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Application for payment can be late but not early

It is a long time since I’ve been involved in the administration of a construction contract, but I often get to deal with payment disputes in adjudication where there are issues with how the parties have operated the contractual payment mechanism. It is for that reason that I found Edwards-Stuart J’s judgment in Leeds City Council v Waco UK Ltd interesting.

Leeds City Council v Waco

This was a dispute all about Waco’s application for payment 21, which was made after practical completion (which occurred on 28 March 2013).

Waco had entered into an amended JCT Design and Build Contract, 2005 Edition, Revision 2 2009 (DB 2005) with LCC, whereby it agreed to design, manufacture and install classrooms at a primary school in Roundhay, Leeds.

The contract particulars set out the dates on which applications for payment should be made. The contract provided that, prior to practical completion, Waco would make applications for payment at monthly intervals. After practical completion, they would be at two-monthly intervals. Up to practical completion, all applications were certified by LCC’s agent, Jacobs UK Ltd, and paid by LCC even though Waco sometimes applied for payment two or three business days after the contractual valuation date.

After practical completion, Waco made applications in April, July and September 2013. None were made on the correct date but Jacobs did not take the point. Only when the November 2013 application was made early (on 26 November instead of 28 November) did it object, requesting Waco to re-submit its application (which it did, on 11 December 2013). It was certified and LCC paid. The next application date (28 January 2014) came and went and then, on 11 February 2014, Waco’s application arrived. Again, Jacobs certified that payment was due and LCC paid it.

Waco’s next application for payment was made on 18 July 2014. Although the court said the application was premature (because it was July’s application, and the valuation date was 28 July), Jacobs certified it and LCC paid it (perhaps out of pragmatism, as it was only for £13,000 or so). As the judge says, that did not amount to:

“any form of implied representation that it would waive a similar irregularity in the future…”

So far, so normal. I’m sure we’ve all come across situations where applications for payment are not made on precisely the same date as the contract’s valuation date specifies, but the project manager duly certifies payment and the employer coughs up.

The September and November 2014 applications for payment

It isn’t clear what happened between July and September or why, when application for payment 21 was made on 22 September 2014, Jacobs did not certify payment and LCC paid nothing. I guess it may have had something to do with the fact that it applied for just under £485,000. The pragmatism surrounding the July 2014 application seemed to have passed!

As no payment was forthcoming, a further application (application 22) for the same sum was made on 28 November 2014. This time, Waco applied on the contract’s correct valuation date and Jacobs issued a payment notice stating that the amount due to Waco was £0.

The dispute over application 21 was referred to adjudication and the adjudicator found in Waco’s favour on the ground that LCC had failed to serve the relevant payment notices. Enforcement proceedings followed, hence the matter coming before Edwards-Stuart J.

Application 21 was invalid

In reaching the conclusion that application for payment 21 was invalid, the court considered the details of what happened. I think it made a number of interesting findings that are a reminder to parties both of how the application for payment process operates and also suggests how the court may interpret those provisions going forward:

  • Jacobs had both ostensible and actual authority to agree different dates upon which applications for interim payment could be made after practical completion due to the use of “(unless otherwise agreed)” in clause 4.9.2. This was not varying the contract, merely implementing the contractual mechanisms.
  • Jacobs could not agree to vary the contract prior to practical completion, as those words were not present. Also, there was no evidence that it had specific authority from LCC to vary the contract.
  • However, there was an estoppel by conduct as Jacobs’ course of conduct led Waco to believe applications for payment would be accepted even if not made on the contractual valuation date. As such, it would be “unconscionable to permit LCC to resile from that understanding”. Waco had relied on Jacobs’ conduct.
  • An application for payment was required to be made on the relevant date and must state the financial position on that date. It had to include the total value of the work properly executed up to that date (clause 4.14).
  • The contract contained no express requirement for an application for payment to be served by any particular date. Equally, the employer came under no obligation to do anything until the application was received. However, the employer had to have “some idea” of when an application for payment was likely to be received.
  • Therefore, Waco was under an implied obligation to submit an application for payment within a reasonable time, which was a “matter of a few days” after the application had been made, that is, within a few days of the contract’s valuation date.
  • Although the course of dealings meant Jacobs would accept an application a few days late, it was under no obligation to accept an application made significantly outside that period of leeway. Equally, the fact that it accepted one application early (the July 2014 application) did not mean there was an implied representation that it would waive a similar irregularity in the future: “one swallow does not make a summer”.

So there you have the application for payment process summarised by Edwards-Stuart J. It is worth noting that “(unless otherwise agreed)” appears in both the old (2005, revised 2009) and new (2011) versions of the JCT’s Standard and its Design and Build Contracts.

What the adjudicator decided, or didn’t

It isn’t clear from the judgment whether the adjudicator simply looked at LCC’s failure to serve the appropriate payment and withholding notices and concluded that it had agreed the value of those works; or whether he made a decision about the validity of application 21 (which would be a merits-based award).

Either way, we have seen two recent decisions where Edwards-Stuart J has scrutinised the new section 111 payment regime following an employer’s failure to serve a pay less notice:

  • ISG Construction Ltd v Seevic College, where the court held that the lack of a pay less notice meant the employer (Seevic) had agreed the value of the works claimed in an interim certificate and the adjudicator had decided the question of the value of those works.
  • Galliford Try Building Ltd v Estura Ltd, where the court confirmed what it had meant in ISG v Seevic. However, that did not mean there was agreement as to the value of the work at some other date.

Jonathan and I looked at the implications of these decisions at the time.

In Leeds v Waco, I also wonder if there was a little of Edwards-Stuart J’s “manifest injustice” thinking coming through in the judgment. After all, he construed strictly Waco’s non-compliance with the contract’s valuation dates where the effect was financially significant (application 21 was for £485,000).

Lord Denning

As a parting comment, it’s always good to see Lord Denning quoted in judgments and this was no exception. I couldn’t finish without including some of his wise words (from Charles Rickards Ltd v Oppenheim):

“If the defendant, as he did, led the plaintiffs to believe that he would not insist on the stipulation as to time, and that, if they carried out the work, he would accept it, and they did it, he could not afterwards set up the stipulation as to the time against them. Whether it be called waiver or forbearance on his part, or an agreed variation or substituted performance, does not matter. It is a kind of estoppel. By his conduct he evinced an intention to affect their legal relations. He made, in effect, a promise not to insist on his strict legal rights. That promise was intended to be acted on, and was in fact acted on. He cannot afterwards go back on it.”

Otherwise known as waiver by estoppel.

MCMS Ltd Matt Molloy

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