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Under NEC3 the position is that liquidated damages become payable (or deductible) when the contractor has failed to complete the works within the prescribed time or any validly granted extension. Clause X7 does not specifically require the engineer to certify non-completion.

If an extension of time granted retrospectively means that liquidated damages should not have been paid or deducted, both JCT and ICC 11 forms of contract provide that, in such circumstances, the employer must repay the money. The ICC 11 and NEC3 forms state that interest must be paid on this sum.

One further point specifically dealt with is what is to happen if part of the building is taken into possession by the employer but the remaining parts remain incomplete and are completed late. It would be absurd if the employer was allowed to deduct delay damages at the full rate when part of the property had been in his possession. Accordingly the standard forms provide that the rate at which damages are payable will be reduced in proportion to the value of the part taken over: see JCT SBC 11 clause 2.37, NEC3 clause X7.3 and FIDIC 1999 Red Book clause 10.2

20.3QUANTUM MERUIT CLAIMS

A quantum meruit claim is one in which the contractor seeks payment of the reasonable value of work done for the employer. Such a claim may arise in a variety of situations, not all of which involve a breach of contract by the employer. The common thread linking these situations is that there is either no contractual entitlement to payment or no contractual assessment of the amount due.

The situations in which a quantum meruit claim is most likely to arise in the construction context are as follows:

1.Where there is an express undertaking by the employer to pay a reasonable sum in return for services rendered.

2.Where professional or trade services are requested by the employer (for

example under a letter of intent), but no price is agreed. Here it is implied that a reasonable sum will be payable.31

3.Where a price fixing clause in a contract fails to operate.

4.Where extra work is ordered which falls outside the scope of a variations clause.32

5.Where an apparent contract under which work is done is in fact void.

The question of how exactly a quantum meruit is to be assessed was considered in the case of Laserbore Ltd v Morrison Biggs Wall Ltd.33 That case concerned an informal sub-contract for micro-tunnelling work, under which the defendants undertook to reimburse the claimants’ … fair and reasonable payment. The defendants argued that this should be assessed on a ‘cost plus’ basis, but the judge ruled that the correct approach was to ask: What would be a fair commercial rate

31Supply of Goods and Services Act 1982, section 15.

32Sir Lindsay Parkinson & Co Ltd v Commissioners of Works and Public Buildings [1949] 2 KB 632, [1950] 1 All ER 208, CA.

33[1993] CILL 896.

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for the services provided? A similar approach was adopted in Costain Civil Engineering Ltd v Zanen Dredging and Contracting Co Ltd,34 where it was acknowledged that, in appropriate circumstances, a contractor might be entitled in effect to share in the profit generated by the work for which a quantum meruit was to be awarded. In Sykes v Packham (t/a Bathroom Specialist)35 a contractor provided an approximate estimate. The Court of Appeal, finding that this was not a fixed price contract, decided that the contractor should be paid on a cost-plus basis. It did not rely on prices originally quoted because it noted the contract had been subject to considerable change, suggesting that those rates were irrelevant to the circumstances in which the work was done.

One area of difficulty, which has generated considerable debate, concerns the use of a quantum meruit claim against an employer who is guilty of a repudiatory breach of contract. The crucial question is whether the contractor in such circumstances can simply ignore the contract and instead claim a reasonable sum for all the work done, even if this means that the contractor recovers more than would have been recovered under the contract. There is some authority to support the view that the contractor can indeed adopt this approach.36 However, there is a strong counter-argument that the contractor should not be allowed to use this remedy to escape from a loss-making contract, and this seems the better view.

20.4NON-PAYMENT AS A CONTRACTUAL REMEDY

A question that frequently arises under building contracts concerns the extent to which an employer may refuse to meet a contractor’s claim for payment, on the ground that the employer has some cross-claim against the contractor which would reduce or even cancel out what is owed. The question seems to arise even more frequently under sub-contracts, where it concerns a main contractor’s refusal on the grounds of a cross-claim to pay the sub-contractor. Such cross-claims are sometimes referred to as rights of set-off, but this is not entirely accurate; as we shall see, there are three separate defences that may arise in this situation.

20.4.1The legal background

It is important to appreciate that, if a cross-claim does not provide a defence, the employer (or main contractor, in the case of a sub-contract) must simply make payment in accordance with the contract terms and then take the cross-claim to court or to arbitration. As a result, where the contract provides (as some do) that no such claim can be arbitrated until practical completion is achieved, the employer may have to wait a long time for reimbursement. It is thus clear, given the size of many claims that arise out of large projects, that this is a topic of immense practical significance.

34(1996) 85 BLR 77.

35[2011] EWCA Civ 608.

36Lodder v Slowey [1904] AC 442.

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It is interesting to note that the early common law provided no defences of this kind. If a builder was promised a sum of money for building a house, then the money would have to be paid as soon as the work was complete. Even if the house had already fallen down, the client would have no defence to the builder’s action, but merely a right to claim damages in a separate lawsuit. Naturally, such an inconvenient rule could not possibly survive and, as we shall see, it has now been substantially eroded.

20.4.2Counter-claim, set-off and abatement

In considering what defences may be available, much depends upon what steps a contractor takes to enforce the claim to payment. If the matter is taken to arbitration or to a full trial in court, then those proceedings should deal with all the issues between the parties. In consequence, any counter-claim of the employer can be set up against the contractor. It is for this reason that an application by the contractor for interim payment (see Section 24.3.2) may be defeated if the employer can raise a ‘mere’ counter-claim, since the court in such proceedings is required to consider what would happen if the action proceeded to trial.37

In practice, contractors often seek to enforce a claim for payment by applying for summary judgment. Where this is done, a mere counter-claim will not operate to defeat the claim.38 However, the contractor’s claim for payment will be defeated by a cross-claim which satisfies the more limited definition of equitable set-off. Whether a cross-claim will do this depends largely upon whether it satisfies the test laid down by the Court of Appeal in Hanak v Green.39 This requires the claim and counter-claim to be so closely linked that it would be manifestly unjust to enforce one of them without taking the other into account.

The facts of Hanak v Green provide a good illustration of the doctrine of equitable set-off. The contract there was for refurbishment work in the employer’s house, and it is clear that the employer and the contractor were virtually at war throughout the contract period. When the work was completed, the employer sued the contractor alleging various defects in what had been done. In answer to this action, the contractor raised claims for extra work, disruption caused by the employer’s refusal to allow one of the workmen into the house, and the loss of certain tools that the employer had thrown away. It was held that all these claims could properly be raised as defences, since they arose directly under and affected the contract on which the employer relied.

In Geldof Metaalconstructie NV v Simon Carves Ltd 40 the Court of Appeal reviewed the authorities on equitable set-off. Rix LJ said the best expression of the test as to whether a cross claim could be asserted as a set-off was ask whether the cross-claim was so closely connected with the claimant’s demand that it would be manifestly unjust to allow it to enforce payment without taking into account the cross-claim.

37Smallman Construction Ltd v Redpath Dorman Long Ltd (1988) 47 BLR 15.

38Tubeworkers Ltd v Tilbury Construction Ltd (1985) 30 BLR 67.

39[1958] 2 QB 9.

40[2010] EWCA Civ 667.

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In the light of Hanak v Green and Geldof, it can safely be said that cross-claims which arise out of the same contract as the primary claim may be relied on to provide a defence of equitable set-off. In theory, the same principle may apply to claims under separate contracts, provided that there is a sufficiently close link between them. In practice, however, the courts have proved extremely reluctant to permit a set-off in such circumstances. Thus in Anglian Building Products Ltd v W & C French (Construction) Ltd,41 it was held that a contractor’s claim against a supplier for defects in concrete beams used on one motorway contract could not be set off against the supplier’s claim for payment for beams used on two other motorway contracts. An even more striking example is provided by B Hargreaves Ltd v Action 2000 Ltd,42 where the parties had signed nine virtually identical subcontracts (relating to different sites) on the same day. When the sub-contractors claimed payment under one of these contracts, the main contractors were not permitted to raise a set-off based on breaches of some of the other contracts. Needless to say, where the two contracts are not even between the same parties, the likelihood of successfully claiming a set-off is even more remote. Thus an employer cannot avoid paying the main contractor in respect of work done by a nominated sub-contractor, on the ground that the employer has a claim against that sub-contractor under a direct warranty agreement for defective work.43

The Hargreaves case raised another point of importance in this context, by recognizing the existence of a second type of set-off. This is common law set-off, and it arises where both claim and cross-claim are in respect of ‘liquidated debts or money demands which can be readily and without difficulty ascertained’. In such circumstances (for example where the employer raises a set-off based on liquidated damages), the two claims need not be closely linked. The defence would be available, even if they arose under separate contracts.

Until fairly recently, the term ‘set-off’ was used somewhat loosely to cover any complaints raised by an employer as an excuse for refusing to pay the contractor. However, the courts now recognize that, in addition to a true set-off (which consists of a cross-claim), there is a separate defence known as abatement. The essence of this defence is an allegation by the employer that the contractor’s claim itself is unjustified, in that the work done is not worth what is being claimed. It follows from this definition that the defence of abatement may be raised only in respect of physical defects in the work; an employer’s complaints about delay are the subject-matter of set-off, not abatement.44

Although the defence of abatement has been recognized for at least 150 years,45 its use in the construction field raises one particular difficulty. This is where the disputed claim rests, not upon a simple assertion by the contractor that money is due, but rather on an architect’s certificate or its equivalent. In such circumstances an employer seeking to defend the claim will face an uphill task, since it requires the court to be convinced of a substantial possibility that the work has been overcertified. It is established that clear evidence will be needed, and that vague

41(1972) 16 BLR 1.

42(1992) 62 BLR 72.

43George E Taylor & Co Ltd v G Percy Trentham Ltd (1980) 16 BLR 15.

44Mellowes Archital Ltd v Bell Projects Ltd (1997) 87 BLR 26.

45Mondel v Steel (1841) 8 M&W 858.

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allegations of defective work will not suffice. However, if the evidence is good enough, the defence of abatement will be available.46

20.4.3Certified sums

Can an employer exercise a right of set-off against sums which the contract administrator has certified as due for work properly executed? Or does the contract administrator’s decision effectively override the employer’s claim? This crucial question has occupied the courts from 1971.

In Dawnays Ltd v FG Minter Ltd,47 the Court of Appeal held that a main contractor could not set off a claim for a sub-contractor’s delay against sums certified as due to the sub-contractor. The actual decision was based on the precise wording of the ‘Green Form’ of sub-contract, which was used for nominated subcontractors under JCT 63, but the court clearly regarded the maintenance of cash flow as a matter of general importance. As Lord Denning MR put it: 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.

The approach adopted in the Dawnays case was applied by the Court of Appeal in several subsequent cases. Most of these, like Dawnays itself, concerned subcontracts, but the principle was also applied as between an employer and a contractor under a main contract.48 However, this whole line of cases was heavily criticized by the House of Lords in the leading case of Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd.49 That case again concerned a sub-contract, but the terms of this one were very different. It was specifically stated that the main contractor could set off from certified sums any bona fide contra account and/or other claims. Not surprisingly, it was held that this clause entitled the main contractor to set off claims for delay and defective workmanship.

Because the wording of the sub-contract in the Gilbert-Ash case was so clear, it is possible to argue that the Dawnays principle still operates. However, the better view is that the courts now regard that principle as having been overruled. As a result: In order to exclude the right to assert cross-claims admissible as equitable set-offs ... it is necessary to find some clear and express provision in the contract which has that effect.50 Moreover, in a case where a supplier’s standard terms of business did purport to exclude a client’s right of set-off, the Court of Appeal held that this was unreasonable and could therefore be struck down under the Unfair Contract Terms Act 1977.51

It should be added that, just occasionally, the right of set-off may also be excluded by implication. This happened, for example, in Mottram Consultants Ltd

46CM Pillings & Co Ltd v Kent Investments Ltd (1985) 30 BLR 80; RM Douglas Construction Ltd v

Bass Leisure Ltd (1990) 53 BLR 119.

47[1971] 2 All ER 1389.

48Frederick Mark Ltd v Schield (1971) 1 BLR 32.

49[1974] AC 689.

50CM Pillings & Co Ltd v Kent Investments Ltd (1985) 30 BLR 80.

51Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 2 All ER 257.

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v Bernard Sunley & Sons Ltd,52 where a contractual clause giving a right of set-off was actually deleted by the parties before the contract was signed. It was held by the House of Lords that this showed the parties’ intention not to have any such right.

20.4.4Procedural requirements

For some years, a number of standard form sub-contracts (though not main contracts) have contained provisions to the effect that a right of set-off cannot be exercised unless certain specified procedures have been followed. These commonly include the requirement to give written notice to the other party, specifying the amount of money to be withheld and the reason for it. Such provisions have in the past resulted in attempts by main contractors to exercise rights of set-off being defeated by the lack of an architect’s certificate of delay,53 failure to give the prescribed written notice,54 and failure to quantify the set-off in sufficient detail.55

Giving notice of an intention to withhold payment was made a general requirement by section 111 of the Housing Grants, Construction and Regeneration Act 1996, which provides that payment of any sum due under a construction contract may not be withheld after the final date for payment (discussed in Section 15.1.2) unless an effective written notice has been given. Such a notice must specify the amount to be withheld and the ground for withholding it, and must be given not later than the prescribed period before the final date for payment. This provision was amended in Local Democracy, Economic Development and Construction Act 2009 and is now known as a pay-less notice. This prescribed period may be set down in the contract; if it is not, then the Scheme for Construction Contracts provides that it shall be 7 days. A sum is ‘due’ for this purpose if it is contained in an interim certificate, even if that certificate is subsequently challenged by the employer. It follows that an employer who disagrees with an interim certificate, but who does not issue a valid pay-less notice, must pay what is stated and seek at a later stage to overturn the certificate.56 This principle is also reflected in the drafting of the standard forms to achieve the same effect.

52(1974) 2 BLR 28.

53Brightside Kilpatrick Engineering Services v Mitchell Construction Ltd (1973) 1 BLR 62.

54Pillar PG Ltd v DJ Higgins Construction Ltd (1986) 34 BLR 43.

55BWP (Architectural) Ltd v Beaver Building Systems Ltd (1988) 42 BLR 86.

56See Rupert Morgan Building Services (LLC) Ltd v Jervis [2004] BLR 18.