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Implied terms in construction disputes, but not as we know them

It’s funny how the construction world can throw up cases with unexpected outcomes. For example, I recently commented on my surprise at Coulson J’s judgment in Deluxe v Beck Interiors. I was also similarly surprised by Edwards-Stuart J’s judgment in Manor Asset v Demolition Services, which was handed down just three days later. There the court found that there was an implied term in the parties’ building contract that allowed their bespoke payment provisions to comply with the Construction Act 1996. One might have thought that, when faced with non-compliant payment provisions, the relevant parts of the Scheme for Construction Contracts 1998 would be implied, but not so. Instead, we got an implied term that the parties had agreed the prescribed period for giving a pay less notice was to be reduced to nil.

There is certainly debate raging over whether the court got it right by implying such a term, whether the Scheme should have been imported “lock, stock and barrel” instead, or whether the employer “consciously chose to forgo his right to give a pay less notice”. Whatever your views on which argument is correct (or have your own alternative theory), there are other aspects of the judgment that are also worth a brief look.

Manor Asset v Demolition Services

This was a demolition contract entered into in April 2015 and based on the JCT Minor Works Building Contract with Contractor’s Design, 2011 Edition. The parties had amended the contract’s payment provisions to provide for payment of a percentage of the contract value when certain milestones were achieved. At that point, the contractor was to issue an invoice, which was to be paid within 72 hours. The first milestone of 60% was determined by a black line drawn on a photograph. 75% was due when the demolition reached the slab top, 90% when “crashing” was complete and 100% at PC (all were stated to be less the amount already paid).

It’s such a simple payment mechanism that it is hard to see how anything could go wrong with it, but this is the world of construction and we all know that things frequently do go wrong.

By October 2015 the contractor felt the 60% milestone had been achieved and it issued its invoice (sent by email on 23 October). On 28 October 2015, the employer issued a pay less notice stating the sum due was £1,500. That notice also contained a statement that:

“Our assessment of the works undertaken for financial purposes is as follows: Demolition completed … 60%”

The adjudication

The lack of payment was referred to an adjudicator, who decided that the milestone had been achieved “on the balance of probabilities” on 23 October 2015, and the pay less notice should have been issued by 18 October 2015. As such, the notice that was served was served out of time. His reasoning for the milestone being achieved included that the pay less notice expressly valued the work as being 60% complete.

When the employer did not pay, the matter was referred to the TCC. The employer argued (among other things) that the adjudicator had breached the rules of natural justice because he did not take its evidence into account when reaching his decision about the milestone being achieved. This evidence included photographs taken during a site visit on 27 October.

Edwards-Stuart J observed that “for the sake of clarity”, the adjudicator should have referred to the analysis of the photographs in his decision. However, he must have taken the evidence into account because:

“…if he had simply overlooked the evidence he would not thought that there was anything to decide. One does not decide a point and then given a reason for that decision unless there is a point in issue that needs to be decided.”

As such, it was “inconceivable” that the adjudicator did not take into account the employer’s photographic evidence about the state of the works in October 2015.

No breach of the rules of natural justice

It is well established that an adjudicator has to take into account all the submissions and evidence before him, but that he does not have to expressly refer to each one in his decision.

Here the adjudicator had listed all the written submissions that he said he had “considered fully when making his decision”. This is fairly standard practice. While the judge agreed that the wording adopted was “formulaic”, I’m sure every adjudicator has a standard approach to that section of their decisions. Being formulaic in how we express ourselves does not mean the words are untrue. While I accept that the question of whether the submissions have actually been considered will ultimately be a matter of fact, the main purpose of recording the fact is to inform the reader that that is the case.

No breach of the rules of natural justice, part two

The second limb of the natural justice argument centred on the idea that the adjudicator had not indicated to the parties in advance what his payment findings were, so they were deprived of an opportunity to make submissions on them.

Essentially, the adjudicator decided that:

  • The contract’s payment mechanism complied with section 110 of the Construction Act 1996.
  • The final date for payment was 26 October, being 72 hours after the invoice was received.
  • The invoice was a valid payee’s payment notice (so section 110A was complied with).
  • The pay less notice should have been served no later than 18 October 2015 (the judge noted this was a mathematical error, and it should have been 21 October).
  • The pay less notice served on 28 October was invalid as it was served too late.

The main focus of the employer’s compliant was that this reasoning meant the pay less notice had to be given before the invoice (something section 111(5)(b) of the Construction Act 1996 expressly prohibits).

Edwards-Stuart J rejected the employer’s complaint, noting that it had a proper opportunity to put its submissions on the timing of the pay less notice to the adjudicator. In fact, he noted that the employer had made “voluminous submissions”, with almost “every possible permutation of payment due dates and final date for payment”. Rather than making the adjudicator’s job easier, he had been presented with too many submissions:

“The scattergun approach always carries with it the risk of obfuscation, not clarification.”

The judge also concluded that the adjudicator’s decision that the employer’s pay less notice was not a valid pay less notice was correct, albeit for the wrong reasons. As such, it was irrelevant whether the adjudicator allowed the employer a “proper opportunity” to put its case about the timing of the pay less notice because “the ultimate outcome on this issue would have been no different”.  (Again, we all know that as long as the adjudicator answers the right question, it doesn’t matter if he arrives at the wrong conclusion.)

It’s an adequate payment mechanism, but not as we know it!

I guess the moral of the story is, beware what you agree and ensure you understand fully the ramifications of that agreement. Even if you think you know where you are, the court can still come along and catch you out!

MCMS Ltd Matt Molloy
MCMS Ltd Matt Molloy

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