Construction and infrastructure updater
March 2012

Implied term to proceed regularly and diligently

The TCC in the following case had to consider whether a sub-contract contained an implied term requiring the sub-contractor to proceed regularly and diligently with the sub-contract works and whether such term was necessary to give the contract business efficacy.

The TCC decided that the sub-contract worked satisfactorily without such an implied term and that the only reason it was sought at all was to enable the contractor to claim unliquidated damages for interim delay.

Leander Construction Limited v Mulalley and Company Limited [2011] EWHC 3449 (TCC)

The implied term

The contractor engaged a sub-contractor to carry out certain ground works for a development in Lewisham.

The sub-contractor carried out the principal elements of its works but not in accordance with either a sub-contract programme or the periods and dates contained in one of the sub-contract documents (the Activity Schedule). It was accepted that the sub-contractor was not under a contractual obligation to comply with the dates in the Activity Schedule as these were indicative and subject to change.

Although the sub-contractor was not in breach of its obligation to complete the sub-contract works on the completion date, the slow progress of the sub-contract works was causing delay to the contractor.

The contractor sought to withhold the sum of £131,000.00 under two withholding notices (one issued in June and other in August 2011) on the basis that the sub-contractor was in breach of an implied obligation “to proceed regularly and diligently with the sub-contract works” and that the dates set out in the Activity Schedule represented the best way to measure whether or not the sub-contractor had complied with this implied term.

The sub-contractor argued that there was no such implied term and challenged the validity of the withholding notices.

The terms of the sub-contract

The sub-contract order identified a start date, a sub-contract period of 46 weeks, and a completion date of 8 August 2011.

The sub-contract did not include contract terms as to interim performance, milestone dates or sectional completion. It was a fixed lump sum contract with one completion date.

The sub-contract did contain an express right entitling the contractor to terminate the sub-contract upon notice if the sub-contractor failed to proceed regularly and diligently with the sub-contract work.

Did the sub-contractor owe the contractor any interim obligation as to progress and performance that would give rise to a claim for damages in advance of the sub-contract completion date?

The relevant test of implication

For a term to be implied into a contract for business efficacy, the term must satisfy the following conditions:

• it must be reasonable and equitable;
• it must be necessary to give business efficacy to the contract so no term will be implied if the contract is effective without it;
• it must be so obvious that “it goes without saying”;
• it must be capable of clear expression; and
• it must not contradict any express term of the contract.

(The relevant test of implication as formulated by Lord Simon of Glaisdale in BP Refinery (Westernport) Pty Limited v Shire of Hastings [1978] 52 ALJR 20).

Ultimately the test was one of necessity i.e. was the implied term necessary to make the contract work? (Liverpool City Council v Irwin [1977] AC 239).

Regularly and diligently: the authorities

The judge reviewed the authorities as to what was meant by the phrase “to proceed regularly and diligently” and concluded that:

• It was difficult to give this term a defined meaning - colloquially it meant “get on with it” GLC v Cleveland Bridge and Engineering (1984) 34 BLR, 50 (GLC);
• Simon Brown LJ (as he then was) defined it to mean “to proceed continuously, industriously and efficiently with appropriate physical resources so as to progress the work steadily towards completion substantially in accordance with the contractual requirements as to time, sequence and quality of work” (West Faulkner Associates v London Borough of Newham [1994] 71 BLR 1).
• The definition in West Faulkner was controversial because the obligation “to proceed continuously” was contrary to the general principle that a contractor was entitled to carry out his works in whichever way he wanted to provided the completion date was met.
• Keating on Construction Contracts (8th edition, 2006) made two points relying on GLC to support its view:
  • Interim slowness which did not result in the contractor failing to complete on time might not be a breach of contract - if it was, damages would, if any, be small.
  • There was no implied term of due diligence beyond the contractor’s express obligation to comply with key dates.

• Hudson’s Building and Engineering Contracts (12th edition, 2011) took a different view (although did not cite any support of its proposition) - an express term of due diligence might be implied in construction contracts as a matter of business efficacy.

The court’s approach

The judge interpreted the conclusion which Staughton J reached in GLC (and which was upheld by the Court of Appeal) as a general principle applicable to building and engineering contracts to the effect that “in the absence of any indication to the contrary, a contractor is entitled to plan and perform the work as he pleases, provided always that he finishes it by the time fixed in the contract.”

The judge concluded from his review of the authorities that the courts have been very reluctant to imply additional terms as to the timing or regularity of the contractor’s performance prior to the contract completion date. In this case, the GLC decision is most in point as both Staughton J and the Court of Appeal refused to imply an obligation to proceed regularly and diligently, notwithstanding the fact that these words appeared in the termination clause.

The court’s decision

The judge held that the contractor failed to demonstrate the need to imply a term of proceedings in a “regular and diligent” manner as a matter of business efficacy for the following reasons:

• case law showed that:
  • (i) the courts were generally slow to imply terms into a contract, particularly where as in this case there were already detailed terms and conditions; and
  • (ii) priority was given to the principle that, provided that the main contractual obligation was to complete by a certain date, it was unnecessary and unhelpful to impose other interim progress obligations upon a contractor.
• the contractor failed to demonstrate that the term was necessary to make the sub-contract work - the sub-contract operated satisfactorily without the implied term.
• regard must be given to the contractual mechanism for delay - there was one completion date and the extension of time provisions related to that date. An alleged term bringing with it start dates, completion dates and durations for a series of sub-contract activities would make the extension of time mechanism impossible to operate.
• the fact that the parties had referred to the failure to proceed regularly and diligently in the termination provision suggested that they had expressly considered what should happen in the event of slow progress and had decided that termination would be the appropriate remedy. It would be impossible to argue that an implied term was necessary in such circumstances.
• the sub-contract contained other terms entitling the contractor to control the sub-contractor’s performance such as the obligation to comply with instructions and to co-operate - these terms militated against the need for further implied terms.
• the implied term was the only way to give contractual status to the dates in the Activity Schedule without which the dates had no contractual effect and the contractor’s claim set out in the withholding notices was invalidated.

Editors’ comments

This case provides a good review of the authorities on a term which is frequently encountered in building and engineering contracts and confirms that contractors and sub-contractors do not have an implied obligation to proceed regularly and diligently with the works.

The case also raised an interesting point about construction of contracts. The judge took the view that by framing the obligation to proceed regularly and diligently in the termination provisions of the sub-contract the parties must have considered that a right to terminate was a preferable solution in the event of a breach as opposed to a right to claim unliquidated damages which would have been the position had the obligation to proceed regularly and diligently been a stand alone provision in the sub-contract. As a consequence, there was no need to imply a stand alone term to proceed regularly and diligently in the sub-contract.

If parties wish for a contractor or sub-contractor to proceed regularly or diligently with its works this should be set out expressly in the contract together with appropriate start and end dates and an adequate extension of time mechanism to extend such start and end dates in the usual way.

View: Leander Construction Limited v Mulalley and Company Limited [2011] EWHC 3449 (TCC)

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The NEC3 Engineering and Construction Contract

Since the release of the New Engineering Contract in 1991 the paucity of court decisions in relation to the NEC contracts has been claimed by some as something of a success story. The argument runs that unlike more traditional contract forms such as the contracts published by the Joint Contracts Tribunal (which have been the subject of repeated scrutiny in the courts), the lack of decisions on the New Engineering Contract is evidence that the philosophy and stimulus to good project management fostered by the NEC encourages the prompt resolution of contractual issues during the progress of the works rather than by costly litigation many years after the event.

Whether the lack of reported decisions is evidence of fewer formal disputes or not, users of the NEC3 Engineering and Construction Contract will greet with interest the recent decision of Lord Glennie in the Outer House of the Court of Session in SGL Carbon Fibres Ltd v RBG Ltd [2012] CSOH 19. The case considers in some detail the proper interpretation of the payment provisions of the NEC3 Engineering and Construction contract in the context of the popular main Option C payment clause (target contract with activity schedule).

SGL Carbon Fibres Ltd v RBG Ltd [2012] CSOH 19

Background

The decision arose in the context of a building contract between the Employer, SGL Carbon Fibres Limited (SGL), and the Contractor, RBG Ltd (RBG) relating to certain works at SGL’s factory. The contract was in the form of an amended NEC3 Engineering and Construction Contract including main Option C and Option W2.

Disputes arose between the parties which led to two separate adjudications and subsequent court decisions (on the extent of an adjudicator’s jurisdiction and in relation to breach of natural justice in adjudication).

Subsequent to these decisions the parties referred their differences to arbitration. The decision in this case resulted from an appeal on a point of law against the decision of the arbitrator under Rules 69 and 70 of the Scottish Arbitration Rules (a similar right exists in English law under section 69 of the Arbitration Act 1996).

The Question

SGL was the claimant in the arbitration and argued that they had overpaid RBG for works done. In contrast RBG argued that it was due additional payments. The arbitrator was asked (amongst other issues) to decide where the onus of proof lay in respect of each of these cross claims. Where SGL claimed to have overpaid was it for SGL to show that it had paid too much or for RBG instead to substantiate that payments made to it were properly due? In contrast where RBG claimed to be entitled to additional payments was it for RBG to prove that additional entitlement?

Relevant contractual provisions and facts

The arbitrator considered the workings of the payment provisions in the NEC3 Core clauses. These provisions will be familiar to all users of the NEC3 forms:

• Clause 50.1 which provides that the Project Manager assesses the amount due at each assessment date;
• Clause 51.1 which provides that the Project Manager certifies a payment within one week of each assessment date, the first payment being the “amount due” and later payments being the “change in the amount due since the last payment certificate”;
• Clause 50.2 which defines the amount due as the “Price for Work Done to Date” (PWDD) plus other amounts to be paid to the contractor and less amounts to be paid by or retained from the contractor;
• The definition of PWDD which is defined in Clause 11.2(29) as the “total Defined Cost which the Project Manager forecasts will have been paid by the contractor before the next assessment date plus the Fee”;
• The definition of “Defined Cost” in Clause 11.2(23) which is, in the Option C payment provisions, a calculation of “actual cost” less “Disallowed Cost”. Disallowed Cost is cost which is not justified by the contractor’s accounts and records and/or should not have been paid by the contractor to subcontractors;
• Clause 50.5 which permits the Project Manager to correct any wrongly assessed amount due in a later payment certificate; and
• Clause W2.3 and Clause W2.4 which permits any Adjudicator or Arbitrator to “review and revise any action or inaction of the Project Manager”.

Also relevant was the way in which the payment provisions had been administered in practice by the parties. Rather than strict adherence to the NEC3 terms, the parties instead operated a less formal payment process. The Project Manager did not play any significant role in the assessment of interim payments. Instead, RBG agreed with SGL’s quantity surveyor the amount due and then submitted a claim in that amount to SGL each month. SGL then paid that amount in full.

The Award

The arbitrator found that:

• RBG had to prove that it was entitled to additional amounts in excess of those sums previously paid (this conclusion was accepted by the parties);
• where SGL believed it had overpaid the burden would be placed on SGL to prove that it had overpaid and was therefore entitled to be reimbursed. It was this aspect of his decision which resulted in the appeal;
• the payment provisions set out a process by which payments made during the course of the contract were made on an interim basis only. These were subject to correction if wrong by either the Project Manager in later certificates or by a subsequent Arbitrator/Adjudicator.

In so finding, the arbitrator rejected SGL’s argument that as the contract provisions provided that RBG had to demonstrate its entitlement by way of the PWDD on a monthly basis this meant that RBG had to justify its entitlement to payment in an arbitration.

SGL obtained leave to appeal in respect of the onus or burden of proof relating to SGL’s claim to recover sums allegedly overpaid to RBG during the course of the contract.

The Decision on the Appeal

In his judgement Lord Glennie considered at some length the provisions of the NEC3 ECC and the main Option C contract discussed above.

He described two important features of the payment mechanism; “first, that the right of the Contractor to payment depends upon an assessment each month of the accumulating PWDD; and second, that that assessment is subject to continual review and correction. In other words, any assessment is only for the purpose of determining what sums are payable at any particular instalment date, and is not binding when it comes to consider future instalments or the final sum due”.

This statement is a helpful confirmation as to the workings of the payment mechanism, though it simply confirms what was common understanding in any event.

The wider conclusion of Lord Glennie in respect of the burden of proof was of more interest.

SGL’s argument on appeal

In the appeal SGL argued as follows:

• “Disallowed Cost,” that is, the costs which are to be deducted from “Defined Cost” as part of the calculation of the PWDD included “cost which is not justified by the Contractor’s accounts and records”. The logical extension of that concept was that any assessment of the PWDD required the Contractor to justify that particular costs were not Disallowed Cost and and so were included in the “Defined Cost”. The burden to demonstrate this lay with RBG (which is of course reasonable given that it is the Contractor who would be in possession of the relevant accounts and records not the Employer);
  
• The arbitrator therefore failed to give effect to the express provisions of the contract which required RBG to prove the PWDD;
• The arbitrator wrongly attached significance to the interim monthly agreements made between the parties by considering that they overrode the contractual position which required RBG to prove the PWDD on a monthly basis; and therefore
• The burden of proof to demonstrate entitlement to the PWDD rested with RBG by virtue of the express contractual provisions, not on SGL.

RBG’s argument on appeal

RBG argued as follows:

• There was a distinction between the burden to prove an entitlement in the arbitration and that burden under the contract;
• Under the contract the burden lay with the Project Manager to assess the amount due. This was a mandatory obligation;
• In the arbitration the burden lay with the party seeking to prove that the Project Manager’s assessment was wrong;
• It would be “contrary to business sense for the payment provisions to operate in such a way that when the stage of arbitration was reached, all the previous assessments and certificates flew off and the parties were required to start again from scratch.”;
• The burden was therefore placed on SGL to prove that previous interim assessments were wrong and that SGL had overpaid.

The court’s decision

Lord Glennie concluded that it was settled law that “he who avers must prove” and that “this [did] not provide the answer in all cases, but [provided] a good starting point.”

He observed that “it does not follow from the non-binding nature of the Project Manager’s assessment and payment certificate that they are to be ignored when it comes to working out the final account or when one or the other party seeks to recover more or recover back sums already paid…Any party wishing to have a prior assessment corrected must at least bear the burden of persuasion”.

In an arbitration, on the basis of the payment process described above, the arbitrator could open up the question of the proper calculation of PWDD (and the question of Defined Cost and Disallowed Cost) and to do that “he will require the Contractor’s accounts and records…But unless and until he has corrected the Project Manager’s payment certificate that certificate stands…In those circumstances … the onus must be on the party seeking to persuade the arbitrator to depart from the assessment of the PWDD made by the Project Manager”.

Lord Glennie’s conclusion was therefore that the process of assessment through the life of the contract could not be ignored; once the relevant assessment was made by the Project Manager that decision would stand until corrected. The burden then lay on the party seeking to prove that the previous decision by the Project Manager was wrong.

Therefore to the extent that SGL believed that previous certificates were wrong and that it had overpaid, the burden was placed upon it to demonstrate that those previous certificates should be revised.

Editors’ comments

This case adds to judicial consideration of the New Engineering Contract and in particular the NEC3 form. It is therefore essential reading for all those involved in using this form of contract.

In the context of the relevant contractual provisions this case confirms that previous assessments by the Project Manager and certificates issued by him can be corrected by subsequent assessments or certificates or by an Adjudicator/Arbitrator. An Employer challenging a prior assessment in arbitration bears the burden of persuading the Arbitrator to depart from the certified position.

Note that as a Scottish decision it is not binding in England though, given its careful reasoning, it may be persuasive.

View: SGL Carbon Fibres Ltd v RBG Ltd [2012] CSOH 19

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Adjudication: forum shopping and apparent bias

The Court of Appeal considered the issue of forum shopping and the apparent bias of the adjudicator. The appeals were heard together and arose out of two decisions in the Technology and Construction Court in Lanes Group plc v Galliford Try Infrastructure Ltd [2011] EWHC 1035 (TCC) (reported in the May 2011 Updater) and in Lanes Group plc v Galliford Try Infrastructure Ltd [2011] EWHC 1679 (reported in the July 2011Updater) which:

• confirmed the appointment of an adjudicator despite the fact that the referring party had abandoned the first reference to adjudication so that the adjudicator was the second adjudicator appointed to hear the same dispute; and
• held that the second adjudicator’s decision was a nullity on the grounds of apparent bias on the part of the adjudicator.

Lanes Group plc v Galliford Try Infrastructure Ltd (t/a Galliford Try Rail) [2011] EWCA Civ 1617

Galliford Try Infrastructure Ltd (contractor) was engaged to refurbish a train maintenance depot in Inverness. It engaged Lanes Group plc (sub-contractor) for certain roofing and glazing works. The contractor terminated the sub-contract and/or accepted its repudiatory breach which led to a dispute between the parties, each claiming substantial damages from the other. The sub-contractor’s court proceedings were stayed to arbitration in the TCC with Mr Justice Ramsey sitting as arbitrator.

In the meantime, the contractor issued adjudication proceedings seeking a declaration that it had lawfully determined the sub-contractor’s employment under the sub-contract; or alternatively that the sub-contractor had repudiated the sub-contract.  

The sub-contract provided that the adjudication would be conducted in accordance with the ICE Adjudication Procedure. Mr Klein was first appointed by the ICE as adjudicator but instead of proceeding with the first adjudication, the contractor decided to issue fresh adjudication proceedings with a separate nomination request. The ICE then appointed Daniel Atkinson as adjudicator for the separate nomination request.

When the sub-contractor failed to serve its response, Mr Atkinson sent the parties a Preliminary Views document setting out the provisional conclusions that he had reached before finally deciding to award over £1 million to the contractor having heard submissions on the Preliminary Views document.

At first instance, the court decided that the contractor was entitled to start a second adjudication despite allowing the first adjudication to lapse but that Mr Atkinson’s decision was a nullity because of apparent bias.

Issue 1: Forum Shopping

In the Court of Appeal, Jackson LJ, giving the judgment of the Court of Appeal, found that a party who did not pursue an adjudication after service of the adjudication notice and the appointment of the adjudicator, did not lose the right to adjudicate that dispute for all time. Jackson LJ noted that, although forum shopping was “never attractive”, a party does have the right to drop its referral and then adjudicate the dispute before an adjudicator it prefers.

Issue 2: Apparent bias

The second issue was whether Mr Atkinson’s award was a nullity because of apparent bias.  

The Court of Appeal noted that the test of the fair minded observer set out in Porter v McGill [2001] UKHL 67 applied in the context of adjudication where apparent bias or apparent pre-determination was alleged (Amec Capital Projects v White Friars City Estates Ltd [2004] EWCA Civ 141).

The Court of Appeal held there was nothing objectionable about expressing a preliminary view so long as the final decision was not reached prematurely.  Applying the test of a fair minded observer, the Court of Appeal considered the adjudicator was merely expressing a provisional view for the assistance of the parties (not as a final decision reached before he had considered the sub-contractor’s submissions and evidence). This conclusion was reinforced in Jackson LJ’s view by the rough and ready nature of adjudication and the fact that an adjudicator's decision was not final and binding on the parties (as opposed to a decision of the court or arbitrator).

The Court of Appeal reversed the first instance decision and held that the adjudicator’s decision was not tainted by apparent bias and Mr Atkinson’s award was enforceable.

Editors’ comments

The Court of Appeal’s decision is a reminder that an adjudication decision is not a final decision as it is only temporarily binding until such time as the parties have concluded either litigation or arbitration proceedings or settlement negotiations or other forms of ADR.

This means that “courts are reluctant to strike down adjudication decisions for breach of natural justice or on similar grounds, unless the complainant’s case is clearly made out.”

View: Lanes Group plc v Galliford Try Infrastructure Ltd (t/a Galliford Try Rail) [2011] EWCA Civ 1617

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Injunction

In the following case, the court had to consider whether to grant an injunction to a contractor requiring the sub-contractor to return 'turnover package' documentation held by its sub-contractor, following termination of the sub-contract by the contractor.

Alstom Power Limited v Somi Impianti S.R.L. [2011] EWHC 445

Alstom Power Ltd (contractor) was appointed by RWE npower plc to engineer, procure and construct a substantial power plant in Pembrokeshire. Under a sub-contract dated 16 April 2010 the contractor engaged Somi Impianti S.r.l. (sub-contractor) to carry out mechanical and piping erection and plant piping and mechanical erection works in two packages.

The sub-contract defined the sub-contractor’s equipment as “all appliances and things of whatsoever nature, other than Temporary Works, required for the execution and completion of the works, other than … things intended to form or forming part of the Permanent Works”.

As part of the project, the sub-contractor was required to produce turnover packages (TOPs) which comprised erection completion certificates, piping diagrams and as-built drawings. The TOPs formed a critical part of the handover arrangements so that without them it was unlikely that the plant would be readily accepted.

The TOPs were retained on site. Some time before termination of the sub-contract by the contractor, the sub-contractor removed the TOPS from the site and a number were taken back to Italy.

The injunction application

The contractor made a summary judgment application for an injunction requiring the sub-contractor to deliver the TOPs to the contractor.

The court was satisfied that the sub-contractor had no right to remove the TOPs from the site as the property and title in such documents remained with the contractor. The definition of the sub-contractor’s equipment was wide enough to cover the TOPs and they became the property of the contractor once brought on to site under a provision of the sub-contract.

The contractor succeeded in obtaining an injunction. The TOPs had no value to the sub-contractor save as a bargaining chip by which it hoped to secure some financial advantage. The court considered that damages would not be an adequate remedy because the sub-contractor was in financial difficulty and would be unlikely to honour any award of damages.

Editors’ comments

This case is a useful reminder that the court is able to grant an injunction to do something rather than refrain from doing something.

View: Alstom Power Limited v Somi Impianti S.R.L. [2011] EWHC 445

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