It is essential that parties to construction contracts understand the payment mechanisms within them and operate them correctly, as if they do not, there can be very harsh consequences. The two very recent cases of Caledonian Modular Ltd v Mar City Developments  EWHC 1855 (TCC) and Henia Investments Inc v Beck Interiors Ltd  EWHC 2433 (TCC) have provided further guidance on payment mechanisms in construction contracts, how the courts will assess payment applications and, in particular, what constitutes a valid application for payment.
Caledonian Modular Ltd v Mar City Developments  EWHC 1855 (TCC)
In this case, Caledonian Modular Ltd (the Contractor) entered into a contract by way of a letter of intent with Mar City Developments (the Employer). The payment mechanism from the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the Scheme) therefore applied to the contract.
The Contractor had always submitted its interim payment applications at the end of each month. The fifteenth interim payment application was met by a timely “pay less” notice from the Employer. A week after the pay less notice was issued. The Contractor submitted further payment documents to the Employer and asked the Employer to amend its pay less notice. The Contractor did not present these documents as a new (sixteenth) application for interim payment. The Employer queried the status of these documents and the Contractor explained that they were an "update of the account". The Employer consequently did not serve any payment or pay less notice in response to the further documents.
Consequently, in the middle of the seventeenth month, the Contractor sent the Employer an invoice for the net sum which could be gleaned from the further documents. A breakdown was attached to this invoice, which was entitled "Final Account Application Summary". A week later the Employer responded to the invoice and breakdown, with a further pay less notice, which maintained that no further sum was due to the Contractor.
The Contractor then commenced adjudication proceedings stating that the Employer had not issued a timely payment or pay less notice in relation to its sixteenth application for payment and so the amount due under that application became the notified sum due from the Employer. The adjudicator found that the further documents comprised an "early" application for a sixteenth interim payment and therefore the Employer had to pay the full sum claimed to the Contractor.
The Contractor applied for summary judgment to enforce the adjudicator’s decision. Mr Justice Coulson in the Technology and Construction Court stated that he had "no hesitation" in rejecting the claim. He held that, on the facts and the law, that:
- The additional documents did not constitute a sixteenth interim application for payment.
- The Contractor was not entitled to submit an interim payment application "early" in the middle of a month.
- The additional documents were not marked as an interim payment application, and when the Employer queried their status, the Contractor did not say that they comprised an interim payment application (they were referred to as the “Final Account Application Summary”).
Accordingly, the claim for enforcement of the adjudicator's decision was rejected.
Henia Investments Inc v Beck Interiors Ltd  EWHC 2433 (TCC)
Henia Investments (the Employer) entered into an amended JCT Standard Building Contract without Quantities, 2011 Edition with Beck Interiors Ltd (the Contractor) for fitting out works. The dates for payment were specifically stated in the contract particulars.
On 28 April 2015 the Contractor submitted its interim application for payment number 18. This identified £2.9 million as due and included a sum for preliminaries for an extension of time claim. On 6 May 2015, the Contract Administrator (CA) issued interim certificate number 18, the net sum payable was £226,000. The Contractor did not submit an interim application for May 2015 but on 4 June 2015 the CA issued interim certificate number 19. On 17 June 2015 the Employer issued a pay less notice saying £0 was due because it had a claim for liquidated damages (at a rate of £15,000 per week).
The Contractor referred the matter to adjudication; the decision was overall, in the Employer’s favour. The Employer then issued proceedings to enforce the adjudicator’s award. The issues to be decided by Mr Justice Akenhead in the Technology and Construction Court were agreed as follows:
- Was the Contractor's interim application for payment number 18 an effective or valid interim payment notice in respect of the 29 May 2015 payment due date?
- Was the Employer's notice dated 17 June 2015 an effective or valid pay less notice?
- Would a failure on the part of the CA to make a decision in respect of a contractually compliant application for an extension of time render the CA's non-completion certificate invalid or otherwise prevent the Employer from deducting and/or claiming liquidated damages?
Mr Justice Akenhead concluded in relation to the first issue that it was clear that the parties had not followed the contractual requirements with any precision. In considering the wording of the payment application the court found that it could be submitted at any time more than seven days before the payment due date. The application must state the sum the Contractor considers “will become due”. It must also be for the sum “at the relevant date”; it must be clear which due date the application refers to. Looking at the language of the Contractor’s interim application for payment number 18, the court held it was clearly intended to relate to the April (and not the May) due date. It expressly referred to application number 18 (which was the April date) and the work was valued to 30 April 2015. The April date had passed but this was not acknowledged by the Contractor and as such the application was not “free from substantial ambiguity”.
It was the Judge’s view in this case that a document relied upon as an interim application must be in “substance, form and intent” an interim application and as it was not free from substantial ambiguity the Judge deemed the application for payment invalid.
Although the second issue before the court was no longer relevant given there was no valid application for payment, the court decided that there was nothing in the contract wording to suggest that the Employer could not legitimately challenge either the amount certified by the CA or the amount claimed within the interim payment notice. Therefore a pay less notice “generally and in this case” could properly challenge either the CA’s certification or any interim payment notice.
In relation to the third issue, the court had to consider whether the CA’s failure to reach a decision on a claim for an extension of time rendered a non-completion certificate invalid or prevented the Employer from claiming liquidated damages. Mr Justice Akenhead stated that the Employer was entitled to deduct liquidated damages. In this instance, the contract contained two conditions precedent to being able to deduct liquidated damages. This first was that the CA had issued a non-completion certificate and the second was that the Employer had given notice before the date of the final certificate. Both of these conditions precedent had been fulfilled therefore the Employer could deduct liquidated damages. If it was to be a condition precedent that the extension of time provisions were to be operated properly, that should have been clearly stated in the contract.
Both Judges in these cases appear to have bucked the trend of the "pay now, litigate later" approach.
Mr Justice Coulson in Caledonian noted that one of the more "baleful effects" of the amendments to the Housing Grants, Construction and Regeneration Act 1996 (“the Act”) had been a large increase in the number of cases before adjudicators and the TCC in which contractors seek to argue that employers have failed to serve notices on time, with the result that the contractor has acquired an automatic right to be paid the sum that it claimed. He commented that if Contractors wished to have the benefit of these provisions, then they should be obliged, in return, to furnish their interim payment claims to their employers "with proper clarity".
Similarly, Mr Justice Akenhead acknowledged that the statutory requirements in the Act "have led to unnecessarily complex provisions, not least those dealing with the consequences of failure to comply with timing provisions." He emphasised that applications for payment "must be clear and unambiguous that an application relating to a due date is being made"; and that a pay less notice can be used not only for deducting liquidated damages, but can also be used where the Employer does not agree with the contract administrator's valuation of the works.
The crucial points to take from these cases in regard to submitting applications for payment and the relevant notices under construction contracts are as follows:
- Be aware of the timetable for payments under your particular contract (or if applicable the Act) and ensure that the relevant deadlines are complied with.
- Applications for payment must be clear and unambiguous. They must include all of the necessary information such as:
- What their status is i.e. describe it as an interim application for payment if that is what it is.
- The payment period to which it relates.
- What the sum due is.
- What the basis for calculation of the sum due is.
- The date when the sum is due.
The key principle to remember in relation to payment mechanisms in construction contracts is that both parties to the contract need to know their contract. The parties must appreciate the timetable set out within it, the content of it and the administrative side such as what constitutes valid delivery, what the address for service is and what the method of service is. This will reduce the likelihood of falling foul of the complex, and sometimes unduly harsh, provisions in contracts or under the Act.
If you have any queries on payment mechanisms in your contracts or any further questions or queries arising out of this article please contact Tom Lister.
Our construction, infrastructure & projects team has a wealth of experience advising clients on all areas of construction law including payments, adjudication, litigation and other means of dispute resolution.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.