Payment provisions in construction contracts: another year on

­In the last Annual Review Jonathan More reviewed the key cases that had been reported in respect of the amendments to the Housing Grants (Construction and Regeneration) Act 1996 (“the Construction Act”) as introduced by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (“the New Act”). This first wave of cases included: ISG Construction Ltd v Seevic College,1 Galliford Try Building Ltd v Estura Ltd,2 Caledonian Modular Ltd v Mar City Developments Ltd,3 and Henia Investments Inc v Beck Interiors Ltd.4 Since then further case law has helped clarify the conclusions drawn from those cases. Jonathan More discusses these developments further.

The first wave of case law

Mr Justice Coulson, in the case of Severfield (UK) Ltd v Duro Felgura UK Ltd5 provided a summary of where we stood in 2015:

“Over the course of the last year there has been a flurry of cases in which Edwards-Stuart J has considered the situation in which a contractor has notified the sum due in a payment notice, and the employer has failed to serve either its own payment notice or a payless notice... In essence, these [cases] are authority for the proposition that, if there is a valid payment notice from the contractor, and no employer’s payment notice and/or payless notice, then the employer is liable to the contractor for the amount notified and the employer is not entitled to start a second adjudication to deal with the interim valuation itself…

All of these cases concern the situation where the contractor is seeking to take advantage of the absence of any notices from the employer to claim, as of right, the sum originally notified. That approach is in accordance with the amended provisions of the 1996 Act. But because of the potentially draconian consequences, the TCC has made it plain that the contractor’s original payment notice, from which its entitlement springs, must be clear and unambiguous. Thus:

(i)     In Caledonian Modular Limited v Mar City Developments Limited… I said:

 
‘… if contractors want the benefit of these provisions, they are obliged, in return, to set out their interim payment claims with proper clarity. If the employer is to be put at risk that a failure to serve a payless notice at the appropriate time during the payment period will render him liable in full for the amount claimed, he must be given reasonable notice that the payment period has been triggered in the first place.’;

(ii)    In Henia Investments v Beck Interiors Limited… Akenhead J said:

‘… the document relied upon as an Interim Application… must be in substance, form and intent an Interim Application stating the sum considered by the Contractor as due at the relevant due date and it must be free from ambiguity... If there are to be potentially serious consequences flowing from it being an Interim Application, it must be clear that it is what it purports to be so that the parties know what to do about it and when.’”

Clear and concise.

The second wave of case law

The second wave of case law by and large focuses on the application of the key principles established by the above cases. What can be said as a consequence of the newer case law, reviewed in more
detail below, is that the following principles will be applied to payment provisions in construction contracts:

(i)     A contractor relying on the noncompliance of the employer in respect of Payment and Payless Notices must itself have complied with its contractual obligations in respect of applications for payment.

(ii)    In particular the contractor must:

         (a)     issue its interim applications on the dates required by the relevant contract;

         (b)     ensure that what it issues as its interim application complies with the contract and clearly constitutes an application in accordance with the process in place between the parties;

         (c)     recognise that a schedule of application/payment dates may replace or supersede dates otherwise agreed in the body of the contract particulars and/or conditions of contract dependent upon the wording.

The principles of the Estura case will only be relevant in exceptional circumstances and are an enforcement issue rather than one which impacts the principles of whether a sum should be awarded at adjudication.

It is clear that in circumstances where the employer and/or administrative team on a construction project have failed to properly issue the notices required, the focus of the attack has been twofold. First, from our experience, there are often numerous references to the “smash and grab” and “baleful” actions of the contractor in raising such a claim, which arguments have not gained any traction with adjudicators. A second and more fruitful approach has been to focus on the contractor’s interim applications, in particular:

• the date of issue of such applications with reference to either the contractual due dates, or
• Schedules of Interim Payments which can also unwittingly amend the contract terms as a result.

Leeds City Council v Waco UK Ltd6

This case challenged an adjudicator’s decision for Leeds City Council (“LCC”) to pay Waco UK Ltd (“Waco”) just under £500,000 as LCC mechanisms for the submission of applications had refused to serve the relevant notices in response to Waco’s interim application no. 21. This application had been made after practical completion, where the JCT mechanisms7 for the timing of submission for applications had changed from monthly to every two months.

It is fair to say that post-practical completion the timing of Waco’s applications was somewhat ad hoc However, the contract administrator had shown some pragmatism in dealing with these applications. Submissions and assessments were made if applications were only two or three days late with reference to the agreed monthly date, or where the sums involved were relatively modest.

The legal principles discussed in this case focused more on matters such as the course of dealings and conduct of the parties as to whether there was waiver or estoppel in play. However, one point made clear by Justice Edwards-Stuart at paragraph 36 of the judgment was the following:

“I consider that the employer needs to have some idea of when an interim application is likely to be received so that he can ensure that he has the resources available in order  to respond to it within the limited time that the contract allows – in particular, to consider and prepare any payment notice.”

In the decision it was held that interim application 21 had been issued prematurely in accordance with the contractual dates (it was issued on the 22nd of the month, six days ahead of the agreed 28th of the month submission date) and was not a valid application, as it did not fall within the more narrow margins of flexibility that the contract was being administered to.

Grove Developments Ltd v Balfour Beatty Regional Construction Ltd8

A similar theme was adopted here to that in Waco. Balfour Beatty Regional Construction Ltd (“BB”) had issued an interim application no. 24 in respect of which it argued that Grove Developments Ltd (“GDL”) had failed to issue either a Payment Notice or a Payless Notice within the applicable time limits. Although GDL denied that it had missed the required dates, it argued that in any event the parties, by virtue of an agreed schedule of interim payment dates, had agreed to only 23 interim payments. BB, therefore, had no entitlement to be paid a 24th interim payment.

The contract here was the JCT Design and Build 2011 standard form, with amendments. The parties had agreed that interim payments would be made in accordance with Alternative A – stage payments “to be agreed within 2 weeks from date of contract”. It was common ground between the parties that a schedule was agreed which regulated the interim payment process from September 2013 to July 2015. The last interim payment on the schedule was no. 23, to be issued on 16 July 2015. It was after this date that BB issued its application no. 24.

At first instance, the court held that:

(i)     The effect of the agreed schedule was to act as a specific amendment to the Contract.

(ii)    Where parties have agreed intervals at which, or circumstances in which, interim payments become due, the fact that the agreement does not provide for interim payments covering all of the work under the contract is no reason to import the provisions of the Scheme.9

(iii)   Accordingly BB had no entitlement to make or be paid in respect of interim application 24 (or any subsequent application).

Just nine months later, this decision was upheld by a majority decision on appeal. BB argued that for the parties could not have intended that if practical completion were delayed, BB would have to wait for payment until the final payment date. In order to make commercial sense, the contract could only be interpreted in such a way as provide for further interim payments.

This argument was rejected for the following reasons:

• The express words used by the parties made it clear the parties only agreed interim payments up to the contractual date for completion i.e. application no. 23;
• It was impossible to deduce from what was said to be the hybrid agreement what the dates for valuations, payment notices, Pay Less notices and payments would be; and
• This was a classic case of a party making a bad deal Lord Justice Vos disagreed. In allowing the appeal he held that the Contract agreed between the parties was ambiguous as the Schedule of Payments was not clear enough to be construed as meaning, when read with the JCT contract, that the parties must have intended that there would be no interim payments after interim payment 23. This being the case the intention of the parties could be considered, and having considered the submissions of the parties Lord Justice Vos found that the parties must have intended the monthly interim payments to continue.

It is clear, therefore, (although the 2 to 1 decision in the appeal might increase the prospects of further appeal) that contractors will be expected to have administered their payment processes strictly (with only small margins of error) in accordance with the agreed contract process. Where any schedule of application dates have been agreed care needs taken to provide for interim payments in the event of delay to the works.

RMC Building & Civil Engineering Ltd v UK Construction Ltd10

The claimant, RMC Building & Civil Engineering Ltd (“RMC”), applied for summary judgment in proceedings to enforce an adjudicator’s decision. UK Construction Ltd (“UKC”) challenged the enforcement proceedings arguing that it would cause manifest injustice. Edwards-Stuart J enforced the adjudicator’s decision and refused to grant a stay pending the defendant’s Part 8 application for declaratory relief.

The enforcement of the adjudicator’s decision was primarily challenged on the basis that the adjudicator had not had jurisdiction to decide the referral.

The more relevant part of this decision for the purposes of this Review related to the reference made by UKC to the Estura case as part of its contention that enforcement of the decision should be stayed. A preliminary comment made by Mr Justice Edwards-Stuart on such arguments is found at paragraph 56:

“The provisions introduced by the Act and the Scheme are all about maintaining cash flow. That purpose is not achieved by simply giving judgment for a sum then staying enforcement; interest is often no compensation for a lack of cash flow.”

A stay of enforcement of the decision of the adjudicator, either in whole or in part, was rejected by Edwards-Stuart J as the defendant had failed to demonstrate that it would suffer financial hardship or beunable to recover any overpayment from the claimant when the dispute was finally resolved, further emphasising that a manifest injustice argument will only be successful in rare cases similar to Estura.

Finally, it is clear that when one party is basing a claim on due contractual process being ignored as regards the content of a notice being invalid, that party’s own proficiency, or otherwise, in completing the contents of its notices will come under sharp focus. This was the situation in the following case.

Jawaby Property Investment Ltd v The Interiors Group Ltd and another11

This dispute related to construction works at Holborn Tower, High Holborn, London. The Contract was an amended JCT 2011 Design and Build form. Jawaby Property Investment Ltd (“Jawaby”) sought declaratory relief against The Interiors Group Ltd and another (“TIG”) in relation to certain payment obligations under the Contract and a related Escrow Agreement.

Under the terms of the Contract, TIG was to submit interim applications for payment on or before the due date, the eighth of each month. TIG’s first six interim applications were submitted to Jawaby in the form of a valuation attaching Excel spreadsheets and setting out a statement of the final sum applied for (or total work done) at the conclusion. Each of Valuations 1 to 6 valued TIG’s works up to the relevant due date. From Valuation 5 onwards, there was a summary sheet followed by detailed backup sheets. Upon receipt of these documents, Jawaby’s agent would “walk the job” with TIG to assess and check that the work was done, following which it would issue a Certificate of Payment accompanied by detailed Excel spreadsheets showing how the assessment had been made.

On 7 January 2016, TIG submitted, by email, Valuation 7 which was marked as an “initial assessment”. On 11 January 2016, Jawaby “walked the job” and, then on 15 January 2016, issued a Certificate of Payment for a negative value. On 18 January 2016 Jawaby provided markedup documentation explaining how they had reached a negative valuation. Both the Payment Certificate of 15 January 2016 and the supporting documents of 18 January 2016 were out of time to constitute Payment Notices under the Contract. TIG issued proceedings on this basis.

Jawaby argued both that it had served a valid Payless Notice by virtue of the documents issued on 18 January 2016 and that TIG had failed to serve a valid interim application because Valuation 7 did not describe itself as such. TIG stated that there was no requirement for the document to be expressly described as an interim application. The Judge concluded that Valuation 7 was not a valid application because:

(i)    
it was materially different from TIG’s previous applications and failed to comply with the provisions of the Contract;

(ii)   
it was described as an “initial assessment”;

(iii)  
the valuation summary sheet had been erroneously marked as Valuation 6; and

(iv)  
unlike TIG’s previous applications, the value did not include works up to the contractual due date.

Stop press – final accounts and payment notices

In Kilker Project Ltd v Purton, Purton argued that the effect of a failure by a party to issue a payment notice and/or a pay less notice is that the payer has agreed the valuation of the payee for that payment and must pay the application sum in full. This meant that in the case of an application for final payment, the effect of a failure by a party to issue a payment notice and/or a pay less notice is that the final account is agreed. It remains open to the payer to challenge the valuation in litigation or arbitration, for example by way of restitution, but the agreed valuation cannot be re-opened in a subsequent adjudication. Deputy Judge O’Farrell QC disagreed, noting that:

“where the “notified sum” determined in adjudication is in respect of a final payment, unless the contract provides that such payment is conclusive as to the contract sum due, although the “notified sum” must be paid, either party is entitled to have the ultimate value of the contract sum determined in a subsequent adjudication, litigation or other form of dispute resolution... It is not necessary for the contract to set out any specific mechanism for that final accounting exercise; payment of any final sum due to either party is based on enforcement of the contractual bargain.“

Here, an adjudicator had determined the “notified sum” payable in respect of the contractor’s final account application but did not determine the proper value of the final account. Kilker was obliged to pay that sum in full. However, there was no agreement that the final account would be conclusive as to the final sum due under the contract and the Judge held that the statutory payment provisions do not have such effect. Therefore, Kilker was entitled to refer the final account valuation to a second adjudicator.

Commentary

The key principles that evolved in 2014/15 in respect of the New Act, clearly created an environment within which the so called “smash and grab” adjudication could thrive. It is apparent from the case law that has followed thereafter that, whilst not departing from the key principles, a contractor will be expected to have followed the contract very closely to benefit from any lapses on the part of employers. To this end, the courts have quite properly applied the checks and balances you would expect to ensure that “draconian” rules do not readily result in “baleful” decisions.

Although apparently straightforward, administrating a construction contract can be difficult and can easily become derailed. The employer will often be on more sound footing on administrative matters as it will likely have employed a consultant specifically to administer such matters. Contractors are well advised to make sure their own administrative functions are well trained and work properly and efficiently in line with specific contractual requirements.

Working collaboratively between administrative functions also needs to be handled with care, as discussions and negotiations at each payment cycle whereby a contractor might try and squeeze an increased payment out of a cycle may mean that the application and response dates become out of sync and confused.

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• 1. [2014] EWHC 4007 (TCC)
• 2. [2015] EWHC 412 (TCC)
• 3. [2015] EWHC 1855 (TCC) 29 June 2015
• 4. [2015] EWHC 2433 (TCC)
• 5. [2015] EWHC 3352 (TCC)
• 6. [2015] EWHC 1400 (TCC)
• 7. The contract was the JCT Design and Build Contract, 2005 edition, revision 2, 2009
• 8. [2016] EWHC 168 (TCC)
• 9. The Scheme for Construction Contracts
• 10. [2016] EWHC 241 (TCC)
• 11. [2016] EWHC 557 (TCC)