Payment issues clarified

Key points

• The payment provisions of the JCT building contracts continue to provide fertile grounds for disputes — the latest case before the TCC was Henia Investments Inc v Beck Interiors Limited.
• Following Henia v Beck, contractors' applications for payment will only be effective if it is clear to which due date they are intended to relate so that employers and their agents know how to respond to the application and when.
• Employers now have the comfort of knowing that pay less notices which set out a revaluation of the work are valid.
• Liquidated damages can be deducted or claimed under a JCT Standard Building Contract (2011 edn) even if the contract administrator has not responded to an application for an extension of time within the timescales required by the contract.

Cases dealing with the potentially serious consequences of employers and/or their agents failing to serve payment notices and pay less notices within the timescales required under building contracts have been before the Technology and Construction Court (TCC) with considerable regularity since November 2014. A number of those cases were considered in 'Take notice' in the October 2015 edition of Construction Law ((2015) 26 8 CL 20).

Further guidance on interim payment applications

A recent case, Henia Investments Inc v Beck Interiors Limited [2015] EWHC 2433 (TCC) (in which I represented Henia) has given further guidance on interim payment applications and, for the first time, clarified what can be covered in a pay less notice.

In addition, the court had to consider whether or not a failure by a contract administrator (the CA) to respond to an application for an extension of time within the timescale required by the JCT Standard Building Contract (the JCT Standard Form) impacted upon the ability of the employer to levy liquidated damages (LADs) - an issue not previously considered by the English courts.

Background

Henia engaged Beck to carry out extensive fit-out works at a property in Cheval Place, London under the JCT Standard Form. The project did not go to plan and the works were delayed by over eleven months. Henia eventually started to levy LADs for delay.

The payment dispute

Under the JCT Standard Form, if the contractor makes a valid interim application for payment, the employer is obliged to pay the sum claimed in full if no interim certificate is issued by the CA and no pay less notice is issued by the employer.

In this case, Beck claimed that a document which it had submitted was an interim application for payment in accordance with the JCT Standard Form and that, in the absence of an interim certificate or a valid pay less notice, it was entitled to be paid the substantial sum for which it had applied.

Henia argued that Beck was not entitled to the sum that it had claimed because:

• the document which Beck had submitted did not constitute an interim application for payment; and
• Henia had served a valid pay less notice.

Under the JCT Standard Form:

• the due date is an agreed date each month (or the nearest business day to that date) - in this case it was the 29th of each month;
• the contractor may (but does not have to) make interim applications for payment. If the contractor does make an interim application, it has to be submitted no less than seven days before the due date;
• the CA has to issue an interim certificate no later than five days after each due date regardless of whether or not the contractor makes an interim application;
  if the employer wishes to pay less than the amount stated in the interim certificate (or, if no interim certificate has been issued, the contractor's interim application), it has to issue a pay less notice not less than five days before the final date for payment; and
• the final date for payment is 14 days from the due date.

In this case:

• Beck issued interim application 18 on 28 April. If it was intended to be an interim application in respect of the 29 April due date, then it was six days late;
• the CA issued interim certificate 18 in respect of the 29 April due date on 6 May, which was one day late;
• Beck did not submit an interim application in May;
• the CA issued interim certificate 19 in respect of the 29 May due date on 4 June, which was one day late; and
• Henia issued a pay less notice in respect of the 29 May due date on 17 June (in time) stating that a combination of the proper valuation of the work by the CA and Henia's entitlement to LADs meant that the sum due to Beck was £0.

Beck claimed in adjudication and then in the TCC that:

• its interim application 18 was an early interim application in respect of the 29 May due date rather than a late interim application in respect of the 29 April due date; and
• given that the relevant interim certificate had been issued late and the pay less notice was not valid (more on this below), the full amount applied for was due.

Was interim application 18 made in respect of the 29 May due date?

The judge rejected Beck's claim that interim application 18 related to the 29 May due date. Instead, the judge found on the facts that interim application 18 was intended to relate to the 29 April due date and was not of any contractual effect as it was submitted late.

The judge made it clear that if a document is to take effect as an interim application, it 'must be clear ... so that the parties know what to do about it and when'. Although it is not absolutely necessary that the relevant due date is expressly referred to in any application:

'... it must be clear and unambiguous that an application relating to a specific due date is being made'.

This judgment is a strong indication that the courts expect contractors to make it clear that they are making an interim application and in respect of which due date so that employers and CAs have a reasonable opportunity to respond. Contractors are highly unlikely to be allowed to benefit from any lack of clarity on their part.

Was the pay less notice valid?

Under the JCT Standard Form, if an employer wishes to pay less than:

• the amount the CA has stated is due in an interim certificate; or
• the amount applied for by the contractor (if the CA has not issued an interim certificate correctly);

a pay less notice has to be served on the contractor at least five days before the final date for payment.

Both the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the HGCRA 1996) and the JCT Standard Form require the pay less notice to set out the sum that the employer considers to be due on the date the notice is served and the basis on which that sum is calculated.

Beck argued that this means that pay less notices can only be used to deduct sums (such as LADs) from the amount stated as due in the CA's interim certificate or the contractor's interim application. As a result, Beck claimed that the pay less notice served on behalf of Henia, which set out a new valuation of the works, was invalid.

The judge disagreed. He stated:

'... the Pay Less Notice can not only raise deductions specifically permitted by the Contract and legitimate set-offs but also deploy the Employer's own valuation of the Works.'

It is, therefore, clear that pay less notices are not limited to deductions such as LADs. They can also include the employer's valuation of the works and so challenge the valuation relied on in the relevant interim certificate or interim application.

Claims for additional time

Under the JCT Standard Form, the CA has 12 weeks from receipt of 'required particulars' to respond to a contractor's application for additional time. What happens if the CA does not do so?

Can the employer still claim LADs? Does the contractor's obligation to complete by a particular date fall away? If so, is it replaced with an obligation merely to finish the works within a reasonable time?

Before the Henia case, you would have struggled to find any cases to help answer questions like these. There was, so far as I am aware, no English case law and a trawl of decisions from Canada and elsewhere for glimpses of guidance was required.

Strictly speaking, the issues did not need to be decided in the Henia case as the parties agreed, for the purposes of the proceedings, to accept the decision in an earlier adjudication that Beck had not validly applied for additional time and so the 12-week review period had not been triggered.

However, acknowledging that the issues were of wider interest to the construction industry, the judge agreed to determine them.

In particular, the judge held:

• Beck was right to concede that a CA's failure to determine an application for an extension of time does not mean that the contractor's obligation to finish the works by a particular date will be replaced with an obligation to complete within a reasonable time - the contractual completion date continues to apply; and
• Beck was wrong to argue that compliance by the CA with its obligation to determine within 12 weeks any application made by the contractor for an extension of time was a condition precedent to Henia being able to deduct or claim LADs. In particular, there is nothing in the JCT Standard Form which suggests that the proper operation of the extension of time mechanism by the CA is a condition precedent to an employer's right to deduct LADs. If the contract was intended to work in this way, it should have been clearly spelt out - in a similar way to the requirement to send the contractor a non-completion notice and a notice that the employer intends to claim the agreed LADs.

Whilst the outcome may seem unfair (as Beck argued), the judge pointed out that it is not necessarily a question of fairness but rather the bargain that the parties have agreed between themselves:

'... there are numerous potential defaults on the part of both Employer and Contractor which can give rise to serious financial consequences to the other and merely because unfairness can happen in the short term does not necessarily or obviously lead to the need to construe clauses as conditions precedent to the ability of one party to secure such financial advantage in that short term.'

A contractor is not defenceless in this situation either. If the CA fails to make a decision on an application for an extension of time within the required timescale, the contractor can refer its claim for an extension of time (and so challenge the deduction of LADs) to adjudication in the short term and either litigation or arbitration in the longer term.

Conclusion

Further clarity on interim payments is welcome. If contractors follow the guidance given by the court in Henia, employers should receive applications for payment which clearly identify to which due date they relate. This will make it easier for employers and those assisting them with payment to know whether an application has been made in time and when notices responding to that application should be sent to the contractor.

Employers and those issuing notices on their behalf now have the comfort of knowing that pay less notices which amount to a revaluation of the work are valid.

LADs can be deducted or claimed even if the CA has not responded to an application for an extension of time within the timescales required by the contract. However, CAs should still comply with the timescales for dealing with claims for additional time in order to ensure that LADs are not deducted where an extension of time is justified.

This article was published in the January/February edition of Construction Law.