Judgment

[Please note that this case has not been edited in accordance with the current Singapore Law Reports house style.]                                                                                                                                                            

S Rajendran J:

1           The plaintiffs had applied for O 14 judgment of their claim against the defendants. The assistant registrar dismissed their application and the matter came up before me on appeal. Ireversed the assistant registrar’s order and granted the plaintiffs’ application. I now give my grounds.

2           The plaintiffs were sub-contractors in a building project in which the defendants were the main contractors. On 28 October 1994 the defendants wrote to the plaintiffs in which they referred to cl 22 of the main contract and cl 9 of the sub-contract and informed the plaintiffs that the architect had by letter dated 25 October 1994 certified that the works ought reasonably to be completed by the revised completion date of 9 August 1994. By this letter the defendants put the plaintiffs on notice that should the employer deduct liquidated damages of $5,000 per day (as provided in the main contract) the defendants reserved the right to recover from the plaintiffs an apportioned amount of such damages.

3           By letter dated 31 October 1994 the defendants informed the plaintiffs that the apportioned amount of the damages that they would recover from the plaintiffs for the period 10 August to 30 September 1994 was $130,000 and that this amount would be deducted from the progress payment due to the plaintiffs. Subsequently, by letter dated 2 December 1994, the defendants informed the plaintiffs that the apportioned amount of damages they would recover from the plaintiffs for the period 1 to 31 October 1994 was $75,000 making a cumulative total of $205,000. The plaintiffs disputed the defendants’ rights to make such deductions but the plaintiffs proceeded to do so. From the amounts due to the plaintiffs under interim certificates dated 1 September 1994, 30 September 1994 and 31 October 1994 the defendants withheld a total of $224,560.16. The plaintiffs commenced proceedings for the recovery of this sum of $224,560.16 and, as indicated above, applied for summary judgment.

4           The defendants alleged that the employer had deducted, from moneys due to the defendants, the sum of $680,000 as liquidated damages for delay in the completion of the main contract works from 10 August to 23 December 1994. They point out that cl 3 of the sub-contract obliged the sub-contractor to observe the terms of the main contract in so far as it relates to the sub-contract work and to indemnify and save harmless the contractor against and from any loss to the contractor arising out of non-performance or breach of the sub-contract. The defendants alleged that the delay in completing the contract works was due to the plaintiffs’ delay in completing the sub-contract work and that they had a right both in common law and by the terms of cl 14 of the sub-contract to set off from the amounts payable to the plaintiffs that part of the claim attributable to delay by the plaintiffs. In support of their case, the defendants relied on a certificate issued by the architect dated 1 April 1995 [which counsel informed the court was issued pursuant to cl 9(a) of the sub-contract] wherein the architect opined that the sub-contract work of the plaintiffs ought reasonably have been completed by 23 September 1994. I shall refer to this letter in greater detail later.

5           The contractual provisions of the main contract and sub-contract in this case were somewhat similar to the contractual provisions in Dawnays Ltd v FG Minter and Trollope & Colls Ltd [1976] 1 BLR 16. In Dawnays’ case, the issue was also whether the contractor could, from payments certified as due to the sub-contract under interim certificates issued by the architect, deduct amounts to cover claims for damages caused to the contractor by reason of delays in the sub-contract work. This depended on the construction of cll 11(b) [which corresponds to our cl 12(b)] and 13 of the sub-contract [which corresponds to our cl 14]. The Court of Appeal in that case regarded cl 11(b) as a specific provision requiring the main contractor to make payment within 14 days of the issue of the certificate, less only the sums specified. In rejecting the argument that the contractor’s cross-claim for delay can under cl 13 be deducted, Denning MR said:

Mr Knight submits that these two clauses [ie cl 13 of sub-contract and cl 27(b) of the main contract (which is also cl 27(b) of our main contract)] should be read together. I agree that they should be. But, so reading them, I hold that both clauses — cl 13 in the sub-contract and cl 27(b) in the main contract — refer to liquidated and ascertained sums which are established or admitted as being due. The reason is because, taking the various words, it is only such a sum which is capable of being ‘deducted’: it is only such a sum as to which it can be said that the sub-contractor is ‘liable to pay’: it is only such a sum of which it can be said that the main contractor is ‘entitled’. Each of those words show to my mind that the only sums which can be deducted from the certificate are liquidated and ascertained sums established or admitted to be payable. It is not permissible to deduct claims which are unliquidated and are still matters of dispute.

6           Lord Denning gave another reason for his decision that the main contractor was not permitted to make the said deductions. This third reason was that under cl 8(a) of the sub-contract (similar to our cl 9(a)) no sums are payable in respect of delay unless there has been a proper certificate by the architect certifying that the works ought to have been completed within the specified time or any certified extension of time. The architect in that case had not finally determined what extension should be given. Lord Denning however did not pursue this point and rested his decision on the construction of cll 11(b) and 13.

7           There was an application to the House of Lords in Dawnays’ case for leave to appeal but this was turned down. The plaintiffs submit that this can only be because the House of Lords was satisfied that, as a matter of construction, the contractual provisions precluded the contractor in Dawnays’ case from setting off his claim for damages from the amounts due to the sub-contract under the interim certificate.

8           Dawnays’ case attracted considerable criticism. This was not so much in respect of the construction placed on the documents but because having stated that cl 11(b) was a very specific provision requiring payment within 14 days of the sum stated less only the sums specified, Denning MR made the following comment:

The interim certificate is regarded as the equivalent of cash. The sub-contractor needs the money so as to get on with the rest of his work. On principle, and in practice, once a certificate is issued, it must be paid save only for the permitted deductions.

9           And after dealing with the arguments based on cl 13, Denning MR reiterated those comments when he said:

It must be remembered that a disputed claim cannot be referred at once to arbitration. Unless all agree, the determination of a disputed claim has to wait until the completion of the work. The arbitration clause makes that plain. It follows that, if Mr Knight’s contention is correct, it would mean that his clients could hold this money (which is the sub-contractor’s money) indefinitely. They could hold on to it until the end of the main contract, that is, until the whole work was completed. They could then hold on to it still longer whilst the dispute was referred to arbitration. They would not have to pay it over until the arbitration was concluded, maybe after a case stated to this court. That seems to me to run counter to the very purpose of interim certificates. Every businessman knows the reason why interim certificates are issued and why they have to be honoured. It is so that the sub-contractor can have the money in hand to get on with his work and the further work he has to do. Take this very case. The sub-contractor has had to expend his money on steelwork and labour. He is out of pocket. He probably has an overdraft at the bank. He cannot go on unless he is paid for what he does as he does it. An interim certificate is to be regarded virtually as cash, like a bill of exchange. It must be honoured. Payment must not be withheld on account of cross-claims, whether good or bad — except so far as the contract specifically provides. Otherwise any main contractor could always get out of payment by making all sorts of unfounded cross-claims. All the more so in a case like the present, when the main contractors have actually received the money.

10       These two passages in the judgment of Lord Denning gave rise to a quick succession of cases in the Court of Appeal in which it was held — following what was called ‘the rule in Dawnays’ case’ — that in the absence of clear words to the contrary, payments of an amount due under an interim certificate could not be held up for disputed cross-claims.

11       The first of these cases to reach the House of Lords was Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689. The Court of Appeal had in that case held, following the rule in Dawnays’ case, that the defence of set-off was not available to the contractor in relation to payments due under an interim certificate. This the Court of Appeal decided in spite of the clear words in cl 14 of the sub-contract for the contractor to:

… deduct from any payments certified as due … the amount of any bona fide contra accounts and/or other claims which he, the contractor, may have against the sub-contractor in connection with this or any other contract.

12       The House of Lords unanimously allowed the appeal and emphatically rejected the principle embodied in the rule in Dawnays’ case. The plaintiffs’ submit that the rejection of ‘the rule in Dawnays’ case’ by the House of Lords did not affect the interpretation adopted by the Court of Appeal on the relevant contractual provisions. As the contractual provisions in Dawnays’ case are similar to the contractual provisions under consideration they urged that this court adopt a similar construction.

13       The plaintiffs conceded that if the defendants’ claim for damages is bona fide, the defendants would, at common law, have a right to set-off but submitted that that right can be excluded by contract and that in this case the right was so excluded. They submitted that, by the terms of the contract between the plaintiffs and the defendants, the only deductions that the defendants were permitted to make were in respect of retention money, sums previously paid out and such other liquidated sum in respect of which the liability of the sub-contractor has been agreed [albeit temporarily as in the case of a deduction pursuant to an architect’s certificate under cl 9(a)] or established. The plaintiffs’ case was that the deductions impugned in this case did not fall within any of these categories. The sole issue in this case accordingly was whether, by the terms of the contract between the parties, the defendants’ rights of set-off has been excluded.

14       The common law right of set-off and the right of parties to exclude that right was considered in the case of Gilbert-Ash. In his judgment Diplock LJ (at p 717C) summarized the position as follows:

The principle is that when the buyer of the goods or the person for whom the work has been done is sued by the seller or contractor for the price:

‘it is competent for the defendant, … not to set off, by a proceeding in the nature of a cross action, the amount of damages which he has sustained by breach of the contract, but simply to defend himself by shewing how much less the subject matter of the action was worth, by reason of the breach of contract;’ (Mondel v Steel 8 M & W 858, at pp871–872).

Or, in the words of s 53(a) of the Sale of Goods Act 1893, the buyer may ‘set up against the seller the breach of warranty in diminution or extinction of the price.’

This is a remedy which the common law provides for breaches of warranty in contracts for sale of goods and for work and labour. It is restricted to contracts of these types. It is available as of right to a party to such a contract. It does not lie within the discretion of the court to withhold it. It is independent of the doctrine of ‘equitable set off’ developed by the Court of Chancery to afford similar relief in appropriate cases to parties to other types of contracts, of which a masterly account is to be found in the judgment of my noble and learned friend, Lord Morris of Borth-y-Gest (then Morris LJ) in Hanak v Green [1958] 2 QB 9. That it was no mere procedural rule designed to avoid circuity of action but a substantive defence at common law was the very point decided in Mondel v Steel 8 M & W 858.

15       Diplock LJ then went on to state that the parties to a contract may exclude this remedy. As there was some dispute in this case as to the form of words necessary to effect such exclusion I will quote what Diplock LJ had to say. At p 717H he said:

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 agreement a remedy for its breach which would otherwise arise by operation of law or such remedy may be excluded by usage binding upon the parties (cf Sale of Goods Act 1893, s 55). But in construing such a contract one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this presumption. [Emphasis added.]

16       And again at p 718E Diplock LJ said:

So when one is concerned with a building contract one starts with the presumption that each party is to be entitled to all those remedies for its breach as would arise by operation of law, including the remedy of setting up a breach of warranty in diminution or extinction of the price of material supplied or work executed under the contract. To rebut that presumption one must be able to find in the contract clear unequivocal words in which the parties have expressed their agreement that this remedy shall not be available in respect of breaches of that particular contract. [Emphasis added.]

17       The defendants on the authority of what Diplock LJ said submitted that to oust the right of set-off established in Mondel v Steel there has to be clear and express words excluding that right. They submitted that not only was there an absence of such words in this case but to the contrary there were express words in the contract (namely, cl 14 to which I shall refer later) which in fact ‘locked-in’ the common law right of set-off. The plaintiffs submitted that the appropriate test was that stated by Salmon LJ in Gilbert-Ash (p 722H) where Salmon LJ expressed the view that the right can be excluded either by express words or by necessary implication:

The parties to building contracts or sub-contracts, like the parties to any other type of contract are, of course, entitled to incorporate in their contract any clause they please. There is nothing to prevent them from extinguishing, curtailing or enlarging the ordinary rights of set off, provided they do so expressly or by clear implication. [Emphasis added.]

18       I do not think that it would be right to read into what Diplock LJ said that he disagreed with the test as formulated by Salmon LJ and that it was his view that the right to set off would not be excluded if the words of the contract excluded that right (only) by necessary implication. In fact, the form of words necessary to exclude the right of set-off was not an issue in Gilbert-Ash.

19       In my view, it would suffice if there was in the contract clear words that excluded the right to set off either expressly or by necessary implication. I would adopt the position taken in this regard by Kan Ting Chiu J in Aurum Building Services (Pte) Ltd vs Greatearth Construction Pte Ltd [1994] 3 SLR 330 where the learned judge said:

Before me, counsel for the defendants referred on the decision of the House of Lords in Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd in support of his contention that a party to a contract is entitled to defend a claim or dispute liability on the basis of his right of set-off unless the contract expressly stipulates that this right of set-off is excluded or ousted. I have no difficulty with this proposition, except that I think that the right of set-off may be excluded by necessary implication as well as express provision. Whether that right is excluded in any given contract is a matter that is to be decided on the terms of that contract.

20       It would be relevant to note, in this context, what Cross LJ said in the subsequent House of Lords case of Mottram Consultants Ltd v Bernard Sunley & Sons Ltd [1975] 2 Lloyd’s Rep 197:

So the position is now once more what it was before Dawnays’ case was decided — namely, that one should approach each case without any ‘parti pris’ in favour or against the existence of the right of set off, though one must bear in mind the principle established in Mondel v Steel. [Emphasis added.]

21       To determine whether the parties had in their contract excluded the right of set-off a detailed consideration of the contract documents is necessary. For convenience I set out below some of the more relevant provisions:

The sub-contract

Clause 1:

The sub-contractor shall be deemed to have notice of all the provisions of the main contract except the detailed prices of the contractor included in schedules and bills of quantities.

Clause 3(a):

3          The sub-contractor shall:

(a)    Observe, perform and comply with all the provisions of the main contract on the part of the contractor to be observed, performed and complied with so far as they relate and apply to the sub-contract works (or any portion of the same) and are not repugnant to or inconsistent with the express provisions of this sub-contract as if all the same were severally set out herein.

Clause 3(b)(ii):

3          The sub-contractor shall:

                   (b)    Indemnify and save harmless the contractor against and from:

…

(ii) any act or omission of the sub-contractor, his servants or agents which involves the contractor in any liability to the employer under the main contractor.

Clause 9(a):

The sub-contractor shall commence the sub-contract works within an agreed time or, if none is agreed, then within a reasonable time after the receipt by him of an order in writing under this sub-contract from the contractor to that effect and shall proceed with the same with due expedition.

The sub-contractor shall complete the sub-contract works and each section thereof within the period specified in Part II of the appendix to this sub-contract or within such extended period or periods as may be granted pursuant to the provisions hereinafter contained.

If the sub-contractor fails to complete the sub-contract works or any section thereof within the period specified or any extended period or periods as hereinafter provided, he shall pay or allow to the contractor a sum equivalent to any loss or damage suffered or incurred by the contractor and caused by the failure of the sub-contractor as aforesaid. The contractor shall at the earliest opportunity give reasonable notice to the sub-contractor that loss or damage as aforesaid is being or has been suffered or incurred.

Provided that the contractor shall not be entitled to claim any loss or damage under this clause unless the architect shall have issued to the contractor (with a duplicate copy to the sub-contractor) a certificate in writing stating that in his opinion the sub-contract works or the relevant section thereof ought reasonably to have been completed within the specified period or within any extended period or periods as the case may be.

Clause 9(c)(iii):

If the regular progress of the main contract works (including any part thereof which is sub-contracted) is materially affected by any act, omission or default of the sub-contractor, his servants or agents, or any sub-contractor employed by him on the sub-contract works, the contractor shall as soon as such material effect becomes apparent give written notice thereof to the sub-contractor and the agreed amount of any direct loss or expense thereby caused to the contractor (whether suffered or incurred by the contractor or by sub-contractors employed by the contractor on the main contract works from whom claims under similar provisions in the relevant sub-contracts have been agreed by the contractor, sub-contractor and the sub-contractor named in these conditions) shall be deducted from the sub-contract sum and regarded as a debt due to the contractor.

Clause 12(b):

Within 28 days of the receipt by the contractor of any certificate or duplicate copy thereof from the architect the contractor shall notify and pay to the sub-contractor the total value certified therein in respect of the sub-contract works and in respect of any authorized variations thereof and in respect of any amounts ascertained under cl 9(c) hereof less:

(i)          Retention money, that is to say the proportion attributable to the sub-contract works of the amount retained by the employer in accordance with the main contract; and

(ii)          The amounts previously paid.

Clause 14:

The contractor shall notwithstanding anything in this sub-contract be entitled to deduct from or set off against any money due from him to the sub-contractor (including any retention money) any sum or sums which the sub-contractor is liable to pay to the contractor under this sub-contract.

The main contract

Clause 22:

If the contractor fails to complete the works by the date of completion stated in the appendix to these conditions or within any extended time fixed under cl 23 or cl 32(1)(c) of these conditions and the architect certifies in writing that in his opinion the same ought reasonably so to have been completed, then the contractor shall pay or allow to the employer a sum calculated at the rate stated in the said appendix as liquidated and ascertained damages for the period during which the works shall so remain or have remained incomplete, and the employer may deduct such sum from any moneys due or to become due to the contractor under this contract.

Clause 23(g):

23          Upon it becoming reasonably apparent that the progress of the works is delayed, the contractor shall forthwith give written notice of the cause of the delay to the architect, and if in the opinion of the architect the completion of the works is likely to be or has been delayed beyond the date for completion stated in the appendix to these conditions or beyond any extended time previously fixed under either this cl or cl 32(1)(c) of these conditions,

…

(g)          by delay on the part of nominated sub-contractors or nominated suppliers which the contractor has taken all practicable steps to avoid or reduce,

…

then the architect shall so soon as he is able to estimate the length of the delay beyond the date or time aforesaid make in writing a fair and reasonable extension of time for completion of the works. Provided always that the contractor shall use constantly his best endeavours to prevent delay and shall do all that may reasonably be required to the satisfaction of the architect to proceed with the works.

Clause 27(a)(vi):

… Provided that the architect shall not nominate any person as a sub-contractor against whom the contractor shall make reasonable objection, or (save where the architect and contractor shall otherwise agree) who will not enter into a sub-contract which provides (inter alia):

…

(vi)          That if the nominated sub-contractor shall fail to complete the sub-contract works or (where the sub-contract works are to be completed in sections) any section thereof within the period therein specified or within any extended time granted by the contractor, with the written consent of the architect, and the architect certifies in writing to the contractor that the same ought reasonably so to have been completed, the nominated sub-contractor shall pay or allow to the contractor either a sum calculated at the rate therein agreed as liquidated and ascertained damages for the period during which the said works or any section thereof, as the case may be, shall so remain or have remained incomplete or (where no such rate is therein agreed) a sum equivalent to any loss or damage suffered or incurred by the contractor and caused by the failure of the nominated sub-contractor as aforesaid.

Clause 27(b):

The architect shall direct the contractor as to the total value of the work, materials or goods executed or supplied by a nominated sub-contractor included in the calculation of the amount stated as due in any certificate issued under cl 30 of these conditions and shall forthwith inform the nominated sub-contractor in writing of the amount of the said total value. The sum representing such total value shall be paid by the contractor to the nominated sub-contractor within 28 days of receiving from the architect the certificate less only (i) any retention money which the contractor may be entitled to deduct under the terms of the sub-contract, and (ii) any sum to which the contractor may be entitled in respect of delay in the completion of the sub-contract works or any section thereof. [Emphasis added.]

22       Although I have set out some of the provisions from the main contract I have done so only in order to show the interlock between the two contracts. The sub-contractor is not a party to the main contract and except in so far as the sub-contract incorporates any of the provisions of the main contract, the terms of the main contract would be relevant in construing the sub-contract only when there is ambiguity in the sub-contract. To quote from the judgment of Reid LJ in Gilbert-Ash:

So the sole question in the appeal is whether by their contract with the sub-contractors the contractors have agreed that sums which they receive from the employers earmarked as due to the sub-contractors on architects’ interim certificates must be paid over immediately without any right of set-off.

There has been much argument about the meaning and effect in this regard of the terms of the RIBA form of contract. This is not directly relevant because those terms are only incorporated in the sub-contract to a limited extent. By cl 17 of the contractors’ conditions in the sub-contract, provisions in the principal contract ‘applicable to the works’ are incorporated, but it has not been argued that that covers provisions which apply to payment for the works.

Nevertheless, I think that if any provisions in the sub-contract is ambiguous in the sense that it is reasonably capable of having more than one meaning, one can go to the principal contract. Not only is it provided in the sub-contract that the sub-contractor is deemed to have full knowledge of the provisions of the principal contract, but the principal contract contains a number of provisions regulating the duties of the contractor towards his sub-contractors. [Emphasis added.]

23       I will therefore consider primarily the provisions of the sub-contract.

24       Clause 9(a) of the sub-contract is in my view significant. This is a very specific provision requiring the sub-contractor to ‘pay’ or ‘allow’ to the contractor a sum equivalent to any loss or damage suffered or incurred by the contractor by the sub-contractor’s failure to complete the sub-contract on time. The sums that the sub-contractor is obliged to allow in respect of damages would quite clearly apply to sums payable to the sub-contractor under interim certificates. Where cl 9(a) is invoked the sub-contractor is obliged to ‘allow’ and consequently the contractor would be entitled to deduct the amount of such damages from sums due to the sub-contractor under the interim certificates. It is to be noted from the language of cl 9(a) that the deductions, and the obligation of the sub-contract to allow the deductions, is not in any way confined to damages that are liquidated or agreed. Further it is expressly provided in cl 9(a) that the contractor shall not be entitled to claim such damages unless the architect shall have issued to the contractor a certificate in writing stating that in his opinion the sub-contract works ought reasonably to have been completed within the specified period or within any extended period (for completion).

25       The architect in this case issued a certificate to the defendants in respect of the alleged delays by the plaintiffs only on 1 April 1995 — about six months after the defendants had made the deductions. No such certificate existed at the time the deductions were made. The certificate was clearly a condition precedent to any such deductions. That being so, it would follow from the proviso to cl 9(a) that the defendants were ‘not entitled’ to make the deductions that they did.

26       Another point to note is that in the certificate the architect is required to certify that the sub-contractor failed to complete the sub-contract works ‘within the period specified or within any extended period or periods’ as the case may be. The certificate issued by the architect was in the following terms:

Basing on the information submitted and your letter ref NCH/YKS/1226/Tai Seng/NW dated 1 March 1995, we are of the view that there was a delay in the aluminium/curtain wall installation by the nominated subcontractor, Kum Leng General Contractor, in that the works ought reasonably to have been completed by 23 September 1994 but were completed in December 1994. This has in part affected the completion of the project.

We are presently evaluating your claim for extension of time and delays caused by the NSC, and shall inform you upon the completion of our full evaluation. [Emphasis added.]

27       It would appear from the language of the last paragraph of the certificate that even at the time the certificate was issued the architect was still evaluating the claim for extension of time on account of the delays by the sub-contractor. It was therefore premature, even at that late stage, to say that the sub-contract works ought reasonably to have been completed ‘within the period specified or within any extended period’.

28       The defendants attempted to get round the difficulty posed by the fact that at the time the deductions were made no certificate conforming with the requirements of cl 9(a) existed by submitting that the key issue was not whether the certificate was issued before the deductions but whether at the time of the O 14 hearing such a certificate existed. With respect I could not accept that submission. The requirements of cl 9(a) are clear: before the defendant is permitted to make a claim for damages for late completion he needs to have an architect’s certificate conforming to the requirements of the proviso to cl 9(a). The absence of such a certificate precluded the defendants from making a claim against the sub-contractor for damages arising from delay.

29       In my view, by cl 9(a) of the sub-contract, the defendants had varied their common law right of set-off. In the light of this clause that right can be exercised only upon the issue of the stipulated certificate from the architect. I do not think that cl 14 of the sub-contract has the effect of overriding the specific requirements of cl 9(a). To give cl 14 such an effect would be to render the proviso to cl 9(a) meaningless. In my view, the words ‘is liable to pay to the contractor under this sub-contract’ in cl 14, in the context of cl 9(a), refers to the liability arising consequent upon the issue of the architect’s certificate. Once such an architect’s certificate is issued, the sub-contractor is under cl 9(a) required to pay to the contractor the contractor’s claim for his damages arising from late completion even though the sub-contractor disputes the contractor’s claim. Where the architect issues such a certificate, the sub-contractor is required to pay or allow the claim first — disputes can come later. As the defendants had deducted their claim for damages without the required architect’s certificate, the defendants had, in my view, made the deductions in breach of the express provisions of cl 9 of the sub-contract.

30       As noted earlier, Denning MR in Dawnays’ case had referred to cl 8(a), a clause similar to our cl 9(a), in the sub-contract in that case. He, however, did not pursue the point as he was satisfied that under cl 11(b) as well as cl 13 the contractor in that case was not entitled to make the deductions that he did. The law lords in Gilbert-Ash in discussing Dawnays’ case did not consider the effect that cl 8(a) may have had in the construction of cl 13 of the sub-contract in that case.

31       The House of Lords in Gilbert-Ash was unanimous in rejecting the rule in Dawnays’ case but there was a division of opinion on the construction adopted by the Court of Appeal in Dawnays’ case on the provisions of cll 11(b) and 13 of the sub-contract and cl 27(b) of the main contract. Morris LJ and Reid LJ accepted the interpretation in Dawnays’ case that cl 13 envisaged the deduction only of liquidated and ascertained sums but Salmon LJ and Diplock LJ were of the view that the words ‘deduct’ and ‘liable to pay’ in cl 13 of the sub-contract in Dawnays’ case would not confine the contractors right of set off only to such sums. In considering cl 13 of the sub-contract, Diplock LJ said (at p 718H):

This clause, so far from negativing the contractor’s entitlement to the remedy available to him at common law of setting up breaches of warranty in diminution or extinction of the price, states expressly (albeit unnecessarily) that he is to be entitled to that remedy.

32       And Salmon LJ in reference to cl 13 said (at p 725G):

I find it difficult to think of any words more apt to make it crystal clear that the contractors’ right of set-off are preserved lest it might be argued that they had been taken away by cl 11.

33       Viscount Dilhorne considered at length the provisions of the main contract in Dawnays’ case but did not proceed to consider the sub-contract in any detail. There was no need for him to do so as the provisions of the sub-contract he was dealing with in Gilbert-Ash was vastly different from the provisions of the sub-contract in Dawnays’ case. But he did, towards the end of his judgment, say that he considered Dawnays’ case as wrongly decided as no consideration appears to have been given to the question whether the contractor’s common law and equitable rights of set-off and counterclaim were excluded by the sub-contract. Shortly before saying that he considered Dawnays’ case was wrongly decided Viscount Dilhorne had said (at p 713B):

If, as the contractors asserted, the sub-contractors had, by reason of the delay in the execution of the sub-contract work, been guilty of a breach of the sub-contract, the sub-contractors were liable at the time of the proceedings to the contractors for the amount of the loss occasioned by the breach. If that loss had been quantified, as it was in the present case, in my opinion the decision in Dawnays’ case would have been wrong. [Emphasis added.]

34       The defendants submitted that the last sentence in the passage quoted above meant that, in Viscount Dilhorne’s view, if the loss had not been quantified the interpretation of cl 13 of the sub-contract in Dawnays’ case would be correct. The defendants submitted that that sentence showed that Viscount Dilhorne supported the construction placed on cl 13 by the Court of Appeal in Dawnays’ case. That would mean that of the five judges in Gilbert-Ash only two rejected the construction of the sub-contract favoured by the Court of Appeal in Dawnays. There was support for this submission in the case of Pembenaan Leow Tuck Chui & Sons Sdn Bhd v Dr Leela’s Medical Centre Sdn Bhd [1995] 2 MLJ 57 where at p 76E Edgar Joseph Jr FCJ said:

Of the five Law Lords who comprised the Judicial Committee, only two, namely, Lord Diplock and Lord Salmon considered that the Court of Appeal had been wrong in deciding the construction point in the Dawnays case in favour of the sub-contractor. As for Viscount Dilhorne, this is what he said on the point at issue ([1974] AC 689 at p713B; [1973] 3 All ER 195 at p 211F; [1973] 3 WLR 421 at p 439F):

‘If that loss [in the Dawnays case] had been quantified as it was in the present case, in my opinion the decision in the Dawnays case would have been wrong. (Emphasis added.)’

But the loss in the Dawnays case was not quantified, as appears quite clearly from the judgment of Edmund-Davies LJ, quoted above, which would necessarily imply that Lord Dilhorne too considered that the construction point had bee rightly decided by the Court of Appeal in the Dawnays case. The remaining two Law Lords, namely, Lord Reid and Lord Morris of Borth-y-Gest, considered that Dawnays was probably rightly decided.

35       With respect I do not think that that sentence meant that Viscount Dilhorne was supporting the decision in Dawnays on the interpretation of cl 13. In the Gilbert-Ash case the damages claimed by the contractor (which were not liquidated damages) had been quantified by the contractor at £4,532.94. In my view all that Viscount Dilhorne meant was that if the damages in Dawnays’ case had also been (similarly) quantified by the contractor, the decision in Dawnays would be wrong. It is quite clear from reading the whole of his judgment that Viscount Dilhorne disagreed with the Court of Appeal’s interpretation of cl 27(b) of the main contract as well as cll 11 and 13 of the sub-contract. I find support for this view in the judgment of Morris LJ in Mottram. Morris LJ (who was on the coram of Gilbert-Ash) said that in Gilbert-Ash what had been regarded as the principle in Dawnays’ case met with general disapproval and that Dawnays’ case itself was overruled by a majority. (See p 199 of the report). Cross LJ in Mottram also took the same view: He said (at p 205 of the report):

In Dawnays’ case — which was a case between contractor and sub-contractor — the question at issue was whether on the true construction of a clause in the sub-contract the contractor could deduct from moneys certified to be due to the sub-contractor only sums established or admitted to be payable by the sub-contractor to him or also claims exceeding the sums certified to be due which were still in dispute. The question of construction was clearly a difficult one since in the subsequent case of Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1973] 3 All ER 195 which reached this House three members of the Appellate Committee thought that the Court of Appeal had been wrong in holding, as it did, in the Dawnays case that disputed claims could not be deducted while two members thought that the decision of the Court of Appeal was probably right. [Emphasis added.]

36       In addressing the question whether Denning MR was right in holding that cl 27(b) of the main contract envisaged that the main contractor could make deductions in respect of damages arising out of delays by the sub-contractor only when the damages were liquidated and ascertained sums which are established or admitted as being due, Viscount Dilhorne referred to cl 27(a)(vi) of the main contract and drew attention to the fact that cl 27(a)(vi) envisaged that upon certification by the architect, the contractor may, in respect of delays by the sub-contractor, make deductions even when the damages claimed is not a liquidated sum. It is instructive to refer to his judgment. At p 708D Viscount Dilhorne said:

One of the provisions that a nominated sub-contractor must be prepared to accept in the sub-contract is that in the event of failure to complete in the stipulated time and the architect certifying that the work ought to have been so completed the sub-contractor should pay or allow to the contractor either a sum calculated at an agreed rate as liquidated and ascertained damages ‘or (where no such rate is therein agreed) a sum equivalent to any loss or damage suffered or incurred by the contractor’ in consequence of the delay in completion (cl 27(a)(vi)). With the nominated sub-contractor obliged to accept such a provision it cannot, in my opinion, have been intended to restrict the operation of cl 27(b) to deduction on account of delay only where the sub-contractor had agreed to pay liquidated damages at an agreed rate.

In my opinion, cl 27(b) is clearly intended to permit the contractor to deduct from the payment due to the sub-contractor under an interim certificate a sum equivalent to the loss he has suffered in consequence of delay. [Emphasis added.]

37       Clause 27 of the main contract in our case provides that the provisions in cl 27 shall apply in respect of sub-contractors to be nominated by the architect to execute the work. Clause 27(a) further provides that the architect shall not nominate a sub-contractor who will not enter into a sub-contract which provides for the matters enumerated in items (i) to (viii) therein. And item (vi) of cl 27(a) provides that upon the architect certifying that the sub-contract work ought reasonably have been completed within the specified (or extended) time, the sub-contractor shall ‘pay’ or ‘allow’ to the contractor the liquidated damages in respect of the delay or (where no rate has been agreed for ascertaining the liquidated damages) a sum equivalent to any loss or damage suffered or incurred by the contractor and caused by the nominated sub-contractor. Clause 27(a)(vi) therefore expressly envisages that the damages deductible may be liquidated or unliquidated.

38       Clause 9(a) of the sub-contract is the clause that reflects in the sub-contract the requirements of cl 27(a)(vi) of the main contract. There is, in my view, no ambiguity in the language of cl 9(a) of the sub-contract. It cannot be argued that cl 9(a) seeks to limit the damages referred to therein to liquidated and ascertained damages. But if there was any such ambiguity reference may be made to the provisions of cl 27(a)(vi) of the main contract and it is abundantly clear from cl27(a)(vi) that no such limitation was intended.

39       Unlike the position in the main contract, there is no provision in the sub-contract providing for liquidated damages for late completion. That being so, damages under the sub-contract would necessarily be unliquidated. If the construction in Dawnays’ case is adopted, then the position would be that there cannot, under the sub-contract, be any set-off in respect of a claim for damages except where the sum is agreed. This would not accord with cl 9(a). It would also render cl 14 quite unnecessary because if the parties are agreed on the sums payable then, by cl9(c)(iii) as well as cl 12(b) [where reference is made back to cl 9(c)] of the sub-contract, the agreed sum is to be deducted from the sub-contract sum payable to the sub-contractor. In my view, so long as the architect has given the certificate required, the contractor would, under the provisions of cll 9 and 14, be entitled to set off from the sums payable to the sub-contractor any bona fide claim for damages that the contractor may have regardless of whether that claim is for a liquidated or unliquidated amount. In the absence of such a certificate the contractor cannot make deductions in respect of his claim for damages for late completion.

40       The plaintiffs in the course of argument had also sought to rely on the judgment of the Supreme Court of Malaysia in Pembenaan Leow Tuck Chui and of Cross LJ in Mottram in support of their submission that Dawnays’ case was correctly decided.

41       In Pembenaan Leow Tuck Chui the Supreme Court of Malaysia had ruled that the employer was not entitled to deduct, from sums payable to the contractor under an interim certificate, the amounts that the employer claimed as damages for faulty workmanship. Clause 30(1) of the contract in that case provided that ‘the contractor shall, on presenting any such (interim) certificate to the employer, be entitled to payment therefor within the period for honouring certificates’. In that contract there were a number of clauses which specifically gave the employer the right of set-off in the circumstances covered by those clauses, but there was no clause giving the employer the right to set off in respect of faulty workmanship. Edgar Joseph Jr FCJ, in delivering the judgment of the Supreme Court, went through the clauses of the main contract and concluded:

In our view, therefore, the express enumeration of permitted set-offs in a contract or sub-contract, can imply that a defendant builder or main contractor, as the case may be, is limited to making such deductions from the amounts claimed as fall strictly within the scope of the permitted set-offs, and nothing else, on the basis of the expressio unius principle.

…

In our view, regard being had to these provisions of the contract, and applying the expressio unius principle, so far as claims for payment on certificates are concerned, the ordinary common law right of set-off had, in the words of Lord Salmon in the Gilbert-Ash case … quoted above, been extinguished, not expressly but by clear implication.

42       The Supreme Court of Malaysia had, in that case, after referring to the criticism of Dawnays’ case in Gilbert-Ash, expressed the view that they considered that Dawnays’ case, on the question of the construction of cl 13 of the sub-contract, was rightly decided.

43       As for Mottram, the plaintiffs sought to rely on the judgment of Cross LJ in Mottram to show that the courts were moving away from Gilbert-Ash and going back to the Dawnays’ position.

44       It may well be that Mottram is a decision inconsistent with Gilbert-Ash. Salmon LJ in his dissenting judgment in Mottram (at p 215) expressed such a concern. But Mottram is a case that was decided in reference to the rather special circumstances of that case. Similarly, Pembenaan Leow Tuck Chui was a case that turned on the employer’s rights (if any) to deduct his claim for faulty workmanship under the terms of the main contract in that case. The contracts in those cases contained terms very different from the terms contained in the sub-contract in this case. Those cases could, therefore, only be of limited help in construing the present sub-contract.

45       In their submissions before me, the plaintiffs challenged the bona fides of the defendants’ claim for damages. It was submitted that (a) there was no supporting evidence to show that the employer had in fact claimed and defendants had in fact paid the sum of $680,000; (b) the apportionment of the damage to the plaintiffs appeared to be arbitrary and no evidence was led as to how the damages were apportioned between the main contractor himself and the various sub-contractors involved in the project; and (c) the defendants were under no legal obligation to have paid the $680,000 to the employer since as at October 1994 the architect had not finalized his calculation as to extension of time.

46       The claim of the plaintiffs was for the refund of the sums deducted on the grounds that the deductions were contrary to the terms of the contract between the parties. The defence to this claim was that the defendants had a bona fide claim for damages against the plaintiffs and that both under common law and by the terms of the contract the defendants had a right to set off their claim for damages against amounts due to the plaintiffs. If the deductions were in fact contrary to the express terms of the agreement, the plaintiffs would in these proceeds succeed even if the defendants had a bona fide claim for damages. The merits of that claim would be a matter for future adjudication. I accepted that the defendants had a bona fide claim for damages. The only issue I had to decide was whether the defendants were under the terms of their contract with the plaintiffs precluded from exercising their right of set off.

47       For the reasons stated above I decided that since at the time of the deductions there was no architect’s certificate as required by cl 9, the defendants were precluded from exercising their right of set-off. That being so, the plaintiffs were obliged by cl 12(b) of the sub-contract to have made full payment on the interim certificates within 28 days of receipt of those certificates from the architect. This they had failed to do. I therefore allowed the plaintiffs’ appeal against the decision of the assistant registrar and granted judgment for the sums claimed.

48       The defendants applied for a stay of judgment pending the result of the arbitration proceedings between the parties at which the merits of the defendants’ claim for damages would be determined. The parties had, in the sub-contract, determined the circumstances in which the contractor can have the right to set off whatever claim to damages he may have against the sub-contractor. A prerequisite for the deductions made in this case was an architect’s certificate under cl 9(a). The contractor made the deductions without such a certificate. To grant a stay would be to enable the contractor to effectively get the benefit of such a set-off in spite of non-compliance with the terms of cl 9(a) of the contract. In the circumstances, I did not consider it appropriate to grant the application for stay.

Appeal allowed.

Reported by Liu Hern Kuan