In the following case, the court had to consider the construction of a contract, and in particular the effect of a clause concerning the priority of documents, in order to determine which of two conflicting provisions relating to the payment mechanism was to prevail.
The case also raised a point of interest as to the proper approach to be adopted by a party who lost an adjudication on a point of law.
Fenice Investments Inc v Jerram Falkus Construction Limited and Others  EWHC 3272 (TCC)
The employer engaged the contractor to design and construct five residential properties and a commercial unit in Camden. The contract incorporated the JCT Design and Build Contract (Revision 1) 2007 (JCT Contract) subject to amendments agreed between the parties.
Disputes arose between the parties in connection with the contractor’s payment application No 19, which centred on whether the employer’s payment notice and withholding notice both of 25 August 2009 had been issued in time.
The contractor maintained that in respect of payment application No 19:
- the notice of payment was due by 11 August;
- the withholding notice had to be served no later than 22 August 2009; and
- the final date for payment was 27 August 2009.
The adjudicator decided that the employer’s payment notice and withholding notice were issued out of time and consequently ordered the employer to pay £177,455.94 to the contractor.
The employer paid only £12,202.45 and issued Part 8 proceedings for declarations that on the proper construction of the contract the payment notice and the withholding notice of 25 August 2009 were served within time. The contractor separately issued an application for summary judgment to enforce the adjudicator’s decision.
The payment terms of the contract
The issue before the court was how to resolve two conflicting provisions in the contract.
Clauses 4.9 and 4.10 of the JCT Contract contained the typical JCT provisions concerning payment namely:
- a monthly application for payment made by the contractor;
- the issue of a payment notice (or certificate) by the employer 5 days after the contractor’s application for payment, and
- payment of the certified sum (less any sums validly withheld) 21 days after the contractor’s original application for payment.
However, clause 15 of the Employer’s Requirements also contained provisions dealing with interim payment, and in particular contained a detailed evaluation procedure requiring the contractor to submit its valuation to the quantity surveyor who would then issue an interim valuation recommendation to the employer’s agent. The employer’s agent would then issue an interim certificate within 5 days of the interim valuation recommendation. Payment would follow 21 days after the issue of the interim certificate.
If the contractor’s argument was right and the payment mechanism to be followed was contained in clauses 4.9 and 4.10 of the JCT Contract then (as the adjudicator had decided) the employer’s payment notice and withholding notice was issued out of time. However, if the employer was right and the payment mechanism to be followed was that contained in section 15 of the Employer’s Requirements then the notices were not out of time.
The conflicting mechanisms of payment
The court considered that the conflict between the JCT Contract and the Employer's Requirements led to an unworkable set of contract provisions. There was a fundamental conflict between the two provisions because the provisions affected the starting point, and therefore the end point, of the payment mechanism.
Under clauses 4.9 and 4.10 of the JCT provision, the starting point was the contractor’s interim application for payment (which had to be made in accordance with the monthly timetable as provided in Alternative B). Under section 15 of the Employer’s Requirements, however, the starting point was the issue of the interim certificate by the employer (or his agent). Additionally, section 15 stipulated no time period for completion of the evaluation process between the contactor’s application for payment and the issue of the valuation recommendation.
The JCT Contract provided for a swift procedure with a clear start date as opposed to the section 15 payment mechanism which provided for a drawn-out procedure where the start date was wholly uncertain and within the gift of the employer (or his agent).
As a result the court held that as it was impossible to read the two provisions together and come up with a rational or workable result.
How does the court choose between these two conflicting sets of provisions?
The answer was found in clause 1.3 of the JCT Contract which set out a clear hierarchy clause, designed to deal with a conflict of this sort. The clause provided that the JCT Contract was to be read as a whole and nothing in the Employer’s Requirements was to override or modify the provisions in the JCT Contract.
“1.3 The Agreement [and] these Conditions are to be read as a whole but nothing contained in the Employer’s Requirements, the Contractor’s Proposals or the Contract Sum Analysis shall override or modify the Agreement or these Conditions.”
The employer argued nevertheless that section 15 of the Employer’s Requirements should trump the printed terms of the JCT Contract including clause 1.3.
The court therefore had to consider whether there were any authorities or principles of law which would oblige it to reach the same conclusion as the employer.
The principles of precedence of contract documents and contract terms
- It is a well known rule of contract construction that, all other things being equal, a term specifically drafted for a particular contract will take precedence over a standard term (the General Rule).
- The General Rule can be negated or displaced by express terms. Clause 1.3 did displace the General Rule.
- There would be no unfairness in holding the parties to their agreement of clause 1.3. The parties had expressly amended the final date for payment in the payment provisions of the JCT Contract (by changing the period from 14 days to 21 days) and could have amended the payment provision further to incorporate the provisions of section 15 of the Employer’s Requirements had they chosen to do so.
- Notwithstanding the recent emphasis in the higher courts on the importance of looking at all the contract documents to work out the parties’ objective intention (Chartbrook Ltd & Anr v Persimmon Homes Ltd  UKHL 38), section 15 could not trump the express priority of documents clause in the printed JCT Contract.
The applicable payment regime was therefore that contained within clauses 4.9 - 4.10 of the JCT Contract. The contractor was therefore prima facie entitled to the amount awarded by the adjudicator less the amount already paid by the employer.
Unsuccessful party to an adjudication
The court also commented that it was not uncommon for a losing party in an adjudication to refuse to pay the sum awarded by the adjudicator and commence Part 8 proceedings to challenge the decision on a point of construction or a point of law. The court noted, however that a Part 8 challenge would not excuse the losing party from paying the sum that the adjudicator had found to be due. If the losing party chose not to comply with the adjudicator’s decision, then regardless of the outcome of the Part 8 proceedings, that party should expect to be penalised for its default by way of punitive interest and costs, including the possibility of indemnity costs.
This case is a good example of the need for employers to ensure that any contract amendments are incorporated correctly and are not simply included within other contract documents, such as the Employer’s Requirements or Contract Preliminaries, so that the contractual arrangements are clear.
The case is also a reminder that it is advisable to include a priority of documents clause particularly in building contracts. As the judge in this case commented:
“… the impression can sometimes be given that the draftsman has included in the contract every piece of paper in his office that related, no matter how tangentially, to the project in question. Some form of hierarchy or precedence is vital …”
This particular point is worth bearing in mind when using the Engineering Construction Contract published by the NEC which (in contrast to the JCT) does not contain a priority of documents clause (although the Project Manager does have the ability to issue an instruction resolving inconsistencies or ambiguities in or between the contract documents).