In our Winter edition, we highlighted a number of government initiatives to improve the payment cycle in the industry and suggested sticking to payment procedures as well as remembering your right to adjudication.

Here's our summer round-up of news and cases relating to payment issues.

Large firms must publish payment practices

In March 2015, the Department for Business, Innovation & Skills announced that large companies would be made to publish their payment practices as part of a government drive "to level the playing field for small business". The requirement is now enshrined in the Small Business, Enterprise and Employment Act 2015, which received Royal Assent on 24 March and was due to be implemented in May 2016. However, we understand from Practical Law Construction that the date for implementation has now been pushed back to October 2016.

Further reading:

  • Construction News article, 3 March 2016, on Build UK's support for the new legislation. Build UK has confirmed that it will collate the information of construction companies that is made public and publish it so that performance can be compared.
  • Department for Business, Innovation & Skills summary of responses on the Duty to Report on Payment Practices and Policies, March 2015.
  • Construction News published an interesting article on 26 April 2016 on the industry's approach to digitising the payment process: "Paying fair". The article summarises a roundtable discussion on "what it will take to digitise the process of payment through the supply chain".

Small business commissioner established

As mentioned above, on 4 May 2016, the Enterprise Bill received Royal Assent and is now the Enterprise Act 2016 (the Act). The Act establishes a small business commissioner, who will be able to consider the payment issues of small businesses relating to their business dealings with larger companies. The commissioner will not, however, be able to deal with matters that are being dealt with in adjudication or legal proceedings or issues relating to the adequacy of payments. Of note is the commissioner's power to name – and therefore potentially shame – larger companies. For the purposes of the Act, a small business is one with fewer than 50 employees. Other criteria for a small business will also apply – but note that local authorities will not be classed as a large business in this context.

Further reading: Government press release: "Enterprise Act becomes law".

A contractor's "initial assessment" was not a valid interim application for payment

Most employers and contractors need no reminder of the importance of submitting payment applications and pay less notices in the right form and on time. Recent cases have also highlighted the need to be very clear about what is intended when those notices are served. However, what happens if the contractor changes its method of applying for payment part way through the project?

This was the situation in Jawaby Property Investment Ltd v. The Interiors Group Ltd and another [2016] EWHC 557 (TCC). The contractor had made six applications to the employer's agent by sending email valuations accompanied by spreadsheet attachments. From the first application, the contractor and the agent established a practice of checking the works before the agent issued a certificate of payment with an explanation in spreadsheet form of how the certificate had been calculated.

However, the seventh application was different: the contractor called it an "initial assessment". The employer did not serve a pay less notice and the issue that arose was whether this application was a valid payment application on which the employer was bound to make payment.

Various decisions have made clear that payment applications must be in a certain form. They must, for example, clearly set out what they are and the intention behind them, and contain all appropriate information. However, the courts have also acknowledged that the operation of construction contracts can sometimes be more fluid than the contract intended – so, if the parties adopt a different payment procedure to that set out in the contract, the court will uphold it on the basis that the parties have waived their contractual rights to use the contract procedure and will be prevented from arguing otherwise because their behaviour suggests they have accepted this different approach. (In legal terms, this is called an "estoppel by convention".)

In the Jawaby case, the court concluded that the contractor's so-called "initial assessment" did not amount to a payment application under the contract. The parties had established a different procedure for payment applications by their behaviour. The application for an initial assessment was not in keeping with this procedure and, quite apart from its presentation, it differed in a number of respects from applications 1 to 6. The nature of the assessment was therefore ambiguous and the court concluded payment was not due.

In this same case, the employer claimed it had served a pay less notice in relation to the initial assessment by email. While the question of whether it was valid did not need to be considered after the court's decision on the initial assessment, the court nevertheless confirmed its view that it was not a valid pay less notice: the employer had not intended it to be a pay less notice when sending it; nor was it sent in the format of previous pay less notices (it was in document rather than email form).

Key points

  • Contractors: serve applications for payment in accordance with the contract and make clear what they are. Take care about deviating from your normal payment procedures. If you do submit (or accept) an application in a different format or manner, make clear your intention. Is it an application for payment?
  • Employers: if you do not think the whole sum claimed for payment is due, serve a pay less notice – and do so within the time limits. Ensure your intentions are absolutely clear in your pay less notices. Clarity is essential if you want to avoid misunderstandings – and having to pay the whole sum claimed.

This was a harsh result for the contractor, who was not therefore able to rely on the initial assessment to obtain payment. The only upside – if you can call it an upside – is that the dispute was dealt with by the relatively swift Civil Procedure Rules Part 8 procedures. Part 8 expedites the proceedings and leads to a swifter decision. It can only be used with disputes that do not involve any substantial disputes of fact and require only simple pleadings. Where cash flow is drying up due to a payment dispute, Part 8 could, in some cases, provide an effective route to resolve the dispute quickly as an alternative to adjudication proceedings.

Reminder – contractual interest must be a "substantial remedy" for late payment

Those negotiating contracts should remember that contracts should include provisions for the payment of interest that constitute a substantial remedy for late payment. If they do not, future late payments might be subject to the Late Payment of Commercial Debts (Interest) Act 1998 (the Debts Act).

The decision in John Sisk & Son Ltd v. Carmel Building Services Ltd [2016] EWHC 806 (TCC) is a useful reminder that the courts will uphold the Debts Act, and impose statutory interest on late payers under the Debts Act, if their contract interest provisions are not a substantial remedy.

In Sisk, the parties had been involved in an arbitration in which the arbitrator had awarded to Carmel the sum of £975,965.48 plus VAT and compensation for late payment. He had also awarded interest on the late payment of £975,965.48, which amounted to £359,329.10 under the Debts Act.

Sisk appealed the award (on a point of law) arguing that the contract contained a substantial remedy for the late payment of debt and that therefore the Debts Act did not apply.

The parties had amended the interest provision in their contract (clause 4.10.5 of the JCT Conditions of Sub-Contract, 2005 Edition, Revision 1 2007 (SBCSub/C)) to read the contractor "may (but shall not be obliged to) pay interest".

The arbitrator had found that that this interest provision was an optional payment regime for the payment of interest and was not a "substantial contractual remedy" for late payment for the purpose of section 8(4) of the Debts Act. It was therefore void and interest was to be calculated under the provisions of the Debts Act.

Take care when drafting or amending interest provisions in contracts to ensure that they do not offer anything less than a substantial contract remedy for late payment. Otherwise, be aware that the Debts Act will apply and statutory interest will be payable anyway.