Jacob Austin 00:00:00 Hi everyone. It's Jacob Austin here from QS.Zone. And welcome to episode 89 of The Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode 89 is going to be a slightly new concept for the show, and I'm calling it Case Law Coffee Break. And the idea behind it is to run through some of the new cases that have the potential to shape our future in the subcontract and contracting environment, and give you some takeaways for what it might mean to you on site. And before we begin, if you're new to the show, then please do subscribe for more user friendly advice on all things subcontracting. So in researching for today's show, I've looked at several cases from the last 12 months within the Technology and Construction Court and the Court of Appeal. And I've picked out three rulings that genuinely could move the goalposts for subcontractors. So first we're going to look at Morgan Stone versus bootcamp, which is about payment schedules and a smash and grab. Then we've got Providence versus hexagon, which is about a termination for late payment.
Jacob Austin 00:01:30 And finally, we'll be looking at JV homes versus Fincham, where a contractor was actually committed to over WhatsApp. So let's start with Morgan Stone limited versus Bergkamp Limited. Just to give you a few facts about the case to make it relevant. This was a £10 million mixed use block in Carmarthenshire. It was under a JCT 2016 design and build subcontract and rarely in unamended form, and at the outset of the project, the parties agreed a schedule of valuation dates with a due date of the 14th of each month. Pay less notice by Wednesday and payment to be made on the Friday. The main contractor, Morgan Stone, later issues an emailed revised schedule which pushed the date for the final payment back by one week, citing that management needed more time for valuations. Bergkamp objected to that, citing that the dates were wrong and that it should be amended, but that was met with silence, and both parties proceeded to use the new schedule between the dates of April and August 23rd. Bergkamp's applications are landing on the new due date, and Morgan Stones pay less notices were issued by the new date in that schedule at the end of August.
Jacob Austin 00:02:50 An application is made for the sum of £207,000. Morgan Stone issues a pay less notice, but without prejudice, argues that the application is invalid because the 2023 sheet was never agreed. Presumably then, following a period of argument in February 2024, an adjudication takes place between the two parties and the adjudicator sides, with Bergkamp awarding the 207,000, but in doing so had overlooked the pay less notice, which included some valid claims for contra charges that Morgan Stone were entitled to deduct. So Morgan Stone launched a part eight procedure challenging the validity of that initial adjudication decision, and after hearing that case, the judge came to a different outcome to the adjudicator. And there are some important points to take away from the judgment. Firstly, the judge said that the parties had, by consistent conduct, adopted the revised schedule of dates, even though these hadn't been signed up to by Bergkamp. The judge also made an important distinction to the Balfour Beatty versus Grove case. Morgan Stone had relied on that, and the key ruling of that case was that there was no fresh right to interim payment after the schedule of valuation dates had expired.
Jacob Austin 00:04:13 But the judge here said that he would treat it on a fact specific basis and that unlike the Grove case, the original contract had already promised monthly valuations and both parties were working on that basis. So the presence of the valuation spreadsheet was really just a piece of housekeeping rather than an essential term under the contract. He went as far as saying that even if no schedule had existed, that the Construction Act would apply and that monthly valuations would be implied by the act. And the final point that the judge made overruled the adjudicators original decision, and the adjudicator had been directed down a narrow field upon which to make his decision, and that narrow field neglected to take in the relevant information in the form of the Payless notice issued by Morgenstern. The adjudicator had stated that that was outside the jurisdiction of the decision, and that deliberate sidestepping breached the natural justice process, and so the award of that original adjudication was unenforceable. So in this case, Morgenstern ducked the £207,000 payment, but as a thank you very much, had to pay its own legal costs.
Jacob Austin 00:05:29 So whilst they won, they didn't win in entirety. So what are the implications of this to you as a subcontractor? Firstly, if you start acting as if a schedule has been agreed, then you're effectively agreeing it by performance. Now we've already heard of contracts being assumed to be agreed by performance, but this decision highlights that the same can be said for minor elements under the subcontract. So if you do receive a new schedule of dates, if you really do object to it and you may well then not only do you need to respond in writing to say, I don't agree with this, and I'll continue with the original contract drafting, but you also need to carry on working as if those dates weren't in place. So revert to the originals and proceed to perform in line with that. You can also use the fallback position of the Construction Act. So if you're continuing to be required to work on site, then you can continue to expect monthly valuations if that is the fashion that the contract was set up in.
Jacob Austin 00:06:31 And then finally, consider carefully if you are ever going to go to adjudication the wording that you draft your referral with. In this instance, it might have been sensible to add the defence of the set off, which had been withheld by Morgan Stone to that adjudication referral. This would have then prevented the part B defense from taking place. But without looking too far into the crystal ball, I couldn't then comment on what the original decision was because presumably if there were valid contra charges, then these would have been taken into account in the original adjudicators decision, which potentially would have reduced that payment in the first place. The next case to look at was Providence Building Services Limited versus Hexagon Housing Association Limited, and the facts on this one were that this was a £5.4 million housing contract carried out under JCT 2016 design and Build and Hexagon Housing Association had been a serial late payer, and this meant for cycles in a row in this particular instance. The contractor Providence served a specified default notice under clause 8.9.1. This required hexagon to pay up the outstanding sum within 14 days, which hexagon eventually did, albeit three days late, which remedied this default.
Jacob Austin 00:07:51 But seven months later, hexagon slipped again, and Providence fired in a termination notice the next day under clause 8.9.4 for repeat default. Now, initially, this court case was trialed by the Technology and Construction Court, and the ruling at that first hearing was said that the right to terminate hadn't accrued because the initial default had been cured before 28 days. So the judge held that the termination was invalid, but when it went to the Court of Appeal, the ruling was flipped with a view that the contract lets you terminate on any repetition, whether it was cured or not. Once the first default had been notified, so it's important to look at why the Court of Appeal took that view and why it was a different view to the initial ruling. And that was because of the plain words of the contract, the phrase for any reason does not give the further notice in clause 8.9.4 means exactly what it says. So in effect, you can skip the 28 day waiting period outlined in the previous clauses. Another reason is that it makes commercial sense, allowing employers to yoyo between paying late and then curing their defaults late would render that clause completely redundant, and as well as that previous versions of the JCT contract followed similar logic to the judge's decision, and whilst the 2016 version of the contract revised the wording, arguably the intent of the contract is the same, so it made logical sense.
Jacob Austin 00:09:27 One thing that the court actually did do on this occasion is duck passing comment on whether the notice was unreasonable or to term it another way, vexatious, and that remains a potential avenue to be explored. And perhaps by issuing a notice just one day after the payment fell late, then the court could have found that it was unreasonable. But then again, on the flip side, if this was the fifth occurrence of being paid late on a particular job, perhaps the contractor was in the right to act promptly and defend themselves. So hexagon actually have the right to appeal that decision. And it may well be the case that we're reading again about the same facts in the future. So what can you take away from this? Well, termination is a really tricky part of the contract to administer. So much so that previous directors of mine have absolutely warned me off doing it altogether. You have to file initial notices at the very right time, and then you have periods to wait before you're able to do anything else.
Jacob Austin 00:10:26 And if you're a day out on your timings, then the notice can be invalid. And the consequence for filing an invalid notice is that you've potentially waived the white flag and walked away, only to then have to go back to site, but with the added complication of likely being filed claims against by the contractor for loss of progress LEDs and other actual damages incurred at the site level. The other takeaway in this instance is the two step approach that the contractor used. They had initially filed a termination notice and the grounds for that termination was remedied. So whilst that initial termination notice didn't come to anything, it did provide the basis or the foundation for the second termination to be super effective, because the recurrence of the same event at a later time triggered the ability for the contractor to withdraw altogether and effectively cancel the contract, termination has serious consequences. So this isn't something that you should be doing lightly. By terminating with a main contractor, you've likely burned your bridges with them altogether and will never set foot through their doors again.
Jacob Austin 00:11:36 You'll always be known as that subcontractor that walked off site. So this isn't something that you do to your favorite main contractor if you end up on a problem job. But if you have ended up on a tier one contractor site, particularly one that works nationally and then other likely to do repeat business with you if they are treating you badly in terms of payment, there is always this in your locker. Okay, so next we have the case of JV homes versus Fincham Demolition. And we find ourselves asking the question can a contract be formed on WhatsApp. Well if you are listening earlier you've already heard the spoiler. Yes it can. So let's start off again with some facts about the case. This was a £248,000 demolition of a Norwich nightclub, and the crucial message was sent on the 17th of May, 2023 at 8:13 a.m., the CEO of JV homes sending a confirmation. All good start Tuesday agreed. $248 plus VAT invoice monthly. Thumbs up emoji. I've never seen a thumbs up emoji on a contract before.
Jacob Austin 00:12:47 It doesn't strike me as overly professional, but what the hell, this is WhatsApp. Fincham replies to that top man 30 day terms. Nine days later, a formal 47 page subcontract arrives with Finchem in PDF form. That document was never signed. The work began, presumably on the Tuesday and then for invoices Land between June and July. JV initially pays £80,000, but then claims that the further invoices are invalid. Later this ends up in front of an adjudicator, and that adjudicator finds that three of the invoices are valid and that one had been duplicated, so was struck out, but the other ones had to be paid. JV homes then try our friend from earlier. The old part eight alternative procedure for claims to overturn the decision, referring to points of law. So this ends up in court, where the judge, Roger Turner, decides that the WhatsApp message is sufficient for the formation of the contract. There had been an offer. There was then a confirmation of acceptance of that offer with a happy thumbs up emoji to boot, and WhatsApp messages are in writing.
Jacob Austin 00:13:59 Stored electronic text satisfies the requirements of the Construction Act. So like it or not, JV homes have entered into a contract with Fincham demolition by writing the short message. All good start Tuesday. Agreed. 248 K plus VAT invoice monthly. The judge decided that the subcontract that had been issued later was absolutely irrelevant to the situation, because the contract had already been crystallised on the 17th of May with that message. The message didn't refer to anything else to say. Subcontract will be in the post or in line with terms and conditions previously issued. So the fact that a subcontractor was drafted and then sent out means absolutely nothing in this instance. Monthly applications would be counted one per calendar month starting on the 17th of May. So had Mr. Finchem delayed his final invoice by a few days, falling in August, he then would have rightly been able to pursue all of that as a debt. The Construction Act applies to all construction and demolition, and is implied if there are no conditions in place whatsoever. So by forming that simple contract over WhatsApp, the payment provisions of the Construction Act, including the standard timescales for payment notices and pay less notices, all apply to the simple contract.
Jacob Austin 00:15:20 So as informal as that message was, it was still enough to be binding. And then the Construction Act filled in the gaps. So if you're ever in a place where you are appointing subcontractors, remember that even if you accept an offer informally, you could quickly be landing yourself with a contract and with statutory payment obligations that you didn't account for. And looking at that from the opposite perspective. If you find yourself greeted with an email of a Monday morning saying your quotation is agreed, then that means pretty much the same thing unless attached to your quotation. There were terms and conditions or you've referred to a particular subcontract. Then by responding to that email, the contractor is not only accepted the terms that you've set out in your quotation, but if those terms are silent when it comes to payment, then the Construction Act will step in and imply the detail without anybody realising. One thing that would help you in this situation is keeping a screenshot or a PDF, or even a printout of any message chain that results in you completing work.
Jacob Austin 00:16:25 If you find yourself in front of an adjudicator or in court, then the court will expect you to be able to retrieve your written agreement without some IT heroics and provided you can do that, that will be enough evidence to demonstrate you've entered into a contract. Other things you could do is reply with a follow up email confirming our WhatsApp conversation X amount lump sum monthly applications on the last day of the month and 30 day payment. If you are to receive a formal subcontract later, it's likely to include a load of duties over and above what you will have otherwise agreed thinking. Design, warranty, liquidated damages, various insurances of certain amounts. In this instance, the demolition contractor just didn't respond to it, but you could have responded, not agreed. We've already contracted as per WhatsApp terms, the one slight fall down in this situation was the submitting of two invoices within the same period. I'm unclear as to whether that means within a particular calendar month, because arguably the calendar month could have started on the 17th of May and run to the end of May, and then following for the full month of June and the full month of July.
Jacob Austin 00:17:38 But arguably the periods could have spanned the midpoint of the month, starting with the start on site date, meaning the cycles would run 17th of May to the 16th of June, 17th of June to the 16th of July, and so on and so forth. Submitting two invoices within the same period would be invalid. So from these three cases that we've spoken briefly about, and feel free to run them through Google if you want to see the full picture of any of them. There are three themes for me that stand out and are important to you as a subcontractor. Firstly, conduct can be paperwork. As we saw in the Morgan Stone case, there was a schedule of valuation dates issued, and because both parties had been acting in line with that by conduct, both parties have accepted it. The same will apply to you if you receive a subcontract. Even though you might not have signed it. If you start on site without signing that subcontract, then you are deemed to have accepted it by performance. Secondly, we have statutory safety nets, so the Construction Act has its monthly cycle.
Jacob Austin 00:18:44 It has its five day payment notice requirement. If there are holes in the contract, then they will be plugged by that law as a backup. And finally it's the procedures and the legislation which is decided the outcome in each of these cases. There's no argument here on workmanship or the failure of a finished product. This all comes down to notices, dates and jurisdiction, which for me again highlights just how important it is to have an accurate contract in place and to know and understand what you're signing up to. So that prompts my regular reminder to you as a subcontractor, it's your obligation to read and understand your subcontracts, to know what you're getting yourself in for. Okay. And that about sums up all I've got to say for today. I hope you've enjoyed today's case law coffee break. If it's been of use to you, then we'll do another one in a few months time. My mission with the show is to help the million SME contractors working out there in our industry. If you've taken some value away from today's episode, I'd love it if you'd share the show and pass that value on to somebody else who'd benefit from hearing it.
Jacob Austin 00:19:53 And of course, subscribe yourself if you haven't already. And thanks for tuning in. If you like what you've heard, then please do check us out at QS.zone for more information. You can also find us on all your favourite socials again at QS.Zone. Thanks again! I've been Jacob Austin and you've been awesome!
