Over the last year we have seen two sets of three cases on the issue of payment provisions in construction contracts. Payment in construction contracts on projects in Great Britain is an issue underpinned by a statutory framework intended to improve cash flow to the construction supply chain by the inclusion of an adequate payment mechanism in construction contracts and the service of certain notices at key stages in the payment cycle. A failure on behalf of an employer to serve a relevant notice in cases where a contractor’s application for payment is not agreed can result in an automatic right to payment in full of the amount claimed without consideration of the underlying merits of the claim.
Matters are complicated by the fact that in addition to the statutory framework and the general principles that apply, payment provisions in standard form contracts can vary immensely. In the first set of cases for example, there was some debate as to how two of the decisions were to be applied as it had been argued that they appeared inconsistent. The court subsequently clarified that the difference resulted from the manner in which interim payments and a payment upon termination were dealt with under the JCT Design and Build Contract. In the absence of an employer serving a payment or pay less notice, the amount of an interim payment shall be “the sum stated as due in the Interim Application” whereas the payment upon termination in the absence of the required notices shall be “the amount properly due in respect of the account”. Close attention is therefore required to the payment provisions in the relevant contract.
In view of all these differences, it is not unreasonable to ask whether any general principles arise from this run of payment related cases, because it may well be that different decisions would arise based on other standard form contracts. Some general principles include the following:
- The importance of the parties following the agreed dates for valuations: An application for an interim payment is required to be made by the agreed due date. A contractor is under an implied obligation to submit its interim payment application within a reasonable time. The court will not permit parties to argue that applications for payment are late where, through a course of dealing, the contract administrator had previously allowed some leeway and accepted applications a few days after the agreed valuation dates.
- The importance of clarity when a contractor serves its applications for payment: A common theme in the second set of cases is the requirement for clarity from a contractor as to whether or not a document is intended to be an application for payment. Accordingly, the court stressed that it must be clear from the face of the document as to whether or not it is actually an application for payment. If contractors wish to have the benefit of the statutory payment provisions then they must set out their interim payment claims with proper clarity. Documents must in substance, form and intent actually be an interim application that states the sum considered due at the relevant due date. Hybrid documents will not be treated as valid even if served on time. Furthermore, a party cannot argue later that a document is something other than that which it was expressed to be at the time.
- The importance of valid notices being served on time by or on behalf of the employer: All six cases concerned the issue of whether any and/or a valid pay less notice had been served.The legal arguments in the first set of cases, which included multiple adjudications in two of them, could all have been avoided had valid pay less notices been served. If an employer fails to serve any notices on time then it must be taken as agreeing the value stated in the contractor’s application, whether right or wrong. This run of payment related cases therefore acts as a salutary reminder for any employer and those that act on their behalf to ensure that the necessary paperwork is issued in its proper form and in accordance within the relevant timescales.
- The importance of an employer being able to use a pay less notice to re-evaluate the works: There had previously been some debate as to whether a payment notice served in response to a contractor’s application for payment should simply spell out what was due disregarding any abatement or set-off with the latter being dealt with under the pay less notice. The court has now come down against this distinction and confirmed that a pay less notice may raise deductions specifically permitted by the contract, detail legitimate set-offs and deploy an employer’s own valuation of the works. A pay less notice can therefore deal with an employer’s re-evaluation of the works in cases where an employer may wish to disagree with either the interim application from the contractor or the amount subsequently certified by the contract administrator.
The updated statutory framework relating to payment in construction contracts came into effect in autumn 2011. The fact that this issue continues to be topical, as illustrated by these cases, only serves to confirm that the statutory requirements have led to unnecessarily complex arrangements, not least those dealing with the consequences of a failure to comply with the provisions relating to the time for service of the relevant statutory notices. Taking professional advice at an early stage and ensuring that the proper paperwork is in place and served on time will assist in avoiding the pitfalls which befell the parties in these cases.