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Page 1 ⇓
CA3/17
18 October 2017
OUTER HOUSE, COURT OF SESSION
[2017] CSOH 132
OPINION OF LORD BANNATYNE
In the cause
MUIR CONSTRUCTION LIMITED
against
KAPITAL RESIDENTIAL LIMITED
Pursuer: Manson; Brodies LLP
Defender: Duthie; Burness Paull LLP
Pursuer
Defender
Introduction
[1] The pursuer trades as a commercial contractor in the construction sector. In or
around 2014, the defender wished to procure the design and construction of a new-build
housing scheme at Admiralty Road, Rosyth (“the project”). The pursuer was selected as the
principal contractor for the project.
[2] The pursuer and defender entered into a Design and Build Contract in relation to the
project on 12 and 14 August 2014 (“the Construction Contract”).
[3] During the course of the project disputes arose between the parties on a range of
matters. In particular, disputes arose in relation to (1) purported defects arising from the
Page 2 ⇓
2
pursuer’s work on the project and (2) the valuation and payment of the pursuer’s final
account in terms of the Construction Contract.
[4] The parties referred questions arising from those disputes to adjudication. The
parties also engaged in litigation in this court under reference CA221/15 relative to the
disputes and the conduct of the adjudications.
[5] The pursuer and the defender elected to attempt to procure a global resolution of the
various disputes which arose from the project. In the early part of 2016, the parties
negotiated and then entered into a contract regulating the manner in which the disputes
were to be resolved. This contract was dated 7 and 8 April 2016 (“the Settlement Contract”).
The Settlement Contract inter alia sought to deal with the circumstances in terms of which
the defender was entitled to retain money pending completion by the pursuer of its
contractual obligations.
[6] On 21 December 2016 the defender issued to the pursuer what purported to be a pay
less notice (“PLN”).
[7] The defender has retained and continues to retain the sum of £102,208.59 (“the
retention sum”).
[8] The pursuer in the present action seeks payment from the defender of the retention
sum. The defender denies liability to make payment of the retention sum to the pursuer. In
addition the defender counterclaims for damages.
The Issues
[9] The action was set down for Debate, in order to discuss the following matters:
(a) The defender’s right to exercise equitable retention.
(b) Express waiver in terms of the Settlement Contract.
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3
(c) The validity of the PLN served by the defender.
(d) The relevancy and specification of the counter claim.
[10] The first issue was argued before me at some length. However, in the course of his
submissions Mr Duthie advised that the defender was no longer insisting upon its argument
based on the concept of equitable retention.
[11] In addition to the Debate I was also addressed with respect to the pursuer’s motion
for summary decree.
The Material Provisions of the Contracts
Retention
[12] The provisions regarding retention are contained in Clause 6 of the Settlement
Contract which provides as follows:
“6.1 Subject to Clause 6.2 the Retention shall be paid by Kapital to Muir upon the
earlier of:
6.1.1 the issue of the Notice of Completion of Making Good Defects under
the Contract; or
6.1.2 31 December 2016.
6.2 If Kapital is of the view that any defects remain as at the date for payment of
the Retention, Kapital may only issue a Pay Less Notice and withhold
payment of any retention in accordance with the Contract if the following
additional/conditions are satisfied:
6.2.1 Kapital has notified Muir of any defects and given Muir the
opportunity to rectify the same;
6.2.2. Kapital has an Expert Report confirming that any defects are Muir’s
responsibility; and
6.2.3
Kapital has undertaken the work to remedy the defects and has
already incurred the cost sought to be withheld and can evidence this
to Muir.”
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4
[13] For the purposes of the argument before me the relevant date in terms of Clause 6.1
was 31 December 2016.
[14] Clause 4.10.2 of the Construction Contract sets out the contractual requirements for a
valid PLN and provides as follows:
“A Pay Less Notice
1 (where it is to be given by the Employer) shall specify both the sum that
he considers to be due to the Contractor at the date the notice is given and
the basis on which that sum has been calculated.
2 (where it is to be given by the Contractor) shall specify both the sum that
the Contractor considers to be due to the Employer at the date the notice
is given and the basis on which that sum has been calculated.”
Waiver
[15] The provisions regarding waiver are contained in Clauses 8 and 9 of the Settlement
Contract and these provide as follows:
“8 RELEASED CLAIMS
8.1 Subject to the other provisions of this Settlement Agreement, upon the
Parties executing this Settlement Agreement, on behalf of itself and its Related
Parties each Party hereby irrevocably waives any and all past, present and
future claims, rights, demands, and set-offs, whether in this jurisdiction or
any other, whether presently known to the Parties or to the law, whether past,
present or future, competent to it on any basis against the other Party or the
other Party’s Related Parties arising out of or in connection with the Contract,
the Works, the Dispute and all other matters relating thereto (and said claims
to include, without prejudice to the foregoing generality, any and all claims of
whatever nature, whether arising in contract, breach of contract, delict,
quasi-contract, at common law, pursuant to statute or otherwise) and each
Party confirms that the entering into of this Settlement Agreement is in full
and final settlement of any such claims (the ‘Released Claims’).
9
RESERVED CLAIMS
9.1 This Settlement Agreement is made strictly under reservation of and
without prejudice to:
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5
9.1.1
Muir’s obligation to correct any defects, shrinkages or other
faults in the Works in accordance with Clause 2.35 of the
Contract;
9.1.2
Kapital’s right to claim against Muir in respect of latent defects
which may become patent after the date of execution of this
Settlement Agreement (irrespective of whether or not the
cause of such latent defects occurred prior to or post the date
of execution of this Settlement Agreement);
9.1.3 Kapital’s right to claim under any Premier Guarantee
warranties issued in respect of the Works; and
9.1.4
Muir’s obligation to maintain insurance in terms of Section 6 of
the Contract including but not limited to its remaining
obligations under the Contract relative to professional
indemnity insurance.”
[16] Clause 2.35 of the Construction Contract referred to at Clause 9.1.1 of the Settlement
Contract is in the following terms:
“If any defects, shrinkages or other faults in the Works or a Section appear
within the relevant Rectification Period due to any failure of the Contractor to
comply with his obligations under this Contract:
1 such defects, shrinkages and other faults shall be specified by the
Employer in a schedule of defects which he shall deliver to the Contractor
as an instruction not later than 14 days after the expiry of that
Rectification Period; and
2 notwithstanding clause 2.35.1, the Employer may whenever he considers
it necessary issue instructions requiring any such defect, shrinkage or
other fault to be made good, provided no instructions under this clause
2.35.2 shall be issued after delivery of a schedule of defects or more than
14 days after the expiry of the relevant Rectification Period.”
Material Dates
[17] It is perhaps convenient at this stage to set out certain dates which were of
materiality in respect to the discussion before the court. These dates are:
1.
The Settlement Contract was executed on 7 and 8 April 2016.
2.
The rectification period ran from 21 July 2015 to 20 July 2016.
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6
3. The date of issue of the PLN was 21 December 2016.
4. The date on which the retention sum was to be paid by the defender to the
pursuer in terms of Clause 6 was 31 December 2016.
5.
These dates were not a matter of contention between the parties.
The Pursuer’s Argument
[18] The first argument advanced by Mr Manson can be summarised as follows: the
defender had not purified the contractual conditions required of it in order to withhold.
This chapter of his submissions involved a number of detailed and separate attacks on the
validity of the PLN.
[19] In expanding upon this contention Mr Manson first argued that the satisfaction of the
conditions contained in Clause 6.2 of the Settlement Contract turned on the form and
content of the PLN.
[20] Mr Manson submitted that the court should test the content of the PLN by reference
to: (1) the demands made of a PLN by the Construction Contract and Settlement Contract
and (2) the “reasonable recipient” test as summarised by Popplewell J in QOGT Inc v
International Oil and Gas Technology Limited 2014 EWHC Civ 1628 paragraphs 109 to 113.
[21] Turning to the content of the PLN he referred in particular to the last paragraph on
page 1 which stated this:
“We consider that the sum that is due on the date this notice is given is: Zero (£0.00)
(the ‘Amount Due’) …”.
[22] It was his position that neither in the PLN itself or the documentation accompanying
it, upon which the defender sought to rely, was any basis given for the zero sum figure
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7
arrived at as being the amount due in terms of the PLN, as demanded by Clause 4.10.2 of the
Construction Contract.
[23] The requirement for such a basis to be set forth is one of the two essential features of
a valid PLN. This submission was made under reference to Surrey and Sussex
Healthcare NHS Trust v Logan Construction (SE) Limited 2017 EWHC 17(TCC) at paragraph 53.
Accordingly, the PLN issued was not valid. The necessary precondition for the issuing of a
valid PLN had not been satisfied.
[24] He argued that support for the position he was putting forward could be found in
the approach of Lord Macfadyen in Maxi Construction Management Limited v Mortons Rolls
[25] In conclusion, if there was no valid PLN due to a failure to provide the basis for the
zero sum then there was no basis for the retention.
[26] The second detailed argument advanced as regards the validity of the PLN was that
Clause 6.2.3 of the Settlement Contract had not been fulfilled.
[27] Mr Manson’s position was that the defender’s averments did not relevantly aver that
the defender had “already incurred the cost” to remedy the defects as at the requisite date,
21 December 2016, the date on which the PLN was issued. Beyond the issue of relevancy it
was his position that in terms of his summary decree motion it was clear from the various
documentation relied upon by the defender that it was bound to lose with respect to the
argument being advanced by the pursuer that Clause 6.2.3 had not been satisfied.
[28] He turned to look at the averments in answer 38 of the defences which set out the
defender’s position with respect to this particular issue. Answer 38 is in the following terms:
“Explained and averred that the defender has undertaken work in relation to the
defects at the substation. The cost of doing so has been approximately £33,084.80,
including costs of £26,390 paid to A King Contracts Limited in or around December
2016. Separatim, the defender has undertaken work in relation to the cycle path. The
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8
pursuer was obligated to provide the cycle path in an adoptable state up to the
underlayer of tarmacadam. The design of the cyclepath included a deliberate camber
to assist with drainage. The pursuer’s work on the cyclepath resulted in a cyclepath
with a bulge in the centre. The cycle path was designed to drain water to one side of
it. The pursuer did not dig deep enough for the substrate levels for the cyclepath.
An inspection from Fife Council highlighted the defects with the cyclepath. The
defects needed to be rectified before the cyclepath could have the top layer of
tarmacadam added to it. The cost of carrying out the work to date is £25,177.60,
including costs of £21,580 paid to A King Contracts Limited.”
[29] With respect to the cyclepath Mr Manson’s argument was this: there was no
averment offering to prove that the costs of carrying out work were incurred prior to the
requisite date in terms of Clause 6 of the Settlement Contract. The averments only offered to
prove that the cost had been incurred prior to the date at which the averment was made,
which was some significant time after the requisite date (the date of the averment was not a
contentious issue).
[30] In advancing the above position Mr Manson contended that “cost incurred” on a
proper construction meant that whereas here a subcontractor was used to carry out the
work, the defender had paid the subcontractor for the work by 21 December 2016.
[31] Beyond this pure relevancy argument, Mr Manson in terms of his summary decree
motion said this: looking to certain further documentation lodged on behalf of the defender,
and in particular having regard to the terms of the affidavit of Keith Punler (the controlling
mind of the defender) there is an acceptance that Kings (the subcontractor) were not paid by
the defender with respect to said work until February 2017. In addition there is an
acceptance that not all of the work to the cyclepath which is the subject of the invoice issued
by Kings on 17 December 2016 was in fact carried out by the requisite date.
[32] Having regard to the above parts of this affidavit it was apparent that the defender
was bound to lose with respect to this part of his case.
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9
[33] Mr Manson advanced certain further arguments which went to the validity of the
PLN. It was his position that the terms of the expert report produced in terms of
Clause 6.2.2 of the Settlement Contract did not satisfy that part of the clause.
[34] Mr Manson analysed the expert report in this way: he did not dispute that it was an
expert report. However, it did not confirm that there were defects which were the pursuer’s
responsibility.
[35] Section 2 of the report did no more than set out the terms of the Construction
Contract and making certain comments upon it.
[36] Sections 3 and 4 referred to incomplete works not to defects. He submitted that there
was a clear distinction to be made in terms of the contracts between defects and incomplete
works.
[37] Section 5 was not prayed in aid in the PLN.
[38] Section 6 was heavily caveated by the use of words such as “if, but and maybe”.
[39] The letter from the defender accompanying the PLN does nothing to improve the
position. It is heavily caveated and introduces a range of contingencies which would inject
uncertainty into the mind of the reasonable recipient. The reasonable recipient would not be
able to assess the nature of the defects and the purported breach nor what was required of
him to remedy the same.
[40] It was his position that the parties intended by Clause 6.1.2 that the defender could
not baldly assert defects to avoid paying. The intention of the clause was that any report
produced should clearly identify what the defects were and what response on the part of the
pursuer was required. Applying Justice Popplewell’s approach the pursuer as the
reasonable recipient could not understand the report. He described the report as no more
than a box ticking exercise.
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10
[41] The next detailed branch of Mr Manson’s argument turned on the issue of waiver.
[42] There were two broad chapters to this branch of the argument:
(a) the pursuer’s position is that many of the claims founded on by the defenders
were incomplete works and not defects. This was the same point he had made
earlier when discussing the retention issue.
[43] Reserved claims in terms of Clause 9 related to defects and accordingly the issues
founded upon not being defects for the reasons which he had earlier advanced meant that
they had been waived.
[44] The second chapter of his argument was this: assuming the issues raised were
defects he made the following submissions under reference to the defender’s averments in
the Scott Schedule which had been lodged in process. According to the defender’s position
in the Scott Schedule: first at item 5 the defender makes averments regarding the cycle
track:
“Factual position: Muir was notified by Hardies during 2015 that the cycle path
remained an incomplete item (KRL document 21) and on 15 May 2015 was advised
that there were issues with the pathway that required to be addressed before it could
be made available to the public.”
[45] Having regard to the above the claim was not latent as at the relevant date in terms
of Clause 9 of the Settlement Contract nor did it appear in terms of Clause 2.35 of the
Construction Contract during the rectification period.
[46] Equally with respect to the Scott Schedule at paragraph 6 the following averment
was made by the defender regarding “Additional work to facilitate adoption of gas
governor and electricity substation”:
“During the construction phase, Muir was advised of the requirement for additional
builders work to satisfy Energetics Ltd... on 22 September 2014 (KRL document 31).”
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[47] Accordingly this was not a latent defect at the requisite date and it did not appear
during the rectification period.
[48] Accordingly it was his position that these were, if defects, claims which had been
waived.
[49] Mr Manson’s argument then turned to look at the other items set out in the Scott
Schedule.
[50] With respect to items 1, 3 and 4 in the Scott Schedule Mr Manson on the basis of the
defender’s factual averments under each of these heads advanced waiver arguments on the
same basis as with respect to items 5 and 6.
[51] Mr Manson then turned from the issue of waiver to advance a number of arguments
with respect to the relevancy and specification of the defender’s averments contained within
his pleadings and in particular as set out in his averments in the Scott Schedule. Mr Manson
first submitted that the claim as set out in paragraph 1 of the Scott Schedule which related to
snagging defects: contained no specification whatsoever of the remedial work required or
how the sum claimed against each item has been calculated.
[52] Beyond the above the claim in terms of paragraph 1 of the Scott Schedule also in part
sought to recover the cost of the employment of a clerk of works. It was his position that
this claim was not envisaged by the terms of the contract and was not a reasonably
foreseeable, natural and ordinary incident arising from the asserted breach (Johnston v W H
Brown Construction (Dundee) Ltd 2000 SLT 791).
[53] Turning to item 2 on the Scott Schedule the argument advanced was this: the claim
was one which had not crystallised in any meaningful way. The claim was contingent. It
related to the adoption of roads by Fife Council. His argument, as I understood it, was to
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12
the effect that the claim had not crystallised as there was no decision by the roads authority
that they were definitely rejecting the roads. Until that happened no claim could crystallise.
[54] As regards items 3 and 4 on the Scott Schedule Mr Manson submitted that the claim
for £28,650.67 as set out in item 3 was contingent and the claim for £54,691.13 as set out at
item 4 was contingent.
[55] In the course of his reply Mr Duthie said that these two particular matters though
referred to in the Scott Schedule did not form part of the defender’s claim. As I understand
it he accepted that these “claims” were contingent. I accordingly do not require to further
deal with this issue.
[56] Also with respect to items 3 and 4 the pursuer submitted that these had been waived
given the factual averments which were to the effect that they had arisen prior to the
commencement of the rectification period.
[57] The final argument advanced by Mr Manson on behalf of the pursuer with respect to
the Scott Schedule related to the ninth item.
[58] The pursuer’s claim was to recover the costs of carrying out intrusive examinations
of all properties on the site and make good defects in all of the properties on the site in
relation to plumbing works. The areas said to be affected by these defects were said to be
joints in pipes which were situated behind walls. The total claim was £71,300.
[59] The justification for this work was set out by the pursuer as follows: in one property
following upon an intrusive examination silver tape was found to have been used in order
to connect two pipes. The joint had failed causing the pipe to leak due to the use of silver
tape. There had been a separate problem where silver tape had been found connecting pipes
in a different area in 15 properties.
[60] Mr Manson made two detailed submissions relative to this claim.
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13
[61] First the pursuer in their averments believe and aver that in all 61 properties on the
site silver tape had been used and that therefore there would be a requirement to carryout
intrusive inquiries in all of these properties and thereafter to carryout repairs in all of these
properties. His position was that there was no proper factual averment for this position.
The factual averments founded on were (a) the discovery of silver tape as a connecting
material in one house behind a wall and (b) the discovery of silver tape on the pipe work of
15 houses (a separate problem, which had been dealt with at an earlier stage and did not
form part of the claim in the current action).
[62] It was not known that silver tape had been used in any of the other 61 properties, but
the defender wished to inspect each of these, and claimed a sum for repair in relation to each
of these although the defender did not know if any other silver tape would be found.
[63] It was his position that these averments were irrelevant.
The Reply on behalf of the Defender
[64] As regards the validity of the PLN Mr Duthie’s position was that it was valid.
[65] The approach to the construction of such a document he submitted was this: it falls
to be construed in the manner of a reasonable commercial person adopting a contextual,
purposive and common sense construction. An overly formal approach to construction of a
contractual notice should be avoided: see Hoe International Limited v Andersen 2017 CSIH 9
per Lord Drummond Young at paragraphs 22 to 24.
[66] A common sense, practical view of the contents of a pay less notice should be taken
by the court: an unnecessarily restrictive interpretation of such a notice is not appropriate.
Provided that the notice makes tolerably clear what is being held and why, the courts will
generally not strive to intervene or endeavour to find reasons that would render such a
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14
notice invalid or ineffective: see Surrey and Sussex Healthcare NHS Trust v Logan
Construction (SE) Limited 2017 EWHC 17(TCC) per Mr Alexander Nissen QC at
paragraphs 56 to 66.
[67] He submitted that the PLN should properly be considered as comprising: (1) the
formal letter from the defender to the pursuer of 21 December 2016; (2) the formal pay less
notice; (3) the note of outstanding snagging; and (4) an opinion from Mr Williamson of
Hurd Rolland Partnership, Chartered Architects. Collectively those four documents allow
the defender to satisfy the requirements of Clause 6.2 of the Settlement Contract.
[68] The defender had on numerous occasions notified the pursuer of the defects in the
works in the vicinity of the substation and gas governor house and the cycleway footpath
along the burn side. The defects and incomplete works in respect of the cycleway footpath
along the burn side are detailed at section three of the report. The defects and incomplete
works in the vicinity of the substation and gas governor house are detailed at section four of
the opinion of Mr Williamson. Properly construed, it is tolerably clear from the report that
the defects are the pursuer’s responsibility. The requirements of Clause 6.2.2 of the
Settlement Contract are therefore satisfied.
[69] He submitted that the extent of detail necessary for the notice to be valid depended
on the circumstances of each case. Whereas here the retention amount is small and a very
large amount of work is necessary for defects to be remedied it is enough for the defender to
say the remedying of the defects will require a sum well in excess of the retention sum.
Thus the basis upon which in this case there is a zero sum in the notice is sufficiently stated.
[70] With respect to the distinction which the pursuer sought to draw between “a defect”
and “incomplete works” he baldly asserted there was no distinction between the two.
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15
[71] Turning lastly to Clause 6.2.3 Mr Duthie argued this: the invoice relative to the work
was issued on 17 December and was due for payment by 31 December. Accordingly the cost
had been incurred by 31 December. This submission was made under reference to
paragraph 17 of the affidavit of Mr Punler. Though the affidavit made it clear that payment
was not made until some time in February this was not relevant when considering whether
Clause 6.2.3 had been fulfilled. For costs to have been incurred in terms of the clause it was
sufficient for the defender to have incurred the liability to pay the cost and for that liability
to have crystallised by the requisite date. Here invoices had been rendered on 17 December
2016 and were due for payment on 31 December 2016. Accordingly on the 31 December
2016 the debt was ascertainable and immediately payable. In support of this proposition he
directed my attention to: Charter Reinsurance Co Ltd (In Liquidation) v Fagan 1997 AC 313 and
[72] So far as when the work was actually carried out by the defender’s contractor it was
his position that having regard to the terms of the affidavit and the other documents it was
clearly a matter of dispute as to when work was carried out and in these circumstances this
matter required to be dealt with at Proof and could not be dealt with in terms of either a
relevancy plea or a summary decree motion.
[73] In conclusion he submitted that for the foregoing reasons the PLN was validly
issued.
[74] With respect to the issue of waiver his general position was this: the pursuer seeks to
place a far broader scope on the waiver provision than it could properly bear.
[75] He accepted that Clause 8 was in the widest possible terms and that to avoid its
effect the defender had to bring matters within the ambit of Clause 9.
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16
[76] His substantive argument with respect to this in summary was: it did not matter in
terms of Clause 9.1.1 that defects had existed and been drawn to the pursuer’s attention by
the defender prior to the commencement of the rectification period. That was of no
relevance on a proper construction of the clause. The only issue of any relevance so far as
purification of the clause was concerned was this: during the rectification period were
defects intimated by the defender to the pursuer? There was no dispute that such intimation
had occurred during that period and accordingly there was no question that these matters
fell outwith the ambit of Clause 9.
[77] It could be seen that nothing which happened prior to practical completion was
relevant as prescription could only run after practical completion.
[78] So far as the issues of relevancy and specification regarding the various matters
averred within the Scott Schedule he commented as follows:
[79] With respect to item one in the schedule proper specification was given. The
specification given had to be placed in context. The pursuer is the contractor who carried
out the original works; all of the matters in the snagging list had been matters which were
the subject of multiple items of correspondence. The pursuer was not coming cold to the
matter. Thus item 1 as set out in the Scott Schedule and all other items in the schedule
together with what was stated within the PLN had to be construed in that context. There are
a very large number of snagging items on the list. Common sense had to be applied when
considering what was required by way of specification. Although he accepted the snagging
list was in abbreviated form it was his position that it was sufficient to tell the pursuer what
the snagging items were and thus proper specification had been given to it.
Page 17 ⇓
17
[80] So far as the issue of the clerk of works was concerned it was a matter for Proof
whether given the number and nature of the snagging items the clerk of works was
necessary.
[81] With respect to item 2 he accepted that not a particularly detailed assessment had
been given. However, this item was relatively minor and accordingly adequate specification
was given.
[82] Turning to items 3 and 4 these were on any sensible view defects. Fair notice
regarding the defender’s position regarding these items had been given.
[83] Finally with respect to item 9 his position was that the factual averments when taken
together were sufficient to draw the inference that all 62 properties which formed the project
required to have intrusive inspections carried out and thereafter each would require to have
remedial work carried out.
[84] It was his position that the claim was not contingent, it had crystallised.
[85] The opening up of the plumbing in each house was a reasonable course of action,
given what had happened to date: namely the finding of a plumbing problem behind a wall
in 1 property and the earlier finding of problems of a similar nature in other areas of houses
in no less than 15 properties.
[86] The point raised by the pursuer he submitted was not a relevancy point, properly
understood, it was rather a quantum argument. It should properly be dealt with at Proof.
Discussion
[87] It was not a contentious matter that the defender can only relevantly withhold
payment by availing itself of the protection of a valid PLN in circumstances prescribed by
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18
paragraph 6.2 of the Settlement Contract. In order to issue a valid PLN the conditions
precedent contained in Clause 6.2 must be purified.
[88] The pursuer’s first argument relating to validity of the PLN is that it does not
properly specify the basis of the “zero sum”. In terms of Clause 4.10.2 it is a term of the
Construction Contract that the PLN will contain the basis for the sum in the PLN, namely:
the “zero sum”. In my view there is substantial force in the argument that no basis for the
zero sum figure in the PLN is put forward in the PLN or the supporting documentation
which is relied upon by the defender.
[89] From none of the information provided could the reasonable recipient work out the
basis on which the zero sum figure was calculated. There is no calculation put forward
which would allow the reasonable recipient to understand how that figure is arrived at.
There is no specification which would allow the reasonable recipient to make any sense of
the figure arrived at. The defender sets forth no figures and thus no basis substantiating the
zero sum figure in the PLN or in any of the other documentation upon which it relies.
[90] With no difficulty I reject the defender’s response with respect to this point. It
amounted to no more than saying the sum retained is not a large one and given the number
and nature of problems founded upon in the PLN the cost of remedying these would clearly
amount to a figure well in excess of the retained sum and thus a basis for the zero sum
figure was provided. That is not providing a basis for the figure. I am persuaded that the
PLN in order to properly provide a basis needs at least to set out the grounds for
withholding and the sum applied to each of these grounds with at least an indication of how
each of these sums were arrived at.
[91] I believe that the conclusion which I have reached is supported by the approach of
Lord Macfadyen in Maxi Construction Management Limited v Mortons Rolls Limited at
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19
paragraph 29. There Lord Macfadyen was considering whether an interim valuation could
be regarded as constituting a claim by the payee in terms of paragraph 12 of the contract. It
was argued before him that:
“Interim Valuation No. 10 was, in effect, lacking in specification. It did not “specify
… the basis on which [the payment claimed] is … calculated.”
[92] The court held that the submission was well founded.
[93] Paragraphs 12 provides
“a written notice given by the party carrying out work under a construction contract
to the other party specifying the amount of any payment or payments which he
considers to be due, specifying to what the payments relates (or payments relate) and
the basis on which it is, or they are, calculated”.
[94] Accordingly the clause Lord McFadyen was considering with respect to its material
parts was on all fours with that before the court in the present action.
[95] In holding the submission well founded Lord Macfadyen observed:
“But paragraph 12 does, in my view, require specification of the basis of calculation
of the new matter included in the application in question.”
[96] Applying that reasoning to the matter before me the PLN did not provide a proper
basis for the zero sum.
[97] For the foregoing reasons I am satisfied that the PLN is not valid and effective.
[98] The pursuer’s next argument regarding validity was directed to the non-fulfilment of
the provisions of Clause 6.2.3 of the Settlement Contract.
[99] He in particular argued that the defender had not: “incurred the cost sought to be
withheld” by the relevant date.
[100] The pursuer’s position was a short one: the words “costs incurred” meant what they
said and accordingly the defender must aver that it had paid for the relevant works prior to
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the issuing of the PLN in order to satisfy the condition. The defender’s position was equally
short: it was sufficient to satisfy this part of the clause that the defender had a liability to
pay for the works in question in terms of an invoice issued on 17 December 2016 and due to
be paid by 31 December 2016.
[101] The first issue which falls for determination is this: by what date, in terms of
Clause 6.2 had the defender’s to have “incurred the cost”. On a sound construction of the
clause it is by the date on which the PLN was issued, which was 21 December 2016. The
preamble to Clause 6.2 expressly provides “Kapital may only issue a Pay Less Notice… if
the following conditions are satisfied“. Thus in order to issue a valid PLN the cost must be
incurred prior to its issue (Clause 6.2.3). Mr Duthie in the course of his submissions under
this head appeared to attach importance to the date: 31 December 2016 which was the date
for the payment of the retention in terms of Clause 6. However, that does not affect the date
at which the validity of the PLN is tested in accordance with the clause. The relevant date
for this purpose is 21 December 2016 the date of issue of the PLN.
[102] The words used in the Settlement Contract are “incurred the cost”. The words
chosen are not “incurred a liability to pay”. Cost incurred and a liability to pay are two
separate things.
[103] A cost is incurred, I believe, when payment is made. I am not persuaded that a cost
is incurred in the context of this clause when an invoice is rendered with respect to the work.
The defender in the course of his written submissions referred to Burr v OM Property
Management Ltd 2013 1 WLR 3071. In this case the court of Appeal held that there was a
clear difference between a liability to pay and a cost being incurred. I recognise that the
discussion is in the context of a different provision. However, it seems reasonably clear
from a consideration of the reasons for the decision that as a matter of principle the court
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recognised a difference between where money is expended and thus a cost being incurred
and a mere liability to pay.
[104] Moreover, support for the pursuer’s construction can be found in the purpose of the
provision of which Clause 6.2.3 forms a part. Clause 6 would have been understood by the
reasonable man who was aware of the facts reasonably available to the parties at the time
they contracted as placing further conditions on the issuing of a PLN founding retention.
This I believe points to the words cost incurred meaning more than the incurring of a
liability to pay and means that the money has been paid. If that is not the sound
construction it is difficult to see what the clause adds to the issuing of a valid PLN.
[105] Even if I am wrong in holding that 21 December 2016 is the relevant date and rather
31 December 2016 is the relevant date I do not believe that assists the defender. In the
context of the Settlement Contract and in particular having regard to the purpose of
Clause 6, as I have above set out, the mere crystallising of the liability by the sums in terms
of the invoices becoming due and payable is not sufficient to satisfy the condition of costs
having been incurred. It would again mean that it is difficult to see what Clause 6.2.3 adds
to the issuing of a valid PLN. Furthermore it would allow an invoice which does not, in part
at least, represent work actually done and where payment was not made timeously but
made some material time later (mid-February) to form a basis for a valid PLN. Again I do
not believe the reasonable man would have understood that that was the intention of
parties.
[106] In summary I am of the view that having regard to the purpose of the clause, and the
terms of the clause that a proper construction of costs incurred is that the sums in any
invoices for work done had to have been paid by 21 December in order to found a valid
PLN.
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[107] Applying the above construction to the defender’s pleadings at answer 38 I observe
that in relation to the cyclepath the defender does not offer to prove that any cost incurred
was incurred prior to 21 December. It only offers to prove that the “cost of carrying out the
work to date” – that is the date when the defender adjusted, which as I understand it was on
14 March 2017. Accordingly these averments are irrelevant.
[108] Turning to the substation the defender again fails to aver that the sums were paid by
21 December. It is not sufficient to aver that costs of £26,396 were paid “in or around
December 2016”. That does not support the costs being paid prior to 21 December 2016. It
could equally on that averment be the position that they were paid in January 2017 which
would not fulfil the condition.
[109] The discussion before the court with respect to this particular matter was not
confined to looking purely at the relevancy of the specific pleadings made on behalf of the
defender. The argument was also put forward that having regard to a number of other
documents that in terms of the summary decree motion there was no proper defence put
forward in relation to this issue.
[110] In particular reference was made to the affidavit of Keith Punler. This affidavit
sought specifically to deal with the issue of when costs had been incurred in relation to the
matters averred in answer 38.
[111] In the affidavit it was accepted:
[112] First at paragraph 14 as regards the cyclepath:
“It was only the blacktop tarmacadam works, which represented 60-65% of the
remaining cost of the work, that were carried out in January 2017. John Proudfoot,
the Fife Council roads inspector, was unavailable in the last week of December 2016
(we had asked for him to attend the site), which resulted in a delay to those works.”
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[113] It is clear from the terms of the above paragraph that not all of the works which
featured in the invoice had in fact been carried out until January 2017 and thus that part of
Clause 6.2.3 which provided for work having been carried out prior to the relevant date was
also not fulfilled.
[114] The affidavit continues at paragraph 16 where the following is said:
“I do not dispute that the works to both areas had not been completed when
Mr King’s invoices had been produced by Mr King’s surveyor.” (emphasis added).
[115] Once more there is an admission, this time with reference to the invoices rendered in
relation to both areas they did not reflect work which had in fact been carried out by the
relevant date. Paragraph 16 continues:
“I am in no doubt, however, that a firm commitment was made to A King by KRL to
incur the costs stated on these invoices. Mr King’s surveyor prepared the invoice, on
the basis of the intended programme.” (emphasis added).
[116] The above makes it absolutely clear the invoices did not reflect work which had been
carried out in whole by the relevant date. These invoices on no basis could be said to
properly reflect works carried out by the relevant date.
[117] It is stated at paragraph 17:
“Having checked my records, however, I note that the sums stated on those invoices
were not cleared until early to mid-February 2017. This was because there were
earlier invoices outstanding at the time that required to be cleared first.”
[118] The above makes it absolutely clear that costs were not incurred until early to
mid-February 2017 in relation to both areas of work. This paragraph concludes with the
following:
“A King has been prepared to accommodate the delay in payment by KRL to date.
Whilst we are occasionally late, we always clear our accounts.”
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[119] This also makes it clear that although the invoices said that they were due and
payable on 31 December, this was not in fact the case.
[120] Having regard to the above parts of the said affidavit it appears to me clear that these
invoices do not fulfil the terms of Clause 6 in that they do not represent work carried out or
sums paid by the relevant date.
[121] A number of other documents were referred to with respect to the issue of when
work was carried out including the defender’s initial position in its defences which stated
that the defender had neither undertaken this work or incurred the cost by the relevant date;
the evidence given on commission of Mr King the contractor who had carried out this work;
various other documents lodged by the defender and the terms of an explanatory note
lodged on behalf of the defender. These raised disputed issues of fact and I did not believe
it appropriate when considering a summary decree motion that I should consider these
documents, see Henderson v 3052775 Nova Scotia Ltd 2006 SC(HL) 85 per Lord Rodger of
Earlsferry of paragraphs 18 and 19.
[122] However, on looking to the affidavit of Mr Punler on its own I am satisfied that the
terms of Clause 6.2.3 were not fulfilled.
[123] Accordingly having regard to the substance of the papers before me and looking
beyond the pleadings I believe the defender is bound to lose with respect to this part of its
defence as it cannot show that this part of the clause was fulfilled.
[124] As regards the various other matters which the defender asserted required remedial
work my understanding was that none of this work had been carried out by the defender by
the relevant date and they accordingly could not form a basis for a valid and effective PLN.
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[125] As regards whether the expert report fulfils Clause 6.2.2 I am not persuaded that it
does. Clause 6.2.2 refers to defects and it appears to me that what is identified in the report
is failures to complete. At paragraph 3.03 of the report this is said:
“These individual issues represent incomplete work that requires to be addressed by
Muir under the Building Contract.”
[126] At paragraph 4.06 the works referred to in that part are said to “represent
significantly incomplete work.”
[127] As regards to the matter dealt with in section 6, it is described as follows at 6.06:
“Resolution remains outstanding consequently this represents potentially
significantly incomplete work that falls to be completed by Muir under the terms of
their Building Contract with Kapital.”
[128] Thus in these three sections of the report what appears to be detailed is incomplete
work. I am satisfied that this is not the same as a defect.
[129] Defective work is described in this way in Hudson’s, Building and Engineering
Contracts at paragraph 4.071:
“… work which fails to comply with the requirements of the contract and so is a
breach of contract. … this will mean work which does not conform to express
descriptions or requirements, including any drawings or specifications, together with
any implied terms as to its quality, workmanship, performance or design.”
[130] Incomplete work on the other hand is, as it says, work which has not been completed
and is nothing to do with quality, workmanship, performance or design. This essential
difference is confirmed in the Construction Contract: the issue of failure to complete works
is dealt with from 2.27 onwards and involves the issuing of a non-completion notice.
Defects on the other hand are dealt with in terms of 2.35 and involve the issuing of a
schedule of defects.
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26
[131] So far as the specification argument put forward by Mr Manson with respect to the
report I believe looking to the whole terms there is just enough to identify what matters are
being brought to the attention of the pursuer and in particular looking to paragraphs 2.06,
3.03, 4.06 and 6.06 there is sufficient specification that the reporter is confirming the
problems he identifies are the pursuer’s responsibility.
[132] For all the foregoing reasons I am satisfied that Clause 6 has not been properly
complied with and that accordingly a valid and effective PLN has not been issued.
[133] I now turn to consider the second broad chapter of submissions which related to the
issue of waiver.
[134] The argument turned on the proper construction of the terms of Clauses 9.1.1
and 9.1.2 of the Settlement Contract.
[135] There was no argument advanced by the defender that the issues were latent and fell
within Clause 9.1.2. Accordingly parties primarily joined issue as to what is the proper
construction of the words “appear within the relevant rectification period” in Clause 2.35 of
the Construction Contract referred to within Clause 9.1.1.
[136] The defender advanced an argument that it did not matter that the pursuer was
aware of the issues prior to the rectification period as long as the issue had been raised by
the defender with the pursuer during the course of the rectification period. The pursuer’s
position was straightforward that the word “appear” should be given its ordinary and
natural meaning and thus matters known about by the defender prior to the rectification
period could not be said to have appeared during the rectification period.
[137] Neither party advanced any authority in support of the particular construction for
which it contended. Accordingly in the first place I believe it appropriate to look to the
natural and ordinary meaning of the language used. I am persuaded this clearly supports
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27
the pursuer’s contention regarding construction. In the Oxford English Dictionary “appear”
is defined, so far as relevant to the context in which it is used in the instant case, as meaning
“become noticeable”, “come into existence”. The defender’s proposed construction is I
think inconsistent with the natural and ordinary meaning of the language used.
[138] It appears from the terms of the Scott Schedule that a number of the items therein
neither became noticeable or came into existence during the rectification period. It is clear
from the defender’s averments within the Scott Schedule that they were known about by the
defender and had been intimated to the pursuer prior to the start of the said period.
[139] The following further points I believe also support the pursuer’s contended for
construction being sound.
[140] If parties had intended to preserve all claims which were intimated during the
rectification period they could have used that word and not “appear”.
[141] I observe that the general purpose of the Settlement Contract is set out at
paragraph (E) of the preamble which provides:
“The Parties wish to enable a comprehensive and final resolution in respect of any
and all differences and disputes under the Contract or arising out of or in connection
therewith, and this settlement agreement sets out the terms on which the parties have
agreed to achieve that.”
[142] Reading short, the general purpose of the settlement is to settle all disputes between
the parties. The defender’s contended for construction is not consistent with said general
purpose. It allows any claim to be preserved as long as it is intimated within the
rectification period. That appears to negate the general purpose. Equally, the defender’s
contended for construction appears inconsistent with the very wide scope of the terms of
Clause 8 of the Settlement Contract which defines released claims.
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[143] When looked at in the context of Clause 9.1.2 the defender’s suggested construction
is shown not to be sound. Both Clauses 9.1.1 and 9.1.2 point in the same direction; namely:
to claims which are unknown until a particular point (a) the rectification period or (b) latent
at the date of the Settlement Contract and thereafter becoming patent being preserved. Only
the pursuer’s proposed construction of 9.1.1 fits in with Clause 9.1.2.
[144] Overall the defender’s construction is inconsistent with the terms of the contract as a
whole.
[145] Accordingly I am persuaded that unless a defect appeared as I have defined the
word “appeared” within the rectification period or was latent at the date at which the
Settlement Contract was entered into then any claim has been waived. Equally, if any claim
is not founded upon a defect as I have defined it, then it has been waived.
[146] I now turn to the issue of specification and the related issues which were raised by
Mr Manson in relation to the defender’s case as set out in the Scott Schedule. I am
persuaded that with respect to claim 1 in the Scott Schedule that this is lacking in
specification for the reasons advanced by Mr Manson. Although a very large amount of
documentation is produced on behalf of the defender in respect to a large number of
snagging items this documentation does not allow the pursuer to understand the basis of
these claims in that there is no specification of precisely what remedial work it is claimed is
required and secondly how the sum claimed with respect to any such remedial work has
been calculated. These matters are not set out with respect to each item listed within the
snagging list.
[147] Although the above are material deficiencies in specification I would not be minded
to dismiss this branch of the defender’s claim on that basis alone. Rather in so far as claims
survived the various other arguments I would intend that the matter should be dealt with
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29
by making a detailed order requiring additional specification to be produced within a
specific period of time. That would appear to me to be an appropriate way to deal with the
issue.
[148] With respect to the issue of a clerk of works raised in terms of claim 1 I do not believe
that I can hold at this stage that this claim is irrelevant. I believe that the court would have
to hear evidence regarding the precise nature of the work done by the clerk of works and the
necessity for him to carry out this work having regard to the nature and extent of the
problems with which he was required to deal.
[149] As regards the second item I reject the argument the claim has not crystallised. The
local authority have made it clear they will not in present circumstances issue a substantial
completion letter until certain issues have been resolved. I would make reference to an
email of 17 December 2015 by the said authority. This was followed up by an inspection in
April 2017 setting out outstanding snagging issues relative to the roads. Against that
background (assuming the responsibility for these matters is the pursuer’s, which is a matter
for Proof) then I am satisfied that the claim has crystallised.
[150] Turning to the issue of specification of the quantum of this head of claim there is no
specification as to how this is calculated again I would intend that this be dealt with by way
of an appropriate order for further specification to be produced.
[151] With respect to items 3 and 4 in the Scott Schedule I observe that on the basis of the
defender’s averments these appear to have arisen prior to the rectification period.
[152] As regards the argument that item 3 was not a defect as I have defined it, I reject this
argument. The factual position put forward on behalf of the defender in the Scott Schedule
is that “the water wall has been installed in the wrong location”. Having regard to the
definition I gave for defect earlier in this opinion it is a defect.
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[153] Lastly the argument with respect to item 9 on the Scott Schedule I am persuaded that
the pleadings supporting this claim are irrelevant. There is no proper basis for the believed
and averred averment. It is not a proper inference to draw from the factual averments that
every other house on the site suffers from the defect of silver tape being used as a jointing
material. The factual averments are these: the fault has been discovered in only one house
on the site; in addition at 15 out of 62 houses a problem with silver tape was identified with
respect to a wholly different part of the plumbing system. The latter averment shows that it
is not appropriate to draw the inference that because a problem exists in one place it exists in
every other possible place. The foregoing averments cannot properly justify intrusive
inspections of all other 61 properties and the inference that in all 61 other properties the
same fault will be found and will require to be repaired.
[154] There is, however, I believe a more fundamental problem: the claim in large part is
contingent. It has not been established that any remedial work is required in relation to any
property. That could only be established after intrusive inspection. That it is a contingent
claim I believe can be illustrated by considering this question: if there is no problem to
remedy in say 45 houses, why should the defender be entitled to damages in relation to
carrying out repairs to these 45 houses? The defender in those circumstances is not entitled
to damages, and would be unjustifiably enriched were he to be awarded damages.
Decision
[155] It was agreed by parties that I should give my decisions on the various core issues
which were argued before me. However, parties also agreed that rather than seeking to
pronounce a detailed interlocutor I should allow parties to consider these conclusions and
Page 31 ⇓
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either reach agreement as to the effect of them or put before me any further argument as to
the detailed effect of my conclusions.
[156] Accordingly the matter will be put out by order for the above purpose and in order
to hear parties with respect to the issue of expenses.
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