Scottish Sheriff Court Decisions

CA324/09

 

NOTE

BY

SHERIFF PRINCIPAL

JAMES A TAYLOR

in the cause

AMW Plumbing & Heating Limited

PURSUERS/RESPONDENTS

against

 

Zoom Developments Limited

DEFENDERS/APPELLANTS

 

My Lords,

 

[1] This is an action in which the pursuers and respondents (hereinafter "the pursuers") contracted with the defenders and appellants (hereinafter "the defenders") to carry out plumbing and heating works at a development of sixty five new build flats in Cumbernauld. The flats were to be constructed in three separate blocks. The pursuers completed the contract works in respect of block one which consisted of twenty four flats in about April 2008. They completed the contract works in respect of block two which consisted of twenty seven flats on 17 October 2008. The pursuers' works were carried out conform to the contract and there were no works which required rectification. The pursuers as specialist contractors have not been able to complete the contract works because the defenders have not yet elected to build the third block. The pursuers have been paid for the work which they have completed save for a retention of 5% as provided in Clause 5.7 of the terms and conditions of contract. Clause 5.7 is in the following terms:-

 

"Unless otherwise agreed, a 5% retention will be held by Zoom Developments Limited which will be reduced to 2.5% on practical completion of the development. One year after practical completion of the development, provided that the works have been completed to Zoom Developments Limited satisfaction with no outstanding defects, and on written request from the Subcontractor, the balance of the sum due will be released, subject to Zoom Developments Limited (sic) rights under these conditions."

 

The purpose of this action was to recover from the defenders the 5% retention held by the defenders in terms of Clause 5.7.

 

[2] The defenders' position before the sheriff and in the appeal was that they had exercised their entitlement to suspend the work in terms of Clause 2.3. Clause 2.3 is in the following terms:-

 

"Zoom Developments Limited reserves the right at all times and with no liability for compensation in respect thereof, to amend the development proposals, in whole or in part, to their satisfaction, cease of (sic) suspend work or vary the amount of work in the Contract at their sole discretion."

 

Until such time as the defenders commenced building the third block the defenders would have no requirement for the plumbing and heating works to be carried out by the pursuers. Because practical completion in terms of Clause 5.7 had not been reached, in that all three blocks had not been completed, the pursuers were not entitled to payment of the 5% retention. That entitlement, said the defenders, would not arise until they had given instructions to their building contractor to erect the third block and then instructed the pursuers to fulfil their contractual obligations by providing the plumbing and heating works to that block. The defenders argued that they had in effect suspended the works in terms of Clause 2.3. The defenders and the defenders alone controlled when the work to the third block would commence and thus when practical completion could be achieved. My attention was drawn to the defenders' letter of 9 November 2006 addressed to the pursuers (6/1 of process) which provides that the date for completion of the contract is "as dictated by Zoom Developments Limited ongoing Contract Programme (Currently Programmes (sic) at 24 months)". The defenders accepted that effectively they controlled when the pursuers might receive payment of the retention monies even although it was now nearly two years since the work had been completed and there was no issue with the quality of the work. As it was put to me by the defenders' solicitor, the contract terms may be "unpalatable" but nonetheless the contract required to be enforced and until the third block was completed practical completion would not occur and the pursuers could not therefore recover the retention monies.

 

[3] At the debate before the sheriff the pursuers submitted that the power to suspend the work was qualified by the terms of Clause 3 of the terms and conditions. Clause 3.1 is in the following terms:-

 

"Zoom Developments Limited may without prejudice to any other of its rights or remedies immediately determine, or at Zoom Developments Limited sole discretion, suspend, for as along as Zoom Developments Limited deems necessary without determining, the Subcontractors employment under its Subcontract in respect of the whole or any portion of the Works, if the Subcontractor:"

 

A number of events are then narrated which would entitle the defenders to exercise their rights under Clause 3.1. These included, for example, the pursuers failing to proceed diligently with the works or if the pursuers were to go into liquidation. The sheriff held that since the defenders were admittedly unable to bring themselves within any of the events specified in Clause 3 they were not entitled to suspend the works and that accordingly the pursuers were entitled to a payment of the retention monies.

 

[4] In the appeal the issue with regard to the interpretation of the contract narrowed itself to whether the suspension referred to in Clause 2.3 was the same suspension as in Clause 3.1. The pursuers accepted that if the two concepts were different the defenders' interpretation of the contract would prevail. I came to the view that when the draughtsman used the word "suspend" in Clauses 2.3 and 3.1 of the conditions he was dealing with two different concepts. In Clause 2.3 it seemed to me that he was dealing with a suspension of the work whereas in Clause 3.1 he was dealing with a suspension of the pursuers' employment to do the work. I came to the view that it was possible for the pursuers to be suspended under Clause 3.1, for example if they did not diligently proceed with the works, but that the contract works themselves might continue with other plumbing and heating contractors being instructed instead of the pursuers. Thus since it was the work, as opposed to the pursuers' employment, which was suspended, Clause 2.3 operated independently of Clause 3. In order to suspend the work the defenders did not require to bring themselves within the terms of Clause 3. Accordingly, I came to the view that the sheriff had erred in his interpretation of the contract.

 

[5] The result of the interpretation which I placed upon the contract was that the issue of payment of the retention monies rested entirely in the hands of the defenders. They could elect not to build the third block of flats for many years in which circumstances the pursuers would not be entitled to receive payment of the retention monies as Practical Completion would not be achieved until the third block was completed. The defenders alone could determine when the pursuers should be paid for work admittedly completed to the contractual standard.

 

[6] The pursuers had an alternative submission. Parties were in agreement that the contract into which they entered was a "construction contract" in terms of the Housing Grants, Construction & Regeneration Act 1996 (hereinafter "the Act").

 

Section 110(1) and (3) of the Act is in the following terms:-

 

"(1) Every construction contract shall -

(a) provide an adequate mechanism for determining what payments become due under the contract, and when, and

(b) provide for a final date for payment in relation to any sum which becomes due.

The parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment.

(3) If or to the extent that a contract does not contain such provision as is mentioned in subsection (1) or (2), the relevant provisions of the Scheme for Construction Contracts apply."

 

[7] Part II of the Scheme for Construction Contracts (SI 1998 No 687) is in the following terms:-

 

"2 - (1) The amount of any payment by way of instalments or stage or periodic payments in respect of a relevant period shall be the difference between the amount determined in accordance with sub-paragraph (2) and the amount determined in accordance with sub‑paragraph (3).

 

(2) The aggregate of the following amounts:-

(a) an amount equal to the value of any work performed in accordance with the relevant construction contract during the period from the commencement of the contract to the end of the relevant period (excluding any amount calculated in accordance with head (b));

(b) where the contract provides for payment for materials, an amount equal to the value of any material manufactured on site or brought onto site for the purposes of the works during the period from the commencement of the contract to the end of the relevant period; and

(c) any other amount or sum which the contract specifies shall be payable during or in respect of the period from the commencement of the contract to the end of the relevant period.

 

(3) The aggregate of any sums which have been paid or are due for payment by way of instalments, stage or periodic payments during the period from the commencement of the contract to the end of the relevant period.

 

(4) An amount calculated in accordance with this paragraph shall not exceed the difference between -

 

(a) the contract price; and

 

(b) the aggregate of the instalments or stage or periodic payments which have become due.

 

3. Where the parties to a construction contract fail to provide an adequate mechanism for determining either what payments become due under the contract, or when they become due for payment, or both, the relevant provisions of paragraphs 4 to 7 shall apply.

 

4. Any payment of a kind mentioned in paragraph 2 above shall become due on whichever of the following dates occurs later:-

 

(a) the expiry of 7 days following the relevant period mentioned in paragraph 2(1); or

 

(b) the making of a claim by the payee.

 

5. The final payment payable under a relevant construction contract, namely the payment of an amount equal to the difference (if any) between -

(a) the contract price; and

(b) the aggregate of any instalment or stage or periodic payments which have become due under the contract,

 

shall become due on -

 

(i) the expiry of 30 days following completion of the work; or

(ii) the making of a claim by the payee,

 

whichever is the later."

A "relevant period" is defined in paragraph 12 of the Scheme as:-

 

"A period which is specified in, or is calculated by reference to, the construction contract or, where no such period is so specified or is so calculable, a period of 28 days."

 

[8] Mr Turnbull, the solicitor for the pursuers, submitted that the terms of paragraph 3 of the Scheme were satisfied in that an adequate mechanism for determining when payments became due is not provided in the contract. The defenders submitted that the contract provided an adequate mechanism for payment. They accepted that it was entirely within their control when work on the third block might resume and thus when practical completion might be achieved. They accepted that they alone could determine when the pursuers should receive the retention monies notwithstanding that the work carried out by the pursuers had been satisfactorily completed almost two years prior to the hearing of the appeal. They accepted that it might be several more years before the defenders instructed the work on the third block to commence. They accepted that it might be several more years before the pursuers might become entitled to payment for the work properly undertaken and completed by them. They submitted that the fact that one party could postpone indefinitely the date for payment did not entitle the court to hold that the mechanism for payment contained in the contract was inadequate. The pursuers had just made a bad contract and the courts could and should not interfere with the situation.

 

[9] In my opinion the mechanism for payment to the pursuers for work properly done by them is inadequate. I fail to see how it can be deemed adequate for contractors to have to wait for their employers to take a particular step which they alone control before the contractors can receive payment for work properly carried out in conformity with the contract. That position is strengthened when one considers that what, in this case, is claimed by the contractor is payment of retention monies. The purpose of retention in building contracts is to provide the employer with some security in the event that defects arise following the employer taking possession of the site. In a J.C.T. contract the Defects Liability Period is usually twelve months after Practical Completion has been achieved. Similar provisions govern this contract as can be seen from paragraph 1 hereof. In the present contract the defenders alone control when Practical Completion can be achieved and thus when the retention falls to be paid.

 

 

[10] It was submitted by Mr Turnbull that the payment to which the pursuers were entitled, ie the retention monies, fell within paragraph 5 in that this was a final payment under the contract. Paragraph 5 entitled the pursuers to the contract price less payments already made under the contract. In his submission, payment therefore fell due in November 2008. The defenders submitted that paragraph 5 could not apply in that the contract works had not been completed. There was still a block to finish. In terms of paragraph 12 of the Scheme the contract price meant the entire sum payable under the construction contract in respect of the work. Standing that there was still work outstanding the entire sum payable under the contract could not be said to be due. It was also said on behalf of the defenders that if suspension was recalled tomorrow and work re‑commenced there was a danger that the pursuers would be entitled to payment twice over. Mr Turnbull, for the pursuers, replied by saying that if the court was of the view that what the pursuers were seeking could not be said to be a final payment he relied upon the provisions of paragraph 2 of the Scheme.

 

[11] I came to the view that there were difficulties in deeming the payment which the pursuers sought to be a final payment standing that it was accepted that the contract works were not yet completed. Thus it was difficult in my opinion for the pursuers to bring themselves within the terms of paragraph 5 of the Scheme. However, paragraph 4 of the Scheme refers and applies to payments of a kind mentioned in paragraph 2. For present purposes paragraphs 2(2)(b) and (c) are not in play. Thus in terms of paragraph 2(1), the payment covered by the Scheme is the amount determined by paragraph 2(2)(a) less the amount determined by paragraph 2(3). The subtraction brings out the 5% retention monies which are the aggregate of the sums first and second sued for. The relevant period is as defined in the Scheme, namely 28 days after the work had been performed in terms of the contract. There was no dispute that the pursuers' work on the two blocks was satisfactorily completed on or before 17 October 2008. The relevant period thus expired on 14 November 2008. In terms of paragraph 4 of the Scheme payment fell due on the expiry of 7 days following the relevant period (21 November 2008) or the making of a claim by the payee whichever occurred later. There is no agreed factual basis before me as to when a claim for payment was first made by the pursuers. However, it is quite clear that the serving by them of an initial writ would constitute a claim for payment. The initial writ was served in 2009. Thus payment fell to be made within 7 days of the raising of this action at the latest.

 

[12] The foregoing is the basis for the extempore decision which I delivered in this case. The pursuers' motion for expenses was unopposed.