COUNSEL: David Gardam Q.C. and Humphrey Lloyd for the appellants.

Patrick Garland Q.C. and Anthony May for the respondents.

 

SOLICITORS: Masons; Hyman Isaacs, Lewis & Mills.

 

JUDGES: Lord Reid, Lord Morris of Borth-y-Gest, Viscount Dilhorne, Lord Diplock and Lord Salmon

 

DATES: 1973 June 25, 26, 27, 28; July 25

 

 

[On appeal from MODERN ENGINEERING (BRISTOL) LTD. v. GILBERT-ASH (NORTHERN) LTD.]

 

The questions in this appeal are: (1) whether the respondents are entitled to judgment for the sum claimed by them before consideration is given to the claims totalling £5,000.15 which the appellants seek to set off by way of defence against the respondents’ claim? or (2) whether the appellants are entitled pursuant to the terms of the sub-contract and in particular the last paragraph of condition 14 thereof, to set off against the respondents’ claim, their claims totalling £5,000.15?

 

[*696]

 

Their Lordships took time for consideration.

 

July 25, 1973. LORD REID. My Lords, the appellants, whom I shall call the contractor, made a contract on February 21, 1969, with the City of Bradford (the employers) to carry out building work. The contract was in the form issued by the R.I.B.A. for Local Authorities 1963 edition (December 1967 issue). It provided for nominated sub-contractors. The respondents, whom I shall call the sub-contractor, were nominated to supply and erect certain steel work. In accordance with the principal contract their contract was made with the contractor. It contained the contractor’s printed terms and conditions.

 

The architect issued three interim certificates referable to this subcontract in May, June and September 1969 for sums amounting in all to £14,532. £10,000 was paid by the contractor to the sub-contractor but they retained the balance of £4,532 alleging that the sub-contractors were in breach of their contract in respect of delay and bad workmanship. In respect of the delay they claimed a set off of £3,137 and in respect of bad workmanship they alleged that they had had to spend £1,862 in doing work necessary to make the work satisfactory.

 

The sub-contractor issued a writ in August 1969 and a defence was delivered in October 1969. For some unexplained reason there was great delay and ultimately, on June 20, 1972, the official referee gave unconditional leave to defend and ordered the trial as a preliminary issue of the question whether the sub-contractors were entitled to final judgment for the sum of £4,532. The real question was whether by contract the contractors had bound themselves to pay sums in interim certificates in full without any right to set off claims in respect of breaches of contract by the subcontractors, leaving any such claims to be dealt with later.

 

Judge Fay decided the question in favour of the contractor. His judgment was reversed by the Court of Appeal. The contractors now seek to have that judgment restored.

 

At this stage it must be assumed that the contractors have valid claims in respect of breaches of warranty by the sub-contractor of the time of completion of their work and of the quality of the work for which payment is sought in this action. It is now admitted, and in my view properly admitted, that at common law there is a right of set off in such circumstances: but that right can be excluded by contract. 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 R.I.B.A. form of contract. This is not directly relevant because those terms are only incorporated in the sub-contract to a limited extent. By clause 17 of the contractors’ conditions in the subcontract, 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 provision in the sub-contract is ambiguous in the sense that it is reasonably capable of having more than [*697] 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.

 

The principal contract does not dictate the provisions of the sub-contractors. It merely says in clause 27 that the sub-contractor must be willing to accept certain terms. The sub-contractor is in a strong position with regard to any other terms which the contractor wishes to impose. He need not accept more onerous conditions. In particular he need not accept the contractor’s printed or standard conditions; he can bargain on equal terms. But if he chooses to accept conditions more onerous than those in the principal contract he cannot complain later. And that is, I think, what has happened here.

 

There is no need to decide in this case whether under the R.I.B.A. form of contract the employer is bound to pay immediately to the main contractor sums in the architects’ interim certificate without any right to set off claims of any kind against the contractor. This form of contract is notorious for its obscurities, and I find this question far from easy. I do not intend to set out all the relevant parts of the form or discuss the various considerations and arguments. But on the whole I am inclined to think that the Court of Appeal have reached the right conclusion in Dawnays Ltd. v. F. G. Minter Ltd. and Trollope and Colls Ltd. [1971] 1 W.L.R. 1205, and the half dozen subsequent cases in so far as they have held that under the R.I.B.A. form of contract the employer must pay at once to the contractor sums due under a valid architects’ interim certificate without having any right of set off. But it may be that, if he attacks the certificate as not being in accordance with the conditions of the contract, he can have an arbitration on the matter under clause 35 and withhold payment pending a decision of that question.

 

But that would not assist the sub-contractor in this case. He has agreed to accept clause 14 of the contractors’ conditions and the decision of this case must, in my view, depend ultimately on the proper constructions of the terms of that clause which are as follows:

 

“Payments (both interim and final) as stated over leaf will be made to the sub-contractor as and when the value of such works under the terms of the principal contract is included in a certificate to the contractor and the contractor receives the monies due thereunder. All interim payments shall be on account only, and these shall not be held to signify approval by the contractor and/or architect or the engineer of the whole or any part of the works executed nor shall any final payment prejudice any claim the contractor may have under the terms of the principal contract against the sub-contractor in respect of the works, either for making good any defects appearing before the expiry of the defects liability period of the principal contract, or as may be otherwise provided therein. If the sub-contractor fails to comply with any of the conditions of this sub-contract, the contractor reserves the right to suspend or withhold payment of any monies due or becoming due to the sub-contractor. The contractor also reserves the right to deduct from any payments certified as due to the [*698] subcontractor and/or otherwise to recover 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.”

 

I think that this clause is intended to supersede and be substituted for the common law right of set off. The first sentence states the general rule that when the contractor receives from the employer money earmarked in the certificate for the sub-contractor, payment will be made to him. The second sentence has not been relied on by either party in argument. At first sight, the third and fourth sentences might seem mutually exclusive, the third dealing with withholding money pending the settlement of disputed claims, and the fourth dealing with deducting finally money due on liquidated or agreed claims.

 

One might expect this case to come within the scope of the third sentence. And so it would but for one point. This provision purports to entitle the contractor to “suspend or withhold payment of any monies due.” There is no reference to the amount of the contractor’s claim in respect of breaches of contract and no requirement that before withholding payment he need even estimate the amount of his claim. Read literally this provision would entitle the contractor to withhold sums far in excess of any fair estimate of the value of his claims. That would simply be to impose a penalty for refusing to admit his claims. Not only would the withholding of the excess permanently deprive the sub-contractor of the interest on that excess which would accrue while the dispute lasted, but it might have most damaging effects on the sub-contractor’s business. So, as it stands, this provision is unenforceable.

 

It was argued that this sentence can be interpreted as meaning that the money withheld must not exceed the value of the contractor’s claims. But to attach such a meaning would go far beyond construing the words of the contract. It would be necessary to insert at the end some words as “not exceeding in all a fair estimate of the value of claims in respect of breach of such conditions.” That would not be construction but adding words which are not there. I am clearly of opinion that what is on the face of it a “penalty” clause cannot be saved in that way.

 

So I turn to the earth sentence. I do not see how it can be limited to sums which have either been found to be due or agreed. It refers to bona fide contra accounts. The words “bona fide” would be quite unnecessary and, indeed, meaningless, if the scope of this provision were limited to sums adjudged or agreed to be due. They must imply a claim which the contractor believes to be genuine but which may still be in dispute. And contra accounts are generally itemised accounts not yet agreed. Even if “other claims” could be read as claims ejusdem generis with contra accounts, that would not help the sub-contractor because in this case the claim in respect of bad workmanship and delay are worked out in great detail. It is true that this provision goes a very long way if that is its meaning, because it would allow deduction of all detailed claims outstanding under other contracts. But if the sub-contractor chooses to agree to that, that is his affair.

 

I doubt whether leave to appeal would have been given in this case were [*699] it not for the fact that in a series of cases beginning with Dawnays’ case, the Court of Appeal have come near to laying down a general rule that not only in cases between employer and contractor, but also in cases between contractor and sub-contractor, sums due under an architect’s certificate must be paid at once without waiting for the determination of claims for set off based on breaches of warranty in respect of the work to which the certificate relates. That may be right under the R.I.B.A. form of contract in cases between employer and contractor - we cannot decide that in this case. But it is certainly not right in cases between contractor and sub-contractor. Then each case must depend on the terms of the sub-contract and there can be no presumption of any general rule there. In the present case I cannot interpret the sub-contract in the way the Court of Appeal have done.

 

I would therefore allow this appeal.

 

LORD MORRIS OF BORTH-Y-GEST. My Lords, it has long been a general principle of law that if one man does work for another, the latter when sued, may defend himself by showing that the work was badly done and that the claim made in respect of it should be diminished. On the same principle the purchaser of an article sold with a warranty may, when sued for the price, say that there was a breach of warranty and he may set this up in order to diminish or even extinguish the price. But if parties enter into a building contract it is unlikely that matters will be left to be worked out according to the general principles of the law of contract: it will be necessary for them to make very detailed and elaborate arrangements. If a building is to be of substantial size it may take a long time to erect. Its cost may be high. Throughout a period which may be lengthy the contractor will be obliged to make continuing payments of wages and of various sums in respect of materials and equipment. He will have all his overhead expenses. He will probably have to employ many subcontractors and to make specific contracts with them.

 

It is manifest that it would not be reasonable or fair to expect a contractor to wait until the end of the period of erection of a large building before he received any money. Furthermore, some procedure is desirable whereby there is supervision (apart from that provided by the contractor himself) of the work being done and of its nature, its quality, its value and its timing. If it is agreed that payments of money should from time to time be paid to the contractor it would clearly be unfair if for any inadequate reasons the payments were not made to him. His outpourings of money would be continuing. Equally it would be unfair if failure to adhere to contractual obligations as to the work to be done should under no circumstances in any way affect his right to receive interim payments. So it is only to be expected that as to these and kindred matters the parties will make specific arrangements.

 

When parties enter into a detailed building contract there are, however, no overriding rules or principles covering their contractual relationship beyond those which generally apply to the construction of contracts. The particular wording of a particular contract may have to be considered in relation to particular facts. A decision in some one particular case as to the meaning and application of words in a contract will not have governing force as to the meaning of different words in a different contract. Nor, [*700] if a contract provides for the issuing of interim certificates, should it be supposed that debts of a special class will come into existence, i.e., debts in relation to which there cannot under any circumstances be any defence or set off. Provisions governing such interim certificates will probably be found in the contract.

 

In this appeal we are concerned with a contract containing relatively few terms. The appellants made a written contract with the Corporation of the City of Bradford to carry out building works known as Phase 1 of the John Street Market development. The form of that contract was described as the R.I.B.A. 1963 private edition with quantities. The contract sum was £94,441. The city architect was the architect: the city quantity surveyor was the surveyor. That contract was dated February 21, 1969. The completion date was July 31, 1969. It was in connection with that contract that the appellants made the sub-contract with which we are concerned. On the terms of a document called a “sub-contractors order form” for a “nominated” sub-contractor the appellants, as “the contractor.” requested the respondents, as “the sub-contractor” to carry out certain works. There was no further formal document but the respondents complied with the request by undertaking the work. It consisted in supplying and erecting perimeter steel work for which the respondents had submitted a lump sum quotation of £9,771.00. There were to be payments by installments at the rate of 90 per cent. of the value executed as the works proceeded, of 5 per cent. upon practical completion, and 5 per cent. six months after the completion of the principal contract or after agreement as to the final account for all works executed under the sub-contract whichever might last happen. There was also a cash discount of 21Ú2 per cent. There was a further specific term of the contract in reference to these payments. The only matter raised in this appeal concerns the construction of this specific term (no. 14 of the terms and conditions).

 

Under the terms of the contract between the City of Bradford and the appellants, provision was made for the issue of interim certificates and in regard to the entitlement of the appellants to payment from the City of Bradford. We are not concerned to construe that contract. The City of Bradford are not parties before us. We have heard no argument on their be half. There is, however, a condition of the sub-contract (no. 17) which provides that the sub-contractor is “deemed to have full knowledge of the provisions of the principal contract.” The condition also provides that where such provisions (if not expressly repeated in the sub-contract) are “applicable to the works” then they are deemed to be incorporated in the sub-contract provided always that if they differ from any of the sub-contract provisions it is the latter which apply and are to be enforced. The “works” are described in the sub-contract.

 

Certain provisions of the principal contract related to (a) the issue of interim certificates stating the amount due to the appellants and to (b) the consequent entitlement of the appellants to payments. From time to time amounts so certified as due, and amounts consequently received by the appellants, would include amounts referable to the work of a nominated sub-contractor. So there was provisions laying down how the appellants should deal with the amounts received by them. The latter provisions are contained in paragraph 27 (b) and (c) of the conditions of the principal [*701] contract. Such provisions do not fall, in my view, within the description of provisions “applicable to the works” (i.e., the supply and erection of perimeter steel work) of the sub-contract and therefore are not incorporated in the sub-contract. The parties before us were however “deemed to have full knowledge” of them. Shortly stated, the scheme of them was that the architect was required to inform the contractor as to the total value of the work done by a nominated sub-contractor which was included in the amount of an interim certificate. The architect had also to inform the sub-contractor. Then the contractor had to pay the sub-contractor the sum representing the total certified value of the work done by him (the sub-contractor) less only (i) any retention money provided for by the subcontract, (ii) any sum to which the contractor may be entitled in respect of delay in the completion of the sub-contract works and (iii) a cash discount of 21Ú2 per cent. Though this was a provision of the main contract the question whether the contractor could, in making a payment to his sub-contractor, make any deduction of “any sum to which the contractor may be entitled in respect of delay” (condition 27 (b) of the main contract) must of course depend upon the terms of the sub-contract. There was a further provision (condition 27 (c)) of the main contract the effect of which was that the architect could ask the contractor for proof that amounts included in previous certificates as referable to work done by a nominated sub-contractor had “been duly discharged.” Failing such proof the architect could so certify with the result that the employer could himself pay such amounts to the nominated sub-contractor and make deduction from sums due or to become due to the contractor.

 

In certificates issued to the appellants (as contractor) down to May 19, 1969, it was certified that there was included a total amount of £10,500 which was in respect of the work of the respondents as nominated sub-contractors: a later certificate certified such total amount as being £13,500: a later certificate certified such total amount as being £14,532 18s. 10d. But the appellants only paid £10,000 to the respondents though it is accepted that they (the appellants) had received (apart from other sums) the amount of £14,532 18s. 10d. So the respondents issued a writ on August 27, 1969, and claimed the sum of £4,532 18s. 10d. Were the respondents entitled then to receive that amount or could the appellants claim to withhold it or any part of it? That must simply depend upon the terms of the sub-contract. There was a further claim made by the respondents for damages (particularised as amounting to £2,313 15s.) in respect of loss which the respondents said they had suffered because of the failure of the appellants to carry out their work under the main contract with due diligence. The appellants delivered a defence on October 28, 1969. They claimed, in reliance upon certain conditions of the contract, that they had claims against the respondents (a) for loss (particularised as amounting to £3,137 10s.) caused by alleged delay on the part of the respondents and (b) for loss (particularised as amounting to £1,862 13&s. 1d.) resulting from alleged defective work on the part of the respondents and that they could deduct the amount of their claims.

 

For some reason it was not until May 1972 that the respondents took out a summons for judgment for the sum of £4,532.94. The matter came before Judge Edgar Fay Q.C. Supported by an affidavit of a director [*702] who had been advised that there was no defence in law to the claim for £4,532.94, the respondents claimed to be entitled to sign judgment for that sum. As there was a substantial matter of law for argument the learned judge took the reasonable course of then giving unconditional leave to defend but of arranging for the early trial before him of a preliminary issue on the question whether the respondents were entitled to final judgment for £4,532.94. The trial of that issue took place on July 31, 1972. There was no affidavit filed by the appellants, but it was accepted that the claims which they had made as set out in their defence were bona fide claims.

 

The issue calling for decision depended, in my view, simply and solely upon the interpretation of the contract made by the parties. We were referred to some decisions in other cases which had arisen out of other contracts between other parties and with other wording. The decisions are not in issue before us.

 

One of the cases was Dawnays Ltd. v. F. G. Minter Ltd. and Trollope and Colls Ltd. [1971] 1 W.L.R. 1205. In that case it was necessary to consider the meaning of certain words in a sub-contract which was different from the sub-contract now before us. Clause 13 of the sub-contract in that case is to be contrasted with condition 14 in the present case. Clause 13 entitled the contractor “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.” What was the meaning of the words “is liable to pay”? Lord Denning M.R. pointed out that counsel for the contractor had argued that a cross-claim for delay could be deducted even though the amount of it had not been ascertained. Edmund Davies L.J. described this as an alarming submission. As he pointed out, at p. 1210:

 

“The result would be that the simple fact that the main contractor makes an assertion of some liability in the sub-contractor to pay him something is sufficient to entitle the former to hold up payment. The practical result would be to render available to any main contractor a ready means of avoiding payment out to the sub-contractor even of sums which the building owner had already paid the main contractor in respect of sub-contract work covered by interim certificates. That is, indeed, the position here, for the defendants have received every penny of the £27,000 odd now claimed. Can Mr. Knight [counsel for the main contractors] utilise clause 13 in that way in the present case? In my judgment, clearly not. Its concluding words refer to ‘any sum or sums which the sub-contractor is liable to pay’ - not ‘may be liable to pay,’ nor ‘which is asserted by the main contractor to be due.’ Mr. Knight cannot quantify even roughly what the sum is that the sub-contractor is so liable to pay. We are told that the main contractor asserts that as a result of unreasonable delays by the plaintiffs, a sum in the region of £47,000 may be payable. More recently, however, the claim is said to be in the region of £61,000. But all that is in the limbo of the unknown. The simple fact is that the defendants can assert no definite and liquidated sum as being unquestionably due to them from the plaintiffs [the sub-contractors]. Unless and until they can do this, they cannot invoke clause 13 in [*703] the manner sought by the defendants. Any other view would involve that the sub-contractor could be kept out of his money until the contract is completed, whereupon the main contractor would condescend to go to arbitration about the matter. In the result, a subcontractor could be kept out of his money for an unconscionable period, with possibly disastrous financial results. I should require the clearest possible provision in the sub-contract before I would conclude that this was what the parties understood and intended and that this was, indeed, the result of the agreement arrived at.”

 

The decision of the Court of Appeal in that case turned upon the meaning of the particular words there in question: it cannot guide decision in the present case. Leave to appeal was refused by the Court of Appeal and a subsequent petition for leave to appeal was dismissed. Had the case come up for review I consider, as at present advised, that an appeal ought to have failed.

 

I turn to the contract which is before us. Condition 2 contained provisions in regard to the commencement, execution and completion of the work. It further provided that if the respondents failed to complete within specified periods they should pay to the appellants any resulting loss or damage suffered by the appellants. Condition 14 which is of major importance contains provisions as to payment.

 

Regard must be had to all the provisions of that condition. It begins with the emphatic provision that both interim and final payments would be made by installments as stated in the contract and would be made

 

“as and when the value of such works under the terms of the principal contract is included in a certificate to the contractor and the contractor receives the monies due thereunder.”

 

Work done by the respondents to the value of £14,532 had been included in a certificate to the appellants and the appellants had received the £14,532 yet they had only paid to the respondents sums totalling £10,000. Unless therefore some later reservation is found in the condition a further £4,532 ought to have been paid to the respondents. There are, however, certain reservations. They are in the third and fourth sentences. In the third sentence it is provided:

 

“If the sub-contractor fails to comply with any of the conditions of this sub-contract, the contractor reserves the right to suspend or withhold payment of any monies due or becoming due to the subcontractor.”

 

If this was a valid provision any failure, however unimportant, would enable the contractor to withhold present or future payments. Such a heavily penalizing provision ought not to be accorded any validity. Nor would it be appropriate to embark upon a process of redrafting the sentence by reading in suggested words which it does not contain. The fourth sentence of the term is as follows:

 

“The contractor also reserves the right to deduct from any payments certified as due to the sub-contractor and/or otherwise to recover the amount of any bona fide contra accounts and/or other claims [*704] which he, the contractor, may have against the sub-contractor in connection with this or any other contract.”

 

It is upon the interpretation of those words that the present case, in my view, depends. A “certified” payment is clearly a liquidated sum. To have a process of deduction from such a sum there must clearly be some other stated sum. There could, for example, be some other liquidated sum. There could be some other sum which could be regarded as a contra account. But there would have to be some sum. There could not be a deduction of something that lacked any kind of specification. But need the sum to be deducted be a liquidated sum or an ascertained sum in the sense of an agreed sum or of a sum assessed by a court? The wording of the provision does not so indicate. There may be a deduction of the amount of any bona fide claim which the contractor may have against the sub-contractor. Such claim may be in connection with the contract which has occasioned the certified payments or in connection with any other contract. As applied to the facts now before us the position is that the appellants have claims against the respondent in connection with the sub-contract. Those claims have both been particularised and quantified. Their amount is known. Whether or not they can be substantiated it is accepted that as “claims” they have been made in good faith. Whether it is wise for a sub-contractor to agree to a provision which may delay his receipt of money certified by an architect as being payable is not for us to decide. I can see no escape, however, from the conclusion that the respondents agreed with the appellants that there could be a deduction of the amount of any bona fide claims. Here there were such. I consider therefore that the learned judge was correct in deciding the preliminary issue as he did.

 

Accordingly, I would allow the appeal.

 

VISCOUNT DILHORNE. My Lords, the question raised in this appeal, one of great importance to the building trade, has been considered by the Court of Appeal in a number of cases in recent years. This is the first occasion on which it has come to this House. Shortly stated, it is whether when under a contract in the R.I.B.A. form an architect has given an interim certificate the employer is bound to pay to the contractor the amount certified without deduction or set off save as permitted by the contract; and where the architect has told the contractor the amount forming part of the total certified attributable to work executed by a sub-contractor the contractor is bound to pay that amount to the sub-contractor without deduction save as permitted by the sub-contract.

 

In his judgment in ,this case, Lord Denning M.R. put the matter thus (1973) 71 L.G.R. 162, 167:

 

“When the main contractor has received the sums due to the sub-contractors 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 business. There must be a ‘cash flow’ in the building trade. It is the very lifeblood of the enterprise. The [*705] sub-contractor has to expend money on steel work 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. The main contractor is in a like position. He has to pay his men and buy his materials. He has to pay the sub-contractors. He has to have cash from the employers; otherwise he will not be able to carry on. So 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 subcontractor, and so forth. Cross-claims must be settled later.”

 

Mr. Garland for the respondents sought to support this passage with one qualification. He agreed that deductions might be made from the amount certified where authorised by the contract and that deductions authorised by the sub-contract might be made by the contractor from the sum which he had received from the employer attributable to work done by the sub-contractor and that the contractor was then only obliged to pay the balance.

 

Mr. Gardam for the appellants challenged this. He contended that neither the contract nor the sub-contract excluded the right of the employer to rely on his common law and equitable rights of counterclaim and set off when sued by the contractor for the amounts certified and the right of the contractor to do so when sued by a sub-contractor for the amount contained in the certificate attributable to his work.

 

Which view is right must in every case depend on the terms of the contract or sub-contract in question. Changes are made from time to time in the form of the R.I.B.A. contracts, and sub-contracts may take very different forms. Prior to 1971 and the decision of the Court of Appeal in Dawnays Ltd. v. F. G. Minter Ltd. and Trollope and Colls Ltd. [1971] 1 W.L.R. 1205, it appears to have been generally thought that an employer was entitled to set off or counterclaim against the amount certified. In Halsbury’s Laws of England, 3rd ed., vol. 3 (1953), p. 471, para. 906, it is said:

 

“the contractor is entitled to immediate payment thereof” (the amount certified) “subject to the terms of the contract and any right of the employer to any set-off or counterclaim (for example, for liquidated damages).”

 

Indeed, no scintilla of authority prior to the decision in Dawnays’ case can be found for the proposition that the amount certified by the architect in an interim certificate as the value of work done and consequently payable to the contractor is in a special position in that the employer cannot lawfully counterclaim and set off against the liability amounts due to him from the contractor.

 

On February 21, 1969, the appellants, the contractors, entered into a contract with the City of Bradford for the erection and completion of Phase 1 of the John Street development for £94,441.

 

The conditions annexed to the contract were in the Local Authorities Edition (with quantities) 1963 edition of the R.I.B.A. forms. Under those conditions the architect was entitled to nominate sub-contractors. The [*706] contract by clause 27 (a) provided that he should not nominate as a sub-contractor someone to whom the appellants made reasonable objection or someone who was not prepared to enter into a sub-contract with the contractor which provided for all the matters set out in clause 27 (a) (i)-(ix). If he was prepared to do so, then the architect could nominate him and if the contractor refused to enter into a subcontract providing for those matters, he would be guilty of a breach of his contract with the employer It was thus open to a person nominated, if he was prepared to enter into such a sub-contract, to refuse to enter into one containing more onerous terms.

 

The architect nominated the respondents as sub-contractors for the erection of certain steel work and on December 20, 1968, the appellants placed an order with them for the erection of that steel work. To that order printed conditions were attached. The respondents accepted the order which, with the conditions attached, constitutes the sub-contract in this case.

 

That order stated that the time for completion of the steel work was “within four weeks from commencement on March 17, 1969,” a period later extended. Clause 1 of ,the conditions attached to the order provided that if the respondents failed to complete their work within the period specified or such extended period as might be allowed, they should pay to the appellants “any loss or damage suffered by” the appellants caused by their failure to do so.

 

On September 24, 1969, the architect certified that the respondents did not complete their work until June 12, 1969, and said that in his opinion they should have completed by the anticipated completion date of 4/5 weeks after April 14, 1969. The appellants claim to have suffered a loss or damage amounting to £3,137.10 by reason of the respondents’ delay in completion.

 

By clause 1 of these conditions the respondents undertook to provide everything necessary for the completion of the steel work in accordance with the drawings, specifications and works complete in every particular to the satisfaction of the appellants and of the architect.

 

The appellants contend that the respondents did not do the steel work satisfactorily and that in consequence they incurred expense amounting to £1,862 13s. 1d. The remedial work, it was stated, consisted almost entirely of joinery, and not steel work.

 

The order provided that the respondents should be paid 90 per cent. of the value of the work executed as the work proceeded.

 

The main contract also provided for payment to the contractor by installments. By clause 30 (1) of the conditions annexed to the main contract and the appendix thereto, the architect was required to issue interim monthly certificates stating the amount due from the employer to the contractor. That clause stated that “… the contractor shall be entitled to payment “therefor” within 14 days from the issue of the certificate. Clause 30 (2) is in the following terms:

 

“The amount stated as due in an interim certificate shall, subject to any agreement between the parties as to stage payments, be the total value of the work properly executed and of the materials and goods delivered to or adjacent to the works for use thereon up to and [*707] including a date not more than seven days before the date of the said certificate less any amount which may be retained by the employer (as provided in sub-clause (3) of this condition) and less any installments previously paid under this condition. …”

 

A great deal has been said in Dawnays’ case [1971] 1 W.L.R. 1205 and the cases which followed it, as well as in this case, as to the importance of a “cash flow” in the building industry. I cannot think that the building industry is unique in this respect. It is, of course, true that the contract makes provision for payments as the work proceeds, but, it is to be observed, a fact to which I feel insufficient attention has been paid, that the contractor is only entitled to be paid for work properly executed. He is not entitled to be paid on interim certificates for work which is defective. The architect should only value work executed properly, that is to say, to his reasonable satisfaction (clause 1); and no interim certificate is of itself conclusive evidence that the work was in accordance with the contract (clause 30 (8)).

 

Under clause 30 (2) it is for the architect to deduct the retention money and the installments previously paid and the balance is the amount to which the contractor is by clause 30 (1) entitled to payment.

 

When one has regard to other provisions of the contract this does not mean payment without deduction. For instance, if the contractor has failed to comply with an instruction and the employer has employed others to do so, all costs incurred in doing so are recoverable from the contractor by the employer as a debt “or may be deducted by him from any moneys due or to become due to the contractor under this contract” (clause 2 (1)).

 

Similarly if the contractor does not comply with the insurance requirements of the contract the employer may himself insure “and may deduct a sum equivalent to the amount paid in respect of premiums from any moneys due or to become due to the contractor” (clause 19) (see also clause 20 (1)). The employer may also deduct under this contract £400 per week as liquidated and ascertained damages for non-completion by the due date (clause 22).

 

The existence of these provisions in the contract lends no support to the contention that the amount certified is of a special sacrosanct character which must be paid without deduction. If these deductions can be made, as they clearly can, from the amount certified, the amount which clause 30 (1) says the contractor is entitled to be paid, why should it be inferred that the contract impliedly, for there is nothing express, excludes reliance by the employer on his common law and equitable rights to counterclaim and set off if sued for the amount certified. I see no ground for any such inference.

 

Where there is a nominated sub-contractor and the interim certificate covers work done by him, the architect is required by clause 29 (b) to tell the contractor the total value of the work done by him. Again, it must be the value of the work properly and not improperly executed, for this requirement applies to all the work covered by the certificate. Clause 27 (b) says that the sum representing that total value “shall be paid by the contractor to the nominated sub-contractor within 14 days of receiving” a duplicate copy of the certificate from the architect, [*708]

 

“less only (i) any retention money which the contractor may be entitled to deduct under the terms of the sub-contract, (ii) any sum to which the contractor may be entitled in respect of delay in completion of the sub-contract works or any section thereof, and (iii) a discount for cash of 21Ú2 per cent.”

 

The contractor is under this provision required to pay the sub-contractor his share of the amount certified within 14 days of receipt of the duplicate certificate and the employer is only required to pay the contractor within 14 days of the issue of the certificate. Under this provision the contractor’s obligation to pay the sub-contractor is not dependent on the prior receipt by him of the money from the employer.

 

The clause permits the contractor to deduct before payment to the sub-contractor any sum to which the contractor may be entitled in consequence of delay in completion by the sub-contractor. It was argued for the respondents that this must be a liquidated and ascertained amount, that is to say, that there could only be a deduction if the sub-contract contained a provision, as the main contract does, for the payment of a sum calculated at a particular rate, in the case of the main contract £400 per week.

 

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 (clause 27 (a) (vi)). With the nominated sub-contractor obliged to accept such a provision alight cannot, in my opinion, have been intended to restrict the operation of clause 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, clause 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.

 

Clause 27 (c) is designed to make provision for the situation where a contractor does not comply with the requirements of clause 27 (b), either, by not paying the sub-contractor the amount due to him under an interim certificate, or, by making deductions before payment not authorised by clause 27 (b). It gives the architect power to require to be furnished with reasonable proof that “all amounts” included in the certificate as “the total value” of the work of the sub-contractor have been “duly discharged” and if the contractor fails to comply with any such request and the architect so certifies, the employer may himself pay such amounts to the sub-contractor and deduct them from any sums due or to become due to the contractor.

 

I think the word “discharged” is significant. If the word had been “paid” and not “discharged” the argument for the respondents would be stronger. Liability to pay to the sub-contractor the total value of his work may be discharged in whole or in part by making the deductions authorised by clause 27 (b). [*709]

 

There are two other clauses in the main contract to which I must refer before turning to the provisions of the sub-contract. Clause 26 provides that if the employer does not pay the amount due on any certificate within the 14 days and within seven days after receipt of a notice from the contractor that notice of determination will be given in default of payment, the contractor may give notice culminating his employment under the contract. This provision was relied on by the respondents as indicating a clear right to receive the amount stated in the certificate. Read in isolation from the other clauses in the contract this appears to be so but, in view of the express provisions to which I referred, giving the employer in certain circumstances the right to deduct amounts “from any moneys due or to become due to the contractor,” clause 26 must, in my opinion, be interpreted in the light of these other provisions as meaning the amount due on a certificate after deduction of any sums which the employer is entitled under the contract to deduct.

 

The purpose of clause 26 is, in my opinion, to make it clear that on failure to pay an instalment due to him, the contractor may treat the failure as a breach of condition and terminate the contract which, if clause 26 was not there, he would not be entitled to do.

 

The other clause to which I must refer is the arbitration clause, clause 35. That provides for reference to arbitration of any dispute between the employer or the architect on his behalf and the contractor as to the construction of the contract or as to any matter or thing of whatsoever nature arising thereunder or in connection therewith, including any matter or thing left to the discretion of the architect. Clause 35 (2) provides that subject to certain exceptions no reference is to be opened without the consent of the parties until after practical completion. One of the exceptions is a reference on the question whether or not a certificate is in accordance with the conditions of the contract. A reference on that is not to be postponed until after a practical completion unless the parties otherwise agree.

 

At one time I was inclined to think that this clause did not apply where the employer sought to dispute the validity of the certificate, but applied only when the contractors sought to do so, for it provides only for the reference of disputes between the employer and the architect on one side and the contractor on the other and not for disputes between the employer and the architect; but I am now satisfied that it does apply to such a case for when the contractor has not been paid the amount certified in an interim certificate and the employer disputes his liability to pay on the ground that the certificate is invalid, the dispute is between the employer and the contractor.

 

This consideration of the terms of the main contract leads me to the following conclusions:

 

1. There is nothing in it to justify the conclusion that it excludes the contractor’s right to counterclaim and set off under the common law and in equity.

 

2. The contract does not provide that the employer must pay the contractor the amount certified and the contractor the sub-contractor the amount contained in the certificate relating to the sub-contractor’s work without deduction. The contract itself makes provision for deduction in [*710] certain circumstances from those amounts. It does not provide that cross-claims must be settled later.

 

3. An interim certificate does not create a debt of a special nature. It is a certificate of the value of work properly executed and it is only for the work properly executed that payment of the sum certified, less any deduction that may properly be made, that the employer has to pay to the contractor and the contractor to pay the portion attributed to the sub-contract.

 

4. If the contractor fails to execute any work properly the value of that work should not be covered by an interim certificate. Clause 6 does not give the architect power to give instructions for the repair of defective work. It does give him power to order its removal. If the contractor does not comply with such an instruction, the employer may employ others to do it and deduct the cost from any monies due or to become due to the contractor (clause 2). There is no need for the architect to be given power to instruct the contractor to remedy defective work for the contractor is, by clause 1, required to complete the works to the reasonable satisfaction of the architects.

 

I now turn to the provisions of the sub-contract in this case, a sub-contract in a special form prepared by the appellants, not the R.I.B.A. form of sub-contract for use where a sub-contractor is nominated, commonly referred to as the “green form.”

 

It is upon the terms of that sub-contract that the rights of the parties in the present case depend. The sub-contract is related to the main contract but it is wrong, in my opinion, to describe it as the creature of the main contract. If it were the case, which in my opinion it is not, that under the main contract the amount certified in an interim certificate and the amount included in the amount certified attributable to sub-contract work had to be paid without deduction, then one would not expect a sub-contract not to reflect that.

 

There are four provisions of the sub-contract relevant to the question to be decided in this appeal. Under clause 2 the sub-contractor undertakes to pay the contractor any loss or damage suffered by the contractor in consequence of delay in completion by the sub-contractor. There is no provision for payment of a sum calculated at a particular rate.

 

Clause 14 is in the following terms:

 

“Payments (both interim and final) as stated over leaf will be made to the sub-contractor as and when the value of such works under the terms of the principal contract is included in a certificate to the contractor and the contractor receives the monies due thereunder. All interim payments shall be on account only, and these shall not be held to signify approval by the contractor and/or architect … of the whole or any part of the works executed. … If the sub-contractor fails to comply with any of the conditions of this sub-contract, the contractor reserves the right to suspend or withhold payment of any monies due or becoming due to the sub-contractor. The contractor also reserves the right to deduct from any payments certified as due to the sub-contractor and/or otherwise to recover the amount of any bona fide contra accounts and/or other claims which he, the [*711] contractor, may have against the sub-contractor in connection with this or any other contract.”

 

Clause 17 reads as follows:

 

“The sub-contractor is deemed to have full knowledge of the provisions of the principal contract and where such provisions not expressly repeated herein are applicable to the works, these shall be deemed to be incorporated herein, provided always that if these differ from those embodied in this sub-contract the latter shall apply and be enforced accordingly. …”

 

The first sentence of clause 14 differs from the provision in clause 27 (b) of the principal contract, and if that clause is by virtue of clause 17 to be deemed as incorporated in the sub-contract as a clause applicable to the works, nevertheless effect is to be given to the wording of the sub-contract. Under clause 27 (b) the contractor is required to pay the sub-contractor within 14 days of receipt of the duplicate interim certificate. Under the sub-contract he became only liable to pay when he received the money from the employer.

 

Literally read the third sentence of clause 14 enables the contractor to suspend or withhold payment of any moneys due or becoming due 40 the sub-contractor, however large, if the sub-contractor is guilty of any breach, however minor, of the sub-contract. Read literally this sentence provides for the imposition of a penalty which may be wholly disproportionate to the damage suffered by the contractor. One would have expected the sub-contract only to have provided for the suspension or withholding of the payment of moneys estimated to be the loss suffered by the contractor by reason of the breach. This sentence does not, however, say that and, in my opinion, that cannot be said to be implied by reading the clause as a whole.

 

The fourth sentence which gives the contractor the right to deduct “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” is not, in my opinion, limited to the deduction of amounts which have been agreed between the parties or to amounts calculated by reference to a liquidated and ascertained amount. This, in my opinion, is conclusively shown by the fact that deduction may be made to recover the amount of any bona fide claims the contractor may have against the sub-contractor. If, as I do not think is the case, a contra account is limited to the deduction of agreed or ascertained sums, the amount of any bona fide claim is not. It is admitted lain this case that the contractor’s claims against the sub-contractor were bona fide. They were quantified by the contractor and under this clause of the sub-contract the contractor is entitled to deduct them.

 

His claim in respect of remedial work is on the basis that the sub-contractor did not execute the steel work properly. It implies that the architect should not have included the value of that work in the interim certificate. The sub-contract contains an arbitration clause which is different from that in the principal contract, in that all arbitration proceedings are to be deferred, unless the parties otherwise agree, until after the [*712] date of the certification of final completion of all works executed under the principal contract.

 

Here the sub-contractor is suing the contractor. I can see no ground for holding that in those proceedings the contractor cannot seek to deduct from the amount claimed from him the amounts bona fide claimed by him from the sub-contractor. Even if the sub-contract does not give, as it does, an express right to make such deduction, I can see nothing in it to exclude the contractor’s common law and equitable rights to set off and counterclaim. In Hanak v. Green [1958] 2 Q.B. 9 my noble and learned friend, Lord Morris of Borth-y-Gest (then Morris L.J.), comprehensively reviewed the law and practice with regard to set off and counterclaim and, in my opinion, there is no doubt that unless the appellants’ right to do so was excluded by the terms of the sub-contract, they are entitled to set off and to counterclaim for the amounts of their cross-claims. In my opinion, their right to do so is not excluded.

 

The main issue in this appeal is whether that right is excluded. Far from that being the case the sub-contract expressly gives the contractors the right to deduct the amount of cross-claims.

 

The views I have expressed are based on consideration of the contract and sub-contract in this case. As building contracts and sub-contracts differ in their terms the result of any contest such as this must depend on the terms of the contract into which the parties have entered.

 

In Dawnays Ltd. v. F. G. Minter Ltd. and Trollope and Colls Ltd. [1971] 1 W.L.R. 1205 sub-contractors instituted proceedings claiming a sum included in the architect’s interim certificate as the value of their work. The contractors, who had received that money from the employer, sought a stay of proceedings on the ground that there had been delay in the completion of the sub-contract steel work, that the contract contained an arbitration clause and that they were willing that the dispute should be referred to arbitration.

 

It appears from the judgment of Lord Denning M.R. that in that case the principal contract contained a clause 27 (b) in the same terms as 27 (b) of the main contract in this case.

 

Clause 13 of the sub-contract was in different terms from clause 14 of the sub-contract in this case. It read as follows:

 

“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 … any sum or sums which the sub-contractor is liable to pay to the contractor under this sub-contract.”

 

Lord Denning M.R., for reasons which do not appear from the report in a the case, held that this clause had to be read with clause 27 (b) of the main contract. That can only be right if the sub-contract incorporated the provisions of the main contract. He also held that clause 13 only applied to liquidated and ascertained sums which are established or admitted as being due: he said, at p. 1209:

 

“… it is only such a sum which is capable of being ‘deducted’: it is only such a sum … 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.’” [713]

 

Edmund Davies L.J. held that clause 13 did not apply as the contractor could not assert that any definite and liquidated sum was unquestionably due to them.

 

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.

 

It is the first case that the doctrine was enunciated that the amount included in a certificate constituted a debt of a particular character, Lord Denning M.R. saying, at p. 1209:

 

“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.”

 

With the greatest respect I cannot regard these statements as correct.

 

In Dawnays’ case 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 So far as one can judge from the report of the case they were not. In the circumstances I have come to the conclusion that that case was wrongly decided.

 

The Court of Appeal followed that decision in five other cases all decided in 1972. Frederick Mark Ltd. v. Schield [1972] 1 Lloyd’s Rep. 9; G.K.N. Foundations Ltd. v. Wandsworth London Borough Council [1972] 1 Lloyd’s Rep. 528; 70 L.G.R. 276; John Thompson Horseley Bridge Ltd. v. Wellingborough Steel and Construction Co. Ltd. (unreported); Bar Library Transcript No. 41A of 1972; Token Construction Co. Ltd. v. Naviewland Properties Ltd. (unreported); Bar Library Transcript No. 170; and Carter Horseley (Engineers) Ltd. v. Dawnays Ltd. (unreported); Bar Library Transcript No. 208A of 1972, holding that the amount claimed under a certificate could not be the subject of set off or counterclaim, that only ascertained sums could be deducted and that payment of the amount due under a certificate could not be held up for cross-claims.

 

In so far as the decision in these cases depend on the decision in the Dawnay case, I have regretfully come to the conclusion that they were wrongly decided.

 

For the reasons I have stated in my opinion this appeal should be allowed.

 

LORD DIPLOCK. My Lords, the respondents (“the sub-contractor”) were nominated to execute specialist work of steel erection under a building contract in the tendered R.I.B.A. form described as Local Authorities Edition (with Quantities). The appellants (“the contractor”) were the main contractors under that contract (“the principal contract”). The Bradford Corporation was the employer. Pursuant to the nomination the contractor entered into a sub-contract (“the sub-contract”) with the sub-contractor for the erection by him of the specialist work. Under the [*714] principal contract the architect issued interim certificates as the work progressed stating the amount due to the contractor from the employer and including therein specified sums as being the value of the work executed by the sub-contractor. Of the aggregate amount so specified in three interim certificates issued between May and September 1969, the contractor failed to pay over to the sub-contractor £4,532.94, this being the amount of the loss which he claimed he had sustained as a result of breaches by the sub-contractor of the sub-contract. The breaches alleged were that the work executed by the subcontractor was defective, and was not completed until four weeks after the date specified for completion.

 

This appeal arises out of the trial of a preliminary issue of law. For the purpose of deciding that issue it has to be assumed that the contractor’s averments in his pleading, both as to the fact that breaches of the subcontract had been committed by the sub-contractor and as to the amount of the loss and damage that those breaches caused to him, are true. The specific question raised in the preliminary issue is whether under the terms of the sub-contract the sub-contractor was entitled to judgment against the contractor for the balance remaining unpaid of the amounts specified in the interim certificates as the value of the specialist work executed by the sub contractor, without any deduction of the loss and damage, quantified at £4,532.94 sustained by the contractor as a result of the sub-contractor’s breaches of the sub-contract.

 

On the face of it this might appear to raise a simple question of construction of the particular words of the sub-contract rather than any principle of law of more general application.

 

The sub-contract was for specified steel work at a lump sum figure of £9,771. The time for completion was “within 4 weeks from commencement on March 17, 1969.” The work, the price and the date of completion were subject to variation in accordance with any variations made pursuant to the provisions of the principal contract, - this as a result of condition 17 of the sub-contract. The provisions for payment are contained on the face of the contractual document and in the printed condition 14.

 

On the face of the document appeared the following:

 

“Terms of Payment For the above mentioned lump sum figure and paid subject to variation:

 

“By installments at the rate of 90 per cent. of the value executed as the works proceed.

 

“5 per cent. upon practical completion of the works.

 

“5 per cent. 6 months after completion of the principal contract or as soon as the final account for all works executed under this subcontract shall have been agreed, whichever may last happen.

 

“All less 2&12frac; per cent. cash discount.”

 

The relevant words in condition 14 are the following:

 

“14. Payments (both interim and final) as stated over leaf will be made to the sub-contractor as and when the value of such works under the terms of the principal contract is included in a certificate to the contractor and the contractor receives the monies due thereunder. The contractor also reserves the right to deduct from any payments certified as due to the sub-contractor and/or otherwise to [*715] recover 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.”

 

The contention that a bona fide quantified claim by the contractor for damages caused to him by breaches of the sub-contract committed by the sub-contractor did not fall within the expression

 

“any bona fide contra accounts and/or other claims which he, the contractor, may have against the sub-contractor in connection with this [sc. the sub-contract] or any other contract”

 

and therefore deductible from any payments certified as due to the sub-contractor, would seem at first sight to be virtually unarguable. The words seem too clear to permit any other interpretation, and for this reason the official referee, who tried the issue at first instance, rejected the contention.

 

The Court of Appeal, however, felt able to reverse his decision by construing “contra accounts and/or other claims” as limited to “established or admitted liquidated sums.” By “established” they meant determined by and embodied in a judgment of a court of law or an award of an arbitrator.

 

My Lords, even without the qualifying adjectival phrase “bona fide” the words “contra accounts and/or other claims” in ordinary usage do not, in my view, bear so restricted a meaning; nor am I persuaded by the Court of Appeal that the restriction is justified by the use of the verb “deduct.” The amount of the “contra account and/or other claims” must, of course, be quantified before it can be deducted; but there is nothing in those words themselves to suggest that the quantification may not be made by the claimant himself. The addition of the qualification that the contra account or claim, in order to be deductible, must be “bona fide” seems to me to point irresistibly to this conclusion. It is wholly inapt if it refers only to contra accounts or claims which have already been the subject of agreement between the parties or of a judgment or an arbitral award.

 

This strained and, as I think, clearly erroneous construction of the plain words of condition 14 of the sub-contract was the result of the application by the Court of Appeal of what Cairns L.J. described as “the rule in Dawnays’ case,” 71 L.G.R. 162, 168 (sc. Dawnays Ltd. v. F. G. Minter Ltd. and Trollope and Colls Ltd. [1971] 1 W.L.R. 1205).

 

On the face of them the judgments of the Court of Appeal in Dawnays’ case do not purport to lay down any principle of law or construction of general application. The decision appeared to turn upon the particular words used in a particular clause of a sub-contract entered into between a main contractor and a sub-contractor nominated under an R.I.B.A. contract. It was in this belief that the Appeal Committee of this House refused leave to appeal from the judgment of the Court of Appeal as seemingly it did not raise any point of law of such general importance as to make it appropriate for consideration by your Lordship’s House. Refusal of leave to appeal does not imply approval by this House of a judgment sought to be appealed against. That judgment carries the same authority [*716] as any other unappealed judgment of the Court of Appeal - neither more nor less.

 

Dawnays’ case was, however, followed in rapid succession by six other cases under building contracts and sub-contracts which reached the Court of Appeal. Two are reported only in Lloyd’s Law Reports (viz. Frederick Mark Ltd. v. Schield [1972] 1 Lloyd’s Rep. 9 and G.K.N. Foundations Ltd. v. Wandsworth London Borough Council [1972] 1 Lloyd’s Rep. 528); three others are unreported. The instant case is the sixth. From the judgments in these cases, all of which have been considered by your Lordships in the course of the argument, it would appear that Dawnays’ case has come 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 installments.

 

That principle as it has developed in the last two years was stated thus in the judgment of Lord Denning M.R. in the instant case, 71 L.G.R. 162, 167:

 

“When the main contractor has received the sums due to the sub-contractors 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 business. There must be a ‘cash flow’ in the building trade. It is the very lifeblood of the enterprise. The sub-contractor has to expend money on steel work 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. The main contractor is in a like position. He has to pay his men and buy his materials. He has to pay the sub-contractors. He has to have cash from the employers; otherwise he will not be able to carry on. So 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.”

 

Lord Denning M.R. is speaking here of interim certificates issued by the architect under a main building contract in the R.I.B.A. standard form since those were in point in the instant case; but in other cases the Court of Appeal has applied the same principle also to final certificates issued by the architect and to installments of the price which were not required by the contract to be certified by an architect or other third party.

 

Since the right to payment derives from a contract, it is accepted in the judgments of the Court of Appeal in each of the series of cases since Dawnays’ case [1971] 1 W.L.R. 1205 that the parties may exclude or vary the application of the principle to a particular contract by its express terms if they are couched in language that is sufficiently clear - though in none of the cases, even the instant case, has the language used been found to be sufficiently clear to exclude the principle as respects any claim for damages for breach of the contract by the party entitled to the instalment of the price. A presumption of law as to the intention of parties to a building [*717] contract or sub-contract which is strong enough to compel the court to place so strained a construction upon the express words of the contract as was adopted by the Court of Appeal in the instant case, is, in my view, more candidly classified as a principle of law rather than as a mere canon of construction. It was to give your Lordships’ House an opportunity of reviewing the correctness of that principle of law that leave to appeal was granted in the instant case.

 

My Lords, a building contract is an entire contract for the sale of goods and work and labour for a lump sum price payable by installments as the goods are delivered and the work is done. Since the turn of the nineteenth century at least (see King v. Boston (Note) (1789) 7 East 481, cf. Basten v. Butter (1806) 7 East 479) there has been a principle of law which is applicable to contracts of this type, but its effect is the converse of that expounded by the Court of Appeal in the instant case. That principle is stated authoritatively in the judgment of Parke B. in Mondel v. Steel ((1841) 8 M. & W. 858) who described it as “established” by that date. In so far as it applies to contracts for the sale of goods it has since been incorporated in section 53 of the Sale of Goods Act 1893; in so far as it applies to contracts for work and labour it still rests upon the common law. 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;” (8 M. & W. 858, 871-872).

 

Or, in the words of section 53 (1) (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 L.J.) in Hanak v. Green [1958] 2 Q.B. 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.

 

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, section 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. In the case of [*718] building contracts no question of usage arises to rebut the presumption. It is conceded by the very experienced counsel for both parties in the instant appeal that until the decision in Dawnays’ case (which was later in date than the sub-contract and the principal contract with which this appeal is concerned) it was the common practice in actions for sums due on interim certificates to set up breaches of warranty in diminution or extinction of that sum.

 

My Lords, I accept the importance of “cash flow” in the building industry. In the vivid phrase of Lord Denning M.R.: “It is the very lifeblood of the enterprise” (71 L.G.R. 162, 167). But so it is of all commercial enterprises engaged in the business of selling goods or undertaking work or labour; and so it was in the first half of the 19th century when this common law remedy for breach of warranty was “established” and in 1893 when its application to contracts for sale of goods received statutory recognition in the Sale of Goods Act. “Cash flow” is the lifeblood of the village grocer too, though he may not need so large a transfusion from his customers as the shipbuilder in Mondel v. Steel or the sub-contractor in the instant appeal. It is also the lifeblood of the contractor whose own cash flow has been reduced by the expense to which he has been put by the sub-contractor’s breaches of contract. 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 in 1893.

 

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.

 

Dawnays’ case was about a sub-contract between the main contractor under a standard R.I.B.A. building contract and a nominated sub-contractor. The sub-contract was also in a standard R.I.B.A. form for sub-contracts and contained a provision for payment of the sub-contract price by installments of the amounts certified in interim certificates issued by the architect under the main contract as attributable to the value of the sub-contract work, subject however to deductions in respect of retention money, a cash discount and amounts previously paid. It also contained the following express clause:

 

“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.”

 

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) [*719] that he is to be entitled to that remedy. In reaching the contrary and, as I think, astonishing conclusion that the use of the words “deduct” and “liable” excluded the deduction of bona fide claims for breaches of warranty which, though quantified by the contractor, were still matters of dispute, the Court of Appeal relied strongly on the terms of the main contract in the R.I.B.A. standard form which were subsequently held in Frederick Mark Ltd. v. Schield [1972] 1 Lloyd’s Rep. 9 to have a similar effect as respects amount certified in interim certificates as due from the employer to the contractor.

 

It is necessary, therefore, to turn to the terms of the main contract in Dawnays’ case [1971] 1 W.L.R. 1205 which so far as is relevant was in the same terms as the principal contract in the instant appeal.

 

Condition 30 provides as follows:

 

“(1) At the period of interim certificates named in the appendix to these conditions the architect/supervising officer shall issue a certificate stating the amount due to the contractor from the employer, and the contractor shall be entitled to payment therefor within the period for honouring certificates named in the appendix to these conditions. Interim valuations shall be made whenever the architect/supervising officer considers them to be necessary for the purpose of ascertaining the amount to be stated as due in an interim certificate.

 

“(2) The amount stated as due in an interim certificate shall, subject to any agreement between the parties as to stage payments, be the total value of the work properly executed and of the materials and goods delivered to or adjacent to the works for use thereon up to and including a date not more than seven days before the date of the said certificate less any amount which may be retained by the employer (as provided in sub-clause (3) of this condition) and less any installments previously paid under this condition.”

 

It is conceded by counsel for the respondent that despite the provision that the contractor “shall be entitled to payment” of the amount certified as due to him from the employer, the employer is empowered by other conditions of the contract, viz. inter alia, condition 2 (1), 19 (3), 22 and 27 (3), to make deductions from the certified amount, for breaches of particular warranties by the contractor. So the certified sum is not sacrosanct. The methods of calculating the sums deductible under these conditions is set out in the conditions themselves. They do not necessarily result in the same figure as the measure of damages for those particular breaches of warranty at common law. The effect of these conditions is to substitute for the sums which would be deductible from the price by operation of law in respect of those breaches of contract, sums calculated in the manner agreed. The expressio unius rule of construction cannot be prayed in aid to exclude the right of the employer to set up breaches of other warranties in diminution or extinction of the instalment of the purchase price stated in the certificate as due.

 

Furthermore, it is expressly provided by condition 30 (8) that no interim certificate of the architect “shall of itself be conclusive evidence that any materials or goods to which it relates are in accordance with this contract”: and by condition 35 that upon an arbitration on the question [*720] “whether or not a certificate has been improperly withheld or is not in accordance with these conditions,” the arbitrator shall have the power “to open up, review and revise any certificate … and to determine all matters which shall be submitted to him in the same manner as if no such certificate … had been given.”

 

Counsel for the respondent felt compelled to concede, in my view rightly, that the employer if sued in an action for the amount stated as due in an interim certificate. would be entitled to challenge the certificate on the ground that the work included in the calculation of that amount was not properly executed; though counsel contended that in order to resist payment on this ground the employer would have to have already submitted to arbitration the dispute as to whether or not the certificate was in accordance with the conditions of the contract and then to apply for a stay of action under section 4 of the Arbitration Act 1950. The arbitration clause, however, does not make an award a condition precedent to a right of action, let alone a condition precedent to a right of defence; and I see no grounds in law to prevent the employer from defending the action by setting up the contractor’s breach of warranty in doing defective work even though this involves challenging the architect’s certificate that that work had been properly executed. The contractor could, no doubt, apply for a stay of action pending arbitration on this issue, but if he did not choose to do so the court would have to decide on the evidence adduced before it whether the defence was made out.

 

I therefore conclude that there is no provision in a main contract in the standard R.I.B.A. form which excludes the common law remedy of the employer to set up breaches of warranty by the contractor in diminution or extinction of any instalment of the price notwithstanding that such instalment has been certified as due from him to the contractor in a certificate issued by the architect. The case which held the contrary, Frederick Mark Ltd. v. Schield [1972] 1 Lloyd’s Rep. 9, was, in my view, wrongly decided.

 

In Dawnays’ case itself, however, the Court of Appeal relied primarily upon condition 27 (b) of the R.I.B.A. main contract. That condition deals with nominated sub-contractors. By sub-condition (a) the contractor is bound to employ to execute work covered by prime cost or provisional sums a sub-contractor nominated by the architect. The contractor has the right to make reasonable objection to the nomination; but if he does not do so he is bound to enter into a sub-contract with the nominated sub-contractor for the execution by the latter of the work. It is open to the contractor and the sub-contractor to negotiate whatever terms they please for inclusion in the sub-contract; and this is what generally happens as it did in and all the cases that followed it. But if the sub-contractor is only willing to enter into a sub-contract which contains inter alia Dawnays’ case the terms set out in paragraphs (i) to (ix) of condition 27 (a), the contractor will be in breach of his own contract with the employer if he refuses to enter into a sub-contract in those terms. Paragraph (vii) contemplates a provision in the sub-contract that in the event of failure on the part of the sub-contractor to complete the sub-contract works within the period specified in the sub-contract the sub-contractor [*721] “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 nominated sub-contractor as aforesaid.”

 

Sub-condition (b) of condition 27 is in the following terms:

 

“(b) The architect/supervising officer 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 clause 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 14 days of receiving from the architect/supervising officer the duplicate copy of the certificate less only (i) any retention money which the contractor may be entitled to deduct under the terms of the sub-contract, (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, and (iii) a discount for cash of 2&12frac; per cent.”

 

As between the contractor and the nominated sub-contractor this provision is res inter alios acta. Its only relevance to their mutual rights and remedies under the sub-contract is that in the event of ambiguity in the express items of the sub-contract that ambiguity should be resolved in favour of a meaning which would involve the contractor’s compliance with his undertaking to the employer contained in sub-condition (b). But the words of sub-condition (b) themselves do not seem to me to be strong enough to amount to an undertaking by the contractor to the employer that in the event of breach of warranty by the sub-contractor he, the contractor, will not exercise as against the sub-contractor his remedy at common law of setting up the breach of warranty in diminution or extinction of an instalment of the price which has become due. It is directed to calculating the amount of the instalment due; not to defences available to the contractor if sued by the sub-contractor for that instalment of the price.

 

The remedy of the employer for failure by the contractor to comply with his undertaking contained in sub-condition (b) is provided in sub-condition (c), which is in the following terms:

 

“(c) Before issuing any certificate under clause 30 of these conditions the architect/supervising officer may request the contractor to furnish to him reasonable proof that all amounts included in the calculation of the amount stated as due on previous certificates in respect of the total value of work, materials or goods executed or supplied by any nominated sub-contractor have been duly discharged, and if the contractor fails to comply with any such request the architect/supervising officer shall issue a certificate to that effect and thereupon the employer may himself pay such amounts to any nominated sub-contractor concerned and deduct the same from any sums due or to become due to the contractor.”

 

Quite apart from the fact that the contractor, as is conceded, can challenge the validity of the certificate, this sub-condition refers to the [*722] contractor’s furnishing to the architect “reasonable proof” that all amounts included in previous certificates in respect of work executed by the nominated sub-contractor “have been duly discharged.” Such amounts being installments of the price of the work done may be “duly discharged” at common law either by payment or by setting up a breach of warranty under the sub-contract in diminution or extinction of an instalment of the price then due. No doubt the contractor would have to satisfy the architect by reasonable proof not only of the fact of the breach relied on but also of the amount of the loss or expense it had caused to him. But if he were able to do that, and for the purposes of the instant appeal it must be taken that he could, the employer would not be entitled to pay the sub-contractor direct or make any deduction from the sums due to the contractor from the employer under the main contract.

 

Sub-conditions (b) and (c) of condition 27 of the principal contract, however, are only relevant at all in the event of there being some ambiguity in the express provisions of the sub-contract relating to payment of installments of the sub-contract price. There was, in my view, no plausible ambiguity in the relevant sub-contract in Dawnays’ case, which I would hold to be wrongly decided. I would hold the same as respects all the cases in the Court of Appeal which followed on it. There is, in my view, no possible ambiguity whatever in the sub-contract which is the subject of the instant appeal. I would allow it.

 

LORD SALMON. My Lords, it has been a well sealed principle of law since the middle of the last century that when a claim is made for the price of goods sold and delivered or work and labour done, the defendant is entitled to set off or set up against the amount claimed any damages which he has suffered as a result of the plaintiff’s breach of the contract under which the goods were sold and delivered or the work and labour were done, Mondel v. Steel (1841) 8 M. & W. 858; Young v. Kitchin (1878) 3 Ex.D. 127; Hanak v. Green [1958] 1 Q.B. 9. This principle was never questioned until 1971. In that year Dawnays Ltd. v. F. G. Minter Ltd. and Trollope and Colls Ltd. [1971] 1 W.L.R. 1205 was decided. That case and five subsequent decisions of the Court of Appeal (Frederick Mark Ltd. v. Schield [1972] 1 Lloyd’s Rep. 9; G.K.N. Foundations Ltd. v. Wandsworth London Borough Council [1972] 1 Lloyd’s Rep. 528 and three unreported cases including Token Construction Co. Ltd. v. Naviewland Properties Ltd.) seem to have laid down what Cairns L.J. referred to in the instant case as “the rule in Dawnays’ case”: namely, a rule that the general principle to which I have referred has no application to any known form of building contract or sub-contract.

 

This type of contract, however, clearly belongs to the class of contract for the sale of goods and work and labour at a price payable by installments. In the thousands of cases in which such contracts had been litigated prior to 1971 it had never been questioned that the defendants were entitled to set off any damages which they bona fide claimed to have suffered as a result of the plaintiff’s breach of the contract under which the price was claimed.

 

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 [*723] 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.

 

It is conceded that, for the purposes of this appeal, it must be assumed that the facts alleged in the contractors’ defence are true, namely, that they have suffered £4,532.94 damages by reason of the sub-contractors’ breaches of the sub-contract. The question is, have the contractors lost their common law right to set off this sum against the amount claimed by the sub-contractors?

 

I will not weary your Lordships by repeating the facts or by citing all the contractual documents. I must, however, set out clause 14 of the subcontract, which is the crucial clause, since it has been held by the Court of Appeal to deprive the contractors of their right of set off:

 

“Payments (both interim and final) as stated over leaf will be made to the sub-contractor as and when the value of such works under the terms of the principal contract is included in a certificate to the contractor and the contractor receives the monies due thereunder.

 

“All interim payments shall be on account only, and these shall not be held to signify approval by the contractor and/or architect or the engineer of the whole or any part of the works executed nor shall any final payment prejudice any claim the contractor may have under the terms of the principal contract against the sub-contractor in respect of the works, either for making good any defects appearing before the expiry of the defects liability period of the principal contract, or as may be otherwise provided therein.

 

“If the sub-contractor fails to comply with any of the conditions of this sub-contract, the contractor reserves the right to suspend or withhold payment of any monies due or becoming due to the sub-contractor.

 

“The contractor also reserves the right to deduct from any payments certified as due to the sub-contractor and/or otherwise to recover 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.”

 

Paragraph 1 of that clause is entirely neutral. It is a common feature of any commercial contract that it should make provision for the dates and conditions upon which payments are to be made. I have never yet heard it suggested that such a provision in any way affects the right of set off. Set off, indeed, does not come into play unless and until some sum is otherwise due and payable by the defendants.

 

Paragraph 2 is admittedly irrelevant. Paragraph 3 purports to confer much more on the contractors than the law allows. According to the natural meaning of its language, it would enable the contractors to suspend or withhold payment of very large sums of money due by them to the sub-contractors in the event of the sub-contractors committing some minor breach of contract causing only trivial damage in no way comparable to the amount owed to the sub-contractors. This paragraph is, therefore, unenforceable since it provides for the exaction of a penalty. It is only by reading into the paragraph a number of words which are not there that this [*724] defect could be cured. And, in my view, this is not permissible. It follows that the paragraph does not help the contractors, but it certainly cannot prejudice the right of set off conferred on them by law.

 

If words mean what they say, I am incapable of understanding how paragraph 4 can be read as taking away the contractors’ rights of set-off. So to read paragraph 4 would, in my view, be doing even greater violence to its language than it would be doing violence to the language of paragraph 3 were it to be read as not imposing a penalty. Paragraph 4 does not say: “any established or admitted contra accounts … or other claims …” but “any bona fide contra accounts … or other claims. …” I am not sure what is meant by an “established contra account or claim.” I imagine it means established by the decision of the court or arbitrator. Clearly you can have contra accounts or claims which are neither “established” nor “admitted” but which are still contra accounts and claims. I can see no reason for excluding these from the ambit of clause 14 and every reason for including them for, if you exclude them, it is impossible to make any sense of the words “bona fide” which immediately precede them. Nor can I see any difficulty in “deducting” the amount of the contractors’ claim for £4,532.94 which although neither “established” nor “admitted” has been elaborately itemised.

 

Had it been possible for me to take the step of holding that clause 14 excludes any deductions from the sums certified as due to the sub-contractors other than the amount of “established” or “admitted” contra accounts or other claims, it would have involved only a small and easy step to hold that therefore paragraph 4, by necessary implication, deprives the contractors of their right to set off anything but such amounts.

 

It is the first step at which I quail and which I think might have given pause to the Court of Appeal had it not been for their previous decisions in which the so-called rule in Dawnays’ case was evolved. The philosophy lying behind this so-called rule has its attractions and has been expounded by Lord Denning M.R. with his usual lucidity. A cash flow is the lifeblood of commerce. This is particularly true in the contracting business in which many contractors have been ruined because of delays in payment by building owners and many sub-contractors have suffered the same fate because of delays by the contractors. Accordingly, it is desirable that, as a general rule, the whole amount certified by the architect as due for payment should be paid promptly and without deduction. This philosophy leads to the presumption that the parties to every building contract or subcontract must have intended to exclude the general principle of law relating to the right of set off save in respect of liquidated or ascertained sums which are established or admitted as being due. At any rate every such contract which has recently been considered in the Court of Appeal, including even the present, has been so construed.

 

My Lords, I cannot help thinking that building contractors and subcontractors and architects advising building owners know far more about the building trade than I or, indeed any judges can hope to do. I am not prepared to approach any contract on the pre-supposition that the parties must have meant to exclude or curtail the right of set off. I am content to consider the language of each contract and see whether it has done so. The danger of a different approach is exemplified not only by the [*725] instant case but perhaps even more dramatically by Token Construction Co. Ltd. v. Naviewland Properties Ltd. (unreported) May 11, 1972. In that case, interim certificates amounting to £222,227 had been issued. The building owners had paid £184,699 on account but refused to pay the balance on the ground that they had suffered damages greatly in excess of the amount claimed owing to seriously defective work by the contractors. There was a great deal of evidence before the Court of Appeal, which that court described as formidable, to show that the building as erected, by reason of the contractors’ breaches of contract, was dangerous and that much of it had had to be demolished and re-erected by the building owners at a cost of about £50,000-60,000. The Court of Appeal recognised that if, in addition to finding this money, the building owners were obliged to pay the balance claimed by the contractors they were likely to be driven into liquidation. Nevertheless Davies L.J., in delivering the leading judgment of the court, felt himself bound by Dawnays’ case reluctantly to dismiss the building owners’ appeal from the summary judgment which had been entered against them.

 

My Lords, it is because in construing the present contract and that of the Token Construction Co. case the Court of Appeal has relied so heavily on its previous decisions and the rule or principle enunciated in them that the validity of those decisions may, and indeed, in my view, should be, reviewed in the present case.

 

In Dawnays’ case the sub-contractors issued a writ and applied for summary judgment against the main contractors for £27,870. This sum had been included in an interim certificate by the architect as due to the sub-contractors and had been received by the main contractors from the building owners. The main contractors put in an affidavit in which they set up a cross claim for £61,000 damages for delays caused by the sub contractors in breach of the sub-contract. They applied for a stay and offered to submit the dispute to immediate arbitration under the arbitration clause in the sub-contract. Prima facie they had a clear right of set off. The Court of Appeal, however, held that this right was excluded by the explicit provisions relating to payment and contained in clause 11 of the subcontract. Clause 13 of the sub-contract read as follows:

 

“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 … any sum or sums which the sub-contractor is liable to pay to the contractors under this sub-contract.”

 

I find it difficult to think of any words more apt to make it crystal clear that the contractors’ rights of set off are preserved lest it might be argued that they had been taken away by clause 11. The Court of Appeal held, however, that the words “deduct” and “liable to pay” in clause 13 confined it to

 

“liquidated and ascertained sums which are established or admitted as being due … 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”

 

(see [1971] 1 W.L.R. 1205, 1209). [*726] In my respectful view, such a construction puts a weight on the word “deduct” which it is entirely unable to bear without becoming seriously distorted. Surely every time a defendant to a claim under a contract for the sale of goods sets off or sets up a cross claim for damages under the contract in extinction of the purchase price, he is, in effect, seeking to deduct from the plaintiffs’ claim damages which he has quantified but which are in dispute and certainly not either established or admitted. Nor do I think that the words “liable to pay” lend any support to the suggested construction of clause 13. The material words are “liable to pay to the contractors under the sub-contract” not “liable, by reason of a judgment or decision by an arbitrator, to pay to the contractor under the sub-contract.” A man is liable to pay damages for breach of contract from the time when the breach occurs and the damage is caused.

 

For the purposes of R.S.C., Ord. 14 proceedings, the courts, with certain immaterial exceptions, are bound to accept the facts deposed to by the defendant as true. In Dawnays’ case, if the facts deposed to by the defendant contractors were true, then the sub-contractors were liable to pay them £61,000 damages under the sub-contract. The facts fell squarely within clause 13. Bona fide claims to set off are very often disputed by plaintiffs. In such cases, the courts have no power to say to defendants: “Pay up now and litigate or arbitrate the dispute later.” This would be to emasculate the right of set-off. The dispute is resolved according to law in the litigation or arbitration; in the meantime the status quo is preserved.

 

I think that the fears expressed in Dawnays’ case that the contractors might delay a decision of the dispute and payment to the sub-contractors until after the completion or abandonment of the main contract are groundless. It is true that under the arbitration clause, no arbitration upon the dispute could take place until completion or abandonment of the main contract except by consent of the parties. But the contractors in Dawnay’s case expressed their willingness to submit the dispute to immediate arbitration. If, in such a case, the contractors were unwilling to go to arbitration until completion or abandonment of the main contract, I am sure that the courts, in the exercise of their discretion, would refuse a stay. But this does not mean that summary judgment would be given for the plaintiffs, certainly not unless there was some other ground for holding that the claim to set off was mala fide. In such circumstances, the dispute, if bona fide would normally be referred to the official referee.

 

It is perhaps worth noting that neither under the standard R.I.B.A. main contract forms nor under what is called the “green form” of sub-contract (in question in Dawnays’ case) is there any obligation upon the contractors or the sub-contractors to continue working after an interim certificate has been dishonored. In such a case, the contractors can throw up the whole contract providing they do so reasonably; the subcontractors may only suspend work. Both, however, are protected against any obligation to give further credit.

 

I agree with my noble and learned friend Lord Diplock’s analysis of clauses 27 and 30 of the main contract.

 

I have no doubt that the standard forms of R.I.B.A. main contract and the standard forms of sub-contract, despite certain obscurities, work well enough in practice. The provisions relating to interim certificates as a [*727] rule ensure a steady cash flow in normal conditions, which is what I think they are designed to do. When, however, a bona fide dispute arises, I do not think the entreat is designed to put the plaintiff contractors or subcontractors in a fundamentally better position than any ordinary plaintiffs nor the defendants in any worse position than any ordinary defendants. I can find nothing in any of the standard forms which support the view that the defendants are deprived of their ordinary rights of set off. Indeed, the arbitration clause in the main entreat form and in what is called the “green form” of sub-contract receptively allow the building owners and the contractors to attack an architect’s interim certificate during the currency of the work on the ground that it is not in assuredness with the interracial conditions and then have the dispute referred to arbitration. This strongly supports the view that the right to hold up payment pending a decision still remains and that the ordinary rights of set of have not been eroded.

 

My Lords, for these reasons I feel driven to the eon elusion that Dawnays’ case [1971] 1 W.L.R. 1205 and those which followed it were wrongly decided. I would accordingly allow this appeal.

 

Appeal allowed.