REUTERS | Kim Hong

Tripping up over complex bespoke payment terms

I don’t know about you, but across a number of adjudications recently, I’ve been seeing ever increasingly complex payment terms (especially in bespoke sub-contracts). Clearly this can lead to problems, as was amply demonstrated in Bouygues (UK) Ltd v Febrey Structures Ltd

Bouygues (UK) Ltd v Febrey Structures Ltd

Febrey Structures (sub-contractor) was employed by Bouygues (main contractor) to construct a concrete frame and structural concrete topping for a new building at the University of Bath. The parties’ sub-contract incorporated the GC/Works Sub-Contract, but they completely replaced the payment terms with their own bespoke arrangements.

These new payment arrangements were set out in Clause 21 and Appendix 10 (mistakenly referred to in Clause 21 as Appendix 8). They included a split payment arrangement, whereby 60% of the payment was to be paid within 21 days of the Main Contractor Assessment Date, with the balance being paid within 35 days of the Main Contractor Assessment Date (the judgment doesn’t mention any more about what this date is).

It’s clear there was plenty of scope for confusion because, in addition to the split payment arrangement, Appendix 10 also referred to an application date, an assessment date, a due date for payment, a payment notice date, two pay less notice dates and two final dates for payment.

Febrey’s October application

Work started on site in March 2015 and Febrey applied for its monthly payments in accordance with Appendix 10. It appears that everything went smoothly until its October application, which was submitted on 23 October 2015. According to Appendix 10:

  • The due date for payment was 16 November 2015.
  • Bouygues had to serve its payment notice for the whole application by 23 November 2015.
  • Bouygues had to serve its pay less notice for 60% by 20 November 2015 and for 40% by 4 December 2015.
  • The final date for payment of 60% was 23 November 2015 and of the remaining 40% was 7 December 2015.

(The keen-eyed among you may have already spotted a problem with this timetable. The pay less notice was due to be served before the payment notice, something that is not permitted by section 111(5) of the Construction Act 1996.)

Bouygues served a payment notice on 23 November 2015, valuing the works at minus £2,041. It did not serve a pay less notice and it did not pay any money to Febrey.

Febrey considered that Bouygues had failed to comply with the terms of the parties’ sub-contract and so, in January 2016, it started an adjudication. Although the judgment doesn’t say what the adjudicator’s decision was, clearly it awarded Febrey something, since Febrey subsequently started enforcement proceedings. Bouygues countered with a Part 8 application for declarations regarding the interpretation of the sub-contract.

At the hearing:

  • The parties agreed that the court should consider only the declaratory relief application, relying on Coulson J’s approach in Caledonian Modular Ltd v Mar City Developments Ltd.
  • Febrey argued that the date for the payment notice was an obvious error and it should have been 20 November 2015.
  • Bouygues said the provisions in Clause 21 applied, which meant the sub-contract complied with the Construction Act 1996. Alternatively, Appendix 10 should be adjusted by implying the relevant provisions of the Scheme for Construction Contracts 1998 to render it compliant with the Construction Act 1996.

Ultimately, Mr Jonathan Acton Davis QC (sitting as a deputy High Court judge) agreed with Febrey. He took a pragmatic approach to interpreting the parties’ payment schedule:

  • The parties had agreed a pattern that was adopted every month except October 2015. There was no good reason for a variation to that pattern. It was a “clear and obvious error” in the dates and they should have been the same date (20 November not 23 November 2015).
  • Bouygues should have served its payment notice on 20 November 2015. By serving its payment notice on 23 November 2015, it had failed to serve a payment or pay less notice in time.
  • This was not a case where the court could follow Manor Asset Ltd v Demolition Services Ltd because the dates in the payment schedule led the court to construe the parties’ sub-contract in a particular way. There was no room for an implied term when that would be contrary to the express terms of the contract, which the court had construed.

I like this common sense approach, construing the October 2015 application dates to be consistent with the majority of the other dates in the payment schedule. After all, it is most likely what the parties intended when they entered into the contract. The reference to 23 November for the payment notice was probably nothing more than a simple (but costly) mistake.

Obviously, the answer is to keep your payment terms simple, then there is less likelihood of ending up in the TCC (as this case demonstrates).

Construction Act 1996’s payment rules

I know some people think the Construction Act 1996’s payment rules are pretty complicated and catch unsuspecting parties out time and time again. Over the years there have been many calls to simplify them. However, that didn’t happen when we got the amendments in 2011. If anything, the new payment rules are just as complicated as the previous set (if not more complicated).

It didn’t help when the payment rules were transcribed into the various industry standard forms and into bespoke contracts. Again we got complicated payment rules. However, from what I’ve seen of the JCT’s Minor Works 2016 Edition, things may be about to change as far as the JCT is concerned. I note the guidance notes suggest that the payment provisions have been simplified. I will leave you to make up your own mind on that one and to wonder (like me) if it is a sign of what is to come in the JCT’s major forms when they are published as 2016 Editions.

But there is (arguably) a bigger question, namely is it time to compel parties to construction contracts to adopt the payment terms set out under the Scheme for Construction Contracts 1998? I certainly wouldn’t suggest that the current form of the payment terms should be adopted, but what if they were amended to be more user friendly? I appreciate that this would further trample on the core principle of freedom to contract, but wouldn’t it result in less payment disputes?

And finally

I think I’m correct in saying that, while 2015 was a bumper year for TCC cases concerning payment and pay less notices, this is one of the few cases we’ve seen on this topic in 2016. It’s also good to see the opinions of a different judge on this topic, albeit a deputy High Court judge. I have to say that I found his style very readable, and it’s good to see one of those who have been acting as deputy publishing a judgment.

MCMS Ltd Jonathan Cope

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