REUTERS | Vasily Fedosenko

Payment issues are flavour of the month

Slowly but surely the TCC is working its way through the Construction Act 1996’s payment provisions and providing clarity where there may have been ambiguity. It reminds me of that phrase:

“If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.”

This time it was Carr J and the main issue was whether a contractor’s interim application for payment was valid. The case was Jawaby Property Investment Ltd v The Interiors Group Ltd and it also concerned money held in an escrow account and whether it could (and should) be released to a contractor to enable it to pay its sub-contractors. 

Jawaby Property Investment Lt v The Interiors Group Ltd

The Interiors Group Ltd (the contractor) was employed under an amended JCT Design and Build Contract, 2011 Edition, to carry out refurbishment works at Holborn Tower, an office block in London. The contract was entered into in July 2015 and was originally with Tekxel Ltd (it was subsequently novated to the current freeholder of the property, Jawaby Property Investment Ltd (the employer)). APS Ltd represented the employer. The contract sum was just over £4 million. An escrow agreement was also entered into and £1 million deposited in the escrow account. This was held by the employer’s solicitors, Eversheds.

As with all construction contracts, the parties’ contract contained detailed payment provisions. It seems the parties operated those provisions successfully six times. Each time, the process was as follows:

  • The contractor sent its valuation by email to APS. It valued the works up to the 8th of each month.
  • APS and the contractor would “walk the job” to assess and check the work done. APS would mark up a spreadsheet.
  • APS issued a Certificate of Payment, along with a spreadsheet showing how the assessment had been made.
  • The contractor issued an invoice and it was paid.

Two formal pay less notices had also been issued. Both were called “Pay Less Notice” and both included a breakdown of how the sum due at the date of the notice had been calculated.

Valuation 7

The valuation that formed the basis of the Part 8 application was issued by the contractor in early January 2016. It was described as an “initial assessment” and valued the work to date at £2.35 million gross. After the parties had walked the job, Certificate of Payment 7 was issued, based on a gross valuation of £1.6 million, and giving a negative value of some £125,600. This meant the contractor was short by £1.1 million. Unsurprisingly, the contractor queried this, asking whether there had been a previous mis-valuation and for the logic of the negative valuation to be explained to it. Some information was forthcoming. However, it is clear that the contractor remained unhappy with this sequence of events, as it gave notice of its intention to suspend on 8 February 2016. It also gave notice that it was going to claim on the escrow account.

The employer applied for (but did not pursue) an injunction to prevent the contractor’s claim on the escrow account. Instead, it sought declaratory relief over whether:

  • The contractor had made a valid application for payment in January 2016.
  • APS’s email and attachments of 18 January 2016 were a valid pay less notice.

Not a valid application

It is the analysis of the contractor’s interim application for payment and the court’s finding that it was invalid that are important in this case. Carr J also provided a really helpful summary of where the law had got to, reminding us of the:

  • Need for an employer to understand that the payment period has been triggered in the first place because of the draconian consequences of an employer failing to serve a pay less notice (Caledonian Modula v Mar City Developments).
  • Need for an interim application to be clear and free from ambiguity, so the parties “know what to do about it and when” (Henia Investments v Beck Interiors).
  • Principles of waiver and estoppel by convention. She quoted from Lord Denning in Charles Rickards Ltd v Oppenheim, which was referred to in Leeds City Council v Waco Ltd.  (In Leeds City v Waco, the contractor has submitted its applications three or four business days after the contractual valuation dates, and the employer had waived that irregularity.)

Turning back to the facts of this case, Carr J held that the contractor’s application was not a valid interim application because the contractor:

“…did not follow the usual pattern and [the application] was materially different to that adopted on previous occasions.”

Critically (and unlike its previous valuations), the contractor:

  • Described it as an “initial assessment”. Carr J said this made it clear that it was not its “firm or final assessment”, which meant it could not be (and could not objectively be construed as) a statement of what the contractor considered was due to it, just “what it considered it might be due”. It was not enough that the contractor identified what might be due to it.
  • Did not value the works up to the “due date” of the 8th of the month.

This meant the contractor had not complied with clause 4.8.1 of the contract and had not submitted a valid application. (It is worth noting that Carr J’s findings also tie in with what Coulson J said in Severfield (UK) Ltd v Duro Felguera UK Ltd about default payment notices, although the case isn’t referred to in the judgment.) 

Carr J noted that this outcome may appear harsh, but there was “little scope for latitude”. If a contractor wants the benefit of an interim payment regime, then its 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.”

Other submissions

Carr J rejected the employer’s submission that:

  • Sending the application by email did not comply with the contract’s service provisions. Further, APS had waived any requirement for hard copy service as it had dealt with the first six applications by email.
  • APS did not have authority to bind the employer:

    “This authority was thus very broad and sufficiently wide to authorise APS to bind JPIL by its course of dealings in relation to TIG’s Valuations. Without more, it would thus be unconscionable to allow JPIL to act inconsistently with that course of dealings to the extent that TIG had relied on it and acted to its detriment.”

  • APS’s email and attachments of 18 January 2016 were a valid pay less notice. She noted that to be a valid contractual notice, the sender had to have the requisite intention to serve it. That was missing here: the email was never intended to be a pay less notice.

What does this all mean for parties?

Essentially, this means that if the parties agree the contractor will submit an interim application for payment, it must be submitted in a form that the employer understands is an interim application. There must be no ambiguity and the application must comply with the contract’s payment provisions. However, if the parties agree to a slight variation of those contract terms, the employer cannot then turn around and go back on that.

MCMS Ltd Matt Molloy

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