Implied Term where the Scheme could not remedy breach of the HGCRA 1996
By Victoria Russell, Fenwick Elliott
Manor Asset Ltd v Demolition Services Ltd  EWHC 222 (TCC) (15 February 2016)
Manor, the Employer, engaged Demolition Services, the Contractor, to carry out demolition works at a project in Hull. The parties entered into a contract using the JCT Minor Works Building Contract with Contractor’s Design, 2011 Edition. They subsequently amended the contract to provide for milestone payments, with payment in relation to the first milestone “to be made within 72 hours of receipt of invoice, issued when the milestone is achieved”.
Demolition Services submitted its invoice in respect of the first milestone. Manor served an alleged pay less notice and did not pay the full invoiced amount.
Demolition Services started an adjudication, claiming that its invoice should have been paid in full and that the alleged pay less notice was invalid. Manor argued in turn that its pay less notice was valid and that Demolition Services had failed to achieve the milestone for which it claimed payment.
The Adjudicator found in favour of Demolition Services, deciding that they had achieved the relevant milestone and that the alleged pay less notice had been served late. The contract provided that a pay less notice must be served “not later than 5 days before the final date of payment”. As amended, the final date for payment was 72 hours after receipt of the invoice”, which in this case was 26 October 2015. Counting back 5 days from 26 October gave a deadline for serving the pay less notice of 21 October 2015, which was actually before the invoice was submitted. The alleged pay less notice was served on 28 October 2015.
Manor did not comply with the adjudicator’s decision and started Part 8 proceedings for a declaration that the decision was unenforceable because the adjudicator had breached the rules of natural justice. It depended on allegations that the adjudicator had failed to take account of evidence the employer had submitted during the adjudication, and that he had given no warning that he was proposing to decided that the pay less notice should have been served before the date of the invoice, thus depriving the employer of the chance to make submissions about such an approach. The employer also sought a declaration on the correct deadline for submitting a payless notice. In turn, Demolition Services sought summary judgment enforcing the adjudicator’s decision.
Mr Justice Edwards-Stuart set out in his judgment the relevant provisions of the contract, both as it was originally made and then as it was amended, together with the relevant statutory provisions. He ordered summary judgment, enforcing the adjudicator’s decision, finding that the adjudicator had not acted in breach of the rules of natural justice, because, firstly, he had taken account of all of the evidence, and, secondly, the employer had had ample opportunity to make submissions about the timing of the pay less notice, and had in fact made voluminous submissions on this point. Further, even if the Adjudicator had breached the rules of natural justice by not allowing the employer to make submissions about the pay less notice, that would have made no difference, because the pay less notice was served too late in any event.
The Judge said:
“…It seems difficult for MAL to say that it was deprived of the opportunity to, still less prevented from, making all relevant submissions as to the timing of the issue of a pay less notice. Its “Jurisdictional Challenge Response” served in the adjudication ran to over 25 closely typed pages. Almost every possible permutation of payment due dates and final date for payment was considered. If anything, the problem was that the adjudicator was presented with far too many submissions, not too few. The scattergun approach always carries with it the risk of obfuscation, not clarification”.
The Judge then considered the issue raised by the final declaration sought, namely when was the final date for payment. He considered the law as to the correct approach to the construction of the contract and the implication of terms, quoting the well known words of Lord Hoffmann in the Privy Council Decision of Attorney General of Belize v Belize Telecom  1WLR 1988, which Mr Justice Edwards-Stuart described as “authoritative” but giving “rise to some differences of interpretation”. He noted that the approach by Lord Hoffmann to the construction and the implications of terms had recently been revisited in the judgments of the Supreme Court in Marks & Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd  UKSC 72, quoting from the judgment of Lord Neuberger.
The Judge said:
“I shall therefore approach Lord Hoffman’s observations in Belize Telecom in the light of the qualifications made by Lord Neuberger in Marks & Spencer. However, the overriding point to be borne in mind is that before implying any term the court must conclude that the implication of that term is necessary in order to give business efficacy to the contract or, to put it another way, it is necessary to imply the term in order to make the contract work as the parties must have intended”.
When considering the true construction of the amendment to the contract, he said:
“56. It seems to me that it goes without saying that the hypothetical reasonable person described in the authorities would expect the amendment to be lawful and, if there was more than one way of reading it, would read it in a way that did not infringe any relevant legislation or which would undermine the purpose of the contract…
58. The words “Payment to be made within 72 hours of receipt of invoice” are, to my mind, clear and unequivocal: they cannot reasonably be construed to mean payment at some later (unspecified) date. It seems to me that, unless there is a compelling reason to give them any other meaning, then they must be understood as referring to “the final date for payment” within the meaning of the Act. The adjudicator came to the same conclusion…
59. Similarly, I regard the amendment as making it clear that the payment of the relevant percentage of the contract value mentioned becomes due on the achievement of the event described: in the case of the first milestone, “when demolition passes the black line”…
60. Construed in this way, the amendment is compliant with sub-sections 110(1) and 110A(1) of the Act because the invoice to be issued by [Demolition Services] is the notice that complies with section 110A(1)(b). Although the amendment does not say in terms that the invoice must be given not later than 5 days after the milestone is achieved, the amendment does say that it has to be issued on completion of the milestone (i.e. straight away, and therefore within 5 days). Similarly, an invoice stating the relevant percentage of the contract value due following achievement of the milestone (and the sum paid to date) would comply with section 110A(3). No further explanation would be necessary or possible.
61. “The “notified sum” for the purposes of sub-section 110A(3), is clearly the percentage amount stated in the invoice, which must then be paid (to the extent not already paid) on or before the final date for payment: see section 111(1).
62. So far, I regard this as fairly straightforward. The potential difficulty is presented by the provisions of the Act relating to pay less notices, which the payer is entitled to give pursuant to section 111(3) of the Act. By sub-section (5) the pay less notice must be given “not later than the prescribed period before the final date for payment” but not before the notice by reference to which the notified sum is determined. In my opinion, that notice is obviously [Demolition Services] invoice.
63. As I have already mentioned, the Act makes it clear that the pay less notice cannot be issued before the invoice to which it relates. That is why the Adjudicator was wrong to find MAL should have issued a pay less notice before 23 October 2015.
64. The core of the problem is the absence of any express agreement as to “the prescribed period”. As I have already pointed out, if the amendment is treated as a situation in which there has been an absence of such agreement, then the result is one that is prohibited by the Act because the pay less notice would have to be given before the issue of [Demolition Services] notice to which it relates.
65. The only solution to this problem that I can identify is the one that I mentioned to counsel both at and following the hearing, namely that when making the amendment the parties impliedly agreed that the prescribed period was to be reduced to nil. Thus MAL could issue a payless notice at any time before the final date for payment: that is to say, within the 72 hour period between receipt of the invoice and the final date for payment 72 hours later.
66. The question that now arises is whether or not this is a solution that it is open to the court to adopt… Did the parties impliedly reach such an agreement?
68. By parity of reasoning with Lord Hoffmann’s observations in the Belize Telecom case, in this situation the most usual inference would be that no provision in relation to pay less notices was intended (because if the parties had intended something to happen, the amendment would have said so).
69. But on that reasoning the parties will have reached no agreement about the prescribed period, with the result that it is 7 days and the amendment falls foul of the Act for the reasons already discussed. In my view it is most unlikely that the parties could have intended this.
70. Accordingly, in my judgment this is one of those cases where, to adapt Lord Hoffmann’s words, the reasonable person in the position of the parties would understand the amendment to mean something else. He or she would consider that the only meaning consistent with the other provisions of the contract, read against the relevant background (in particular, the provisions of the Act), is that something is to happen.
71. Faced with a stark choice between rendering the amendment wholly ineffective or enabling it to work, the parties must surely have intended the latter… The only way in which it can be made to work, whether by so construing the contract or implying a term, is to say the prescribed period was to be nil – thus enabling MAL to serve a pay less notice at any time within 72 hours after receipt of the invoice. In my judgment such an agreement is necessary and it is not inequitable…
72. I therefore declare that, as a result of the amendment, the final date for payment is 72 hours after receipt by MAL of [Demolition Services] invoice following achievement of a milestone. Two other conclusions necessarily follow from the reasoning that leads to this conclusion; first, the due date for payment is the date when the milestone is achieved and, second, the parties are to be taken to have agreed by necessary implication that the “prescribed period” for the service by MAL of any pay less notice is nil (in other words, it can be served at any time between receipt of [Demolition Services] invoice and the expiry of the 72 hours following such receipt.)”
The Judge concluded that the decision reached by the adjudicator that MAL’s notice of 28 October 2015 was not a valid pay less notice was correct, albeit for the wrong reasons. MAL’s challenges to the validity of the decision had therefore failed.
This case was unusual, with the amendment to the contract meaning that the payment mechanism contravened HGCRA 1996; replacing the offending clause with the relevant provision of the Scheme did not remedy the breach. The solution to the problem was suggested by the Judge and even at that point expressed as a departure from the usual assumption that the parties intended no additional provision beyond what they had expressly agreed. This case identifies an implied term as a possibility that parties’ representatives and adjudicators may previously not have considered and may well give rise to more arguments in the future about implied terms in contractual payment mechanisms.
RMC Building and Civil Engineering Ltd v UK Construction Ltd  EWHC 241 (TCC) (15 February 2016)
RMC started an adjudication against UK Construction in relation to its application for payment No. 8. No pay less or other notice had been served by UK Construction and after a few months of unsuccessful negotiations, RMC concluded that it had no choice but to adjudicate.
UK Construction raised various challenges to the adjudicator’s jurisdiction but he rejected them and continued with the Referral, eventually ordering UK Construction to pay RMC the sum claimed.
During the adjudication, UK Construction had put before the adjudicator some of the email exchanges between the parties during the negotiations. RMC contended that it should not have done so, as these documents were all “without prejudice”, being evidence of negotiations to resolve a dispute. Since the dispute was not resolved, RMC submitted that none of the documents, and certainly not those which were said to contain admissions by RMC, should have been put before the adjudicator.
Mr Justice Edward-Stuart considered as a preliminary point whether the communications upon which UK Construction relied had been made on a “without prejudice” basis and were therefore not admissible in evidence.
These exchanges between the parties had not been referred to in either the Notice of Adjudication or the Referral Notice; some of them were set out for the first time in the Response. RMC had therefore not waived the “without prejudice” protection. Further, some of the emails upon which UK Construction now relied were not referred to even in its Response (which was called its Reply).
The Judge said as follows:
“26. In my view, the exchanges between the parties referred to in the Reply are a classic example of the type of discussions that are protected by the without prejudice rule. That is to say, that admissions against interest made in the course of such discussions are not admissible in evidence. This is because those discussions took place against the background of a dispute and were part of an attempt to resolve it.
28. The evidence of these discussions or any admissions made in the course of them should not have been put before the Adjudicator in the first place and they cannot be relied on by UKC in these proceedings as admissions against interest by RMC”.
The Judge also examined whether the adjudicator had exceeded his jurisdiction by awarding a sum in excess of the “cap” referred to in paragraph 2(4) of Part II of the Scheme, which seeks to provide a cap on the amount of any stage payments. The cap is described as the difference between the contract price and the aggregate of the instalment stage payments. The Judge held that this challenge failed on the “very simple” ground that UK Construction had not shown what the contract price was. They had submitted that it was the original contract sum, notwithstanding the fact that they themselves had certified a far greater amount as being the value of the work undertaken so far.
Having rejected these and other challenges made by UK Construction to the jurisdiction of the adjudicator, the Judge gave RMC summary judgment. He then had to look at whether there should be a stay of enforcement of some or all of the judgment sum. UK Construction based their application for a stay on the assertion that not to give one would amount to a manifest injustice. They argued that such injustice would greatly outweigh any detriment suffered by RMC, which could, in any event, be compensated by a subsequent award of interest.
The Judge said:
“The provisions introduced by the Act and the Scheme are all about maintaining cash flow. That purpose is not achieved by simply giving judgment for a sum and then staying its enforcement: interest is often no compensation for a lack of cash flow. …
62…. At the very least, the court is entitled to expect that a party seeking a stay of enforcement of a judgment must show either (a) that it will suffer severe financial hardship if required to pay the full amount or (b) that there is a real risk that it may be unable to recover any overpayment (if it is subsequently shown that there was one) from the other party when the dispute is finally resolved….
66 UKC must have known that if it wished to avoid enforcement of all or any part of any judgment, it would have to put forward some credible evidence as to its financial position. Having failed to do so, it cannot expect the court to make assumptions in its favour. Further there is no evidence to the effect that RMC will be unable to repay the balance (if any) between the judgment sum and its true entitlement, if less. In the circumstances, I do not regard this as one of those rare cases in which there should be a stay of enforcement of any part of the judgment sum”.