Neutral citation: Northern Ireland Housing Executive v Combined Facilities Management [2014] NIQB 75

NEC contract topics: Payment, application of payment notices

Form of contract: NEC3 Term Service Short Contract

Main areas of law: Withholding and set-off, amendments to standard forms, inconsistency, and contra proferentem rules.

 

The Northern Ireland Housing Executive (NIHE) entered into four separate maintenance contracts with Combined Facilities Management (CFM). These contracts adopted the NEC3 Term Service Short Contract (September 2008) as the standard form, but with amendments that specifically modified Section 5 concerning payment. The dispute arose after CFM submitted a payment application for £110,032.88 plus VAT. In response, NIHE issued a withholding notice the next day, deducting £5,822.21 plus VAT for alleged overpayments tied to incorrect Schedule of Rates (SOR) codes, and £3,254.41 plus VAT for low performance damages. The notice cited clause 52.1 as the contractual basis for the deductions. The relevant clauses in the standard form of the NEC3 Term Service Short Contract  were amended as follows:

• Clause 50.14 required the employer to notify the contractor of a revised amount and any intention to withhold payment, specifying grounds and calculations.
• Clause 50.15 required payment of the contractor’s assessed amount if no such notice was given.
• Clause 51.3 required notice of any withholding or deduction, to be given at least one day before the payment date.
• Clause 52.1 allowed for the employer to retain or set off any amount owed by the contractor under the same or another contract.
• Clause 52.2 required that disputed deductions be resolved under the contract’s dispute resolution provisions, and only undisputed elements could be withheld.
• Clause 52.3 allowed issuance of a Job Request equivalent to any undisputed retained or deducted amount.

The central issue of the dispute was the interpretation and reconciliation of the amended clauses 50.14, 51.3, and 52.2, particularly where one clause appeared to authorise deductions (even if disputed), while another appeared to prohibit deductions unless the amounts were undisputed. NIHE argued that under clause 50.14, it was entitled to revise the contractor’s assessment and withhold the amount it considered appropriate, whether or not that amount was disputed. CFM contended that clause 52.2 prohibited any such withholding in relation to disputed amounts, and required that the disputed portion be resolved through adjudication before any deduction could be made.

The main question for the court was whether clause 52.2 effectively qualified the employer’s entitlement to withhold under clauses 50.14 and 51.3 or whether those earlier clauses should prevail, even when the deductions were in dispute.

 

Weatherup J acknowledged that the contract contained inconsistencies between the clauses. He applied principles from Lewison’s “Interpretation of Contracts”, considering whether the clauses could be read together or whether one should prevail over the other. While clause 50.14 appeared unqualified in allowing the employer to revise and withhold payments, clause 52.2 directly addressed disputed deductions and required their referral to dispute resolution, rather than unilateral withholding.

The court reviewed the so-called internal inconsistency rule, which suggests that if two clauses conflict irreconcilably, the earlier prevails unless the later qualifies it. However, Weatherup J noted that this rule had limited relevance in modern commercial contracts and could produce arbitrary outcomes. The rationale behind this rule, discussed in older authorities such as Slingsby’s Case (1587) and more recent ones like Martin v Martin (1987) and Joyce v Barker Brothers (1980, was considered inapplicable in this context.

The judge rejected the idea that the contra proferentem rule (interpreting ambiguous clauses against the drafter) provided meaningful guidance, given the dual role of NIHE as both the drafter and beneficiary under clause 50.14.

Ultimately, the court concluded that clause 52.2 must be qualified by clauses 50.14 and 51.3. To give effect to all provisions, any disputed deduction must not be withheld but referred to adjudication. Clause 50.14 must be interpreted accordingly. Weatherup J stated:

 

"The introduction of the latter clause must be taken to have been intended to qualify the earlier clause, or it would be of no effect."

 

The court found in favour of the contractor, declaring that the disputed amount of £9,076.62 could not be withheld and must be resolved through adjudication. There were no separate awards for damages or costs detailed in the judgment.

 

For employers and project managers, the ruling serves as a caution that even when a clause appears to permit immediate deductions, these rights may be limited by subsequent provisions, particularly when the standard form has been amended.  The decision emphasises the risks of amending standard form contracts. Drafters should take great care to avoid creating conflicting mechanisms for payment and withholding provisions.