“Let Me Be Clear…” – The need for clarity with payment applications and notices.

Jawaby Property Investment Ltd v The Interiors Group Ltd / Mr Black

President Obama’s hackneyed phrase resonates in the mind when reading the above case which was decided in the TCC in March this year.

As most will know, the revision to the HGCRA 1996 (the “Construction Act”) brought about by the LDEDC Act of 2009 introduced what many perceive to be harsh consequences to a paying party in a construction contract should they not issue timely Payment or Pay Less Notices in response to an Application for Payment from the Payee. The first case that tested whether the new Act actually meant what it purported to state was that of ISG Construction Ltd v Seevic College [2014] in which ISG was awarded the full value of its interim application for payment in the absence of a Payment/ Pay Less Notice from the Employer – irrespective of whether the value claimed was capable of being disputed by the Employer.

Since this landmark decision, the door on achieving a “payment by default” may be said to have been gradually closed by various subsequent cases which, collectively, provides a topic for another day but, first, back to the case in question.

The project concerned a £4m refurbishment of an office building in Holborn, London. Jawaby was the Employer and The Interiors Group (“TIG”) was the Contractor. The contract was the JCT 2011 Design and Build Contract with amendments. The Employer was bringing the case to effectively stop the Contractor from presenting a claim that would trigger a payment of just over £1.1m from an escrow account, set up as financial security to the Contractor in the event that the Employer failed to make a payment that was properly due.

The Employer contended that a valuation from TIG, emailed to the Employer’s Agent (EA) on 7th January 2016 was not a valid interim application under the Contract. Alternatively, if the Judge decided it was valid, the Employer averred that an email sent by its Agent on 18th January constituted a valid Pay Less Notice.

TIG was to make an application on 8th of each month; this was considered to be the “due date” for payment (alternatively, it would be when the Contractor submitted its application – if this was later). The final date for payment was 30 days after the due date and a Payment Notice was to be submitted within 5 days of the due date and a Pay Less Notice was to be issued not later than 5 days before the final date for payment.

Throughout the project TIG had issued 6 “valuations” which were then assessed by the EA, following a site meeting, and Certified for invoicing. On 5th January, the EA requested the Contractor’s valuation (ahead of a planned meeting on site on 11th January). On 7th January, the Contractor submitted what was stated to be “an initial assessment for Valuation 007 based upon progress update and onsite review carried out earlier this week”. Following the meeting on 11th, the EA sent a Certificate of Payment on 15th January, which advised the Contractor that no payment was due as its assessment was £124K less than the previous assessment. This communication was clearly too late to be a valid Payment Notice. On 18th January, the EA sent the back-up documentation relating to its assessment as well as answering some specific points about the assessment from the Contractor’s email of 15th January. The Employer subsequently contended this constituted a Pay Less Notice.

In summary, the Judge decided that the EA’s communication was not acceptable as a Pay Less Notice; it had previously submitted two formal Pay Less Notices, each labelled as such including what clause of the contract and Construction Act it was pursuant to – the email on 18th January was completely different to the formal Notices issued previously and dealt with other queries.

More significantly, however, it was decided that the Contractor’s email of 7th January was not a valid application for payment, as it did not follow the usual pattern of procedure and was materially different to that adopted previously. For example, it was an “initial assessment” (not a firm or final one), it did not contain what it considered to be due, the valuation did not value the works beyond 5th (or 7th) of January and, unlike previous valuations, did not include the value of works up to the due date (of 8th January). There were other contentions raised by the Employer including that the valuation did not apply for anything and did not contain the back-up documents required by the Contract. Accordingly, the Judge concluded that any reasonable recipient of the document would not have regarded it unambiguously as being an Interim Application, as required by the Contract, in its substance, form and intent.

Conclusion

Although the conduct of the parties, or the convention adopted, throughout the course of the contract will be taken into account in assessing whether strict contractual requirements have been waived in respect of how applications are made – and how they are responded to, the case emphasises the point, that where such significant consequences arise for the paying party (should they not comply with the requirements for notices in respect of payment applications received) it is also incumbent upon the party making the application to be absolutely clear on what it is submitting and to follow the contractual requirements for making an application.

The Employer was fortunate in this case as, although the Judge decided that what the Contractor had submitted was not a valid application for payment it was also decided (albeit this was somewhat academic) that the EA’s response to the “application” was also not acceptable as a Pay Less Notice.

Practical Tips

The need to have to rely on a convention of past dealings in circumstances such as those presented in this case, in order to prove a document is valid under the Contract (and the unpredictable outcome that may ensue), can be avoided by following some of the precautionary measures below:-

  • Follow the contract – where to send the application, when, what format (including additional information), how it is to be sent and to whom.
  • Be clear on what it is you are sending to the paying party and check it.
  • Be clear on what you consider to be the “amount due” (the author’s view is the net amount for payment rather than the gross to avoid any doubt).

 

The full judgment is available at URL: http://www.bailii.org/ew/cases/EWHC/TCC/2016/557.html

Written and contributed by Ian Stumpf 

(This article does not represent legal advice).