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Court of Appeal upholds TCC on hybrid contract issue

I always enjoy reading Coulson LJ’s judgments as he explains things so clearly. Therefore, you’ll not be surprised to see that this week I’m looking at his judgment in C Spencer Ltd v MW High Tech Projects UK Ltd, where he upheld Farrell J’s October 2019 judgment. To be fair, I like her judgments too (although we’ve not had the benefit of so many of those yet), and I also wrote about that judgment at the time.

C Spencer Ltd v MW High Tech Projects UK Ltd

In my earlier blog (TCC considers the section 105(2) exclusions (again)) I set out the background, and explained that MW High Tech was the main contractor, engaged by Energy Works (Hull) Ltd, to design and construct a power plant processing fuel produced from waste (commercial, industrial and municipal). C Spencer Ltd (CSL) was sub-contracted to design and build the civil, structural and architectural works for the facility.

CSL’s sub-contract was based on the IChemE Subcontract for Civil Engineering Works, The Brown Book. It included the assembly of plant and the erection of steelwork to provide support or access to plant and machinery. These works fell outside the ambit of “construction operations“. Both parties agreed the sub-contract works were carried out on a site where the primary activity would be power generation.

At first instance

The dispute at first instance was about whether MW’s payment notice needed to distinguish between the sums claimed for construction operations and the sums claimed for non-construction operations (CSL’s application for payment had made the distinction).

In a nutshell, O’Farrell J held that sections 110A and 111 do not require the sums due for construction operations and other operations to be set out separately:

  • Section 110A refers to the “sum considered due at the payment due date and the basis on which that sum is calculated”.
  • Section 111 simply identifies the “notified sum”.

By stating the overall sum considered due (including any sum for construction operations), the payment notice satisfied section 110A.

On appeal

On appeal, the central issue was one of statutory and contractual interpretation regarding section 104(5) of the Construction Act 1996. Section 104(5) provides that where an agreement relates to “construction operations and other matters”, the Construction Act 1996 applies “only in so far as it relates to construction operations”.

CSL argued that this phrase should be read into every section and sub-section concerned with payment, namely sections 109-111. Consequently, they said this meant that, under a hybrid contract, if there was a failure to specify “within the overall sum notified” the amount that related to construction operations only, there was a failure to comply with the Construction Act 1996.

Coulson LJ disagreed. His analysis went through a number of steps:

  • The Construction Act 1996 identifies certain minimum requirements that every construction contract must contain. Thus, any analysis starts with the parties’ contract to see if it complies with the Act. If it does, then the conventional view is that the Act is no longer of any direct relevance to the parties’ rights and obligations.
  • While parties cannot contract out of the Construction Act 1996, they can contract in. Coulson LJ noted that it is now “commonplace” for parties in industries that “appeared anxious to avoid such minimum payment requirements” to contract in through the standard form sub-contracts in use.
  • The parties’ contract complied with the Construction Act 1996’s minimum requirements (in sections 109-111) and the parties had contracted in by agreeing one set of Act-compliant payment terms for both construction and non-construction operations.
  • The phrase “only in so far as it relates to construction operations” in section 104(5) means the Construction Act 1996 recognises there might be hybrid contracts. However, it should not be interpreted as meaning that a hybrid contract should include a term “requiring the separate or distinct notification and breakdown of sums due for construction operations”. There is nothing that does that, and yet “the Act could easily have said so”.
  • Requiring that type of modification in hybrid contracts would be a “significant” one. If the parties had to differentiate between sums due for construction and non-construction operations, the notified sum would not be the full sum due, just that part relating to construction operations (which the parties could not contract out of). Alternatively, there would be two different notified sums, one each for construction and non-construction operations. It was “neither necessary nor appropriate” for the phrase in section 104(5) to be “read in” to other sections of the Act.
  • It was “not only permissible, it is to be welcomed” that parties are contracting in to the Construction Act 1996’s payment provisions. Here the parties had augmented their rights by agreement. There was no clash between the terms of the sub-contract and the Act.
  • The distinction between construction and non-construction operations was only relevant if a dispute arose over the sum due, since an adjudicator would only have jurisdiction over the construction operations part, unless the parties had agreed to extend jurisdiction to all disputes arising under the sub-contract. This sub-contract made it clear the parties had not done that.

I entirely understand the conclusions Coulson LJ reached. However, I’m still concerned about the point in my last bullet, which relates to CSL’s right to refer payment disputes to adjudication under this particular hybrid contract, whether as a smash and grab or on the merits. Although Coulson LJ said he had sympathy with CSL’s position that they would be prejudiced if the payment notice did not distinguish between the sums claimed for construction operations and non-construction operations, he considered it to be “overstated” as (he said) CSL could have started an adjudication and left MW to take the jurisdiction point, which may or may not have been successful.

But, if that had happened and MW’s jurisdictional challenge was successful, then surely CSL’s right to refer disputes to adjudication would have been fettered.

I’m not suggesting that Coulson LJ’s decision is wrong, rather I’m highlighting that the anomaly of the potential fetter still remains.

Section 111 and the obligation to pay the notified sum

I thought that Coulson LJ’s comments in paragraphs 68 to 74 were also interesting, where he touches on Sir Rupert Jackson’s comments in the Court of Appeal in S&T v Grove that section 111 was the principal source of the obligation to pay the notified sum, even if the contract said the same thing.

Coulson LJ analysed this and, while he declined to reach any findings, he did say that he retained “at least some doubt about their correctness” and that they appeared to “turn the conventional approach …  on its head”. He also commented that:

“They appear to be suggesting that, at least for the purpose of the obligation to pay the notified sum, the contract is irrelevant, even if that contract meets all the minimum terms required by the Act. That may be right, but it might be thought to be a potentially surprising result.”

He went on:

“There seems to me to be nothing obvious on the face of s.111 which suggests that it is creating a completely different right to those created by ss.109-110B inclusive. In addition, I am not entirely clear how a provision like s.111, which started life dealing with the need for a construction contract to enshrine a party’s right to
withhold payment of the sum due (if that party complied with the specified procedure) should now be read as creating a statutory right to be paid the notified sum regardless of the contract terms.”

He said that this was a matter for another day but, given that the basis of some of Sir Rupert Jackson’s key findings in S&T v Grove were founded on his view of the primacy of section 111, it would be interesting to see this point developed further in the Court of Appeal. It is perhaps unfortunate that we missed hearing what the Supreme Court had to say, given the parties in S&T v Grove settled their dispute.

Room 101 (again and again and again)

I don’t think this blog would be complete without reiterating the fact that it is high time that the government addressed the issue of the exceptions and abolished those that result in the types of issues seen in this case. Off to Room 101 they should go!

O’Farrell J referred to the hybrid contracts issue created by the exceptions to the Act as “illogical and uncommercial” and Coulson LJ’s distain for them is well known. Indeed, he described the need for the courts to spend time dealing with the issue as a “self-inflicted problem”.

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