Building contract–Builders begin action for balance of contract sums shortly before issue of architect’s certificate fixing date for operation of clause providing for damages for late completion–Absence of a certificate at time of issue of writ no bar to an application for a stay under arbitration clause–Dispute in existence even before writ issued–In any case, builders themselves on shaky foundations in their action
This was an
appeal by J E Lesser (Properties) Ltd, of Staines Road, Hounslow, from an order
of Master Bickford-Smith granting Ramac Construction Co Ltd, of Stonecot Hill,
Morden, summary judgment for £10,744 in an action brought by them against the
appellants over a building contract.
Mr J A
Tackaberry (instructed by McKenna & Co) appeared for the appellants, and Mr
J F Uff (instructed by Masons) represented the respondents.
Giving
judgment, FORBES J said: This case is concerned with a point affecting building
contracts which both Mr Tackaberry and Mr Uff assure me not infrequently
arises, and on which no ruling exists. They both, therefore, asked me to give
judgment in open court, which I now do. The plaintiffs are the builders and the
defendants the building owners or employers. The contract was one which
incorporated the standard form of RIBA contract with certain modifications, the
most important of which was that any reference in the standard form to ‘the
architect’ should be taken as a reference to ‘the employer’s
representative.’ The defendants explain
this as a matter of convenience for them; it enables them to use their
supervisory manpower in a more flexible manner because the change of
‘representative’ can be done informally. It is, they say, a common practice
adopted by many developers. The contract was one for the construction of an industrial
workshop and office block in Hounslow. It provided for a completion date and
for fixed sums for liquidated damages in the event of late completion. In fact
there were delays, and completion was some time behind schedule. The employers’
representative allowed certain extensions of time, but even with these
extensions completion was late. The certificate of final payment, issued by the
defendants on August 22 1974, showed a balance outstanding on the contract sum
of £11,744 less a ‘contra charge’ of £10,744 described as ‘Damages Total,’
leaving £1,000 as a balance due to the plaintiffs. This sum was paid. The
plaintiffs sued for the sum of £10,744 and issued a summons for summary
judgment under order 14. The defendants applied for a stay of proceedings so
that the matter could be referred to arbitration under the contract. The master
gave summary judgment for the plaintiffs under order 14 for the full sum, but
stayed execution pending appeal on condition that the defendants brought £5,000
into court.
The argument
turns on clauses 22 and 35 of the standard form of contract. Clause 22 is in
these terms:
‘If the
contractor fails to complete the works by the date for completion stated in the
appendix to these conditions or within any extended time fixed under clause 23
or clause 33 (1) (c) of these conditions and the architect certifies in writing
that in his opinion the same ought reasonably so to have been completed, then
the contractor shall pay or allow to the employer a sum calculated at the rate
stated in the said appendix as liquidated and ascertained damages for the
period during which the works shall so remain or have remained incomplete, and
the employer may deduct such sum from any moneys due or to become due to the
contractor under this contract.’
Clause 35 is a
long clause, and is familiar to those concerned with building contracts, and I
do not think I need to read the clause in full. The argument here turns really
on the provisions of subclauses (1) and (3), since, as I shall show in a
moment, subclause (2) is not applicable. At the time of the issue of the writ
there was no certificate of the architect under clause 22, because one had not
then been given, but before the order 14 summons was heard this omission was
repaired by the issue of a certificate by a
In addition to
the authorities which I shall mention in this judgment I was referred to Russell
v Pellegrini (1856) 26 LJNS 75; London & North Western Railway
v Billington [1899] AC 79; Morgan v Johnson & Co
[1949] 1 KB 107; and Hanak v Green [1958] 2 QB 9. Mr Uff, for the
plaintiffs, now concedes that a triable issue exists in the action and that he
cannot support the order for summary judgment, but he does so because he
concedes that under order 18, rule 9 the defendants are entitled to
counterclaim liquidated damages equal to the full amount claimed, and to set
off this amount as a defence to the claim, although the cause of action on
which the counterclaim was based arose after the issue of the writ. He says,
however, that there can be no entitlement to a stay, because at the time of the
issue of the writ there was no architect’s certificate, and such a certificate
is a condition precedent to a claim under clause 22. He relies on a passage
from a judgment of the Master of the Rolls in Dawnays Ltd v F G
Minter and Trollope & Colls Ltd [1971] 1 WLR 1205. The passage in
question is at p 1210 between A and B:
I ought to
mention one further point. Under clause 8 (a) no sums are payable in respect of
delay unless there has been a proper certificate by the architect certifying
that the works ought to have been completed within the specified time and any
certified extension of it. The architect in this case did not finally determine
what extension should be given. He originally gave three weeks, but afterwards
was to reconsider it. So, in any case, no sums were payable for delay.
Mr Uff relies
upon that passage as indicating that the architect’s certificate is a condition
precedent, but of course, in Dawnays Ltd the Master of the Rolls was
dealing with a principle which the Court of Appeal was there laying down, a
principle which is succinctly put on p 1209 at H:
An interim
certificate is to be regarded virtually as cash, like a bill of exchange. It
must be honoured. Payment must not be withheld on account of cross-claims,
whether good or bad, except so far as the contract specifically provides.
Under this
principle it was necessary for a defendant to be able to set against the architect’s
certificate showing payment due to the plaintiff another architect’s
certificate certifying the date on which work should have been completed,
because it was only in those circumstances that the employer was entitled,
under the contract, to ‘deduct such sum from any moneys due or to become due to
the contractor under this contract.’ I
ought to have added that the general principle enunciated by the Court of
Appeal in Dawnays’ case appears to have been disapproved by the House of
Lords in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol)
Ltd [1973] 3 WLR 421. As will be apparent in a moment, I would not think
that the passage in which the Master of the Rolls referred to the certificate
under what, for the purposes of this case, is clause 22, would have been
covered by the disapproval of the House of Lords expressed on the general
principle. Mr Uff’s argument then proceeds in this way. He says that the
counterclaim is here for a liquidated sum, namely the amount certified by the
architect under clause 22. But at the time of the issue of the writ there was
no such certificate in existence; hence there could be no counterclaim, and
thus, he says, no dispute to be referred to arbitration. He refers to section 4
(1) of the Arbitration Act 1950, which is in these terms:
If any party
to an arbitration agreement, or any person claiming through or under him,
commences any legal proceedings in any court against any other party to the
agreement, or any person claiming through or under him, in respect of any
matter agreed to be referred, any party to those legal proceedings may at any
time after appearance, and before delivering any pleadings or taking any other
steps in the proceedings, apply to that court to stay the proceedings, and that
court or a judge thereof, if satisfied that there is no sufficient reason why
the matter should not be referred in accordance with the agreement, and that
the applicant was, at the time when the proceedings were commenced, and still
remains, ready and willing to do all things necessary to the proper conduct of
the arbitration, may make an order staying the proceedings.
Mr
Tackaberry’s point is that clause 35 is wide enough to allow the arbitrator to
determine the substantive point at issue between the parties, namely the proper
duration of the extension of time which ought to be allowed to the plaintiffs
for completion of the work. Once this point is settled, the amount of
liquidated damages is a mere matter of calculation, but, he says, the
arbitrator is entitled to make an award in the sum so calculated. The power,
continues Mr Tackaberry, to settle this difference between the parties is
derived from clause 35 and is irrespective of whether there has been an
architect’s certificate under clause 22. It should be noted in passing that the
certificate of practical completion in this case was dated August 17 1973, so
that the restrictions in clause 35 (2) no longer apply.
I find myself
agreeing with Mr Tackaberry. The fallacy in Mr Uff’s argument seems to me to be
that he asserts that if no counterclaim had arisen before the issue of the writ
there was no dispute to go to arbitration; but the general principle is, I
think, plain. To succeed in an action on the contract the plaintiffs, or the
defendants in their counterclaim, will have to show that any necessary
preliminaries to the claim have been fulfilled. An architect’s certificate
under clause 22 is such a necessary preliminary; in that sense it is a
condition precedent to any action by the employer to recover the sums due. It
is not, however, a condition precedent to the submission of a dispute to
arbitration. Under the words of clause 35, once a dispute arises it is
automatically referred to arbitration. I quote: ‘such dispute or difference
shall be and is hereby referred.’ The
words of clause 35 are very wide. In my view a dispute or difference arose
between the parties the minute the plaintiffs refused to accept that there was
only £1,000 due to them on the final payment. All that is necessary under the
contract is that the dispute should be, in the words of clause 35 (1),
‘as to the
construction of this contract or as to any matter or thing of whatsoever nature
arising thereunder or in connection therewith (including any matter or thing
left by this contract to the discretion of the architect or the withholding by
the architect of any certificate to which the contractor may claim to be
entitled. . . .’
Under clause
22 the architect has to certify in writing that ‘in his opinion the same ought
reasonably so to have been completed.’
In other words the work ought reasonably to have been completed within
the extended time fixed. The fact that he has not done so does not mean that no
dispute has arisen: a dispute has arisen: it is as to the proper extension of
time. The arbitrator has the power to decide this question irrespective of
whether there has been an architect’s certificate under clause 22. He also has
power to award any sum due as a result of his determination of this question.
In fact the
plaintiffs in this case have proceeded on an entirely false basis throughout.
Mr Uff has argued that the defendants should not have a stay because the
counterclaim was not maintainable at the date of the writ, as no certificate
under clause 22 was then in existence. I have already dealt with the confusion
which this argument involves between what are the necessary conditions
precedent to the bringing of an action and a reference to arbitration
respectively. But the confusion goes much deeper. In fact it is the plaintiffs
whose tackle is not in order. The necessary condition precedent to a claim
under the contract in the circumstances which here prevail is that there should
have been an architect’s final certificate under clause 30 (6) (b). This alone
creates the debt due from the employer to the contractor. But there is here
only one document which I have been
August 22 1974, which shows, not £10,744 as a balance due to the plaintiffs,
but £1,000, and the latter sum has already been paid. Indeed, in the statement
of claim endorsed on the writ the plaintiffs asserted that that document was
the final certificate on which they relied. In my view they cannot accept and
deny the document; they cannot accept the parts of the document which are in
their favour and deny those which are to their disadvantage. It has to be taken
as a whole. It is either a final certificate or it is not, and as far as I can
see the only sum that certificate shows to be due is the sum of £1,000, and
that has been paid. The true answer to the plaintiffs’ claim in this action is
thus not that there is an available set-off, but that the necessary condition
precedent to a claim under the contract has not been fulfilled.
However that
may be, I am not concerned with what might be the position in the action. I am
concerned with whether or not a dispute or difference has arisen between the
parties and whether, if it has, this is an appropriate case for a stay. As I
have indicated, a dispute has arisen and has already been referred to
arbitration, although, of course, the appointment of an arbitrator has not yet
been agreed between the parties. The only remaining duty is to satisfy myself
of the matters referred to in section 4 of the Arbitration Act 1950, namely
‘that there is no sufficient reason why the matter should not be referred in
accordance with the agreement, and that the applicant was, at the time when the
proceedings were commenced, and still remains, ready and willing to do all
things necessary to the proper conduct of the arbitration.’ There is no dispute about these matters, and
in the circumstances I think this is a proper case for a stay. Accordingly I
allow the appeal and discharge the master’s order, substituting therefor an
order that there should be a stay of proceedings so that the arbitration may
proceed under section 4 of the Arbitration Act 1950. The plaintiffs’ summons
for summary judgment is dismissed, and there should be an order for payment out
to the defendants’ solicitors of the £5,000 in court and accrued interest.
The
defendants were awarded costs above and below.
