In Re Dawnays Was it Decided Correctly - Case Study Example

In Re Dawnays – Was it Decided Correctly? Before embarking upon the topic under study, it would be advisable to define construction law as well as to introduce the facts of the matter in the case under analysis, which will be of help in understanding the case. Construction Law Construction law refers to the statutes and provisions that define the rights and obligations of the parties to the contract related to the building, erection, renovation, repairing, alteration and demolishing of the construction projects created after their entering into legal agreement, which have been expressed manifestly in the terms and conditions of the contract. “Construction law”, State Lawyers submit, “deals with all legal issues relating to the construction process from land acquisition and project financing to post-construction claims settlement. These include such matters as, building contracts, bonds and sureties, construction and builders’ liens, tendering, and construction claims, which affect all participants in the construction industry, including lender financial institutions, architects, general contractors, subcontractors, suppliers, builders, owners, planners, designers, developers and engineers.”1 Consequently, construction law determines rights and obligations, to the parties to the contract, related to construction, and bind them to a legal relationship by protecting their rights throughout the construction process from land acquisition to the handing over the project to the owner. The subcontractors and architects are also considered as the party to the contract along with general contractors, builders, owners and developers etc under the construction law. An Interim Certificate of an Architect, whether can be treated as a Bill of Exchange The topic of this study is the position of law with regard to the statement made by Viscount Dilhorne, where he held that Lord Denning’s judgement declaring ‘an interim certificate to be regarded as virtually as cash, like a bill of exchange,’ while deciding Dawnays was not correct. While deciding Gilbert-Ash (Northern) Ltd. V Modern Engineering (Bristol) Ltd, the House of Lords had occasion to consider the correctness or otherwise of the rule in Dawnays. It was held in the Judgment by Lord Diplock that Dawnays case was wrongly decided.2 In Dawnays Ltd v F G Minter,3 the Court of Appeal reversed the judgment of the trial court. The appeal committee of the House of Lords refused leave to appeal from judgment of the Court of Appeal on the ground that “seemingly it did not raise any point of law of such general importance as to make it appropriate for consideration” by the House of Lords.4 In that matter, Dawnays were appointed as the subcontractors for conducting the entire steelwork for the Green Form Co., where Minter, Trollope and Colls were the general contractors jointly.5 The quality of Dawnays’ work and services were evaluated and assessed by the main contractors, where the payment was to be made to Dawnays on the basis of the architect’s interim certificate. The general contractors (i.e. Minter) received full payment from the Green Form, but refused to pay Dawnays their share. Dawnays’ work, according to Minter was defective. According to the general contractors, the said defective work had forced them to pay damages to the Green Form against the losses caused because of the delay of the steelwork. Judge Fay, during the initial hearings, dismissed Dawnays’ claim of money in receiving the payment from the general contractors, but the Court of Appeal overturned the decision made by the lower court, and held that the main contractor had no right to deduct the share of the subcontractor on his behalf. On the contrary, the main contractor would have, according to the Court of Appeal, to pay the share to the subcontractor according to the terms made in the interim certificate. “A number of cases have come”, 6 Jones observes, “before the court in relation to set-off in the construction industry.” One of the most noteworthy cases was of Dawnays Ltd v F G Minter [1971], in which the Court of Appeal held that no set off should be allowed. And the main contractors could only deduct sums which were liquidated and ascertained, and which were established or admitted as being due. Hence, the court declared the interim certificate equal to the cash like a negotiable instrument i.e. ‘bill of exchange.’ It is important to understand the grounds on which Lord Denning discarded the decision made by the lower court. Lord Denning is of the view that the subcontractor maintained the right to get the money of his share because the right of set off had not been mentioned in the contract between the employer and the subcontractor. It was also thought necessary by Lord Denning that for the smooth running of business enterprises, cash flow is vital. In Lord Denning’s words, “When the main contractor has received the sums due to the sub-contractor----- as certified or contained in the architect’s certificate----the main contractor must pay those sums to the sub-contractor. He cannot hold them up so as to satisfy his cross-claims. Those must be dealt with separately in appropriate proceedings for the purpose. This is in accord with the needs of the business. There must be cash flow in the building trade. It is the very lifeblood of the enterprise. ---once the architect gives his certificates, they must be honoured all down the line. The employer must pay the main contractor; the main contractor must pay the sub-contractor, and so forth. Cross claims must be settled later.” Before the House of Lords held that Dawnays was wrongly decided, while hearing the appeal made in Gilbert- Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd, decision of the Court of Appeal in Dawnays served as a sort of precedent for the cases of same nature and situation. The judgment of the House in was delivered by Lord Diplock. The judgment distinguished between interim certificates, saying that even the final certificates are liable to be considered by the Arbitrator, and the Architect himself is no last authority. Aftermath of Dawnays As is mentioned in the judgment in Gilbert- Ash, the decision in Dawnays was followed in six other cases decided by Court of Appeal; Frederick Mark Ltd. v Schield,7 G K N Foundation Ltd. v Wandsworth London Borough Council,8 John Thomson Horsley Bridge Ltd. v Wellingborough Steel and Construction Co Ltd .9 Two others are unreported.10 Gilbert- Ash was the sixth. Dawnays case “came to be regarded not as a mere decision on the construction of a particular clause in a particular contract but as authority for a general principle of law applicable to all building contracts and sub- contracts which contain provision for payment of the price of the works by instalments.” Lord Denning was dealing with interim certificates, but the rule in Dawnays was applied in cases where the architect had issued final certificate and to instalments of which the price which were not required by the contract to be certified by an architect or other third party. Law prior to Dawnays Prior to the decision of the Court of Appeal in Dawnays, the usual practice in litigation regarding sums due on interim certificates to seek defence by setting up breaches of warranty in diminution or extinction of the sum due. But Dawnays changed all that till the House of Lords overruled the decision in Gilbert- Ash (Northern) Ltd v. Modern Engineering (Bristol) Ltd. An important decision in respect of right of set off available to defendants, which has stood the test of time, is Mondel v Steel.11 It was decided in that case that the defendant in an action need not seek a set off by way of a cross action. It is enough for him to defend his case by saying that the sum in dispute would become that much lesser because of the amount due to him from the plaintiff which was result of a breach of a contract. This principle was later codified in the S. 53 Sale of Goods Act 189312, which provides that the buyer may set up against the seller the breach of warranty in diminution or extinction of the price. That is to say, the contractor in Dawnays had a right of set off as against the sub-contractor, the former being a buyer of services and the later the seller. However, the principle followed “since about the turn of the nineteenth century at least”13, was ignored while deciding Dawnays by Lord Denning, the main reason as opined by the Court of Appeal being the need for cash flow. Lord Diplock says in his judgment in Gilbert- Ash, “It is not to be supposed that so elementary an economic proposition as the need for cash flow in business enterprises escaped the attention of judges throughout the 130 years which had elapsed between Mondel v Steel and Dawnays case in 1971 or of the legislature itself when it passed the Sale of Goods Act 1893.” It was further observed that “it is of course open to parties to a contract for sale of goods or for work and labour or for both to exclude by express remedy for its breach arising by operation of law or such remedy may be excluded by usage binding on the parties.” In light of subsequent case law, and mainly the decision in Gilbert- Ash, the view taken by Lord Denning appears to be incorrect. The parties to a contract in construction field were always governed by common law till the implementation of the Housing Grants, Construction and Regeneration Act 1996. The preamble of the said act itself states that it is enacted along with other objectives “to amend the law relating to construction contracts and architects”. The decision in Dawnays was criticised mainly because the finality it gave to the certificate by an architect regarding completion of part of the entire work. In Dawnays the certificate of the architect was an interim certificate. But the ruling of the Court of Appeal was followed even in cases where the architect had issued a final certificate. In that case, the main contractors or the employers would have been precluded from withholding any and all sums even when the sum due as per the architect’s certificate was to be paid to the sub- contractor or the contractor was the final sum payable under the contract. According to Lord Denning, the certificate of the architect is “to be regarded virtually as cash, like a bill of exchange”. A bill of exchange is defined in statute as under “A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer.”14 However, it can not be so regarded, as it is subject to review by an arbitrator. Further, the work in progress need not be taken to its finality in all the cases, and the work done by the sub- contractor is to be subject to the approval by the principal, i.e. the employer. In that case, the main contractor would be at a loss as to the course of action. What he has in his rights is to withhold the payment so as to indemnify himself against any losses suffered by him as a result of breach of contract or otherwise. This position has been adopted in the Housing Grants, Construction and Regeneration Act, 1996. However, it is also made mandatory that the employer serves notice to the contractor (as the main contractor would be required to be served upon the sub- contractor).15 Clause 30.10 of the standard form of building contract issued by RIBA16 provides that “Save as aforesaid, no certificate of the architect shall of itself be conclusive evidence that any works, materials or goods to which it relates are in accordance with the contract”. Clause 30.9 provides that the final certificate is to be conclusive evidence of the matter certified in accordance with the elaborate provisions set out in that clause.17 In Beaufort Developments (NI) Limited v Gilbert- Ash NI Limited and Others [1998], the issue of finality of the architect’s certificate was discussed in detail by the House of Lords. In the said matter, Northern Regional Health Authority v Derek Crouch Construction Co. Ltd.18 was overruled. In Crouch, the issue was wrongly decided. It was observed in the judgment that the clause 41.4 (in Crouch), “cannot properly be construed as giving an interim certificate (as distinct from a final certificate) any conclusive effect in litigation between the parties.19 Read More