J Murphy & Sons Ltd v Beckton Energy Ltd [2016] EWHC 607 (TCC)
The Technology and Construction Court refuses a declaration that a Contractor is not obliged to pay Liquidated Damages until a determination by an Engineer under any clause of the contract.
Key facts
In March 2013, the parties had entered into a FIDIC Yellow Book Contract for the design, procurement, construction, start-up, testing and commissioning of a combined heat and intelligent power plant at Beckton, East London.
Following complications, Beckton threatened to call on an On-Demand Performance Bond in respect of Liquidated Damages of £8,724,000, which Beckton contended were due payable by Murphy. Murphy disagreed and issued Part 8 proceedings for a declaration that, until there had been an agreement or determination by the Engineer of the amount of Liquidated Damages that Beckton was entitled to be paid, Murphy was not obliged to pay anything. The court was also asked to consider whether:
- if Murphy succeeded on that point, whether Beckton’s call on the Bond would be fraudulent; and
- if so whether injunctive relief should be granted.
The decision
To determine the issue, the court had to interpret the Contract and determine the meaning and interplay between clauses 2.5 and 8.7 of the amended FIDIC Yellow Book Contract.
Tensions existed because clause 2.5 provided that if Beckton was entitled to any payment underany clause of the Contract, then the Engineer would proceed to determine the issue in accordance with clause 3.5. However, clause 8.7 (which gave Beckton the right to claim Liquidated Damages and to deduct these from the next Notified Sum) had been amended to remove the wording “subject to Sub-Clause 2.5”. Consequently, the right to receive Liquidated Damages was said to be unconditional on the procedure set out in clause 2.5, even though this clause was stated to apply to all clauses within the contract.
The court firstly noted that it was common ground that the relevant clauses 4.2 (Performance Security) and 8.7.4 (Delay Damages) were not in the standard wording of the FIDIC Yellow Book, whereas clauses 2.5 (Employer’s Claims) and 3.5 (Determinations) were. When interpreting a written contract, the judge highlighted that the court is concerned to identify the intention of the parties by reference to what a reasonable person having all the background knowledge available to the parties would have understood the clauses to mean. Further, agreements should be read as a whole and construed so far as possible to avoid inconsistencies between different parts on the assumption that the parties had intended to express their intentions in a coherent and consistent way.
On the face of it, the judge considered that clause 2.5 (Employer’s Claims) is in the widest of terms. As a result, the clause it was considered that the clause could apply if the Employer considers it was entitled to any payment under any clause of the contract "or otherwise in connection with the Contract". Any such claims would be subject to the Engineer’s determination provision. Consequently, the delay damages could come within the scope of clause 2.5 and thus Murphy’s case would succeed.
However, on more careful analysis, the judge came to the conclusion that, on a proper construction, the right to Liquidated Damages under clause 8.7 was not subject to the mechanism set out in clauses 2.5 and 3.5. Accordingly Murphy’s case failed as determination by an Engineer was not required. This conclusion was reached on the following basis:
- In clause 8.7 the words "subject to Clause 2.5" qualifying Murphy's payment obligations do not appear, whereas in the equivalent standard clause in the FIDIC Yellow Book they do. This selected deviation from the standard form was considered consistent with the parties' intention being not to make Beckton's right to claim Liquidated Damages subject in any way to clauses 2.5 and 3.5;
- Clause 8.7 sets out a self-contained regime for the trigger and payment of Liquidated Damages. It does not suggest that an additional regime, such as that contained in clauses 2.5 and 3.5 is to be imported;
- There are three important and substantive inconsistencies between clauses 2.5 and 8.7.4 which could all be resolved by construing clause 8.7 as providing for an independent regime that is not subject to clause 2.5; and
- Many other sub-clauses in the contract would entitle Beckton to make a claim under and be appropriate as the subject of clause 2.5 and, crucially, these do not have the tensions that exist between clause 2.5 and clause 8.7.4.
The decision on the point above meant that the court did not have to determine whether the call on the Bond would be fraudulent. However, the judge addressed the issue briefly and found that a call on the Bond would not be fraudulent as the trigger for making a claim was the beneficiary's belief that it was entitled to make the claim, not that there had been a final determination giving rise to a payment obligation.
Comment
This case demonstrates the issues that can arise when standard form contracts are amended in part, but when associated provisions are left unchanged. It highlights the need for careful drafting when amending standard form provisions as simple wording (rather than just removing the wording “subject to Sub-Clause 2.5”) in this case could have clarified the relationship between the clauses and saved the expense of court proceedings.
It is also important to note that contractual parties should also be warned, as was stressed by the judge, that the court’s role is not to re-write parts of a contract. Parties should therefore not expect a court to liberally interpret contractual provisions when there is ambiguity.
Narandas-Girdhar v Bradstock [2016] EWCA Civ 88
The Court of Appeal has approved the test to be applied when determining if deleted words in an agreement can be admissible as an aid to the interpretation of a contract.
Key facts
Mr and Mrs Parekh both approached the Respondent in 1999 due to being in debt and under pressure from their creditors. In the same year the Respondent circulated proposals for each of Mr and Mrs Parekh (the “Proposals”) to their creditors. The key provision in Mr Parekh’s proposal was paragraph 4.3, which provided for monthly instalments and also stated:
“4.3 The acceptance of my Individual Voluntary Arrangement is conditional upon the acceptance of the Arrangement for my wife/husband, following acceptance the estates shall be combined for dividend purposes and treated as one.”
Various modifications to Mr Parekh’s proposal were put forward prior to the creditors’ meeting on 15 December 1999. One of the modifications was to paragraph 4.3 (quoted above) in the following terms:
“Clause 4.3 is to be substituted with “I agree to pay the Supervisor for the benefit of the creditors not less than £230 per month for the duration of the Voluntary Arrangement.”
It was common ground that the Modification replaced the whole of clause 4.3 of the Proposal. In the documents presented at the 15 December meeting all modifications (of which there were 13), were set out in a separate document from the Proposal, headed “Atulkumar Parekh – Modifications”. No party attended the creditors’ meeting and Mr Parekh’s proposal was then approved by proxy vote by the requisite number of his creditors. By contrast Mrs Parekh’s proposal was rejected by her creditors.
Despite the clause being substituted in this way, Mr Narandas-Girdhar issued proceedings to set aside his Individual Voluntary Agreement (“IVA”). He argued that the modified proposal nonetheless remained conditional upon the simultaneous approval of his wife’s IVA as it remained clear from the other provisions of the proposal that the IVA was conditional.
It was further submitted that the judge of first instance had erred in proceeding on the assumption that he was entitled to have regard to the wording that was removed by the modification (i.e. the deleted words of 4.3).
The decision
The Court of Appeal reviewed the trial judge’s reasoning and as a result of the ambiguous nature of the proposal, it held that it was entirely legitimate to consider the words that the modification had removed from the original proposal. The court considered that as the words of conditionality were removed altogether in paragraph 4.3, the trial judge had given the modified proposal the correct construction as it was not conditional upon the wife’s IVA being approved.
As part of its reasoning, the court approved the approach taken in Mopani Copper Mines plc v Millennium Underwriting Ltd which stated:
"[t]he deletion of words may be taken into account … if the fact of deletion shows what … the parties agreed that they did not agree and there is ambiguity in the words that remain".
The court also cited Keating on Building Contracts in support of the court’s ability to consider previously deleted words as an aid to construction. This states:
‘Where parties have made a contract in a document that contains deletions, to look at the deletions does not offend the principle … which prevents reference to preliminary negotiations. The deletion is physically contained in the concluded contract. It is submitted that the court should first construe the retained words. If they are unambiguous, reference to the deletions is unnecessary. If they are ambiguous reference to deletions from printed documents should be permitted to see whether objectively they throw light on the meaning of the retained words.’
Comment
This case provides clear authority on how to approach the use of deleted words in a contract and the test that should be applied when matters are ambiguous. However, as referred to in Mopani Copper Mines plc v Millennium Underwriting Ltd, the court was keen to stress that care must be taken as to what inferences, if any, can be drawn from deleted words when constructing an agreement. Therefore, the extent to which deleted words are a useful aid when interpreting a contract can only be determined on a case by case basis.
Jawaby Property Investments Ltd v The Interiors Group Ltd[2016] EWHC 557 (TCC)
The Technology and Construction Court has provided further guidance on the approach to be taken when determining if Interim Payment Applications are valid.
Key facts
The Claimant ("JPIL") sought declaratory relief against the Defendant Contractor ("TIG") in relation to certain Interim Payment obligations contained within an amended JCT 2011 Design and Build Contract.
The Building Contract was originally entered into by Tekxel Limited and TIG, but Tekxel later novated the Building Contract to JPIL. At the same time that Tekxel entered into the Building Contract, an Escrow Agreement was signed by Tekxel and TIG, which confirmed that the Minimum Deposit Balance (£1million) had been deposited by Tekxel in an Escrow Account. This balance was held as security, payable as a result of JPIL’s Default. A Default was defined as:
“a failure by the Employer to pay the whole or any part of any sum properly due under the terms of the Contract by or on the final date for payment thereof.”
Once the Escrow Agreement was signed and the Minimum Deposit Balance deposited, JPIL was substituted for Tekxel in the Escrow Agreement by way of a separate novation agreement.
As the project developed, a number of Interim Payment applications were submitted by TIG and paid by JPIL. However, an issue arose in respect of an emailed valuation (of £2,352,937.29) sent by TIG on 7th January 2016 which stated:
“Please see our initial assessment for Valuation 007, this is based upon Progress update and onsite review carried out earlier this week.”
JPIL argued that this email was not a valid Interim Application on the basis its email format did not comply with the requirements for service prescribed by clause 1.7 (as substituted by amendments to the standard form), and the terms of the email were insufficient to constitute an Interim Application under clause 4.8.1. This states:
In relation to each Interim Application, the Contractor shall make an application to the Employer (an ‘Interim Application’) … stating the sum that the Contractor considers to be due to him and the basis on which that sum has been calculated…
As JPIL refused to pay the sum stated in the alleged Interim Application, TIG therefore argued that JPIL had "Defaulted" within the meaning of the Escrow Agreement following which TIG was able to seek payment from the Escrow Account. Declaratory relief was therefore sought against TIG ordering that the emailed valuation on 7th January 2016 was not valid under clause 4.
The decision
The court reviewed clauses 1.7 (Service of Notices), clause 4 (Contractor’s Interim Applications and Due Dates) and paragraph 460 of the Employer’s Requirements (Interim Applications). These provided that TIG had to make monthly Interim Applications for Payment with the Final Date for payment being 30 days after the Due Date. Not later than 5 days after the Due Date JPIL was required to give a Payment Notice. If no such Notice was given, then the Interim Payment was to be the amount in TIG's Interim Application, subject to any Pay Less Notice given by JPIL. A Pay Less Notice was to be given not later than 5 days before the Final Date for Payment. The Employer’s Requirements specified that the Interim Application must contain the amount considered due together with all supporting information. The court also reviewed the email from TIG dated 7thJanuary 2016 quoted above.
The court then considered the case law applicable to Interim Payments and noted that the effect of the Interim Payment provision is that the Employer is required to pay the Notified Sum by a Final Date for Payment, irrespective of whether or not that sum in fact represents a correct valuation of the work to date. If an Employer fails to give relevant notice (irrespective of whether this is by mistake, administrative oversight or any other reason) then a sum for which the Contractor has applied becomes immediately contractually payable, even if it is wrong in valuation terms.
Considering the above, the court held that the valuation sent via email on 7th January 2016 was not a valid Interim Application. This was on the basis that it did not conform to the meaning of clause 4.8.1 as, critically, and unlike any previous valuations, the valuation was described only as TIG's"initial" assessment. This made it clear that the valuation was not TIG's firm or final assessment. Thus it could not objectively be construed as a statement by TIG of what it considered was due to it for the purpose of clause 4.8.1 of the Contract, but rather only of what it considered it might be due, subject to further consideration.
Consequently, there can be no Default event within the meaning of the Escrow Agreement and TIG could not take steps to make a call on the Escrow Account.
Comment
This judgment highlights the need for Contractors to set out their Interim Payment Applications with clarity and to ensure there can be no ambiguity. Otherwise, the court will be slow to declare the request as valid.
JPIL had also argued that the email sent 7th January 2016, being an email only, did not comply with the requirements for service prescribed by amended clause 1.7 which materially provided:
“any notice, approval, request or other communication to be given by either Party under this Contract shall be sufficiently served if sent by hand, by fax or by post to the registered office, or if there is none then the last known address of the Party to be served…"
The court disposed of this issue quickly, as it interpreted the clause to neither expressly or impliedly exclude electronic communications. Consequently, parties entering into this type of Contract that wish to exclude such email communications should consider expressly stating so in their agreement. It is also important to note that even if email communications were excluded under the Contract, the court held that JPIL’s agent, in accepting email applications in the form of Valuations 1 to 6, established a convention so that it would be unconscionable to allow JPIL to act inconsistently with that course of dealings to the extent that TIG had relied on it and acted to its detriment.
This case therefore also highlights the risks of parties deviating from a contract by conduct, and then being held to that course of action in the future. If, like JPIL, an agent is appointed, it is worth considering an express clause limiting the agent’s authority to create a convention inconsistent with the contract.
