07 December 2015 #Construction
A new level of importance has been placed on applications for payment in the construction industry. As a result, contractors must up their administrative game.
In 2015, the courts turned their attention to applications for payment as a result of its view that one of the "more baleful effects of the amendments" to the Construction Act 1996 was in providing contractors with an entitlement to payment simply because no valid pay less notice had been served (Mr Justice Coulson in Caledonian Modular Ltd v Mar City Developments Ltd  EWHC 1855 (TCC)).
2014: Pay Less Notices
In ISG v Seevic (2014), the lack of a pay less notice had meant that the employer was deemed to have agreed the value of the works claimed by the contractor in an interim application. This meant that the employer was not entitled to adjudicate to ascertain the actual value at the date of the application. This was because the employer was not prevented from challenging the value of work in response to a later application. In the ongoing saga of payment in construction projects, the pendulum had swung in favour of the contractor.
2015: Payment Applications – the pendulum swings back!
The payment mechanism in the Construction Act 1996 does not expressly provide for the contractor to make payment applications, but contracts generally require the contractor to notify the employer of the sums it considers will be due to it on a specified date (known as a payment “application”). For example clause 4.8 of the JCT Design and Build Contract (DB 2011) provides for monthly, or stage, applications.
Payment applications trigger the payment mechanism (which is either set out in the contract or implied by the Construction Act) thereby starting the payment-clock ticking. As a result, the courts had become concerned that contractors might get into the habit of making a fresh claim every few days in the hope that their employer would "take his eye off the ball and fail to serve a valid pay less notice", thus giving the contractor a "wholly undeserved windfall" (Mr Justice Coulson in Caledonian Modular Ltd v Mar City Developments Ltd  EWHC 1855 (TCC)).
A run of cases followed, in which the courts have attempted to redress the balance:
Leeds City Council v Waco UK Ltd  EWHC 1400 (TCC)
In this case, Mr Justice Edwards-Stuart found that the contractor’s application number 21 was invalid as a result of it being made 6 days before the date specified in the contract. The fact that a number of previous applications had been accepted a few days late did not mean that the employer had agreed to accept applications made “significantly” outside that period of leeway. Furthermore, the fact that the employer had accepted one previous application early did not represent an ongoing waiver of the fixed application date (“one swallow does not make a summer”!).
Caledonian Modular Ltd v Mar City Developments Ltd  EWHC 1855 (TCC)
Mr Justice Coulson confirmed that the contractor was not at liberty to issue an application for interim payment approximately half-way through a payment period and outside the agreed contractual (and statutory) payment mechanism.
The contractor had issued an “interim application” on 13 February 2015 (half-way between monthly valuation dates), which, the court found, was nothing more than a selection of documents prepared during negotiations over the contractor's final account (i.e. not a valid application), because:
Henia Investments Inc v Beck Interiors Ltd  EWHC 2433 (TCC)
In this case, the contractor claimed that its “Application 18”, made on 28 April 2015, was a valid application for the purposes of the 29 May application date (i.e. it had been issued a month before the contractual application date). This was because clause 4.11.1 of the contract in question (the JCT Standard Building Contract without Quantities, 2011 Edition (SBC/XQ 2011)) provided that interim applications could be submitted at any time “more than seven days before the payment due date”.
Mr Justice Akenhead commented that the literal interpretation of clause 4.11.1 meant that, in theory, a contractor could submit all its applications for payment on day one of the contract (although it was unlikely that "sensible contractors” would do this) and certainly one month in advance. This was an unfortunate position not least because an application becomes the contractor's interim (or default) payment notice if the contract administrator fails to issue a payment notice (or pay less notice) in time.
In order to avoid a world in which contractors submit applications every few days, Mr Justice Akenhead decided that:
Therefore, the contractor's interim “application 18” was invalid as it was clearly intended to relate to the April application date (and not the May date), and was not "free from substantial ambiguity".
Back in 2014, in deciding whether a payment had fallen due to a contractor, adjudicators rarely questioned whether the originating payment application was valid – they simply decided whether the employer had issued a valid payment or pay less notice. Times have changed and contractors will need to be far more astute in issuing payment applications to ensure that those applications are not ultimately deemed to be invalid.
The old story now applies to both sides: