Construction law and legal problem

Question (A)

GPD's architect realises that decisive action is needed to address the contractor's use of inferior exterior cladding and interior flooring, and the defective workmanship affecting the doors. Describe and explain the options available to GPD's architect under JCT 98 for dealing with this situation, considering, as a further approach, whether the doctrine of temporary disconformity might have any bearing on the issues raised by the disconformity of materials to the contract documents.

JCT 98 includes in its Articles of Agreement at the front end of the document that the Contractor will upon and subject to the Contract Documents carry out and complete the Works shown upon, described by or referred to in those Documents. This premise is reinforced within the Contract Conditions, for example clause 8.1.3 states that all materials, goods and workmanship shall be of the standard specified in the contract documents and work must be carried out in a proper and workman-like manner and in accordance with the Health and Safety Plan. There is therefore a dual obligation on the contractor to complete the works in accordance with the contract and to complete it, including putting right any defective works.

In general "breach" in relation to a contract means a failure, without legal justification, to perform an obligation required under the contract. The breach may be material, which is any failure to perform that permits the other party to the contract to either compel performance, or collect damages because of the breach. It is therefore evident that the extent of the duty to perform depends primarily on the terms of the contract and performance must be exactly in accordance with these terms. Where the breach of contract involves defective work the normal measure of damages is the cost of reinstatement taken at the time when the defect was discovered.

The architect has several options regarding the discovered defective work; the materials or goods could be removed (cl 8.4.1); the materials or goods could be allowed to remain (cl 8.4.2); a variation could be issued (cl 8.4.3); or he could issue an instruction under clause 8.3 to open up or test the defects in accordance with cl 8.4.4. Clause 8.4.4 should be used with reference to the Code of Practice appended to the Contract Conditions which requires consideration of the uniqueness of the defect and its likely affect on similar elements of the Works or its detrimental affects on any other users. Due to the health and safety implications of the apparently poorly fixed cladding the architect could instruct the contractor to open it up for inspection, or arrange for testing of the fixed cladding. No time limit is specified, but the architect should instruct as soon as the need for such action becomes apparent during the course of his normal inspections as delay could result in escalating or unnecessary costs. In this instance, as the marble effect tiling and cladding also do not meet the contract specifications in terms of material quality then the architect should immediately issue an instruction requiring the removal of the materials from the site (cl 8.4.1), this will also serve to remove any danger arising from poor workmanship with regard to the cladding fixity. If a notice requiring compliance with a clause 8.4.1 instruction to remove from the site is given and not complied with, then the provisions of clause 4.1.2 could be brought into operation. To fall under clause 8.4.1 the instruction must specifically require removal of the work from site, however impractical, simply drawing attention to the defective work would not be sufficient.

With regard to non-compliance in terms of workmanship for the internal and external doors the architect should issue an instruction under clause 8.4.2 to allow the materials to remain but instructing that they must be reinstated to full functionality before they are included on the Interim Valuation for payment submitted by the contractor. In the context of a defective billiard room door, Judge Coulson in McGlinn v Waltham Contractors Ltd and others (No 3) said:

“the architect must take all possible steps to ensure that the defective element is replaced”.

Judge Coulson said that all this would have entailed was a written statement to the contractor telling him that if he did not rectify the defect immediately, a deduction would be made from the interim certificates. Judge Coulson also drew a distinction between “temporary disconformities” and completed defective work and said that where there is a temporary disconformity, the architect need take no action as these would have no impact on the interim valuation. A defect, on the other hand, should be brought to the contractor's attention and accounted for in any interim valuation. Otherwise, where the works are prematurely terminated (as in McGlinn), the architect would be liable for any over-valuation in an interim certificate in respect of defects that it had not highlighted. He also said deciding whether something is a temporary disconformity or a defect to be dealt with is a matter for the architect's judgement.

The issue about whether the Architect can do anything about defects discovered during completion depends on whether one of the following two requirements are satisfied: either (a) the defective work must constitute a breach of contract, or (b) the contract must expressly empower the purchaser to take appropriate measures. If the contract does not address the second requirement, then the position is entirely dependent on whether the common law treats pre-completion defects as breaches of contract. There is some debate about the precise status of pre-completion defects in building work because of the development of the temporary disconformity theory. This theory proposes that contractors cannot be in breach of their quality obligations until completion because, until then, they can put right any defects that arise. The temporary disconformity theory is derived from non-binding observations (obiter dicta) made in the judgements given in two decisions. First, in Jarvis v City of Westminster (1970), the judge at first instance observed that a builder who makes an error in the course of performance is entitled to remedy it if he can, and if fully remedied it does not constitute a breach of contract. Second, in P & M Kaye Ltd v Hosier & Dickinson Ltd (1972), it was observed in a dissenting speech by Lord Diplock that:

“Provided that the contractor puts it right timeously I do not think that the parties intended that any temporary disconformity should of itself amount to a breach of contract by the contractor”

This observation was made for defects made good before completion, but where the purchaser classified them as pre-completion breaches of contract in order to circumvent the liability of the final certificate. A critical review of the temporary disconformity theory was completed by Ellis Baker and Anthony Lavers as reported in the Construction Law Journal. By use of various scenarios the authors assessed the view of Lord Diplock by testing it against other views expressed in subsequent cases,. They found that the authorities, including Lord Diplock's speech could be reconciled so as to make sense and that temporary disconformity did have a role to play in English law, although it was not found to be as wide a principle as was unsuccessfully contended for by counsel in Lintest8 et al. The application of the concept to the scenarios demonstrated by Baker & Lavers showed that temporary disconformity could be dealt with practically and realistically within the context of building works.

The question left open by the Court of Appeal in Lintest was decided by His Honour Judge Stannard, sitting as an Official Referee, in William Tomkinson & Sons Ltd v The Parochial Church Council of St. Michael & Others (1990). Judge Stannard, in the course of his judgment, said the following at page 326:

“As to the passage in the speech of Lord Diplock on which Mr Leveson relies, I accept that if a contractor remedies defects in works prior to the due date of practical completion, it may be concluded, as a matter of construction of the contract, that it was not intended that damages should be recoverable in respect of temporary deficiencies in the works prior to their being corrected. However, it does not follow that where workmanship falls short of the standard required by the contract and the employer remedies it prior to practical completion, there is no breach of contract, or the employer is not entitled to recover as damages his outlay in remedying the defective works….

In so far as they are the result of workmanship which falls short of the contractual standard, I consider that they cannot be regarded otherwise than as breaches of contract, except in the situation to which Lord Diplock refers, namely that if they are remedied by the contractor prior to practical completion the contract may be construed as impliedly excluding any right to nominal damages in respect of them”.

In Oval (717) Ltd v Aegon Insurance Co (UK) Ltd [1997] Mr Recorder Colin Reese Q.C. observed that an employer did not expect initial perfection in on-site performance by all operatives engaged in the works at all times. The Employer therefore expects that the Contractor will proceed in a regular and diligent fashion with the performance of its obligations and take necessary steps to deal with defects if they arise, in accordance with the Contract Documents. In all cases it would in general only be an issue if the Contractor refused to acknowledge that the work in question was unsatisfactory and that he required it including in the interim payment that a notifiable non-performance or non-observance would arise. The judgement required by GPD's architect is whether the defects were something which he might fairly regard as works in progress, or whether they were something which should properly have been treated as complete. In the case of the inferior cladding and tiles the disconformity theory is not relevant as they do not meet the minimum requirements in terms of material specifications. For the sticking doors which is related to workmanship this may be remediable by planing off etc. and therefore becomes a remediable defect and simply requires exclusion from the interim certificate of payment until they are made good.

In Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, [1973] 3 All E R 195, HL, Viscount Dilhorne states that there was ‘no scintilla of authority' for Lord Denning's view - expressed in Dawnays Ltd v F G Minter [1971] 1 W L R 1205 - that ‘an interim certificate is to be regarded virtually as cash, like a bill of exchange'. Give your reasoned opinion for agreeing or disagreeing with Lord Denning's position in the light of subsequent case law that followed and departed from the decision in Dawnays. Also critically discuss any wider implications raised by the case law in question including the impact and relevance of the Housing Grants, Construction and Regeneration Act 1996.

Lord Denning's view expressed in the decision of Dawnay Ltd v FG Minter [1971] was based on the premise that cash flow was critical to a Contractor and could sometimes mean the difference between solvency and insolvency. Lord Denning stated:

“When the main contractor has received the sums due to the subcontractor - as contained in the architect's certificate - the main contractor must pay those sums to the subcontractor. He cannot hold them up so as to satisfy his cross-claim. Those must be dealt with separately in appropriate proceedings for the purpose. This is in accord with the need of business. There must be a “cash flow” in the building trade. It is the very lifeblood of the enterprise. The sub-contractor has to spend money on steel, work and labour. He is out of pocket. He probably has an overdraft at the bank. He cannot go on unless he is paid for what he does as he does it. The main contractor is in a like position. He has to pay his men and buy his materials. He has to pay the subcontractor. He has to have cash from the employers, otherwise he will not be able to carry on. So, once the architect gives his certificates, they must pay the main contractor; the main contractor must pay the sub-contractor, and so forth. Cross-claims may be settled later”.

In Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] Viscount Dilhorne's view was that to make the certificate conclusive could easily cause injustice as it may have been given when the knowledge of the architect about the state of the work or the effect of external causes was incomplete. The apparent impartiality of the architect who is paid by the employer was also deemed subject to debate. Lord Morris in the same case said:

“When parties enter into a detailed building contract there are, however, no overriding rules or principles covering their contractual relationship beyond those which generally apply to the construction of contracts ... Nor, if a contract provides for the issuing of interim certificates, should it be supposed that debts of a special class will come into existence, i.e. debts in relation to which there cannot under any circumstances be any defence or set-off. Provisions governing such interim certificates will probably be found in the contract”.

In normal construction contracts an impartial third party such as the architect is employed to form opinions or make decisions on certain issues using his or her own professional judgement. Part of this role involves the issuing of financial certificates as works progress by what is commonly known as an 'interim certificate' which identifies the quantities of work carried out and the corresponding interim payments due. A correctly served interim certificate creates a debt due from the employer but this will be no more than the parties have agreed it to be within the Contract Conditions. Typically, in the standard forms of building contract, the provision of interim certificates acts as a prima facie condition before payment. In most cases either party to the contract can challenge the certificates issued through the contract's dispute resolution provisions such as arbitration. Lord Hoffman's view as expressed in Beaufort Developments (NI) Ltd v Gilbert Ash (Northern) Ltd (1973) 71 L.G.R. was that if the certificates were not conclusive, what purpose did they serve? As construction contracts may involve substantial work and significant costs over a protracted length of time it is important that the determination of payments rightly due to the contractor is made and adhered to. Use of architect's certificates if they are not challenged as inconsistent with the contractual terms which the parties have agreed will determine when interim payments are due or completion must take place.

Lord Diplock in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] viewed that cash flow was vital to all commercial enterprises not just the construction industry. He also viewed that no consideration was given to whether the contractor's common law and equitable rights of set-off and counterclaim were excluded by the sub-contract in the Dawnays case. The Court of Appeal followed “the rule in Dawnays' case” in other cases such as: Frederick Mark Ltd. v. Schield [1972]; G.K.N. Foundations Ltd. v. Wandsworth London Borough Council [1972], holding that the amount claimed under a certificate could not be the subject of set-off or counterclaim, that only ascertained sums could be deducted and that payment of the amount due under a certificate could not be held up for cross-claims. Lord Diplock claimed these were wrongly decided because the Dawnays case did not intend to establish any principle of law or rules for general application.

Following the ratio decidendi in the Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] case, the Irish Supreme Court rejected the obiter dictum of Lord Denning in Dawnays Ltd v FG Minter Ltd [1971] which viewed that there was a special rule of construction applicable to cross-claims in building contract cases which ran counter to the principle pertaining to the right of set-off and subsequently entrenched in common law. In John Sisk & Son v Lawter Products BV the Irish High Court specifically stated that it disagreed with Lord Denning's “dogmatic proposition” and that the true test was whether the terms of the particular contract were inconsistent with the exercise of a right of set-off for the employer. The actual effect of this position is similar to Lord Denning's approach insofar as a contractor is entitled to be paid on the basis of an interim certificate even if the employer alleges it has claims against the contractor. However, a contractor should be careful to ensure that the words contained within its contract do not alter this position. When such entitlement arises, the contractor is entitled to commence proceedings to obtain judgment in the Courts. The arbitration clause in Northern Regional Health Authority v. Derek Crouch Construction Co. Ltd. [1984] gave the arbitrator the power to "open up review and revise any certificate" of the architect. The Court of Appeal held this special power was confined to the arbitrator, on whom it had been conferred by the arbitration clause. Since it would have been unjust to the contractors to deprive them of the opportunity of challenging the architect's certificates in that case, the Court of Appeal held that the two arbitrations in question should go ahead.

The construction industry has unfortunately got a poor reputation in terms of Contractor payments, the Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd [2006] case involving a £60million sub-contract for the steel structure of the new national Wembley stadium is a recent high profile example of this. It is evident that construction contracts, by both their duration and complex nature, will generate disputes regarding payment. The contractors who are employed to complete the work often consider themselves entitled to additional payment for variations to the works and concomitant delays, while the clients who have had work carried out often have good reasons why payment should not be made, for example defective works. Cash flow between the contracting parties is therefore a major concern in the construction industry. Forecast revenue is usually represented by an S curve and any deviation due to either project or cash flow delays can have a major impact on the project.

By the 1990s it was generally recognised that the construction industry required regulation with regard to non-payment as it was affecting the economic stability of the construction industry. On the back of this, it was announced in 1993 that there was to be a Joint Review of Procurement and Contractual Arrangements in the UK construction industry, funded by the Department of the Environment, and conducted by Sir Michael Latham. His final report, “Constructing the Team” was extremely wide-ranging; the report set out thirty recommendations, with number twenty-seven recommending that mandatory trust funds for payment should be established controlled by the conditions of contract in order to maintain confidence amongst sub-contractors. He considered that all construction and engineering contracts should include a general duty to trade fairly, with specific requirements relating to payment and related issues, clearly defined work stages, pre-pricing of variations, and an adjudication system which was independent of contract administration. He also concluded, with respect to non-payment, that if an employer or main contractor wanted to use its rights of set-off, it had to be done within a very short timeframe following the issue of the certificate or request for payment.

Subsequent consultation between the Government and trade bodies such as the; Building Employers Confederation, the Federation of Civil Engineering Contractors and others concentrated on the payment provisions and adjudication elements of the report. The result of the consultations was the Housing Grants, Construction and Regeneration Act 1996. The Act incorporates many of the Latham recommendations and was brought in essentially to aid confidence of payment in construction contracts. Its aim was to resolve disputes quickly, promoting cash flow, and allowing projects to continue efficiently with certainty of payment. It sought to impose terms for payment on commercial contracts regardless of the bargaining power of the parties. Where the contract provisions comply with the payment provisions of of the Act (sections 109-113), they remain effective; however, where they are non-compliant, or no provision is made at all, the Scheme for Construction Contracts will apply. The Act (sections 109-111) aims to ensure that all construction contracts provide a clear method for interim payments to the contractor/subcontractor. An obligation is imposed on the payer to notify the payee, in advance of the due date, how much is going to be paid and how that sum has been calculated. If monies are to be withheld, then the payer must notify the payee how much will be withheld and why.

Given the nature of the UK construction industry, disputes are unavoidable. The interaction of large numbers of parties on complex construction projects will inevitably result in conflict, and it is for this reason that the UK construction industry gained a reputation for being adversarial and inefficient.

Disputes between main contractors and their sub-contractors frequently stemmed from an obvious conflict of interest regarding payment: payments made to sub-contractors reduce a main contractors' cash flow (and therefore his profit). The principle behind Lord Denning's statement regarding interim certificates is fair with regard to maintaining a cash flow to keeps the wheels of industry rolling. It is unfair for a main contractor to benefit financially from making late and/or underpayments to his sub-contractors. Sub-contractors are frequently the subject of payment abuses, with unjustified late and/or underpayments being the norm. This has resulted in high incidences of sub-contractor insolvency in the industry. The dispute resolution procedures available in the industry were also not suitable for financially stretched sub-contractors, who were often forced to ‘write-off' monies owed when faced with the alternative of protracted and expensive arbitration or litigation. This fact was frequently exploited by main contractors, who would delay proceedings at every step, safe in the knowledge the financially difficulties the subcontractor was encountering (caused by the main contractors non-payment) would prevent the sub-contractor continuing with the proceedings. The practice of spinning out the settlement of disputed money was widespread, as a potential paying party was generally entitled to avoid payment if it could put up an apparently plausible abatement, set-off, or counter-claim.

Bibliography

Case Law:

Dawnays Ltd v FG Minter Ltd [1971] 2 All ER 1389; [1971] 1 WLR 1205;

East Ham Corporation v Bernard Sunley [1966] A.C. 406.

Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689; [1973] 3 All ER 195;

Holland Hannen & Cubitts (northern) Ltd v Welsh Health Technical Services Organisation (1985) 35 BLR 1 (CA).

Ian McGlinn v Waltham Contractors Ltd [2007] EWHC 149 (TCC).

Jarvis v City of Westminster (1970) 7 BLR 64.

Kaye (P&M) Ltd v Hosier & Dickinson Ltd [1972] 1 WLR 146.

Lintest Builders Ltd v Roberts (1980) 13 B.L.R. 38.

Mondel v Steel (1841) 8 M & W 858; (1835-42) All ER 511;

Oval (717) Ltd v Aegon Insurance Co (UK) Ltd [1997] 54 ConLR.

William Tomkinson & Sons Ltd v. The Parochial Church Council of St. Michael & Others (1990) 6 CLJ 319.

Other Resources:

Defective Construction Work and the Project Team, Kevin Barrett, John Wiley & Sons Ltd, 2008, 93-99.

Temporary Disconformity in Construction & Engineering Contracts, Const. L.J. 2004, 20(6), 301-318.

Construction Claims: Current Practice and Case Management, Jeremy Hackett, LLP Professional Publishing, 2000.

Joint Contracts Tribunal Ltd, Standard Form of Building Contract, Private with Quantities, 1998 Edition.

Guide to JCT98, Sarah Lupton, RIBA Companies Ltd, 1999, 31-32, 73-74.

Hudson's Building and Engineering Contracts, 11th edition, Sweet and Maxwell, London, 1995.

Internet:

http://www.irishconstruction.com/page/2045