The need for care when adding additional packages of works to a contract

By Jeremy Glover, Partner, Fenwick Elliott

Shepherd Construction Limited v Drax Power Limited

[2021] EWHC 1478 (TCC)

Drax engaged Shepherd to carry out works relating to the conversion of four generating units to operate on biomass fuel at a power station in North Yorkshire. The contract was based on the 1999 FIDIC Yellow Book, although there were a number of amendments. Whilst, initially, the contract related to one package of works, it was later varied to include a second. These two elements were the “Ecostore Works” and the “BDS Works”. They could have been performed by different contractors or could have been governed by two separate contracts between Drax and Shepherd. It was later deemed to be significant that Drax and Shepherd provided for them to be governed by the same contract.

In September 2014, Taking Over Certificates were issued for the Ecostore Works and the final Milestone Payment, which was the last part of the retention in relation to the Ecostore Works, was made on 31 December 2014. In July 2017, the Taking Over Certificate for the last part of the BDS Works was issued and the Defects Notification Period in relation to those works expired in July 2018.

Disputes arose over whether Drax could make deductions from a final milestone payment for the BDS works if those deductions related to the Ecostore package had been taken over some time earlier. In February 2019, Shepherd issued Interim Payment Application 35A seeking payment of £1.3million; this  being the balance of retention in respect of the BDS works. Drax relied on Subclause 14.9.6 in respect of the cost of remedying defects in the Ecostore Works to make those deductions.  

The contract

The standard FIDIC terms had been expanded and Subclause 14.9, as amended, read:

"In relation to the Works comprising and relating to Sections 1, 1A, and 2:

14.9.1 Subject always to the Contractor's compliance with Clause 5.6.4 of the Contract in relation to Sections 1, 1A, and 2 the final Milestone Payment in relation to Sections 1, 1A, and 2 shall be paid to the Contractor in accordance with and subject to Clause 14 following the issue of the Taking-Over Certificate in respect of the whole of the Works Sections 1, 1A, and 2 and delivery of the Retention Bond to the Employer … and in an amount equal to 2.5% of the part of the Contract Price relating to Sections 1, 1A, and 2 … No amount shall be due to the Contractor in respect of the final Milestone Payment in relation to Sections 1, 1A, and 2 until the Engineer has issued the Taking Over Certificate in relation to Sections 1, 1A, and 2 and received the related Retention Bond, and any application for payment which seeks payment of the final Milestone Payment in relation to Sections 1, 1A, and 2 by the Contractor prior to such Taking-Over Certificate being issued and the related Retention Bond being provided to the Employer … shall not be a valid Interim Statement …

14.9.2 Promptly after the latest of the expiry dates of the Defects Notification Periods for Sections 1, 1A, and 2 the Contractor shall be entitled to apply for payment of the outstanding balance remaining part of the Retention Money referred to in limb (i)(c) of the definition `Retention Money' (taking into account any reduction in said amount by way of any claim or deduction by the Employer in relation to the Works) in the next Statement which amount shall, subject to Clause 14, be paid to the Contractor.

14.9.3 However, if any work remains to be executed under Clause 11 (Defects Liability) or Clause 12 ( Tests after Completion) the Employer shall be entitled to withhold the estimated cost of this work until it has been executed and to deduct the same from amounts otherwise due to the Contractor until such time as the work is completed.

In relation to the Works comprised and relating to Sections 3, 4, and 5:

14.9.4 Subject always to the Contractor's compliance with Clause 5.6.4 of the Contract in relation to Sections 3, 4, and 5, the final Milestone Payment in relation to Sections 3, 4, and 5 shall be paid to the Contractor in accordance with and subject to Clause 14 following the issue of the Taking-Over Certificate in respect of Sections 3, 4, and 5 and delivery of the Retention Bond to the Employer … and in an amount equal to 2.5% of the part of the Contract Price relating to Sections 3, 4, and 5 … No amount shall be due to the Contractor in respect of the final Milestone Payment in relation to Sections 3, 4, and 5 until the Engineer has issued the Taking Over Certificate in relation to Sections3, 4, and 5 and received the related Retention Bond and any application for payment which seeks payment of the final Milestone Payment in relation to Sections3, 4, and 5 by the Contractor prior to such Taking-Over Certificate being issued and the related Retention Bond being provided to the Employer … shall not be a valid Interim Statement …

14.9.5 Promptly after the latest of the expiry dates of the Defects Notification Periods for Sections 3, 4, and 5 the Contractor shall be entitled to apply for payment of the remaining part of the Retention Money referred to in limb (ii)(c) of the definition `Retention Money' (taking into account any reduction in said amount by way of any claim or deduction by the Employer in relation to the Works) in the next Statement which amount shall, subject to Clause 14, be paid to the Contractor.

14.9.6 However, if any work remains to be executed under Clause 11 (Defects Liability) or Clause 12 (Tests after Completion) the Employer shall be entitled to withhold the estimated cost of this work until it has been executed and to deduct the same from amounts otherwise due to the Contractor until such time as the work is completed." [Our underlining] 

So, whilst Clause 14 generally addressed the final milestone payments and retention bond separately in relation to each package, the final part said that Drax could withhold the estimated cost of "any work" that remained to be executed from the final milestone payment for the second package.

The meaning of “any work”

The dispute turned on the correct interpretation of the words "any work". Was it unqualified, as Drax said, so as to include work necessary to remedy defects in the Ecostore Works as well as the BDS Works? Alternatively, as Shepherd said, was it to be read as qualified by the words "In relation to the Works comprising and relating to Sections 3, 4, and 5" and so confined to work necessary to remedy defects in the BDS Works? Was Drax permitted to withhold the estimated cost of "any work" that remained from the final milestone payment for the second package? Or was Shepherd correct that the right to withhold only related to the second package of works? 

Judge Eyre QC agreed with Drax that the words applied to both packages and that they could withhold the estimated cost of any work remaining to be executed from the sums due for the BDS Works, under Clause 11 or 12 regardless of whether that work related to the Ecostore Works or the BDS Works.

The most important reason for this was the wording of sub-clause 14.9.6. The reference was to "any work". It was not put forward as a defined term and was qualified only by the requirement that the work is to be unexecuted under Clause 11 or Clause 12. The clause could have referred to "any such work" or "any of the said Works".  Either of which terms would have indicated that reference was being made to the preamble to Clauses 14.9.4 – 6 and to the limitation there to the BDS Works. Alternatively, there could have been an express reference to Sections 3, 4, and 5 as there was in Clauses 14.9.4 and 14.9.5. The absence of any express qualification was a powerful indication that the reference was not limited as suggested by Shepherd.

This was confirmed by the use of the word "however" at the start of the clause, which supported the view that the clause stood in distinction to the previous provisions. It was a distinct provision to be construed primarily by reference to its own language (albeit read in context). The combined effect of Subclauses 14.9.5 and 14.9.6 was that, by virtue of the former, claims or deductions relating to the BDS Works were to be taken into account when determining how much of the Retention Money was due to be paid, but that the latter provided for a further withholding (in addition to deductions relating to the BDS Works) if any work remained outstanding under Clauses 11 or 12.

Sub-clause 14.9.6 dealt with the amount to be withheld from the money due for the BDS Works. There was no given reason as to why the amount to be withheld from the final payments in respect of the BDS Works should be limited to the cost of the outstanding defects liability works in respect of those works when other sums remain due to Drax under the same contract. It would not, in the view of the Judge, make commercial sense for Shepherd to be entitled to the full amount due in respect of the BDS Works at a time when it had received payment for the Ecostore Works but when work remained to be executed by way of Defects Liability in respect of the latter works. 

The Interim Payment application 

Drax said that Shepherd’s interim payment application was invalid because it did not take into account the claims or deductions asserted by Drax in relation to the Ecostore works. The Judge dismissed this saying that Shepherd were entitled to apply for the payment that it said was due. There was no requirement to subtract from that amount any claims and deductions asserted (i.e., not necessarily determined as being due) by an employer. In the UK, it was always open for Drax to serve a pay less notice.

Conclusions

Like most construction disputes, the dispute turned on the precise meaning of the contract. However, the dispute does illustrate the care needed when dealing with multiple packages and deciding how to incorporate additional phases of work into an existing project, whether by variation or a separate contract for those works. The issue here was whether any right to withhold payment was limited to a specific package of works. It was not because there had been no attempt to distinguish between the two packages in the relevant clauses;  “any works” meant just that. 

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