London & Regional (St George's Court) Ltd v Ministry of Defence & Anor

A settlement agreement in a chain of contracts does not create a no-loss bar where it preserves the intermediary's liability for disputed work and gives the contractor control of the downstream claim. The downstream payment obligation may be a primary contractual duty to pay costs incurred, rather than merely an indemnity.

A certificate under a linked building contract may ordinarily mark when payment becomes due, but its absence is not fatal where payment has arisen through another contractual route or an adjudicator's or court's order. A general finality clause does not make an employer's notice conclusive as to the existence or value of variations without clear words and a supporting contractual context. The certificate has provisional validity and may be challenged.

London & Regional took a lease of an office building, agreed to refurbish it and sublet it to the Ministry of Defence, and engaged Shepherd Construction to carry out the works. The lease agreement, building agreement and building contract were interlocking contracts. Disputes arose over work said to be Tenant's Variations.

London & Regional and Shepherd later settled their other disputes, expressly preserving claims against the Ministry and giving Shepherd conduct of those claims. On agreed preliminary issues, Coulson J held that the settlement did not prevent London & Regional bringing the claim and that certificates under the building contract were not conclusive. The Ministry appealed on the settlement's effect and on whether a certificate was a condition precedent to payment and binding as to the fact or amount of a variation.

The Court of Appeal dismissed the appeal, subject to correcting a typographical error in the order and modifying the answer on the certificate issue. Lord Justice Hughes gave the judgment; Lord Justices Richards and Waller agreed.

1. Settlement and loss. The settlement agreement, read as a whole, preserved London & Regional's liability to Shepherd for the Tenant's Variations. Clauses 2.1 and 1.1 excluded the Ministry claims from the sums finally settled, while clauses 4.1, 5.1 and 6.1 provided for Shepherd to pursue those claims and for receipt of their proceeds to settle London & Regional's remaining liability. There was therefore no circularity or absence of recoverable loss. The Ministry's obligation under the lease agreement was properly characterised as a primary contractual duty to pay costs incurred, not simply an indemnity against liability to Shepherd. The approach in Hydrocarbons Great Britain Ltd v Cammell Laird Shipbuilders (1991) 53 BLR 84 supported that conclusion.
2. Certificate as a payment trigger. Clause 4.2(a) ordinarily meant that liability to pay arose when the employer's notice under building contract clause 30.3.3 was presented. The certificate therefore operated as a condition precedent in the timing sense. Its absence was not, however, an absolute bar to recovery. Payment could also become due where London & Regional became liable to pay Shepherd under clause 30.3.5, or where a competent adjudicator or court ordered payment. This was consistent with Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] EWCA Civ 814.
3. Effect of certification. Clause 2.7 did not give Tweeds conclusive power to determine whether work was a Tenant's Variation or what it was worth. The employer's notice had provisional validity: it was binding to the limited extent that it recorded that payment was being made, but its correctness could be challenged in litigation. A conclusive certification regime requires the clearest possible terms, and the linked contractual context supplied none. The reasoning concerning provisional validity was also consistent with Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd [1999] 1 AC 266.
4. Orders. Issue 6 was answered No, correcting the lower court's typographical Yes. On issue 1, the appeal was dismissed: the certificates were not binding as to the fact or amount of a Tenant's Variation, and a certificate was one of several possible triggers for London & Regional's cause of action.

1. Court of Appeal (Civil Division): Dismissed the Ministry's appeal, subject to correcting the answer to issue 6 and expressing the alternative triggers for payment on issue 1(c).
2. High Court of Justice, Queen's Bench Division, Technology & Construction Court: Coulson J determined agreed preliminary issues in [2008] EWHC 526 (TCC), holding that the settlement did not prevent the claim and that the contractual certificates were neither an absolute precondition to recovery nor conclusive as to the variation claim.