Payment under Construction Contracts: Bouygues (UK) Ltd v Febrey Structures Ltd
The payment provisions are a crucially important element of any construction contract – particularly given the consequences of failing to properly certify payments where the Housing Grants, Construction and Regeneration Act 1996 as amended (the "Construction Act") applies. This sets out a detailed payment mechanism with which all ‘construction contracts' must comply. This includes notification provisions that, if not strictly complied with in terms of content and timing, can lead to claimed sums becoming automatically due and payable. To the extent that a construction contract fails to comply with the payment mechanism required by the Construction Act, then the relevant provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 as amended (the "Scheme") will apply to the contract.
Therefore, if there is an issue with a payment provision being non Construction Act compliant, is it not just a question of whether that provision is governed by the Construction Act, the Scheme or a combination of the two? Whilst this can in itself create uncertainty, at least there would only be two options. In the recent case of Bouygues (UK) Limited v Febrey Structures Limited (2016) EWHC 1333 (TCC) that was clearly how the lawyers viewed it. However, the Judge took a very difference approach by rejecting this position and deciding that the contractual payment mechanism should be interpreted to take into consideration the 'intention' of the parties.
In March 2015, Bouygues (UK) Ltd (the "Contractor") employed Febrey Structures Ltd (the "Sub-contractor") to construct a new building at the University of Bath.
Clause 21 of the contract detailed the method by which the Sub-contractor was to submit its interim applications for payment:
"21.1.1 The Sub-Contractor shall submit to the Contractor applications for interim payment on those dates stated in any schedule of dates for application for interim payment that may be contained in Appendix 8."
The Appendix detailed the specific dates for payment. The Contractor was to assess the Sub-contractor's application and payment became due 14 days after the assessment date. The Contractor then had to issue a payment notice or pay less notice within 5 days of the due date for payment. From March 2015 to October 2015 the dates within the Appendix followed a consistent pattern whereby the payment notice or pay less notice were to be served on the same day.
Work began in March 2015 and there was no dispute until the Sub-contractor's October 2015 payment application. According to the Appendix the relevant dates were as follows:
- The payment application was due on 23 October 2015;
- The valuation date was 2 November 2015;
- The due date for payment was 16 November 2015;
- The payment notice was to be served on 23 November 2015;
- The pay less notice was to be served on 20 November 2015;
- The final date for payment was 23 November 2015.
These dates followed the pattern of the previous months save for the payment notice which was due three days later than usual. Had the payment schedule followed the timeline set out for all the previous months, the payment notice would have been due on the 20 November 2015.
The Contractor served a payment notice on 23 November 2015 in accordance with the payment schedule. The Sub-contractor argued that the Contractor's payment notice was served late and that it should have been served on 20 November 2015. This was on the basis that under the Construction Act, a payment notice has to be issued within five days of the due date.
In January 2016, the Sub-contractor referred the dispute to adjudication. The Contractor accepted the Appendix did not comply with the Construction Act but argued that its notice was valid for one of two reasons:
1) Clause 21 should take precedence as it was compliant with the Construction Act. The consequence of this would be that the Contractor's payment notice could be construed as a valid pay less notice, at least on timing.
2) If the Appendix applied in place of Clause 21, it must be adjusted to render it compliant with the Construction Act.
The adjudicator found in the Sub-contractor's favour. The Sub-contractor then applied to Court to enforce the adjudicator's decision and the Contractor applied for declaratory relief.
The Court held that the Contractor had failed to serve any payment notice or pay less notice in time and accordingly its payment notice was invalid. The Court rejected the Contractor's arguments and found that it was important to look at the parties' intentions with regards to the Appendix. Since March 2015, the payment schedule had followed a specific pattern and there was no good reason that the parties would have intended for that pattern to be varied. The Court concluded that the date for the payment notice in respect of the October 2015 application was an "obvious error". It was held that the Appendix should be construed to reflect the parties' express agreement that a payment notice was to be provided within 5 days of the due date.
The decision is clearly a very difficult one for Bouygues as it complied with the specific dates set out in the contractual payment schedule. It is perhaps surprising that the Court would find against Bouygues given its apparent contractual compliance and the consequences where a payment notice is ‘late’. It is clear from the judgment that parties to construction contracts will need to be increasingly cautious both in the drafting and implementation of their contractual payment schedules and also take cognisance of how a previous course of dealings could impact on contractual interpretation.
Whilst it may previously have been adequate to follow the letter of the contract, the Court has indicated that this will no longer suffice. Instead, a pragmatic approach to interpreting payment schedules should be taken and full consideration to the intent of the parties should be given.
This is not to say that any contractual payment schedule should be ignored or any less weight placed upon it. Having said that, this approach leads parties into particularly murky water and the decision has not been welcomed due to the uncertainty which it brings. The decision has also been criticised due to the Court's apparent disregard for the actual arguments presented by the parties and the apparent inconsistency with previous decisions on this topic .
However, when applying the test as to whether the contract contains an ‘obvious error’ that potentially overrides its express payment terms, it must be remembered that that this decision was arrived at based on a very specific set of facts. In this instance, there was a detailed Appendix which listed payment dates for a considerable number of months, all of which followed a very specific pattern. The date for service of a payment notice in respect of the October 2015 application was the one and only date which did not follow the established timeline. What may have added further weight to the ‘obvious error’ interpretation (although this was not expressly referred to by the Court) was the fact that the ‘out of sequence’ October payment notice date was later than the pay less date (which is not permitted by the Construction Act).
In summary, it seems that in all but the most unusual cases where an extremely "obvious error" has occurred, the parties can rely on the express payment provisions of the contract and/or the Scheme. The best method to avoid such issues of course is for parties to ensure that payment schedules are carefully checked at the outset and that all dates relating to payments and notices are correct and adhered to.
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.
If you would like any assistance or have any queries arising out of this article, please contact Paul Barge, Partner, in DWF's Construction & Infrastructure team – firstname.lastname@example.org or on 0161 603 4984.