Escalator clause in RIBA contract held to apply to payments made under scheme for incentive bonuses–Contractors entitled to introduce these NJC-approved schemes and charge them up to the employer–Only limitation is that contractor must act reasonably and bona fide
This was an
action by William Sindell Ltd, building contractors, of Leda House, Station
Road, Cambridge, against the North West Thames Regional Health Authority for
moneys claimed under the escalator clause in an RIBA contract for construction
of the New Lister Hospital at Stevenage, Hertfordshire.
Mr P E Webster
QC and Mr M Saville QC (instructed by McKenna & Co) appeared for the
plaintiffs, and Mr D Gardam QC and Mr P Scott (instructed by J Tickle & Co)
represented the defendants.
Giving
judgment, DONALDSON J said that the dispute related to the true construction
and effect of the escalator clause, clause 31 (1), in the RIBA contract, local
authorities edition, with quantities. The clause provided for the way in which
the contract sum should be deemed to be calculated, and for certain
adjustments, and was designed to take some account of changes in wage rates
occurring after the date of tender. What had happened in the present case was
that an incentive bonus scheme had been introduced, the basis of which was the
setting of targets for as many operations as possible. The targets established
the amount of work to be expected in any given time or the time expected to be
taken in performing any given operation. If the specified output or operation
was achieved in less than the target time, a bonus was earned which reflected
the time saved. Bonuses were calculated weekly on the man-hours saved, and were
paid to gangs, which shared them out on whatever basis was agreed within the
gang. The rate of bonus was 25p or two-thirds of the average of the current
standard rate of wages per man-hour of two craftsmen and one labourer,
whichever was the greater. Bonus payments were also made to those engaged in
work which did not lend itself to the establishment of targets. These payments,
like those related to targets, were based on a rate which was affected directly
or indirectly, by changes in the basic rate of wages.
The date of
the tender was September 6 1966 and the date of the contract April 12 1967.
Work began in February 1967 and was completed on May 8 1972. The incentive
scheme itself was agreed and took effect in August 1967. Changes in the
nationally-agreed rates of wages in the industry occurred in May, July and
October 1967 and in March 1968, but it was not until a further increase
occurred in November 1968 that the bonus payments to those with targets were
affected by being raised above the minimum 25p per man-hour rate. The effect of
the changes on bonus rates payable to those without targets might have been
felt at a different date, but this action was not concerned with quantum and
that consideration did not affect the principles involved. A decrease of one
old penny per hour took place in December 1968, but this was followed by further
increases in February and November 1970 and in March and June 1971. It was
common ground that all these changes took place by reason of an alteration in
the rules, decisions and agreements referred to in clause 31 (1) (a) (i).
Counsel for the contractors submitted that the bonus payments constituted
wages, since they were paid as a recompense, reward or remuneration for work
done by the workmen concerned (see under ‘wages’ in ‘Words and Phrases
Legally Defined,’ 2nd edition, and London County Council v Henry
Boot & Sons Ltd [1959] 1 WLR 1069). Mr Gardam, for the authority,
submitted that the payments were emoluments rather than wages, because they
were paid to the gang as such, labourers and craftsmen shared equally in the
payments, and the amount was not directly related to the work done by each man.
If the
distinction between wages and emoluments was relevant, he (his Lordship)
thought the bonus payments ranked as wages, because a gang was composed of a
number of men and the payments were for work done by that gang. It seemed to
him irrelevant that when any part of that money found its way into the pocket
of a particular man the precise amount might not be directly related to the
amount of work done by that man. But in any event, clause 31 (1) (a) (ii) applied,
in his judgment, to both wages and emoluments, so that it did not matter which
label was applied to the bonus payments. Counsel for the contractors was thus
in a position to submit (a) that nationally-agreed rates of wages were
increased, and (b) that as a result there was a net increase in the wages and
other emoluments paid out by the contractors over the amount which would have
been paid out if there had been no such increase in the nationally-agreed
rates. It followed, counsel submitted, that the clause took effect. Mr Gardam
submitted, however, that on the true construction of clause 31 (1) (a) (ii)
there must be some causal connection between the increase in the
nationally-agreed rates and the net increase in payments by the contractors for
wages before they could recover from the authority, and he (Donaldson J)
thought this was plainly right. The issue between the parties which thus
emerged was as to the nature of the causal connection which was required. Mr
Gardam submitted that the implied causal connection must be such as would limit
the recoverable increases to increases which were directly and inevitably
caused by the change in national rates. Here, said counsel, the increases did
not stem solely and directly from the changes in national rates, but from a
private bargain between the contractors and their employees to pay incentive
bonuses. What, asked Mr Gardam forensically, was to stop a contractor paying a
bonus of five times the national rate and seeking to charge the authority with
five times any increase in that rate?
He (his
Lordship) agreed that wholly inappropriate use of
wage bill would be outside the scope of the clause. Bonus payments for clerical
workers based on the nationally-agreed rates for building trade craftsmen might
well be such a case. But this incentive bonus scheme was of a type which was
contemplated, and indeed encouraged, by the National Joint Council for the
Building Industry. In answer to Mr Gardam’s forensic objection, he (Donaldson
J) thought that the parties must have contemplated that the contractors would
act reasonably. Any claim under this clause must be in respect of a bonus
scheme which had been entered into bona fide. He thought it would be
wrong for him to try to formulate with precision the implied term as to the
casual connection between an increase in the nationally-agreed rates of wages
and the increase in the contractors’ bill for wages which they could pass on.
Nevertheless he considered that increases arising under this incentive scheme,
which was of a type expressly contemplated by the NJC, must fall within any
such formulation. It was common ground that if the contractors could obtain
increased productivity by increasing the size of their work force, they could
pass on the increase in wages caused by changes in the nationally-agreed rates,
even though the building owners would be unable to control the size of the work
force and might never have contemplated so large a number of men being
employed. He (his Lordship) could see no reason why such increased productivity
should not be achieved in the different but approved manner discussed and why
the disputed clause should not apply thereto. There would therefore be judgment
with costs for the plaintiffs.
