IMPERIAL CHEMICALS INDUSTRIES LTD v MERIT MERRELL TECHNOLOGY LTD (No 4)

 

Technology and Construction Court

Fraser J

12 July 2017

IMPERIAL CHEMICALS INDUSTRIES LTD v MERIT MERRELL TECHNOLOGY LTD (No 4)

The employer on the contract’s termination was entitled to recover any overpayment made in respect of the value of the works despite part of the amount it had paid including an adjudicator’s award for the sum applied for in an interim payment application made on the sole ground that the employer failed to serve any pay less notice

 

The contract was based on the NEC3 form of contract and was terminated as a result of the contractor’s acceptance of the employer’s repudiatory breach of contract. An issue arose as to the employer’s right to recover any overpayments for executed works at the time the contract was terminated. The issue arose because the contractor had had the benefit of an adjudicator's decision on the last interim certificate before the termination, in which the contractor was awarded the full amount of its interim payment application on the sole ground that the employer failed to serve a pay less notice. The contractor contended that (i) The valuation of the account was the amount paid by the time of the contract’s termination (ii) The actual payments made were "deemed to be the value of the works" and (iii) Any overpayment claimed by the employer based on what it alleged was the true value of the works it had executed by the time of termination therefore could not be recovered by it.

 

Fraser J, in rejecting the contractor’s contentions, stated that the fact that the employer repudiated held that the contract did not relieve the parties of an analysis of the value of the works executed by the contractor or freeze the contractor’s entitlement to payment at the amount it had in fact already been paid (or which had already been included in the most recent interim assessment) up to the time of termination. An interim assessment under the NEC3 contract could not be said to be a definitive or final valuation of the works for all purposes at that point in the project and could be corrected in a later certificate.

 

The contractor relied (exclusively) on the decision of Edwards-Stuart J in ISG Construction v Seevic College (2014) in advancing its contention. Fraser J noted that the Court of Appeal in its judgments in Harding v Paice (2015) and in Brown v Complete Building Solutions (2016) did not expressly find that ISG v Seevic was wrong because it was unnecessary to do so) but cast some real doubt in their ratio as to whether ISG v Seevic would be decided in the same way now. The decision of Edwards-Stuart J in ISG v Seevic was in any event not authority for the contractor’s contentions.

 

THE RELEVANT PASSAGE IN THE JUDGMENT OF FRASER J

 

Recovery by ICI of over-payments made to MMT

 

  1. Given that a split trial between liability and quantum was ordered, it was necessary for the parties to assume that the eventual financial exercise would show that the amounts paid to MMT were in excess of the correct contractual valuation of its works, if the legal position concerning overpayment to MMT were to be resolved. ICI submit that recovery of any such (assumed) overpayment is something to which ICI is entitled, either under the contract terms or the equitable doctrine of restitution. MMT challenge this, claim that the valuation of the account is in the sum of £20.930 million (the amount paid) and maintain that the actual payments made are "deemed to be the value of the works" and any such over-payment (which is denied) cannot be recovered by ICI. It is also said by MMT that the value of the account "is not in issue in these proceedings; they have already been determined in a finally binding adjudicator's decision and in court proceedings in MMT's favour". I have in this paragraph provided a summary of the parties' cases on this point, taking in particular MMT's points in paragraphs 55(5) to (7), and paragraphs 87 to 96 of its Amended Defence and Counterclaim. …

 

  1. Recovery by any employer of any balance of interim payments made to a contractor could potentially arise under one of two legal routes. The first is under the terms of the contract itself; the second is by an alternative non-contractual legal route. Even though ICI puts its case on this point substantially on restitution, it is necessary to analyse the contracts term first. Each route – contractual, and ex-contractual - can be considered in turn, and it is sensible to deal with the contract itself first, because if that legal mechanism permits recovery of overpayments then there is no need to consider the non-contractual legal options. Further, in this case the total paid to the contractor MMT by ICI was, in part, as a result of two adjudication decisions, namely those in Adjudication No.1 and Adjudication No.4. The status of those payments must too be considered as that is an important component in any claim for recovery by ICI.

 

The contractual route to recovery of over-payment

 

  1. Although the contract terms, in clauses 90 and 91, provide for a termination process that results in a Termination Certificate specifying the reason, with the amounts payable in either way identified in the Termination Table, I have found that this did not occur in this case and ICI repudiated the contract by purporting to accept a repudiatory breach, or breaches, which did not exist. ICI therefore repudiated the contract.

 

  1. I consider it well-established law that, if a contract comes to an end through repudiation, the parties' existing rights and obligations under that contract remain in existence. Further performance of the contract by both parties comes to an end. Neither party has any future substantive obligations. However, the existing rights and obligations the parties have, as at the time the contract comes to an end, remain, and the parties remain governed by the contract terms in that respect. Accordingly, if ICI had a right as of 17 February 2015 to recover overpayments under the contract, that right remained in being notwithstanding the repudiation by ICI of the contract.

 

  1. The nature of the payment obligation upon any employer in a construction contract is to make interim or stage payments. This was required by the Housing Grants Construction and Regeneration Act 1996 initially, and now as amended by the Local Government Economic Development and Construction Act 2009. Contracts governed by this legislation must include certain terms on some matters, including payment, and a failure to do so has the provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998 No.649) imposed into that contract. Even before this legislation, the majority if not all the standard forms had provisions for interim payments to be made (usually against interim certificates) to the contractor during the project, to assist with cashflow. Some agreements – and a recent example is in Balfour Beatty Regional Developments Ltd v Grove Developments Ltd [2016] EWCA Civ 990 – actually identify in advance the specific dates in different months when each instalment or stage payment will be applied for, and paid. Others identify this by particular intervals stated to be in number of days. Some, more basic, contracts might have specific percentages of the overall contract value as the interim payments. Most are, however, assessed by way of some sort of interim valuation.

 

  1. This contract has two components so far as payment to MMT is concerned. One is the Defined Cost, and the other is the Fee. Clause 50.1 makes it clear that the Project Manager assesses the amount due at each assessment date. That amount – the "amount due" – is, by clause 50.2, made up of three elements:

 

"1. The Price for Works Done to Date

 

  1. Plus other amounts to be paid to the Contractor

 

  1. Less amounts to be paid by or retained from the Contractor"

 

  1. I do not consider that such an interim assessment can be said to be a definitive or final valuation of the works for all purposes at that point in the project. Clause 50.5 makes it clear that "The Project Manager corrects any wrongly assessed amount due in a later payment certificate." That later payment certificate could, potentially, be an interim assessment. It is not only at the Final Assessment stage that the Project Manager can correct any "wrongly assessed amount". If there could be any doubt about the nature of the entitlement by the contractor to the sums paid in an interim assessment contained in a payment certificate – and I do not consider that there can be – this is made crystal clear by Clause 56 which states the following:

 

"The issue of any payment certificate or the payment of any amount by the Employer to the Contractor does not constitute or imply or be evidence of the Project Manager's, the Supervisor's or the Employer's approval or acceptance of any design, work, Plant and Materials forming part of the works or relieve the Contractor of any of his obligations under this contract."

 

  1. If, for example, the contractor were to perform works using certain (less-expensive) materials on a particular part of the project different to those specified, and for whatever reason these works are included in a payment certificate and paid, Clause 56 cannot be relied upon by the contractor to argue approval or acceptance of those materials or that work by the Project Manager or employer. However, if Mr Mort QC's argument were to be correct, even though the value of those works (which would on this analysis undoubtedly be "wrongly assessed") could be corrected in a later certificate, until that later certificate were in fact issued, the employer would not have any accrued legal rights to repayment for sums paid by it for the non-contractual works. I do not consider that is how the payment provisions of the NEC3 contract are intended to work. It should be further noted that clauses 50, 51 and 52 are Core clauses. They are central to how the NEC3 contract operates.

 

  1. Mr Mort QC has one authority upon which he relies to substantiate MMT's argument, namely ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC), a decision of Edwards-Stuart J. In that case, the contract was on the JCT Design and Build Contract 2011. The contractor sought an adjudicator's decision in relation to its Application No.13, in respect of which the employer had not served valid payless notices. This decision, in Adjudication No.1, was in the contractor's favour in the sum of £1.097 million. Some four days before the decision in that adjudication, the employer started another adjudication, Adjudication No.2, in relation to the actual value of the contractor's works the subject of Application No.13. The employer succeeded in that adjudication in that the adjudicator decided that the value of the works the subject of that adjudication was only £315k, because the adjudicator disallowed a very considerable sum (approximately £1 million) claimed as loss and expense. Edwards-Stuart J declared that there was no jurisdiction to conduct Adjudication No.2, even though in Adjudication No.1 the adjudicator had stated "For the avoidance of doubt I record that I have made no decision as to whether or not that is the correct value of work undertaken by ISG." This was because, as he put it in [25] "as between contractor and employer, in the absence of any notices the amount stated in the contractor's application as the value of the works executed is deemed to be the value of those works so that the employer must pay the sum applied for." He considered that the question of the valuation of the works in Application No.13 had been decided in Adjudication No.1. Permission to appeal was granted in that case by the Court of Appeal, but the appeal did not take place as the matter was compromised.

 

  1. However, in my judgment that case does not go so far as Mr Mort QC seeks to press it. The Amended Defence and Counterclaim in this case relies upon part of the passage of the judgment in that case at [25] that states that the amount of the interim application is "deemed to be the value of those works". In any event, the case was decided before the Court of Appeal judgment in MJ Harding Contractors v Paice and Springall [2015] EWCA Civ 1231 [2016] BLR 85. This was the Court of Appeal judgment in a set of disputes of long-running serial adjudications. This judgment concerned the 3rd and 4th adjudications between the same parties. In the 3rd adjudication, an adjudicator found that there was no valid payless notice in respect of a final account claim which had been issued by the contractor, the notice that had been issued being too late. He decided that the final account claim (the merits of which he did not consider) should be paid. The employer (two private individuals who had contracted together as employer) commenced the 4th adjudication to determine the value of the final account. When the 4th adjudication started, the contractor sought an injunction to restrain it continuing on the grounds that it concerned the same dispute that had already been decided in the 3rd adjudication. Edwards-Stuart J refused the injunction. Jackson LJ gave permission to appeal on the basis that the case raised issues of importance. The Court of Appeal heard the appeal notwithstanding a decision by Coulson J, after the decision of Edwards-Stuart J but before the appeal was heard, that the decision in the 4th adjudication was not enforceable for reasons of breach of natural justice.

 

  1. In dismissing the appeal (Jackson, Rafferty and Gloster LJJ), the Court of Appeal stated that "the dispute" referred to in any adjudication should not be looked at in isolation. The decision in the 3rd adjudication had dealt with the first of two alternative limbs, namely the contractual issue (validity of the payless notice) and hence had not dealt with the second issue, the valuation issue. Accordingly, Mr Paice and Ms Springall were entitled to have referred the valuation dispute for resolution in the 4th adjudication, and remained entitled to do so again in what was by then a proposed fifth adjudication. Jackson LJ referred to ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) and said that it was not necessary to say if that decision was right. However, in my judgment it can be difficult to reconcile the decision in ISG v Seevic with the ratio in Paice v Harding. A similar approach to defining the dispute was adopted by a differently constituted Court of Appeal in Brown v Complete Building Solutions Ltd [2016] EWCA Civ 1. In that case there were repeat adjudications, in a situation where Mr and Mrs Brown had engaged the contractor to build a new house in Surrey. Following issue of a "Final Certificate" by the Architect, the contractor sought a final payment. It was not paid and the contractor commenced the 1st adjudication. The adjudicator decided that the certificate was not ineffective (which was one of the issues), but that the letter seeking payment was not a valid payment notice as it had certain deficiencies. He therefore found that no sum was payable. The contractor then corrected the deficiencies that had been identified, issued a valid payment notice, and started a 2nd adjudication. Mr and Mrs Brown did not serve a payless notice, and said that this was the same dispute as had been resolved in the the 1st adjudication. The 2nd adjudicator did not agree and decided in favour of the contractor. HHJ Raynor QC sitting as a judge of the High Court granted the contractor summary judgment on the decision, and Mr and Mrs Brown appealed. The Court of Appeal (Beatson, Simon LJJ and Sir Robin Jacob) dismissed the appeal, holding that the terms, scope and extent of the dispute previously referred, and the terms, scope and extent of the earlier decision, had to be analysed. The dispute that was referred for resolution in the earlier adjudication could not be considered in isolation. The latter adjudication dealt with a different dispute and the adjudicator had jurisdiction.

 

  1. In my judgment, the ratio of both those Court of Appeal authorities – though neither expressly finds that ISG v Seevic is wrong, because it was unnecessary for the differently constituted courts to do so – cast some real doubt on whether that case would be decided in the same way now. That must lead to similar doubts as to whether the reasoning in that case concerning rights to recover overpayments is correct, even if it were directly on the point that Mr Mort QC is pressing. However, upon analysis, it can be seen that the judgment in ISG v Seevic is not authority for what he seeks to establish in any event.

 

  1. ISG v Seevic is a case concerned with timing, not substantive underlying rights. At [43] the judge said the following:

 

"Since the only issue referred to the adjudicator in Adjudication No 2 was the value of ISG's works at the date of Application No 13, and since I have concluded that this question was decided in Adjudication No 1, that conclusion disposes of the dispute referred in Adjudication No 2. Accordingly, ISG is entitled to a declaration to that effect."

 

(emphasis added)

 

  1. The fact that ISG v Seevic is concerned with timing and dates can be seen from subsequent passages in the judgment. At [44] and [45] the judge said the following:

 

"[44] However, if I am wrong about the issue referred to the adjudicator in Adjudication No 2 as being the value of ISG's works on the valuation date for Application No 13, there is another route to the same result. On this application for summary judgment the court is being asked, in effect, to decide the rights of the parties in relation to the dispute raised by Adjudication No 2. In my judgment, the court is entitled to do just that (because, as I have already mentioned, there is no arbitration clause).

 

[45] For the reasons that I have already given under this form of contract the employer has no right to demand a valuation of the contractor's work on any date other than the valuation dates for interim applications specified in the contract. Accordingly, if and in so far as in Adjudication No 2 Mr. Juniper was purporting to determine the valuation of the works at a date other than a valuation date (ie. 13 May 2014 instead of 11 May 2014), and then to make a financial award on the basis of it, he was in my judgment wrong to do so."

 

(emphasis added)

 

  1. These two passages are important. They show that the reasoning that follows the conclusion concerning what was decided in Adjudication No.1 is obiter and not part of the ratio decidendi of the judgment. The passages also make it clear that the statements in [45] are directed at the date upon which valuations were contractually to be performed. It should also be noted that even if the employer has no "right to demand" a valuation of the contractor's works on a date other than a valuation date under the contract, this is different to stating that the finite amount to which the contractor is entitled as final payment for the works is in all cases the figure in the most recent interim assessment. They are two entirely different points.

 

  1. In Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC) the judge himself explained his view of what ISG v Seevic had decided, and what it had not. He said the following:

 

"[18] I held that if an employer fails to serve the relevant notices under this form of contract it must be deemed to have agreed the valuation stated in the relevant interim application, right or wrong. Accordingly, the adjudicator must be taken to have decided the question of the value of the work carried out by the contractor for the purposes of the interim application in question.