[2021] EWHC 1478 (TTC) Date:  29th April 2021

Before : HH JUDGE EYRE QC

This case concerns the Defects Liability, the Application for Payment, the use of Retention Money in the FIDIC contract 1999, and the right of set-off.

Cases quoted in reference: 

Right of set-off, contractual interpretation in particular circumstances: 

• Gilbert Ash v Modern Engineering [1974]
• NEI Thompson v Wimpey Construction UK (1987) 39 BLR 65 (decision of the Court of Appeal)
• Acsim v Danish Contracting (1989) 47 BLR 55 (decision of the Court of Appeal)
• Mellows Archital v Bell Products (1997) (decision of the House of Lords)

Right of set-off, guidance for general application:

• in Rainy Sky v Kookmin Bank
• Arnold v Britton
• ABC Electrification Ltd v National Rail Infrastructure Ltd

 

Background:

The Defendant, DRAX POWER LIMITED, which is also the Operator, hired the Claimant, SHEPHERD CONSTRUCTION LIMITED, to carry out works related to the conversion of 4 of the 6 units of a biomass power station. The works comprised 2 elements: 

• the Ecostore Works: design, engineering, installation, and commissioning of a facility (“the Ecostore”) for the unloading of the biomass fuel from rail wagons and the subsequent handling and storage of that fuel together with a conveyor system for transporting it to the boiler distribution system, 
• the BDS Works :  design, engineering, installation, and commissioning of the boiler distribution system which was to convey the biomass fuel from the Ecostore to silos for intermediate storage and thence to the mills from which the boilers were to be fed.

The contract, dated March 2012, is largely based on the FIDIC Yell0w book 1999, and the value for the Ecostore Works was  £149,970,559. The Variation of the contract dated October 2012 provided for the Undertaking of the BDS Works. The new contract value became £240 millions.

Nota: The works can’t be operated separately. In addition the Claimant does not challenge the Defendant’s contention that it was only after the BDS Works had been completed and the boiler distribution system was operational that it was possible fully to test the operation of the Ecostore.

Claims:  

The Claimant says that on its correct interpretation the Contract does not entitle the Defendant to deduct from the Retention Money due in respect of the BDS Works sums relating to the remedying of defects in the Ecostore Works.

The Defendant’s case is that its right under Clause 14.9.6 to withhold sums from the BDS Works Retention Money is not so limited and that it is entitled to withhold the cost of any unexecuted works arising under the Contract’s Defects Liability provisions whether those works relate to the Ecostore Works or the BDS Works.

Facts:

Taking Over Certificates were issued for the Ecostore Works in September 2014. In relation to those works the final Milestone Payment (which was the last part of the Retention Money relating to the Ecostore Works) was made on 31st December 2014.

The Taking Over Certificate for the last part of the BDS Works was issued in July 2017 and the Defects Notification Period in relation to those works expired in July 2018.

In February 2019 the Claimant made Interim Payment Application 35A seeking payment of £1,283,765 being the balance of the Retention Money in respect of the BDS Works. The Defendant sought to make twelve deductions from that sum by reference to Clause 14.9.6 of the Contract. Of those deductions four in sums totalling £1,002,737 net of VAT relate to amounts said to be due as the cost of remedying defects in the Ecostore Works.

The Issues:

Three issues to be addressed:

1. The correct interpretation of Clause 14.9.6 and the question of whether sums due for the remedying of defects in the Ecostore Works can be withheld from the Retention Money relating to the BDS Works,

2. Whether  the Defendant can nonetheless withhold sums relating to the defects in the Ecostore Works by way of a set off-or a common law abatement,

3. Determination whether Interim Application 35A was a valid application pursuant to Clause 14.9.5.

The Relevant Terms of the Contract (see detailed provisions above):

In its original form:

• Clause 12 (Tests after Completion in he FIDIC Contract) does not exist, but Clause 14.9 in respect of the Retention Bond, calls the Clause 12, while this one is not used. This stemms from a lack of cross-checking of all the references.  

In the amended version of the contract: 

• There is a definition for the term “BDS Works”, while there is no equivalent for the Ecostore, 
• The “Defect Notification period is defined” (it is not mentionned in the case so it might suggest that the Defect Notification Period covers the whole works),
• The “Retention Money” in relation to the Works comprising and relating to Sections 3,4 and 5:
  • (a) 5%; until
  • (b) the Taking-Over Certificate has been issued in relation to Section 3, whereupon the percentage of retention shall be 3%; until
  • (c) the Taking-Over Certificate. has been issued in relation to Sections 3, 4 and 5, whereupon the percentage of retention shall be 2,5%;
• “ Works” was a defined term being the “Permanent Works” and the “Temporary Works” the latter defined namely as works required for the remedying of any defects.

It is to be noted that an interrelation exists between the different elements of the works : it is addressed at Clauses 9.1.13 and 9.1.14 with particular emphasis on the silos and silo bottoms. The former of these clauses provided, at (a), that the Tests on Completion in relation to the Section 4 works should also measure the performance of the Section 3 works to operate concurrently with the Section 4 works and, at (b), that Tests on Completion for the Section 5 works should similarly measure the concurrent operation of the Section 3, 4, and 5 works.

The Interpretation of Clause 14.9.6.

The dispute between the Claimant and the Defendant turns on the correct interpretation of the words “any work” in Clause 14.9.6.

The primary and crucial aspect concerns the phrasing of Clause 14.9.6, specifically regarding the mention of “any work.” This phrase lacks a clear definition and is only limited by the condition that the work remains unexecuted as per Clause 11 (Defects Liability) or Clause 12 (Tests after Completion).

The use of the word “however” at the start of the clause is strongly suggestive that the clause stands in distinction to the provisions in Clauses 14.9.4 et 14.9.5.

There is a difference in language in clauses 14.9.5 and Clause 14.9.6. In Clause 14.9.5 the reference is made in relation to the ‘Works” which is a defined term relating to the BDS Works. While  Clause in 14.9.6, the term used is “if any work remains to be executed under Clause 11 (Defects Liability) or Clause 12, the use of “work” in a general sense suggests that it is not related only to the BDS works. 

Mr. Hughes (the Claimant) emphasised the “bifurcation” in Clause 14.9: he argues that the division between sub-clauses 14.9.1-3 and 14.9.4-6, along with their preambles stating that the subsequent sub-clauses were specifically related to different parts of the project. According to Mr. Hughes, this division was a “careful demarcation” where each set of provisions formed a “complete code” governing the release of retention monies for their respective works.

Each of Clauses 14.9.4, 14.9.5, and 14.9.6 deals with a different matter:

– Clause 14.9.4 deals with the timing and amount of the final Milestone Payment.

– Clause 14.9.5 governs the question of the date when the Claimant would be entitled to apply for payment of the remaining part of the Retention Money.

– Clause 14.9.6 is dealing with a different question namely the amount to be withheld from the money due for the BDS Works.

The judge held there is no a priori reason why the amount to be withheld from the final payments in respect of the BDS Works should be limited to the cost of the outstanding defects liability works in respect of those works when other sums remain due to the Defendant under the same contract. it would not make commercial sense for the Claimant to be entitled to the full amount due in respect of the BDS Works at a time when it had received payment for the Ecostore Works when work remained to be executed by way of Defects Liability in respect of the latter works.

It is significant that the Claimant and the Defendant provided for them to be governed by the same contract. Moreover, when an argument is presented, it is important to evaluate the level of care taken during the drafting process. If a contract is clearly a result of careful drafting, the court is more likely to believe that the language used accurately represents the intentions of the parties, even if it later leads to unexpected or inconvenient consequences. This is not such case here. 

Was there Exclusion of the Defendant’s Potential Claims by Way of Equitable Set-Off or Abatement?

The Defendant contended that it was still entitled to make the deduction by way of a legal set off (as to £372,542) or an equitable set off (as to the full sum of £1,002,737) or by way of exercise of a common law right of abatement, and accepted that the rights of set off and abatement can be excluded by a sufficiently clearly drawn contract. 

The question is one of the construction of the contract by reference to the general principles set out in the cases quoted in reference (see above).

If the interpretation of Clause 14.9.6 is incorrect, the question becomes relevant. In that case, both Clause 14.9.6 and Clause 14.9.5 should be considered as essential elements of a comprehensive set of rules governing the release of retention monies for their respective works: the Contract would specify the deductions allowed from the Retention Money for each division. It can be presumed that the parties mutually agreed that only deductions related to the BDS Works would be permissible from the Retention Money assigned to those works.

The Claimant’s argument highlights the difference between completely excluding a right of set-off or abatement and a provision that restricts the scope of that right. The latter option is more likely to have been intended by the parties, as it deviates less from the standard position. This interpretation suggests that the language used in the Contract is clear enough to accomplish the intended outcome.

It follows that if, contrary to the conclusion reached above, Clause 14.9.6 precludes the withholding of sums relating to the Ecostore Works then it would not avail the Defendant to seek to rely on rights of abatement or set off.

The Validity of Interim Payment Application 35A.

This issue turns on the correct interpretation of Clause 14.9.5 and in particular of the effect of the words in parenthesis “(taking into account any reduction in said amount by way of any claim or deduction by [the Defendant] in relation to the Works)”.

With the Clause. 14.9.5. Process for making a Payment Application, the Claimant is not precluded from applying for payment it believes to be due. 

As the Claimant rightly said the Defendant cannot be the judge of the amount for which the Claimant can seek payment. The remedy for the Defendant is to serve a pay less notice. The resulting dispute could then be resolved by way a determination of the amount due. 

Conclusion.

Although Interim Payment Application 35A was a valid payment application the proper interpretation of Clause 14.9.6 is that the Defendant was entitled to withhold from the Retention Money in respect of the BDS Works the estimated cost of work remaining to be executed under Clause 11 in relation to the Ecostore Works. The effect of this is that the Claimant is not entitled to the relief sought and the Claim fails.

 

LESSONS LEARNED: 

1. Amendment, Variations: 

• Conditions applicable to a Variation: 

In this case, the BDS Works, as an additional work constituting of a contruactual variation, is the object of the contract’s amendment. Although certain clauses have been updated, the contract drafting remains inconsistent due to the omission of numerous other clauses from the update.

In this particular situation, the Retention Money associated with the BDS Works acts as a security for the remaining works outlined in the contract.

2. The right of Set-off: 

When assessing whether a right, which would normally exist, has been excluded by a specific contract, there is no special approach to be followed. The determination depends on the construction of the contract based on general principles. However, excluding a right, which would ordinarily arise, deviates from the norm.

Provisions can be crafted to restrict the scope of the set-off right rather than entirely excluding it. However it is advisable to explicitly address such restrictions to prevent any potential ambiguities, as demonstrated in this particular case.

3. Defects Liability:

For the purpose of restricting the defect liability so that it does not apply to the entire contract, it is crucial to provide a clear specification regarding its scope.

4. Process of contract drafting:

It is important to bear in mind that relying solely on the sophistication of drafting for a single clause is not sufficient when the rest of the contract shows deficiencies and inconsistencies.

Defining the terms utilized throughout a contract holds equal, if not greater, significance than the drafting of any individual clause. Failure to define a term within a paragraph can introduce ambiguity and uncertainty.