Clause 14 outlines payment, certificates, and release from liability. While the methodology remains unchanged, procedural adjustments may delay payments but aim for prompt claim resolution. Some changes benefit contractors: e.g. claims are addressed during or shortly after the contract period.

This important clause sets out the method of payment, certificates, and release from liability.

The overall methodology has not changed, but there are several procedural adjustments and some inconsequential tidying. Some of the procedural changes will be welcomed by Contractors, but several will entail further delay in payment to the Contractor. There is a determined effort to ensure that all claims are dealt with during the contract period or very shortly thereafter.

Sub-Clause 14.2 – Advance Payment Guarantee

There is a new sub-clause specifically dealing with Advance Payment Guarantees. The most significant change (a very useful one for the Employer) is that where a guarantee has to be extended and the Contractor fails to do so, the Employer may call it in to the extent that any part of the advance payment has not been repaid.

The Advance Payment is to be made within 35 days of the Contractor’s providing their application together with the Performance Guarantee and Advance Payment Guarantee. This contrasts with 42 days under the 1999 Edition.

Sub-Clause 14.3 – Interim Payments

The 1999 Edition referred to applications for interim payment certificates (‘IPC’). This terminology is now gone. Now there is a Statement, which is then followed by the IPC (the term ‘IPC’ is used throughout).

The statement was formerly required in 6 paper copies. Only 1 hard “original” is now required, coupled with an electronic copy.

There then follows a list of the items which have to be included in the Statement. These have been expanded to include Provisional Sums, any release of Retention Money and the amount which the Employer is entitled to be paid for use of Temporary Utilities.

Presumably because Sub-Clause 21.4.3 requires that any money awarded by a DAAB shall be paid without the requirement for any certification or Notice, there is (in contrast to the 1999 Edition) no specific reference to such amounts in the list of items which are to be included in the Statement. Nonetheless, Contractors should include such amounts, as this will bring into effect the right to interest under Sub-Clause 14.8, running from the date of the decision. There is no provision for payment of interest unless a DAAB award is included in this way.

A new requirement has been added to the detail that the Contractor is required to provide. This is stated as “sufficient detail for the Engineer to investigate these amounts”. While this is obviously a useful and sensible requirement it has significant implications.

For the first time, an element of subjectivity is included in the requirements. It is quite possible that the Engineer and the Contractor will disagree about what is “sufficient” or what the Engineer needs to investigate any amounts claimed.

Should there be such a disagreement and the Engineer demands additional information, the time for payment under Sub-Clause 14.7 does not start to run until the relevant information has been received (there will arguably be a short-fall in the supporting documents). Not only may the Contractor be paid later than it would otherwise be entitled, it will also be limited in any claim for financing charges under Sub-Clause 14.8. Unfortunately, it is not uncommon for Engineers to be slow in issuing IPCs, especially when the Employer is having payment difficulties. The Contractor would be very unwise not to comply with any demands for additional information, even if it considers the demands unreasonable, but even then, there may be a consequent delay in payment.

It will be difficult for the Contractor to do anything to speed payment in these circumstances (a Notice under Sub-Clause 16.1 would be a drastic but possible remedy) but it will have the basis of a claim for Financing Charges. To gain these it will need to initiate a dispute under Sub-Clause 20.2 – a time-limited right, so notice needs to be given within 28 days of the Engineer wrongly refusing to accept additional information as sufficient for it to investigate.

However, it should be noted that Sub-Clause 14.6.2 requires the Engineer to issue an IPC even in the absence of such information, while making a suitable deduction to reflect his concerns (see also the discussion under 14.7).

Sub-Clause 14.4 – Schedule of Payments

Under the 1999 Edition, the Engineer was entitled to revise a payment schedule only if progress was less than expected. Now he may amend it if it “differs”. This opens the way to bringing payments forward if the Contractor is making better than expected progress. Unfortunately, there is no provision for the Contractor to trigger this correction process. However, the trigger date for the purposes of the Engineer’s Sub-Clause 3.7 process is when the difference is first “found by the Engineer”. Presumably the Contractor can tell the Engineer and thus makes sure he/she “finds” it.

Under Sub-Clause 3.7 however, the time allowed to the Engineer to make its decision is 42 days. The decision only starts the payment process, so it may be up to 70 days before a change takes effect.

Where the Engineer decides to invoke the process (most likely when progress is slower than that on which it considers the Schedule of Payments was based) the Contractor at least has the advantage that it is entitled to be consulted and that the Engineer must act neutrally and fairly.

There will be a question of how the Engineer can determine that progress differs from that on which the Schedule of Payments was based. If the Schedule simply provides for fixed payments on a monthly basis there will be the possibility of a dispute as to what progress was assumed in the Schedule of Payments. The Contractor’s principal obligation is to complete on time, not necessarily to conform to the programme. It is arguable that if the Contractor decides to change the way in which it will achieve timely completion, this does not mean that the agreed Schedule of Payments is inappropriate.

Where there is a Schedule of Payments, payments for Plant and Materials intended for the Works (see the next section on Sub-Clause 14.5) is disapplied. There is no equivalent provision in the 2017 Silver Book, and it is difficult to see how Sub-Clause 14.5 can work in this situation.

Sub-Clause 14.5 – Plant and Materials Intended for the Works

Like the 1999 Edition, the 2017 Edition allows the parties to agree that Plant and Materials may be paid for when shipped or delivered. The Contractor simply provides the evidence in his application for payment and the amount should then eventually be included in the IPC. Under the 1999 Edition, the term “determination” was used without cross reference to the (then) Clause 3.5. Once that determination was made the amount could be included. Presumably in the interests of clarification the clause now refers to Clause 3.7 [Determination].

This has the consequence that the Engineer has up to 84 days to make a decision, which previously would have been made immediately, and it will no longer be possible to include the amount in the next IPC. Even then there will be another 56 days delay before payment. In addition, the amount to be included in the IPC is only 80% of the value of the items.[1] It is thus probable that by the time the application is dealt with under Sub-Clause 3.7, the items will have been installed so this causes further cash-flow issues. The provision was intended to give the Contractor some early payment, but as amended, it achieves the opposite.

In a sensible and practical change, the requirement for a bank guarantee before the Engineer proceeds to determine a payment has been replaced with a promise of a guarantee, but with eventual payment being conditional on the guarantee being provided.

Note that (even if the parties have agreed to apply this provision) Sub-Clause 14.4 excludes its operation when payment is made against a Schedule of Payments rather than against measured interim payments.

Sub-Clause 14.6 – Issue of IPC

The Clause now provides, as a condition precedent, that the Contractor has appointed the Contractor’s Representative.

Sub-Clause 14.6.1 – Content of IPC

The Contractor is now entitled to a copy of each IPC and it is specified that the Engineer must explain any differences between the amount applied for and the amount Certified. Contractors will be very pleased to have an entitlement to this information.

It is interesting to note that the requirement for the Engineer remains to issue the Final Payment Certificate (‘FPC’) for such amount as he “fairly” considers due, so that while Sub- Clause 3.7 has moved from “fair” to “neutral”, the halfway house of fairness remains in place here. (Clause 14.13 includes the same requirement for issue of the FPC.

Sub-Clause 14.6.2 – Withholding (amounts in) an IPC

A further welcome addition from the point of view of Contractors is that the Engineer is now obliged to explain why amounts are withheld.

Where Engineers find significant errors or discrepancies in the Statement, they now have a right to adjust the amount certified to take account of the extent to which this has prejudiced or prevented a proper investigation. This does not amount to a licence simply not to include amounts in respect of items where there may have been such an error. All the Engineer is entitled to do is “take account” of the error. This must be something other than simply failing to consider material which contains errors. Presumably this is not intended to detract from the obligation to act fairly, but exactly what it will mean in practice remains to be seen.

The IPC also includes any amounts determined under Sub-Clause 3.7. Although there is no specific statement to this effect here, this provision in fact reflects another considerable improvement from the Contractor’s point of view. Virtually all employer claims now pass through the Sub-Clause 3.7 procedure, so the situation which prevails under the 1999 Edition (where a deduction is sometimes made for an Employer claim before the Contractor has the opportunity to argue the point) has now been remedied.

Sub-Clause 14.6.3 – Correction or modification of IPC

There is a welcome new provision setting out in detail what the Contractor is entitled to do if he does not agree with the IPC. Following the Contractor’s submissions, the Engineer has an opportunity to include corrections in the IPC. If he does not do so, or the Contractor still remains unhappy, he is entitled to entitled to ask the Engineer to deal with the matter under Sub-Clause 3.7. There is no time-limit on the Contractor making this request.

Although the 3.7 process is lengthy in the context of payment, the clear right for a Contractor to pursue this procedure in the face of a difficult Engineer will be welcomed by Contractors.

Sub-Clause 14.7 – Payment

As before the Employer’s time for payment runs from when the application is made by the Contractor. This is 56 days for all IPCs except the FPC. Confusingly the Sub-Clause includes two separate time limits for payment under IPCs – 56 days after Engineer receipt for normal ones and 28 days after Employer receipt where the IPC is issued as result of a Partially Agreed Final Statement under Clause 14.13. The FPC is payable 56 days after its receipt by the Employer.

Sub-Clause 14.8 – Delayed Payment

As before, interest is due on late payment. The rate is calculated at 3% above variously defined base rates which have been re-defined. Formerly the base was the discount rate of the central bank of the country of currency of payment. It is now based on the rates charged to borrowers at the place for payment or, if there is no such rate, the rate in country of the currency of payment (there may be some debate about what rate should be paid where the currency of payment is the Euro).

Payment is now to be made without any requirement for a notice from the Contractor of any sort. There is no time limit expressed and no provision for interest on late payment of such interest. Contractors who fear late payment of interest may be wise to include a claim in their next Statement for inclusion in an IPC.

Sub-Clause 14.9 – Release of Retention Money

This new provision marks a considerable negative change as far as Contractors are concerned. Under the 1999 Edition, payment was certified by the Engineer outside the normal IPC process and should have been made immediately. It is now to be included in a Statement for an IPC. This inevitably means at least a 56 day delay in refund.

Sub-Clause 14.10 – Statement at Completion

This has always been required to include any amounts the Contractor considers to be due. The particular categories are now spelled out in detail – including claims still being considered by the Engineer and the DAAB. These are only given as examples, but the list contains considerable gaps – for example, amounts where a NOD is likely to be issued, and amounts which are about to be challenged in arbitration.

Sub-Clause 14.11 – Draft Final Statement, Agreed Final Statement and Partially Agreed Final Statement

There are now three sub-clauses covering what was previously one, referring to the application for a Final Payment Certificate. As before the Sub-clause envisages a process under which the Engineer and the Contractor attempt to agree on the figures for the FPC.

The significant change is the introduction of the concept of a Partially Agreed Final Statement (PAFS). This is a Statement prepared by the Contractor identifying amounts which (after discussions with the Engineer) are agreed and those which are not agreed. This is a sensible additional provision to avoid the situation where there is disagreement over the content of the Final Statement and the Engineer is forced to make a decision as to what he includes in the FPC.

As with as Agreed Final Statement, the consequence of a PAFS is that the Engineer proceeds to issue an FPC (14.13). However, the payment consequences are different. In the case of an FPC, Clause 14.7 requires payment 56 days after receipt by the Employer. A PAFS does not lead to an FPC, but to an IPC which is to be paid 28 days after receipt by the Employer.

Sub-Clause 14.12 – Discharge

The 1999 Edition provided for a full and final discharge by the Contractor, which only took effect once all outstanding claims had been satisfied. This has now been limited in that the discharge covers all agreed amounts but can only exclude limited elements of the Contractor’s claims.

The excluded items may only be items in respect of which a DAAB or arbitration is “in progress”. Thus, claims still being dealt with by the Engineer under Clause 3.7 cannot be excluded, nor can those which, while still live, have not yet been made the subject of a DAAB or arbitration (notice not yet given, proceedings not yet commenced, etc). Contractors ought to be very reluctant to issue such a discharge, but it is a condition precedent to issue of the Final Payment Certificate. The discharge will be deemed to have been submitted and will be effective even if the Contractor fails to provide it so long as the amount certified in the Final Payment Certificate has been paid and the Performance Security returned.  Given that the FPC cannot be issued until the discharge is provided this provision is unworkable.

Sub-Clause 14.13 – Issue of FPC

The FPC is issued 28 days after the Final Statement or Partially Agreed Final Statement. This is as in the 1999 Edition, but the content of the statement now includes credit for any amounts paid under the Performance Security and any balance due from the Employer.

The Sub-Clause now contains additional wording to deal with the situation where there is a Partially Agreed Final Statement (or the Engineer considers that the draft final Statement submitted is in fact a Partially Agreed Final Statement).

Unfortunately (perhaps due to a drafting error) there are two alternative approaches included, with no indication as to which is to apply.

The opening words provide that following a Partially Agreed Final Statement, a Final Payment Certificate is to be issued.

However, the final paragraph provides that in the same case, no FPC is to be issued, but there is to be another IPC. As noted above, if this approach is followed, this IPC (unlike other IPCs) is to be paid 28 days after receipt by the Employer, rather than 56 days after its receipt by the Engineer.

Sub-Clause 14.14 – Cessation of Employer’s Liability

As in the 1999 Edition, the Employer’s liability is limited by reference to what is included in the Final Statement, unless something new arises after the work is completed.

The 2017 Edition contains an additional exemption for the Employer. Unless reference has been made in the Final Statement or Partially Agreed Final Statement, the Employer is absolved from any amounts which the Contractor might wish to claim, unless he makes a claim under 20.2 within 56 days of receiving the Final Payment Certificate. Under the 1999 Edition, no such cut-off was provided. Contractors will have to be sure to start all their claims immediately.

As with the 1999 Edition, the cessation of the Employer’s liability does not apply in the case of his indemnification obligations, or in case of fraud, deliberate default, or reckless misconduct. “[G]ross negligence” has now been added to this list (to the Contractor’s possible advantage) .

The addition of “gross negligence” may have substantially different results depending on which Law applies to the contract.

In a very interesting treatment of the subject recently presented to the Society for Construction Law in London,[2] the authors quoted a passage from a Court of Appeal case Armitage v Nurse[3] as follows:

“It would be very surprising if our law drew the line between liability for ordinary negligence and liability for gross negligence. In this respect English law differs from civil law systems, for it has always drawn a sharp distinction between negligence, however gross, on the one hand and fraud bad faith and wilful misconduct on the other

“… we regard the difference between negligence and gross negligence as merely one of degree … civil systems draw the line in a different place. The doctrine is culpa lata dolo aequiparatur [gross negligence is equal to fraud]; and although the maxim itself is not Roman the principle is classical. There is no room for the maxim in the common law.”[4]

On this basis it seems that, in common law jurisdictions, all significant negligence prevents parties from escaping from liability, and under civil systems, only fraud will enable them to escape.

Sub-Clause 14.15 – Currencies of Payment

This adds two provisions to those in the 1999 Edition. One provides for the way in which currencies are to be allocated in valuing variations (there is a comment on this in our treatment of Clause 13). The other deals with the currencies in which Performance Damages are to be paid.

Please get in touch at victoria.tyson@howardkennedy.com with your thoughts or to discuss any concerns.

[1] Note that under Sub-Clause 7.7 property in Materials and Plant does not pass until they are fully paid for, so this 80% provision means that the Contractor retains ownership far longer than one might expect.

[2] Exclusions from Immunity: Gross Negligence and Wilful Misconduct, James Pickavance and James Bowling SCL October 2017.

[3] [1997] EWCA Civ 1279, [1997] 2 All ER 705, [1997] 3 WLR 1046.

[4] Armitage v Nurse Note 14 [1997] 3 WLR 1046 para [254].

Even if a claimant has achieved complete success in litigation, it remains exceptionally difficult to recover legal costs on an indemnity basis, as this case demonstrates. Costs will most likely be recovered on the standard basis – at least in the absence of bad conduct during the litigation itself. This case also indicates that the court will generally limit an interim payment of costs to two-thirds of an approved costs budget.

Even if a claimant has achieved complete success in litigation, it remains exceptionally difficult to recover legal costs on an indemnity basis, as this case demonstrates. Costs will most likely be recovered on the standard basis – at least in the absence of bad conduct during the litigation itself. This case also indicates that the court will generally limit an interim payment of costs to two-thirds of an approved costs budget.

In the recent case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC) [1] the Howard Kennedy International Construction Team (formerly Corbett & Co.) acted for the Government of Gibraltar (GoG). In April 2014, the Technology and Construction Court of England & Wales found that GoG had successfully terminated its £30 million FIDIC Yellow Book contract with Obrascón Huarte Laín SA (‘OHL’) for design and construction work to Gibraltar Airport, which principally involved the creation of a tunnel beneath the airport runway. As the successful party, GoG returned to Court in June 2014 to claim its legal and other costs of the proceedings. In particular, GoG sought the recovery of indemnity costs and an interim payment of those costs. As a general rule costs are not awarded on an indemnity basis. However, the Court’s discretion to award indemnity costs under Part 44.3 of the Civil Procedure Rules is wide.

The basis of costs

GoG requested costs on an indemnity basis due to OHL’s conduct. OHL accepted that it must pay GoG’s costs but asserted that it should do so on a standard basis only.

GoG referred to the cases of Excelsior Commercial and Industrial Holdings Ltd v Salisbury Hammer Aspden and Johnson [2002] EWCA Civ 879 [2]and Three Rivers District Council v Bank of England [2006EWHC 816 (Comm) [3] as authority that a party seeking indemnity costs must establish some conduct or circumstance to take a case ‘out of the norm’. GoG asserted that OHL’s conduct indeed took the Gibraltar case out of the norm, in particular by OHL’s reliance on a report by a consultant whom it had engaged. That report was put forward to support OHL’s suspension of the works and redesign of the tunnel and also to put commercial pressure on GoG. In his judgment of April 2014 the judge had said this report was ‘palpably and obviously inept, was clearly worked on by OHL and cannot have been considered by OHL to be independent or competent’.

GoG also identified similarities in OHL’s conduct to that of the defendant in the case of Amoco (UK) Exploration Company v British American Offshore [2001] EWHC 485 (Comm).[4] In Amoco the defendant’s conduct had involved a deliberate policy calculated to exert unfair commercial pressure on the other party, the prioritisation of commercial interests over the rights and wrongs of the situation and a constantly changing case. It ultimately led to a resounding defeat at trial and the rejection of evidence put forward in support. The court had awarded indemnity costs in those circumstances.

OHL denied that its conduct bore any similarity to that of the defendant in the Amoco case. It instead asked the Court to consider the case of Courtwell Properties Ltd v Greencore PF (UK) Ltd [2014] EWHC 184 (TCC)[5] (a case heard by the same judge) where, although the defendant had been unsuccessful at trial, its position was nevertheless arguable and its conduct in the litigation had not been unreasonable.

Decision: costs on standard basis

The judge observed that the Gibraltar case was ‘many layered’ although primarily concerned whether the termination was lawful. He pointed out that there were other substantive and important issues such as ground/soil and water contamination, design processes, rock, suspension and re-design which had all been properly raised by OHL. He distinguished the Amoco case, and said that the primary question in present circumstances was whether a particular case was fought on a basis that took it out of the norm. Although highly sceptical of OHL’s tactics in the commissioning and drafting of the much criticised consultant’s report, the judge said that primarily the costs here were concerned with the costs of the litigation itself. OHL had run a large number of issues at trial and the fact that it had lost resolutely did not mean that GoG would automatically receive indemnity costs. OHL had not thereby taken the case out of the norm. This was not a case for indemnity costs, although the judge considered it was certainly not unreasonable for GoG to have requested them in present circumstances. OHL was ordered to pay the costs of the issues tried to date on the standard basis, to be the subject of a detailed assessment if not agreed.

Interim payment of costs: how much?

Early in the proceedings, at the case management conference, both parties had agreed cost budgets each in excess of £6 million and these had also been approved by the Court in a costs management order. Following judgment in April 2014, the parties had agreed that GoG was entitled to an interim payment of its costs, but disputed the size of that payment. GoG requested an interim payment of £5.5 million (approximately 80% of the budget previously approved by the Court) and OHL offered it only £4 million (approximately 58% of the approved budget).

GoG argued that its approved costs budget was ‘reasonable and proportionate’ and that its recoverable costs (after a detailed assessment) were unlikely to be much less. It relied on the case of The Board of Trustees of National Museums and Galleries on Merseyside v AEW Architects and Designers Limited -and- PIHL UK Limited and Galliford Try Construction Limited (in joint venture) [2013] EWHC 2403 (TCC).[6] There an interim payment of 70% had been made.

OHL argued that the fact that a costs management order had been made for the full agreed costs budget should not lead the Court to award more than would normally be paid on account. OHL referred to the cases of Henry v News Group Newspapers Ltd [2013] EWCA Civ 19 [7]and Troy Foods v Manton [2013] EWCA Civ 615[8] and claimed that the approved costs budget ‘does not act as a rubber stamp for claims up to that amount’. OHL said that GoG would still need to demonstrate in a detailed assessment that the costs it had incurred were proportionate and reasonable. It suggested that questions might arise in such a detailed assessment over the reasonableness of the approved costs budget. For example, OHL suggested there might have been some duplication in the involvement of two QCs and two law firms on the part of GoG (despite this point never having been raised before).

The judge remarked that the case was a relatively complex piece of litigation involving international parties, five disciplines of experts, and had been conducted in a short period of time, all of which meant that preparation for the trial had to be more focused. Although the costs budgets had been approved at the case management conference, the judge had not been asked to cast a critical eye over them at the time. They had not been criticised by the opposing parties nor did they seem out of the ordinary for a case of this nature.

The judge said that the purpose of an interim payment is to reflect the fact that there is a winning party entitled to substantial costs and to ensure that that party is not kept out of those costs. Whilst the agreed costs budget set a likely upper limit at this stage on what GoG is likely to recover in costs, it does not set out figures on a standard or detailed assessment. The judge confirmed that unless GoG’s costs could be agreed between the parties, there would have to be a detailed costs assessment process.

Decision: Interim payment of two-thirds of the approved costs budget

The judge considered that a costs assessment on a standard basis commonly, but not always, reduces the claimed sum to two-thirds (higher on an indemnity basis). Therefore, an interim payment should not represent more than could be recovered on a standard assessment. OHL was ordered to pay two-thirds of the approved costs budget i.e. £4.5 million on account of GoG’s costs. A time for payment was agreed between the parties.

Conclusion

Unless a losing party has behaved particularly badly during the litigation process itself, the winning party is unlikely to recover legal and other costs on an indemnity basis. The winning party can expect only to recover those costs on the standard basis even after an outright victory. The size of an interim payment is also likely to be capped at two-thirds of an approved costs budget. However, there is no absolute rule in this. In an even more recent case – (1) Peter Kellie and (2) Kelly Kellie -v- Wheatley & Lloyd Architects Limited [2014] EWHC 2886 (TCC)[9] – the court took a more generous approach. There almost all of the approved costs budget was ordered to be paid on account of costs. The facts of a particular case always have the potential to influence the outcome of an application for an interim payment.

http://www.bailii.org/ew/cases/EWHC/TCC/2014/1028.html

http://www.bailii.org/ew/cases/EWCA/Civ/2013/615.html

http://www.bailii.org/ew/cases/EWHC/TCC/2014/2886.html