Interrelated contracts – Agreement for lease and building contract – Refurbishment works – Appellant tenants agreeing to be liable for cost of variations to works requested by them – Certification mechanism – Whether settlement agreement between respondent and contractor providing defence to claim against appellants for payment – Whether certification condition precedent to appellants’ liability – Appeal dismissed
The respondent took a lease of an office building with a view to refurbishing and subletting it to the appellants. Three contracts were entered into in March 2001: (i) a building agreement between the freeholder and the respondent; (ii) an agreement for a lease (AFL) between the respondent and the appellants; and (iii) a building contract between the respondent and a contractor for the performance of the works. In addition to the principal refurbishments, for which the respondent would pay, the AFL provided for such additions or variations to the works as the appellants might reasonably request (tenant’s variations), to be carried out at the appellants’ expense. Clause 4.2 of the AFL set out the appellant’s obligation to pay the costs of such works and provided, at clause 4.2(a), that “payment is to be made against the Employer’s Agent’s certifications of the costs and incidental expenses within 30 days of delivery of the certificates to the Tenant”. Clause 2.7 provided that such a certificate would be final and binding save in the case of manifest error.
Disputes arose between the respondent and the appellants regarding payment for tenant’s variations. Further disputes, between the respondent and the contractor, were largely resolved by a contract of settlement, under which the respondent agreed to pay £1.28m to the contractor together with the proceeds, after the first £200,000, of any litigation against the appellants in respect of the tenant’s variations; the contractor was to be entitled to pursue such litigation in the respondent’s name. Proceedings ensued in which the appellants disputed their liability for the tenant’s variations on the grounds that: (i) clause 4.2 took effect as an indemnity given by the appellants in respect of the respondent’s liability to the contractor for tenant’s variations, which liability had been discharged by the settlement agreement; and (ii) there could be no liability in respect of the claimed works in the absence of any certification pursuant to clause 4.2. Preliminary issues on those matters were determined in favour of the respondent: see [2008] EWHC 526 (TCC); [2008] PLSCS 74. The appellants appealed.
Held: The appeal was dismissed.
(1) The settlement agreement did not provide for the respondent’s liability to the contractor to be completely discharged. Instead, the liability in respect of tenant’s variations was expressly preserved and was to be pursued; the contractor could still, if necessary, sue the respondent under the building contract. The advantage to the respondent of the settlement agreement was that its potential liability to the contractor was limited to whatever could be passed on to the appellants. Moreover, it ought to be able to take little part in any dispute, in effect interpleading between the contractor and the apellants. The agreement was a sensible one of a kind that was not unusual in cases where there were chains of contracts. The object was to give control of any claim in respect of the tenant’s variations to the party that would ultimately benefit should any money be properly payable by the appellants, namely the contractor that carried out the work. Accordingly, any liability on the part of the respondent would be settled as and when sums were recovered from the appellants, but not before: Hydrocarbons Great Britain Ltd v Cammell Laird Shipbuilders & Automotive Products Ltd (1991) 53 BLR 84 distinguished. Further, the appellants’ liability to the respondent was not properly described as being a mere indemnity, but constituted a primary contractual duty to pay to the respondent the costs that the latter had incurred in carrying out tenant’s variations. It followed that the respondent was entitled to bring the claim under the AFL.
(2) The absence of a certificate under clause 4.2(a) of the AFL was not in all cases fatal to recovery. Clause 4.2(a) provided a means of ascertaining the point at which the appellants’ obligation to pay the respondent for the variations was activated. That would happen once the respondent’s own obligation to pay the contractor arose, but not before. The certificate would certify acceptance on the part of the respondent’s agent that payment was due to the contractor for what appeared to be tenant’s variations and, thus, that the time for payment by the appellants had arrived; it would be binding as a statement that the certified payment was being made, although it could be challenged by litigation if it did not correctly state what was due. However, there were other ways, such as the outcome of an adjudication of a dispute under the building contract, in which the respondent could become liable for a payment to the contractor in circumstances where no certificate had been issued. A clause 4.2(a) certificate was only one of a number of provisional triggers giving rise to the obligation to pay; others were a payment by the respondent to the contractor without a certificate or a ruling by a competent adjudicator or court that payment was due to the contractor: Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] EWCA Civ 814; [2005] 1 WLR 3850 applied.
Stephanie Barwise QC and Marc Lixenberg (instructed by the Treasury Solicitor) appeared for the appellants; Paul Darling QC (instructed by Wragge & Co, of Birmingham) appeared for the respondent.
Sally Dobson, barrister