Administering payments under construction contracts is not easy. The contractual procedures are not always straightforward, mistakes do occur and, if relationships break down, parties often use errors by the other side to get an "easy win". A number of disputes about payment end up at the Technology and Construction Court, which has seen a particular flurry of cases in recent months. The latest is Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC), where the Court focused on the contents of a Contractor's Interim Application and an Employer's Pay Less Notice.

The Facts

Henia Investments Inc ("Henia") appointed Beck Interiors Ltd ("Beck") to carry out construction and fitting out works under a JCT Standard Building Contract without Quantities 2011.  The payment process under the contract was:

  • Not later than seven days before the due date, Beck could issue an Interim Application setting out the sum it considered would become due on the due date
  • The due date was the 29th of each month
  • Interim Certificates were issued by the Contract Administrator not later than five days after the due date.  These set out the sum the Contract Administrator considered was due on the due date
  • The final date for payment was 28 days from the due date. Henia had to pay the sum set out in the Interim Certificate before this date.  If there was no a valid Interim Certificate, then Henia instead had to pay the sum set out in the Interim Application  
  • If Henia wanted to pay less than the sum in the Interim Certificate / Interim Application, it had to issue a Pay Less Notice. This had to be issued not later than three days before the final date for payment.

Not much seems to have gone right with payments under this contract. As the judge noted, the parties "have not followed with any precision the contractual requirements". This particular dispute centred around payment numbers 18 and 19. The relevant facts are:

  • Beck issued Interim Application 18 on 28 April 2015 (six days late) and applied for a net sum of £2,943,098.95 for the period to 30 April 2015
  • The Contract Administrator issued Interim Certificate 18 on 6 May 2015 (one day late). It showed a net sum payable to Beck of £226,248.95
  • Beck did not issue an Interim Application 19
  • The Contract Administrator issued Interim Certificate 19 on 4 June 2015 at 00:03 hours (three minutes late). This showed a net sum payable to Beck of £18,893.53 
  • Henia issued a Pay Less Notice on 17 June 2015 (which was in time). This was based on Interim Certificate 19 and deductions of liquidated damages of £373,751.05.  It stated that £0 was due in relation to Interim Payment 19. 

The Judge was asked to consider two discrete questions in relation to the payments:

  1. Was Beck's Interim Application 18 valid?; and
  2. Was Henia's Pay Less Notice valid?

The Judgment

The Interim Application

The Contract allowed Beck to submit an Interim Application setting out the sum it considered would become due on each due date (which was the 29th of each month).  However, Beck's Interim Application 18 indicated the works applied for were "Valued to 30/04/15". 

On this basis, the Judge held that Beck's Interim Application was invalid. The Contract allowed an application based on a valuation of the works at either 29 April or 29 May.  30 April was not an option.

The Judge did not comment on the effect of the timing of Beck's Interim Application (which was six days late).  However, the Courts have clearly shown that they will interpret such provisions strictly, most recently in Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC) and Leeds City Council v Waco UK Ltd [2015] EWHC 1400 (TCC).  An exception is where there has been a course of dealing showing that the parties have varied the provisions, for example by allowing applications which are three-four days late. 

The Pay Less Notice

The Judge's decision on Interim Application 18 meant the dispute over Henia's Pay Less Notice was no longer relevant.  The entire contractual machinery had broken down, as there was no valid Interim Application or Interim Certificates (both of which had been issued late), and therefore no interim payment was due to Beck. However, the Judge usefully did go on to consider the parties' arguments in relation to the Pay Less Notice.

If Interim Application 18 had been valid, Henia would have been required to pay the sum in that application (as there were no valid Interim Certificates), subject to the effect of Henia's Pay Less Notice.  

Beck argued that a Pay Less Notice allowed Henia to pay less than the sum in the Interim Certificate (or Interim Application) only on the basis of cross claims (liquidated damages, for example).  Beck therefore was entitled to the difference between the sum in its Interim Application 18 (£2,943,098.95) and the liquidated damages claimed by Henia (£373,751.05).

Henia argued that, as well as including any cross claims, it was also entitled to put forward its own valuation of the works in its Pay Less Notice.  In this case, Henia's valuation was based on the late Interim Certificate 19 (which valued the work at £18,893.53).  Its claim for liquidated damages far exceeded this and therefore no sums were due to Beck.  

The Judge agreed with Henia. He held that the contract (which he held reflected the provisions of the Housing Grants Construction and Regeneration Act 1996 as amended) required Henia to serve a Pay Less Notice if it intended to "pay less than the sums stated as due". There was nothing in the wording to suggest this was limited to cross-claims.

Henia could therefore, as part of a Pay Less Notice, put forward its own valuation of the works.

Comment

Court is often seen as a costly and lengthy process; however this is an example of how quick and efficient the TCC can be.  Henia issued its claim on 25 July as a "Part 8" claim. The hearing was held on 10 August and the decision delivered on 14 August.  That is 20 days start to finish, over the summer holidays: quicker than a normal adjudication.

Employers will welcome the decision in relation to Pay Less Notices, which effectively gives them a second bite at the cherry if a Contract Administrator fails to issues an Interim Certificate on time. 

Otherwise, the practical advice is simple.  Follow the terms of the contract; to the date and to the letter.