English Court considers evidential approach to global costs claims and JCT conditions on interest for late payment

In the recent decision of John Sisk & Son Ltd v Carmel Building Services Ltd (in administration), England’s Technology and Construction Court considered the evidential approach to global and costs claims and whether the JCT Conditions provide an adequate remedy for interest for late payment.

The Sub-Contract

Sisk had been engaged by Bolsover Street Limited under a JCT 2005 Rev 1 2007 Without Quantities contract for the construction of a nine-storey building and creation of forty apartments, together with a new Outpatients Department for the Royal National Orthopaedic Hospital (the Project).

By the Sub-Contract, Carmel agreed with Sisk to carry out the supply and installation of mechanical and electrical services on the Project. The Sub-Contract consisted of a number of documents, including Sisk’s Sub-Contract Particulars (the Particulars) and Sisk’s Sub-Contract Conditions (the Sisk Conditions). The Particulars expressly incorporated the conditions of the JCT Conditions of Sub-Contract SBCSub/C2005 Rev 1 2007(the JCT Conditions). In the event of conflict between the JCT Conditions and Sisk Conditions, the Sisk Conditions were to prevail. Clause 16.4 of the Sisk Conditions stated that any disputes arising out of or in connection with the Sisk Conditions should be referred to arbitration.

On 1^st June 2009 Carmel submitted its Application for Interim Payment No 8 to Sisk. On 4^th June 2009, Sisk notified Carmel that it had valued Carmel's work for the purpose of the Interim Payment at £2,688,728.86 (gross) (Valuation No 8). Final payment was then due on 3^rd July 2009. However, on 19th June 2009 Carmel entered into administration and ceased work under the Sub-Contract. Sisk terminated the Sub-Contract on 23 June 2009 pursuant to Clause 7.5.1 of the JCT Conditions, which provided that if the Sub-Contractor is insolvent, the Contractor may at any time by notice to the Sub-Contractor terminate the Sub-Contractor’s employment.

Clause 7.7 of the JCT Conditions set out various provisions in the event of Carmel's employment being terminated, including that Sisk was not obliged to pay any further sums to Carmel, but following completion of the sub-contract works, Carmel was entitled to apply to Sisk for the value of any work executed or goods and materials supplied by Carmel to the extent not included in previous payments. That clause also gave Sisk the right to deduct from the sum payable its direct loss and/or damage arising as a result of the termination and any other amounts payable to Sisk under the Sub-Contract. To the extent that the amount payable to Sisk exceeded the amount payable to Carmel, Sisk could recover the balance as a debt.

Referral to Arbitration

Upon the Works being completed, Carmel referred the matter to arbitration and claimed £1,975.286.44, as allegedly due to it under Clause 7.7 of the Sub-Contract. Sisk's position was that no sum was due to Carmel and that it had a counterclaim pursuant to Clause 7.7 in respect of its direct loss and/or damage caused by the termination and other amounts payable to it under the Sub-Contract, in the sum of £646,281.99. Each party claimed associated late payment interest and, in the case of Carmel, statutory fixed compensation, from the other.

Arbitration Award

The arbitrator awarded Carmel £975,965.48 compensation for late payment plus interest on the late payment of £359,329.10 (the Award). 

Appeal against Arbitration Award

Sisk appealed the Award, seeking variation, or alternatively remission of it, contending that the arbitrator had made errors of law in relation to three issues.

Issue 1 – Burden of proof in relation to Carmel’s Claim under Clause 7.7.4 of the JCT Conditions

The arbitrator found that whilst the burden of proof lay on Carmel to demonstrate the amount to be paid for work carried out, in light of valuation no.8 undertaken by Sisk and the fact that Sisk now claimed that a lower sum was due, the evidential burden fell on Sisk to show why the earlier valuation was erroneously high.

The Court held that the arbitrator had not erred in finding that Sisk had to demonstrate why valuation no.8 was erroneous and there was no basis for interference with the arbitrator’s decision on this issue. It held that:

• The arbitrator had correctly identified that, in relation to the valuation of Carmel’s work at termination, the legal burden fell on Carmel to prove the value of any work which it had carried out but for which it had yet to be paid.

• The arbitrator’s central finding was that the best available starting point for evidence of the value of Carmel’s work at termination was valuation no.8, which was a finding of fact which the arbitrator was fully entitled to reach.

• The arbitrator’s conclusions did not turn on any misapplication of some evidential burden. What the arbitrator was doing at the outset was to identify an obviously important contemporaneous piece of evidence that was at stark odds with the position being adopted by Sisk in the arbitration as to the value of Carmel’s works.

Issue 2 – Whether or not Sisk's primary claim to set-off under Clause 7.7.4 was a global claim and thus irrecoverable? 

In determining what was due to Sisk under Clause 7.7.4 by way of set-off, the arbitrator was required to consider two alternative claims:

a)        Sisk's primary claim for £1,344,477.96, being the whole of the losses which Sisk said had been caused to it by the termination and which were recoverable under Clause 7.7.4.

b)       Sisk's secondary claim, of £1,145,506.93, being the itemised costs which Sisk said had been caused to it by the termination and which were recoverable under Clause 7.7.4.

Carmel submitted that, as a matter of law, Sisk's primary claim was a 'global' claim and thus irrecoverable.

The arbitrator held that:

• Sisk’sclaim was a total costs claim and not a global claim because each part of its post-administration costs claim was purportedly attributed to a single event, namely the termination of the Sub-contract as a consequence of the administration.

• However, as a matter of principle, pursuit of a claim on a global basis was not precluded.

• The burden which falls on a party endeavouring to prove a global, or, for that matter, a total costs claim is greater than the burden it would bear in having to prove the same claim on an itemised basis because in order to succeed with a total costs claim, a party must be able to demonstrate not only that every element of the actual cost said to have been incurred is valid and has been properly incurred, but also the financial validity of the hypothetical comparative cost.

• Sufficient doubt had been established by Carmel as to the accuracy of the 'total costs' alleged to have been incurred by Sisk to justify the rejection of the claim advanced on that basis.

• Accordingly, the appropriate way to deal with Sisk’s claim for set off was by consideration of its itemised claim and thus Sisk's primary claim on its set-off was rejected.

Sisk argued that its primary claim was not a global or total costs claims at all and that there was no distinction between those terms, as the arbitrator incorrectly seemed to think. Sisk argued that its claim was for all costs and losses incurred by it due to a single event, namely termination. Alternatively, Sisk argued that insofar as the claim was a global or total costs claim, the arbitrator had proceeded on the incorrect basis that there was a greater evidential burden of proof upon Sisk in seeking to prove the actual costs incurred than any other claim would impose.

The Court held that there was no merit to Sisk’s challenge to the arbitrator’s decision on this issue. It said that the arbitrator had found in Sisk’s favour on its primary two contentions of principle, namely he accepted that Sisk’s primary claim was not a global claim and accepted in any event that even if it were, that would not preclude the claim being brought. He went on to correctly say that a party endeavouring to prove a global or total costs claim will carry a greater burden than a party endeavouring to prove the same claim on an itemised basis. There are, the Court said, added evidential difficulties in proving a global or total costs claim.

The Court said that even if the arbitrator was under the misapprehension that a total costs claim was something different to a global claim, it could not identify any resulting material error or law. The arbitrator had found that as a matter of fact, on the basis of all the evidence, Sisk had failed to prove its primary claim.

Issue 3 – The rate of interest to be applied to sums awarded to Carmel

The arbitrator was required to determine the amount of interest due to Carmel upon the sums awarded to it, including the rate of interest applicable. Carmel sought statutory interest in accordance with the Debts Act. Sisk argued that Clause 4.10.5 of the JCT Conditions was a term of the Sub-Contract, and constituted a substantial remedy for the late payment of the debt, with the result that the Debts Act had no application.

The issue was complicated by the fact that the Sub-Contract had incorporated both the Sisk Conditions and the JCT Conditions, with the former overriding the latter in the event of any conflict, but leaving it uncertain what would happen where a Sisk Condition overrode a JCT Condition where it was also made void by operation of the Debts Act. Clause 15.9 of the Sisk Conditions provided that "If Sisk fails to pay in full any sum properly due hereunder by the final date for payment, Sisk may (but shall not be obliged to) pay interest thereon from the final date for payment until payment of such sum is made." By the terms of the Sub-Contract, this provision overrode clause 4.10.5 of the JCT Conditions which provided that “If the Contractor fails properly to pay the amount, or any part of it, due to the Sub-Contractor under these Conditions by the final date for its payment, the Contractor shall pay to the Sub-Contractor in addition to the amount not properly paid simple interest thereon at the Interest Rate for the period until such payment is made. Payment of such interest shall be treated as a debt due to the Sub-Contractor by the Contractor…”

The arbitrator held that Clause 15.9 was not a substantial remedy for the late payment of commercial debts and so was declared void under section 8(4) of the Debts Act (which was not disputed by the parties). What was disputed was whether the effect of clause 15.9 being made void under the Debts Act was to incorporate the provisions of the Debts Act, or whether it would instead reactivate Clause 4.10.5 of the JCT Conditions to fill in the void.

The arbitrator determined that the provisions of the Debts Act would be incorporated because “Clause 15.9 cannot be declared to be void until after it has become a term of the Sub-contract. Thus, before Clause 15.9 had been declared void, it had been incorporated into the Sub-contract in place of Clause 4.10.5, which was thereby deleted. Clause 15.9 was then declared void.”

Although the Court held that the arbitrator’s reasoning was difficult to follow, it came to the same conclusion. It held that even if Sisk was correct and Clause 4.10.5 was operative, it did not provide for the payment of interest by Carmel on anything other than late payments by Carmel of amounts due to Sisk by way of interim payment under Clause 4.10. Thus the provisions of the Debt Act were to be implied, as the arbitrator had found.

Accordingly the appeal was dismissed on all three issues.

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