Self-certification clauses: enforceable but care needed

United Kingdom

A recent TCC decision has considered the enforceability of self-certification clauses in construction contracts. The decision gives a detailed analysis of the enforceability of such clauses by reference to implied terms, the Construction Act and the Unfair Contract Terms Act. The court’s findings show that implied duties are likely to arise and that attempts to draft around them may jeopardise the enforceability of these types of clauses.

Everwarm Limited v BN Rendering Limited

Everwarm provides energy efficiency advice and related services including the provision of residential external building insultation. Following an increase in Scottish government spending on external wall insulation, Everwarm required a considerably larger labour force. BN Rendering Limited (“BNR”) were able to offer competitively priced labour from central and eastern Europe and so became the beneficiary of huge quantities of labour only work from Everwarm on 38 different subcontracts.

The relationship between the parties was remarkably informal and differences soon arose as to payment, with BNR claiming it had been underpaid by Everwarm. BNR ultimately suspended work and submitted final account claims covering these alleged underpayments and the return of retention money. BNR contended that Everwarm had not submitted payment or pay less notices in response to these claims and was therefore bound to pay the amount claimed as the “notified sum” under section 111 of the Housing Grants Construction and Regeneration Act 1998 (as amended) (the “Construction Act”).

Everwarm, for its part, claimed it had overpaid BNR and sought to rely on a self-certification clause in its standard terms and conditions (clause 4.9). This allowed Everwarm to:

“At any time whatsoever… make an assessment of the aggregate of the value of all work properly performed and all other sums properly incurred in relation to the Sub-Contract Works up to the selected assessment date, calculated in accordance with the Subcontract … to the extent that any difference above shows that a sum is due and owing to the Company such difference shall be a debt due and payable by the Sub-Contractor within 7 days, without any right of set-off and/or deduction”.

Everwarm delivered assessments under this clause and relied on these to claim back amounts said to have been overpaid to BNR. Everwarm accepted that such assessments could only be temporarily binding on BNR pending an adjudication or court determination as to the true value of the account.

Everwarm commenced TCC proceedings and an initial hearing was held to determine on an interim basis whether BNR was bound by Everwarm’s assessments under clause 4.9 and/or whether Everwarm was required to pay the full amount of BNR’s claims under s111 of the Construction Act. A determination of the true value of the account between the parties was held over for a further hearing. This Law-Now focuses on Everwarm’s self-certification claim under clause 4.9 and BNR’s challenges to it. 

Delay

BNR first argued that it was too late for Everwarm to have carried out any clause 4.9 assessment between the completion of the works and the conclusion of the final account process. This submission was rejected. Although the assessment could not literally be made “at any time” such as after a court had ruled on the correct value of BNR’s entitlement, there was no reason to limit the broad language of the clause in the period before the final account was resolved.

Implied Terms

BNR had more success in arguing for implied restrictions on the use of clause 4.9. As the clause involved the exercise of a discretion by Everwarm affecting the rights of both parties, it was subject to an implied term that the discretion should not be exercised for an improper purpose, capriciously, arbitrarily or in a way no reasonable person would act.

On the facts, it was decided that Everwarm had breached this implied term when carrying out its assessments. Some of the more prominent failings were as follows:

  • Everwarm relied on measurements of properties not covered by the subcontract in question.
  • Everwarm instructed their surveyor to carry out a physical measure of only a small number of properties on two sites and to use that measure to assess a blanket percentage reduction to be applied to all 38 subcontracts.
  • The blanket reduction was itself arbitrary, even being applied to subcontracts where the actual measures were known.
  • The assessments made no allowance for the release of retention.

The fact that Everwarm’s assessments had been carried out by a well-known quantity surveying firm did not assist because that firm had merely followed Everwarm’s instructions as to the preparation of the assessments.

Construction Act

BNR also argued that the self-certification provisions of clause 4.9 were contrary to  both the philosophy and terms of the Construction Act. It was accepted that the clause did not provide for payment or pay less notices, nor did it stipulate a final date for payment. However, the court considered these deficiencies could be adequately made good by supplementing the clause with the relevant parts of the Scheme for Construction Contracts.

More generally, BNR complained that the clause meant there was no adequate mechanism for determining what payments were to become due under the subcontracts. As clause 4.9 did not require Everwarm’s assessments to be provided, BNR argued that the whole interim payment regime under the subcontract could be subverted by Everwarm issuing notices under clause 4.9 based on undisclosed assessments. However, in the court’s view, a further term was to be implied requiring Everwarm’s assessments to be provided to BNR. On this basis, the clause would not render the payment mechanism under the subcontracts inadequate.

BNR also noted that clause 4.9 could be deployed by Everwarm to overcome a failure to issue a payment or pay less notice in relation to an interim payment. If a pay less notice had been missed, Everwarm could rectify this by assessing an overpayment under clause 4.9. By this means, BNR argued that clause 4.9 would undermine the interim payment provisions. This argument was also rejected by the court: “In just the same way as adjudicators and Courts give effect to and enforce interim payments in the order in which they occur, I see no reason why the same could not happen where an Assessment [under clause 4.9] follows an interim payment.”  

UCTA

BNR also made similar arguments under the Unfair Contract Terms Act 1977 (“UCTA”), claiming that clause 4.9 would allow Everwarm to render performance substantially different from that which could be reasonably be expected (one of the grounds for impugning a standard term under UCTA).

The court rejected this argument for similar reasons. The two implied terms noted above and the combined system of notices (implied by the Scheme) and adjudication under the Construction Act were sufficient controls to ensure that Everwarm could not unilaterally carry out an assessment under clause 4.9 and make a demand for payment which bore no relation to the value of the works undertaken by BNR.

Conclusions and implications

This is an important decision for parties considering the use of self-certification provisions. Such provisions provide a quick way for perceived overpayments to be remedied on a temporarily binding basis. As this judgment notes, they may provide an employer with an effective “backstop” for situations where a payment or pay less notice has not been given validly or on time leading to payment of the whole of a contractor’s application being required under section 111 of the Construction Act. Similar clauses allowing contractors to self-certify claims against subcontractors are sometimes seen, for example in relation to delays under a subcontract.

The court’s decision provides detailed guidance as to the enforceability of such clauses. It is notable that the two implied terms found by the court formed a key part of the reasoning as to compliance with the Construction Act and UCTA. Employers would be well advised to ensure that these protections are not eroded in an attempt to include more favourable wording. The absence of such protections may well have led to the invalidity of the clause in this case.


References: Everwarm Ltd v BN Rendering Ltd [2019] EWHC 3060 (TCC).