Barrister Professor Rudi Klein delves into the latest case on the payment procedure under the Construction Act.
The statutory payment procedure
The payment procedure under the amended Construction Act has been described by judges as “draconian” for the paying party. This is what Mr Justice Coulson had to say in the case of Caledonian Modular v Mar City Developments (2015): “…the employer’s failure to serve a pay less notice… challenging the payee’s notice [or application] can have draconian consequences.” He added: “…it seems to me that, if contractors want the benefit of these provisions, they are obliged, in return, to set out their interim payment claims with proper clarity.”
Continuing in the same vein, Mr Justice Akenhead in Henia Investments v Beck Interiors (2015) said: “…an Interim 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… If there are to be potentially serious consequences flowing from it being an Interim Application, it must be clear that it is what it purports to be so that the parties know what to do about it and when.”
The judges here are describing the effects of the statutory default procedure, which is the situation where you submit an application for payment and, in the absence of any notices from the other side, the amount claimed will have to be paid by the final date for payment. Given this “draconian” outcome, the courts have become very insistent that payment applications are issued in accordance with the relevant contractual and statutory requirements.
This issue has arisen again in the case of Jawaby Property Investment Ltd v The Interiors Group Ltd (2016).
Jawaby Property Investment Ltd (JPIL) was the employer. It had entered into a design and build contract (governed by the JCT Conditions albeit with amendments) with The Interiors Group (TIG) for the refurbishment of the reception area and a number of floors in a high-rise office block in London, known as Holborn Tower. The contract sum was just over £4 million.
The parties had entered into an escrow agreement. This involved JPIL depositing £1 million in a designated account held by JPIL’s solicitors. This money was to be held as security against sums properly due to TIG. In the event that JPIL did not discharge payment, TIG would only have to swear a statutory declaration to the effect that a default (i.e. failure to make payment) had occurred and that a specific sum was due; the relevant sum would then have to be paid from the escrow account.
Under the contract, TIG was to make monthly applications for interim payments on the 8th of each month. This was also the due date but, if the date of receipt of the application was later, the latter date would be the due date. Not later than five days after the due date, JPIL was required to issue a payment notice. The final date for payment was 30 days from the due date. Any ‘pay less’ notice had to be issued five days before the final date for payment.
Everything had proceeded fairly smoothly with TIG having submitted valuations 1 to 6 to APS, the employer’s agent. TIG would send valuations to APS by email to which were attached spreadsheet calculations with detailed back-up sheets and a statement of the final sum applied for. Each valuation valued the works up to the due date. Once APS had received these documents, it would then “walk the job” with TIG to assess and check the work. APS would then issue a certificate of payment with detailed spreadsheets showing how the assessment had been made. TIG would then issue an invoice for the relevant sum.
Problems arose with valuation no. 7. This was for the total gross sum of £2,352,937. On 7 January 2016, in response to a request from APS, TIG sent the following email. “Please see our initial assessment for Valuation 007…” (emphasis added).
Eight days later, on 15 January, APS issued a payment certificate for a negative sum, minus £124,604.00. There was no breakdown of this figure or any back-up documentation. Following queries raised by TIG, APS emailed a response on 18 January providing an explanation. In any event, this response was too late to be a valid payment notice; it was served after the expiry of five days from the due date on 8 January.
TIG was by now in severe financial difficulties. It threatened to suspend performance and give notice of default under the escrow agreement. JPIL issued proceedings to seek a declaration that it was not in default (i.e. that it had not failed to pay a due amount).
Matters for decision by the judge
The first issue was whether valuation no. 7 was a valid interim application. If it wasn’t, nothing was due. JPIL argued:
- that the valuation should not have been sent by email; an amendment to the contract stated that it should have been sent to JPIL’s registered office “by hand, by fax or by post”; and
- that the email did not apply for anything and, moreover, the valuation was described as an “initial” assessment, indicating a degree of provisionality.
TIG responded that the valuation had been treated by APS as an interim application – otherwise APS would not have issued a certificate of payment (by way of a payment notice).
The judge quickly dismissed the email issue as lacking merit. Emails were not expressly prohibited. She said: “…it would need clear and express words for service electronically to be impermissible.” In any event, APS (on behalf of JPIL) had waived any requirement for hard copy service since all previous valuations were sent by email.
But this was as far as the judge went in supporting TIG’s position. The emailed valuation no. 7 was not a valid interim application because it was described as TIG’s “initial” assessment. The judge added: “Thus it was not (and cannot objectively be construed as) a statement by TIG of what it considered was due to it… but rather only of what it considered it might be due, subject to further consideration.”
This was not sufficient to give rise to “the draconian consequences of the payment regime that follows…” said the judge. Furthermore, the valuation did not include valuation of the works up to the due date (i.e. 8 January).
The judge went on to consider the second issue, which was whether there was a valid pay less notice (although this was not absolutely necessary since the application was invalid). JPIL had argued that the APS email of 18 January (which was an attempt to explain its negative certificate) constituted a pay less notice. The judge held that this email was not intended to be a pay less notice; it was a response to queries from TIG regarding the payment certificate.
The outcome of this case was particularly harsh on the contractor, TIG. If the interim application had been valid, the contractor would have got its money from the escrow account. But, given this “draconian” outcome for the employer, the judge was insistent that the application had to be correct “in substance, form and intent”.
Make sure you read the contract rules applying to the issuing of applications and stick to them – even if they require you to handwrite the application on a piece of toilet paper using a fountain pen!