Hidden agenda

"Parties who intend to sign up to construction contracts should either use an unamended standard form of contract, or their own homemade contract conditions. To attempt a mixture of both is usually a recipe for disaster”.

It was with this piece of advice by Donald Keating, the founder of Keating Chambers, that Mr Justice Coulson began his judgment in the recent case of Fenice Investments Inc –v- Jerram Falkus Construction Ltd.

The Facts of the case

Fenice engaged Jerram Falkus to design and construct five residential properties and a commercial unit at a site in Camden, North London. Disputes arose concerning whether Fenice had served an effective withholding notice against Jerram Falkus’s interim payment application. Jerram Falkus said that the withholding notice was out of time under the payment mechanism in the contract and therefore Fenice had to pay up.

The contract was the JCT Design and Build Contract (Revision 1) 2007, as amended by the parties. One of the amendments added by Fenice was to be found lurking in the Employer’s Requirements and purported to change the payment mechanism in the contract.

The payment mechanism in the JCT provided for a withholding notice to be served not later than five days before “the final date for payment”, which was in turn defined as 21 days from the date of receipt by Fenice of the interim payment application.

The payment mechanism inserted into the Employer’s Requirements by Fenice said that the date of receipt of the interim payment application was deemed to be the date of issue of “the interim certificate”, which was in turn due within five days of the date of the Employer’s Agent’s “interim valuation recommendation”.

This second payment mechanism potentially not only gave a much longer period for the giving of a withholding notice, but also gave Fenice, through its agent, complete control over the timescale.

Fenice’s withholding notice was given outside the period provided for in the JCT, but within the period given in the Employer’s Requirements.

Mr Justice Coulson found that the two payment mechanisms were irreconcilable, ie they couldn’t be operated together, so one of them had to prevail. The general law says that, unless there’s express agreement to the contrary, a term specifically drafted for a particular contract will take precedence over a standard term. However, in this case, there was express agreement to the contrary in the form of a hierarchy clause. Clause 1.3 of the JCT said “The Agreement and these Conditions are to be read as a whole but nothing contained in the Employer’s Requirements, the Contractor’s Proposals or the Contract Sum Analysis shall override or modify the Agreement or these Conditions”. In other words, the JCT took precedence and Fenice’s withholding notice was out of time.

In any event, the payment mechanism in the Employer’s Requirements, because it could effectively be extended at will by Fenice, was not an “adequate mechanism for determining what payments become due under the contract, and when”, as required by the Construction Act. As such, the payment mechanism was unenforceable anyway and would either revert to the JCT mechanism or be implied by the Scheme. In either case, Fenice’s withholding notice was still out of time.

Summary

Parties should beware of including contract mechanisms outside the formal contract amendments. Not every standard form of contract has a hierarchy clause like the JCT. Such clauses can be particularly important, however, in building contracts, where, in the words of Mr Justice Coulson “the impression can sometimes be given that the draftsman has included in the contract every piece of paper in his office that related, no matter how tangentially, to the project in question”.

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

Back to news