be less than 45 days.

(2) The parties are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they became due.

(3) In the absence of such agreement, the relevant provisions of the Scheme for Construction Contracts apply.

(4) References in the following sections to a payment under the contract include a payment by virtue of this section."

Section 110 provides:

"(1) Every construction contract shall -

(a) provide an adequate mechanism for determining what payments become due under the contract, and when, and

(b) provide for a final date for payment in relation to any sum which becomes due.

The parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment.

(2) Every construction contract shall provide for the giving of notice by a party not later than 5 days after date on which a payment becomes due from him under the contract, or would have become due if -

(a) the other party had carried out his obligations under the contract, and

1. no set off or abatement was permitted by reference to any sum claimed to be due under one or more other contracts,

specifying the amount (if any) of the payment made or proposed to be made, and the basis on which that amount was calculated.

(3) If, or to the extent, that a contract does not contain such provision as is mentioned in subsection (1) or (2), the relevant provisions of the Scheme for Construction Contracts apply."

The Issue

4. While the defenders do not accept that the provisions of the parties' contract failed to contain terms which are desiderated by the 1996 Act, with the result that the Scheme's provisions to any extent come into play, they aver that, in any event, the final date of payment of any sums due to the pursuers was a matter of agreement by the parties and is not to be substituted for by the provision in the Scheme relating to final date of payment. The pursuers' position is, however, that, on a proper reading of the 1996 Act's provisions, and the provisions of the Scheme itself, when a construction contract in any respect fails to contain a term or terms which comply with the requirements of Section 109 and 110 of the Act, the whole of the Scheme's provisions come into play in substitution for any agreed contractual provisions regarding payment. In the present case, the issue assumes its practical importance in the following way. The terms of the defenders' standard conditions, which the pursuers themselves aver form part of the contract between the parties, provided for the final date for payment of any payments due to be made under the contract as 28 days after the date on which the payment in question fell due. The pursuers accept that even if the Scheme's provisions regarding what payments are due and when they are deemed to be due, fall to be applied to the parties' contract, if the final date for payment of the sum sued for in the present case was 28 days after the date it fell due, then the pursuer's case is irrelevant. That is because, by that time the employer had gone into administration and by virtue of other provisions of the parties' contract, the defenders would not be liable to the pursuers for the payment in question. On the other hand, if the Scheme's provision relating to the final date of payment applied to the parties' contract, the final date would be 17 days from the date of the payment becoming due. That date would have pre-dated the administration of the employer and in that situation, (on the footing that the Scheme's other provision regarding payment apply, a matter not conceded by the defenders), the defenders would be liable to the pursuers for payment of the sum in question.
5. Both parties sought a debate on the issue, the pursuers, as I have noted, accepting that if the defenders' construction of the relevant provisions of the Act and the Scheme were correct, then the whole basis of the pursuers' case fell and the action would require to be dismissed. I allowed a debate.

Discussion

6. At the debate the defenders sought dismissal of the action. Mr Connal, Queen's Counsel, Solicitor Advocate, for the defenders, submitted that the 1996 Act, for present purposes, provided for two things. The first was a short form of decision making procedure during the currency of construction contracts. The second was that it imposed certain constraints on parties to such contracts in respect of the provisions in those contracts regarding payment. Section 108 of the Act deals with the first matter i.e. adjudication. Sections 109 to 113 provide for the second matter. The provisions of Sections 109 to 113 provide for the incorporation into a construction contract implied terms regarding payment, when those contracts themselves do not provide terms on the lines desiderated by the provisions of Sections 109 to 113. The defenders' basic position, in relation to the provisions of Sections 109 and 110, was that simply because a construction contract was deficient with regard to one or more of the matters regarding payment referred to in those Sections, it did not mean that the whole of the Scheme's provision regarding payment fell to be applied to the parties' contract with the effect of substituting all of the contractual provisions which the parties have expressly agreed in relation to payment. My attention was drawn by the Solicitor Advocate for the defenders to the following provisions. The use of the expression "relevant provisions" in Section 109(3) was, he submitted, significant. It showed that the statutory intention was not that once there was some deficiency, having regard to the requirements of the Act, in the agreed contractual terms regarding payment, then the whole of the statutory provisions regarding payment applied. It was only the relevant provisions which would apply. That point was re-enforced when one turned to the provisions of Section 110 regarding dates for payment. Sub-sections 1 and 2 of Section 110 set out what was required to be included in construction contracts relating to that matter. But the wording of sub-section 3 had to be attended to carefully and, in particular, its qualified terms when it states, "if, or to the extent, that a contract does not contain such provision as is mentioned in sub-section (1) or (2), the relevant provisions of the Scheme for Construction Contracts apply." The Solicitor Advocate for the defenders emphasised the words "or to the extent" which he said went to the heart of the issue raised before me. By drawing my attention to Section 114(4) of the Act, he also reminded me of the legal effect of any of the statutory provisions coming into play. Section 114(4) states:

"Where any provisions of the Scheme for Construction Contacts apply by virtue of this Part in default of contractual provision agreed by the parties, they have effect as implied terms of the contract concerned."

The Solicitor Advocate for the defenders then turned to consider the wording of the relevant provisions of the Scheme. Paragraph 4 of the Scheme provides:

"Where -

(a) the parties to a construction contract are unable to reach agreement for the purposes mentioned respectively in sections 109, 111 and 113 of the Act; or

(b) a construction contract does not make provision as required by section 110 of the Act, the relevant provisions in Part II of the Schedule to these Regulations shall apply."

7. Part II of the Schedule to the Scheme contains the provisions regarding payment which fall to be applied in the absence of appropriate provision in a construction contract. Paragraph 1 of Part II of the Schedule provides as follows:

"Where the parties to a relevant construction contract fail to agree -

(a) the amount of any instalment or stage or periodic payment for any work done under the contract;

(b) the intervals at which, or circumstances in which, such payments become due under that contract; or

(c) both of the matters mentioned sub-paragraphs (a) and (b),

the relevant provisions of paragraphs 2 to 4 shall apply."

Paragraph 3 of Part II of the Schedule provides:

"Where the parties to a construction contract fail to provide an adequate mechanism for determining either what payments become due under the contract, or when they become due for payment, or both, the relevant provisions of paragraphs 4 to 7 shall apply."

Paragraph 8 of Part II provides as follows:

"(1) Where the parties to a construction contract fail to provide a final date for payment in relation to any sum which becomes due under a construction contract, the provisions of this paragraph shall apply.

(2) The final date for the making of any payment of a kind mentioned in paragraphs 2, 5, 6 or 7 shall be 17 days from the date that payment becomes due."

8. In their pleadings the pursuers, after having, as noted above, set out why they say the provisions of the parties' contract did not comply with the requirements of the Act and that, accordingly, "the Scheme regulates payment in this case", aver as follows:

"In terms of paragraph 4 of the scheme payment becomes payable 7 days after the expiry of a relevant period. In terms of paragraph 12 of the scheme, a relevant period is 28 days in the absence of agreement. Interim application 2 was for such a period. Payment therefore fell due 7 days after the submission of that application. In terms of paragraph 8 of the scheme payment becomes finally due 17 days after the day on which payment becomes due."

9. I was reminded by the Solicitor Advocate for the defenders that the pursuers aver, and the defenders admit, that in terms of Clause 18(iv) of the defenders' standard conditions (which both parties aver form part of their contract), the final date for payment was to be 28 days after the date when the payment fell due. In that situation, it was submitted, there was no place for the provision of paragraph 8 of Part II of the Scheme to be applied to the parties' contract. It only came into play, as the wording of paragraph 8(1) made perfectly clear, where there had been a failure by the parties to the contract, themselves, to provide a final date for payment in relation to sums which became due under the contract. That was not the position in the present case. The parties had expressly agreed in their contract that the final date for payment was 28 days after the payment became due. As the pursuers accepted that, if that were the case, their claim was irrelevant, the action should be dismissed.
10. The pursuers' position appeared to be that once one or other of the provisions under Part II of the Schedule to the Scheme fell to be applied, they all fell to be applied. That was inconsistent with the wording of the provisions of both the primary legislation and the Scheme itself.
11. The Solicitor Advocate for the defenders referred me to two cases which, it appeared, the pursuers sought to rely upon in support of the position they advanced in the present case. The first of these cases was CB Scene Concept Design Ltd v Isobars Ltd (2002) EWCH CIV 46, reported also in (2002) 18 Const. L.J. No. 2 at page 139. That was a decision of the Court of Appeal in England in proceedings for the enforcement of an adjudicator's decision. The case was really concerned with the basis upon which a Court can interfere with such a decision. At first instance the Judge, Mr Recorder Moxon-Browne, Q.C., upheld an argument that where parties to a construction contract had not made contractual provision as to what should be paid by interim payment and when such payments were to be made, the provisions of the Scheme for England and Wales, made under the 1996 Act, in relation not only as to how the amount of interim payments was calculated and the time when they were due, but also the provisions as to notice and the effect of failure to give notice as set out in the Scheme, were implied into the contract. The Court of Appeal, in the event, did not consider that it was necessary, for the purposes of their decision, to reach a view as to whether or not the Recorder was correct in upholding that submission. The Solicitor Advocate for the defenders submitted, however, that it was of some interest, perhaps, to note that Sir Murray Stuart-Smith, in giving the judgment of the Court, at page 143 paragraph 20, emphasised the words "if or to the extent that a contract" as they appear in Section 110(3) of the Act.
12. The second case referred to was Barr Ltd v Law Mining Ltd 80 Con LR 134. The question in that case was whether an adjudicator had asked himself the right question in determining the dispute before him. It appeared, however, from the Lord Ordinary's narration of the background to the matter, at paragraph 21, and, in particular, his quotation from the decision of the adjudicator in that case that the adjudicator had, perhaps, proceeded on the basis that once one aspect of Part II of the Schedule of the Scheme fell to be applied to a construction contract, the whole of the provisions under that part of the Scheme had to be applied to the contract in question. I am not sure that I myself read the adjudicator's decision as going that far but, in any event, it is clearly not determinative of the issue before me.
13. In conclusion, the Solicitor Advocate for the defenders submitted that a distinction fell to be drawn between the provisions, on the one hand, for establishing what payments are due and when they are due, which normally depends on certification mechanisms, and on the other hand, provisions regarding the next stage, i.e. the fixing of a period between the time when the payments become due and when they are finally to be paid. That distinction is recognised in the statutory provisions. Paragraphs 1 to 7 of Part II of the Schedule to the Scheme are concerned with the first stage. Paragraph 8 is concerned with the second stage. Section 110(1) of the Act itself, in its structure, recognises the distinction, the first stage being covered by Section 110(1)(a), the second stage being covered by Section 110(1)(b). It did not follow that because the Scheme's provisions regarding the first stage fell to be applied, the Scheme's provisions regarding the second stage automatically fell to be applied, where the parties had expressly provided themselves for the second stage, i.e. had provided for a final date for payment in relation to any sum which became due. The final date for payment had a role to play beyond the matter of due payment. In this connection, I was referred to Section 111 and Section 112 of the Act. The Solicitor Advocate for the defenders placed considerable emphasis, on the final words of Section 110(1),"The parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment." Those words, it was submitted, showed that the intention of the legislature was not that any agreed final date should be replaced by the final date under the Scheme, simply because other provisions of the Scheme regarding payment fell to be applied.
14. In reply, counsel for the pursuers submitted that if the contract provisions regarding what, and when, payments became due to the pursuers, were not compatible with the provisions of the 1996 Act and consequently required to be "swept away" and replaced by the relevant provisions of the Scheme dealing with those matters, the contract then no longer provided a final date for payment, since what had been expressly provided for in that respect fell to be "swept away" also. His short point, in other words, was that if the provisions of paragraphs 1 to 7 of Part II of the Schedule to the Scheme fell to be applied as implied terms in the parties' contract, so, too, did the provisions of paragraph 8. Counsel referred me to the case of Strathmore Building Services Ltd v Greig (2001) Const. L.J. 72, but I am bound to say that I found that case to be of no assistance to me in deciding the issue before me. Counsel also relied on the acceptance by the judge of first instance in the case of CB Scene Concept Design Ltd of a submission made to him regarding the application of the Scheme's provisions in that case, which, as I have already indicated, the Court of Appeal did not, in the event, have to decide was correct or not. I was also referred by counsel for the pursuers to the opinion of Lord Reed in case of Ballast Plc v The Burrell Company (Construction Management) Ltd 2001 SLT 1039. In that case, his Lordship was concerned with the grounds upon which an adjudicator's decision may be challenged. At page 1046, his Lordship pointed out that Section 108 of the 1996 Act envisages that adjudication procedure may be agreed between the parties, provided that the agreement fulfils the requirements of Section 108(1) to (4). He noted that if the parties' contract does not provide for adjudication procedure in accordance with the statutory provisions, the adjudication procedure as set out under the Scheme will be implied into the parties' contract. In neither case did Lord Reed consider that the adjudicator was exercising a jurisdiction created by statute. His Lordship gave his reasons for that view in the following passage at page 1046 G-I where he said:

"First, such an approach would not be warranted if the adjudication procedure had been one expressly incorporated into the contract, since the adjudicator's powers and duties would then be created and defined by contract; and I would not regard it as appropriate or desirable to draw a fundamental distinction between adjudication under contract terms complying with Section 108(1) to (4) and adjudication under the scheme. It is indeed possible that an adjudication might be governed partly by express contract terms and partly by the scheme, since the contract might comply only in part with the requirements of Section 108(1) to (4); and that is reflected in the terms of Section 114(4) ('where any provisions of the Scheme for Construction Contracts apply': emphasis added). In that event, it would be unrealistic to treat differently the scheme provisions from the express contractual provisions. Secondly, Section 114(4) itself requires the court to give effect to the scheme provisions as implied terms of the contract between the parties."

15. Counsel for the pursuers accepted that the reasoning in that passage was against the position he sought to advance in the present case. If the Court in Ballast was correct in being prepared to contemplate the adjudication procedure in any particular case being partly governed by express contractual provisions and partly by provisions implied under the Scheme, then by parity of reasoning, the same could arise in relation to provisions regarding payment - i.e. these might be provided partly by the express terms of the contract itself and partly by the terms of the Scheme. Counsel for the pursuers simply contended that Lord Reed's opinion, in this respect, was incorrect and was a recipe, as counsel put it, "for chaos". The "chaos" referred to, as I understood it, was that parties would have to have regard to two sets of provisions, those contained in the contract and those implied by virtue of the statutory provisions. Counsel for the pursuers repeated that his approach was that once any part of the Scheme dealing with payment fell to be applied to a particular construction contract, the whole of the part of that Scheme covering payment applied.
16. The next case to which counsel for the pursuers referred me was Karl Construction (Scotland) Ltd v Sweeney Civil Engineering (Scotland) Ltd 2001 SCLR 1995 and 2002 SCLR 766. This was yet another case in which the Court had to decide whether an adjudicator's decision was ultra vires or not. The petitioners, in particular, maintained that by finding that the contract in question did not make clear provision for determining when an interim payment was due, and by relying on the provisions of Part II of the Schedule to the Scheme, the adjudicator had strayed beyond what had been referred to her - see page 104 C-D of Lord Caplan's judgment at first instance. The Lord Ordinary, in the event, found that the petitioners' criticism of the adjudicator's approach was not well founded and dismissed the petition. His Lordship's decision was upheld by an Extra Division of the Inner House. Counsel for the pursuers, in the present case, however, contended that the approach adopted by the adjudicator in that case as recorded in the opinion of the Lord Ordinary, reflected the position which was being advanced on behalf of the pursuers in the present case. I am not sure that that emerges clearly from what is set out in the report and, in particular, Lord Caplan's opinion. But, in any event, it is abundantly clear that there was no argument in that case of the sort that has been made in the present case and indeed the issue in the present case was not the subject of any decision either at first instance or on appeal. I do not therefore consider that that case is of any assistance to me in deciding the question I have to determine.
17. Counsel for the pursuers accepted that if the final date, in the present case, was to be held to be 24 days after the date on which any payment fell due as opposed to 17 days, then that would not cause "chaos" in the operation of the contract. Since the final date provided for in the parties' contract was, however, connected to or depended on other provisions in the contract which were not, on the pursuers' argument, in accordance with the provisions of the Act, the provisions regarding payment fell away and the Scheme's provisions regarding payment in their entirety, including the provision regarding final payment in paragraph 8, applied. I was therefore, invited, by counsel for the pursuers to sustain the pursuers' second plea in law to the extent of deleting the defenders' averments set out in the last ten lines of answer 3, which relied on the final date being 28 days after payments becoming due.

Decision

18. I approach the question which was raised at the debate from the starting point that it is to be assumed, as a matter of statutory interpretation, that the legislature intended to innovate on parties' freedom of contract only to the extent that this was clearly provided for, either expressly or by clear implication by the terms of the legislation itself. It appears to me that that approach is expressly recognised in various parts of the legislation dealing with the payment provisions in construction contracts. So Section 109(9) provides that: "The parties are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they become due."

Again Section 110(1) provides inter alia: "The parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment." By virtue of Section 111(3) the parties are free to agree what should be the prescribed period for effective notice to be given for withholding of payment. It is only, in the absence of agreement, in relation to any of these things, in the parties' own contract, that the provisions of the Scheme apply. Moreover, as has been seen, Section 114(4) provides that where any provision of the Scheme does apply to a construction contract, in default of a contractual provision agreed by the parties, the effect is that the Scheme's provision becomes an implied term of the contract in question. That sub-section begins with the words 'where any provisions of the Scheme'. The emphasised words, in my judgement, clearly envisage that it was not intended by the legislature that expressly agreed terms relating to the matters covered by the Scheme were to be supplanted by the provisions of the Scheme simply because of the fact that the parties had omitted to provide for one or other of the matters desiderated by the legislation or had failed to deal with it adequately, having regard to the statutory provisions. On that contrary, the language of the Scheme itself points the other way. So paragraph 1 of Part II of the Scheme provides that:

"Where the parties to a relevant construction contract fail to agree -

(a) the amount of any instalment or stage or periodic payment for any work under the contract;

(b) the intervals at which, or circumstances in which, such payments become due under that contract; or

(c) both of the matters mentioned in sub-paragraphs (a) and (b), the relevant provisions of paragraphs 2 to 4 shall apply." (My emphasis).

The wording which I have emphasised, in my opinion, clearly demonstrates that the approach of the legislature is not, as the pursuers contended, of importing into parties' contracts all of the provisions regarding payment where the parties have failed to provide for one or other aspect required by the legislation to be agreed by the parties. The approach is simply to import into the parties' contract the appropriate provision from the Scheme to make up for their omission, or to replace their own inadequate term, with the Scheme's provision, as the case may be. Again, paragraph 3 of Part II of the Schedule provides as follows:

"Where the parties to a construction contract fail to provide an adequate mechanism for determining either what payments become due under the contract, or when they become due for payment, or both,

the relevant provisions of paragraphs 4 to 7 shall apply." (My emphasis)

The use of the word "relevant" in my judgment, once more, makes it clear that simply because the parties have omitted to provide, or have provided inadequately, in their contract, for one matter in relation to payment, does not mean that anything more than the Scheme's provisions in relation to that matter, is imported into the parties' contract as an implied term of that contract. Paragraph 8 of the Part II of the Schedule, in dealing with the final date for payment, stands alone and only comes into effect, in my opinion, when the parties themselves have failed to specify a final date for payment in relation to payments which have become due under the contract. That is the effect of the plain meaning of the wording of paragraph 8(1). The purpose of the provision can be seen from paragraph 8(2) to be to provide for a final date when the parties themselves have not provided for one and to provide it simply for the making of any payment mentioned in paragraphs 2, 5, 6 or 7 of Part II of the Schedule. It is, therefore, contemplated that even in respect of payments prescribed in terms of those paragraphs, an agreed final date may apply. Paragraph 10 of Part II of the Scheme also emphasises, in my judgment, the sovereignty, as it were, of any agreed final date, when there is one. It states:

"Any notice of intention to withhold payment mentioned in sub-section 111 of the Act shall be given not later than the prescribed period, which is to say not later than 7 days before the final date for payment determined either in accordance with the construction contract or, where no such provision is made in the contract, in accordance with paragraph 8."

19. On a proper analysis of the legislative provisions on the Scheme, it is therefore, in my judgment, apparent that the approach adopted by the pursuers in this case is unsound. I, accordingly, disagree with the view expressed at first instance in the case of CB Scene Concept Design Ltd. In so far as the approach of adjudicators in any of the other cases, to which I was referred to, seem to support the pursuers' case, then I consider any such approach to have been wrong. I am, furthermore, comforted by the fact that the approach which I consider to be correct, is echoed in what Lord Reed had to say in the case of Ballast.
20. It follows that I am of the opinion that in respect of payments due under the contract between the parties, the final date for payment was 28 days after the payment in question became due. As I have noted, it was accepted by counsel for the pursuers that if the final date is 28 days as opposed to 17 days, the pursuers' case is irrelevant. I shall accordingly sustain the defenders' second plea-in-law and dismiss the action.