Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2017] CSOH 94

CA72/16

OPINION OF LORD TYRE

In the cause

STEWART MILNE GROUP LIMITED

Pursuer

against

RUTH ANNE ANDERSON and GRAEME DAVID WADDELL ANDERSON

Defenders

Pursuer:  Walker, MacGregor;  ADLP

Defender:  McBrearty QC, A McKenzie;  Turcan Connell

30 June 2017

Introduction

[1]        In 2010 the parties entered into a building contract for the construction by the pursuer of a new two‑storey house on a site near Killin.  The form of the contract was the SBCC Standard Building Contract with Quantities for Use in Scotland (SBC/Q/Scot) (revised October 2007).  Work on construction of the house (“the Works”) began.  On 6 December 2012, a firm of contract administrators acting on behalf of the defenders served notice on the pursuer that it was in breach of contract by failing to proceed regularly and diligently with the Works.  The pursuer was required to address and discontinue the default within 14 days.  On 24 December 2012, the second defender notified the pursuer that the defenders considered that it had failed to address and remedy the breaches of contract set out in the 6 December notice, and that the contract was accordingly terminated.

[2]        In the present action the pursuer asserts that the defenders’ termination was a material breach of contract, in respect that both before and after 6 December 2012 the pursuer had proceeded to carry out the Works regularly and diligently.  The pursuer avers that as at the date of termination, the Works were nearly complete.  It sues for damages consisting of (i) the value of the Works at date of termination less sums certified by the contract administrator prior to termination;  (ii) prolongation costs; and (iii) liquidated damages and other sums said to have been wrongfully withheld from it by the defenders.

[3]        The defenders, for their part, aver that the contract was validly terminated for the reason stated.  They have also counterclaimed for a sum far in excess of the contract price.  In the counterclaim the defenders aver that after the termination of the pursuer’s contract, more and more defects which had not been known to them or to their advisers were uncovered.  Investigation of one defect led to the uncovering and investigation of another, and so on.  The defenders assert that the pursuer, in breach of contract, failed to carry out the Works in a proper and workmanlike manner and in compliance with the contract documents.  The remedial and construction works are still in progress, but are expected to be completed by about August 2017. 

[4]        On the assumption that the contract was validly terminated by them, the defenders’ counterclaim proceeds under the terms of SBC/Q/Scot.  In the alternative, on the hypothesis that the termination was unlawful, the defenders have a common law claim for damages for breach of contract.  The estimated loss is the same in each case.

[5]        The action was set down for debate of three specific matters.  The most important of these was the pursuer’s contention that the defenders’ counterclaim based on the terms of the building contract was premature and should be dismissed.  The other two matters were largely resolved by the end of the hearing; I deal with them briefly at the end of this opinion.

Contractual provisions regarding termination
[6]        Section 8 of SBC/Q/Scot contains the provisions regarding termination of the contract.  Section 8.4 has the heading “Termination by Employer” and the sub‑heading “Default by Contractor”.  It states inter alia as follows:

“8.4.1 If, before practical completion of the Works, the Contractor:

…

2  fails to proceed regularly and diligently with the Works or the design of the Contractor's Designed Portion; …

the Architect/Contract Administrator may give to the Contractor a notice specifying the default or defaults (the 'specified default or defaults').

8.4.2 If the Contractor continues a specified default for 14 days from receipt of the notice under clause 8.4.1, the Employer may on, or within 10 days from, the expiry of that 14 day period by a further notice to the Contractor terminate the Contractor's employment under this Contract.”

[7]        Section 8.7, under the sub-heading “Consequences of termination under clauses 8.4 to 8.6”, provides:

“8.7  If the Contractor's employment is terminated under clause 8.4, 8.5 or 8.6:

1 the Employer may employ and pay other persons to carry out and complete the Works and/or (where applicable) the design for the Contractor's Designed Portion and to make good any defects of the kind referred to in clause 2.38, and he and they may enter upon and take possession of the site and the Works and (subject to obtaining any necessary third party consents) may use all temporary buildings, plant, tools, equipment and Site Materials for those purposes;

…

4 within a reasonable time after the completion of the Works and the making good of defects (or of instructions otherwise, as referred to in clause 2.38), an account of the following shall be set out in a certificate issued by the Architect/Contract Administrator or a statement prepared by the Employer:

1 the amount of expenses properly incurred by the Employer, including those incurred pursuant to clause 8.7.1…, and of any direct loss and/or damage caused to the Employer and for which the Contractor is liable, whether arising as a result of the termination or otherwise;

2 the amount of payments made to the Contractor; and

3 the total amount which would have been payable for the Works in accordance with this Contract;

5 if the sum of the amounts stated under clauses 8.7.4.1 and 8.7.4.2 exceeds the amount stated under clause 8.7.4.3, the difference shall be a debt payable by the Contractor to the Employer or, if that sum is less, by the Employer to the Contractor.”

It may be noted, for the sake of completeness, that the defects referred to in clause 2.38 are defects, shrinkages and other faults in the Works appearing during the relevant rectification period which are due to materials, goods, or workmanship not in accordance with the contract, or any failure of the contractor to comply with his obligations in respect of the Contractor’s Designed Portion.  In other words, they are defects due to fault on the part of the original contractor rather than any replacement contractor.

Argument for the pursuer
[8]        On behalf of the pursuer it was submitted that the counterclaim, in so far as based upon the terms of the building contract, was premature.  The claim required to be made under clause 8.7.  The issuing of a certificate or statement in accordance with clause 8.7.4 was a critical element of the procedure; any debt only became payable after such a certificate or statement had been produced and intimated.  No certificate or statement could be produced until after the Works had been completed by the replacement contractor.  It was common ground that the Works have not yet been completed.  Accordingly no debt was payable in terms of clause 8.7.5.  The situation was analogous to Costain Building & Civil Engineering Ltd v Scottish Rugby Union plc 1993 SC 650.  The counterclaim in so far as based upon clause 8.7.5 fell to be excluded from probation: cf Crear v Morrison (1882) 9R 890, Lord President Inglis at 892.

[9]        The defenders’ pleadings were, moreover, unclear as to what was expected to happen in terms of clause 8.7.5.  Reference was made to the issuing of a certificate, which implied that it would be issued by an independent contract administrator acting fairly as between the pursuer and the defenders.  It was not possible to predict what the contract administrator might determine, which emphasised the prematurity of the counterclaim.

[10]      Proof should be allowed in the principal action alone.  If the pursuer was successful, no claim under clause 8.7 could be sustained.  A further proof could be allowed in the alternative counterclaim, but on the basis that the pursuer was an innocent party.  If the pursuer was unsuccessful in the principal action, a further proof could be allowed, if necessary, on the reasonableness of expenses certified or stated for the purposes of clause 8.7 to have been properly incurred.  The alternative counterclaim would fall away.

Argument for the defenders
[11]      Senior counsel for the defenders did not take issue with the general proposition that it was premature to pursue a contingent debt, but submitted that the present situation was distinguishable.  Liability for any defects in the Works was an issue which arose in both the principal action and in the alternative counterclaim, as well as in relation to an eventual claim under clause 8.7.5.  The desirability of having a single proof was obvious.  In these circumstances, the pursuer’s argument was one of form over substance.  The unusual mismatch in timing in the present case between the pursuer’s claim for damages and the defenders’ contractual claim had arisen because the defects had begun to be discovered very late in the contractual period, and continued to be discovered as investigatory work took place.  The certificate or statement required by clause 8.7.4 would usually have been issued by now.  The Costain case was concerned with execution of diligence and should not be determinative of the outcome in the present case.

[12]      The defenders wanted the dispute to be dealt with as a whole.  To proceed only with the principal action would inevitably lead to wasteful duplication of evidence when the counterclaim, in one form or the other, came before the court.  Commercial court procedure was sufficiently flexible to allow the court to hear a proof which determined liability for defects for all purposes without, in the meantime, dismissing or excluding from probation the clause 8.7.5 claim.

Decision
[13]      In my opinion the submission on behalf of the pursuer is correct in principle.  Section 8 of SBC/Q/Scot is a comprehensive statement of the parties’ rights and obligations following upon lawful termination of the contract.  Clauses 8.7 and 8.8 set out the employer’s rights following termination on any of the grounds specified in clauses 8.4 to 8.6, including failure by the contractor to proceed regularly and diligently with the Works.  Clause 8.7 addresses the situation where the employer decides to have the Works completed by another contractor;  clause 8.8 addresses the situation where the employer does not decide to do so within six months after the date of termination.  In each case, the contract provides a mechanism to determine whether a sum is payable by the employer to the contractor or vice versa.  Where clause 8.7 applies, an account of expenses properly incurred by the employer must be set out in a certificate by the architect/contract administrator or a statement by the employer himself.  In terms of clause 8.7.4, the certificate or statement must be issued “within a reasonable time after the completion of the Works”.  Completion of the Works is therefore a pre-requisite of the issuing of the certificate or statement which is itself a condition of entitlement of either party to payment.

[14]      In the Costain case, the contractor raised an action for payment of sums which had not been certified by the engineer as due for payment.  The Inner House recalled an arrestment on the dependence of the action, on the ground that the contractor’s entitlement to payment was, in terms of the ICE Conditions, dependent upon a decision by the engineer (or an arbiter) that the sum claimed was payable, with the consequence that the claim was future and contingent and arrestment was therefore incompetent.  In my view the case is directly in point.  The fact that it came before the court in the context of the competency of diligence on the dependence is neither here nor there; the court’s decision is based on whether an entitlement to payment could arise without a decision or other form of certification required by the terms of the contract.  Lord President Hope observed (page 657):

“I have found it impossible to reconcile the pursuers' argument with the provisions set out in the Conditions of Contract and with the definition which is given in cl. 1 (1) of these conditions of the contract price. The position might have been different if this had been a contract for a fixed price which the parties themselves had agreed upon as the sum which was to be paid upon completion of the work. As it is, the pursuers' approach seems to me to ignore the detailed provisions by which the contract price is to be ascertained and to proceed instead upon the view that they are entitled to be paid for the work at rates which can be adjudicated upon by the court. That, in effect, is a claim for payment quantum meruit, but no basis has been laid in the pursuers' averments for such a claim.”

In my opinion those observations apply mutatis mutandis to the circumstances of the present case.  The counterclaim has been commenced at a time when the Works have not been completed and no certificate or statement in terms of clause 8.7.4 has been issued.  It follows that the counterclaim, in so far as based upon clause 8.7.5, is for a future or contingent debt and is accordingly premature.

[15]      The circumstances of the present case are perhaps exceptional in respect of the long period of time (4½ years) that has elapsed since the date of termination of the contract without completion of the Works having been achieved by another contractor.  As yet the court has not had to make any finding as to the reasons why this has happened, but a situation has undoubtedly been created in which the pursuer has raised an action for damages proceeding on the hypothesis that the contract was unlawfully terminated, yet the defenders, while obviously entitled to defend the pursuer’s claim, are not yet able to make a contractual claim of their own proceeding on the hypothesis that the contract was lawfully terminated.  Although I have not yet reached a concluded view, I see force in the defenders’ submission that it would be desirable to have a single inquiry into both the existence of defects in the work carried out by the pursuer and the reasonableness and cost of the remedial works undertaken by the defenders.  I would wish, however, to discuss the procedural consequences of my decision with parties before pronouncing any interlocutor.

Other issues
[16]      I have mentioned in passing that clause 8.8 of SBC/Q/Scot addresses the situation where, within six months after the date of termination, the employer decides not to complete the Works.  In such a case, or if the employer does not begin to make arrangements within the six-month period for carrying out and completing the Works, then a mechanism for payment similar to that in clause 8.7.5 is triggered.  It was submitted on behalf of the pursuer that the defenders had failed to state in their pleadings that they had begun to make arrangements to carry out and complete the Works within the requisite six-month period.  Senior counsel for the defenders offered a brief formal amendment to make the position clear, and I need not address this matter further.

[17]      It was further submitted on behalf of the pursuer that the defence to the principal action was irrelevant in so far as it proceeded on the basis of complaints, such as defective workmanship, which were not “specified defaults” in the default notice.  The defenders submitted that all of their current complaints fell within the scope of breach of the contractual obligation to proceed regularly and diligently with the Works, and that they were not precluded from relying on facts of which they only became aware after termination.  I understood counsel for the pursuer ultimately to accept that this matter could be left over until after inquiry into the lawfulness of the termination.  I agree that that would be appropriate.

Disposal
[18]      As stated, I will put the case out by order to discuss further procedure.  Questions of expenses are reserved.