COD had entered into a contract with Space Change using an amended JCT D&B form. Space Change served a statutory demand (for a figure in excess of £600k) based on three applications for payment, Nos 6, 7 and 8. Although a Payment Notice was served proposing a reduced payment amount for Application No. 6, it was late and no Pay Less Notice was served at all. The same happened with Application No. 7. With Application No. 8 no notices were served but COD said that the application was not served.
On 29 January 2016, Space Change gave notice, pursuant to clause 4.11.1, of the intention to suspend the performance if payment was not made within seven days. Mr Justice Warren noted that he had not been shown a reply to that letter. Then on 9 February 2016, Space Change wrote saying that the suspension was “now in effect and we have no further obligations under or arising from the contract until payment of the outstanding balance is made”.
That letter also enclosed a statutory demand. The situation was not entirely straightforward as the judgment suggests that Space Change had walked off site just before Christmas 2015 and that after that date, COD had engaged others to carry out the work. This led Space Change to suggest that the employment of others was a repudiatory breach of contract.
On 15 February 2016, COD rejected the demand for payment, noting amongst other issues that Space Change had been notified that payment would be withheld until such time as a performance bond was put in place (although this was not something COD maintained at the hearing). Correspondence continued and on 29 February 2016, COD put Space Change on notice of default under clause 8.4, something Space Change rejected. COD further challenged the threat to present a winding-up petition, saying that the alleged debt was disputed; there was a dispute about whether the contract had been terminated and if so by whom.
Mr Justice Warren noted that the payment provisions of the JCT contract were balanced. Whilst a contractor can seek an interim payment, if the amount is not accepted, the employer can serve its own Payment Notice or, failing that, a Pay Less Notice. If it does so, it only has to pay the lesser amount which it considers is due, with the contractor being left to other remedies, such as adjudication, if it considers that it is entitled to more on an interim basis. In particular the Judge noted that:
“If an employer fails to observe the clear contractual procedure laid down, the contractual consequences follow and it cannot be heard to say that the interim sum is not due and is excessive. Any necessary adjustments can be effected at a later stage of the contract.”
If an employer fails to make an interim payment that is due, the contractor can invoke a procedure for suspension, and ultimately termination, if the default continues. However, a contractor does not have to follow that route. As the Judge remarked, a contractor may consider that it is in its commercial interests simply to continue with the contract and attempt to recover payment in some other way at the end of the contract.
If the employer has failed to challenge an application for interim payment by a Payment Notice or Pay Less Notice, the amount due may be more than the employer considers reasonable, but that, the Judge made clear, provides no ground on which to object to the contractor’s notice of suspension or, ultimately, termination when the contractual provisions in respect of the unchallenged amount are relied on.
Here, whilst the Judge considered that Space Change had followed the contract procedures correctly, COD had failed to respond to the payment applications within the contractual time limits. Space Change said that it therefore had an unanswerable claim for the amounts set out in the payment applications. Accordingly, it was entitled to implement the default provisions; and it was entitled to suspend work and, ultimately, to terminate the Contract.
The Judge went on to consider whether or not there was a dispute sufficient to justify an injunction restraining presentation of a petition. He felt that COD had made only “the most general of assertions”. However, even if those assertions could have been substantiated, which they were not, then the fact was that no default notices were ever served in respect of them and they afforded no answer to the claims under the interim applications which had not been met by valid Payment Notices or Pay Less Notices.
There was, in the view of the Judge, nothing to prevent Space Change from relying on the provisions of the contract concerning interim payment, suspension and ultimately termination. Further, although COD asserted that there was a counterclaim which would exceed the amount of the Statutory Demand, there was no evidence before the court to show this, not even “a shadowy case to suggest that that is so”.
Accordingly, on the information before the court, the Judge refused to grant the injunctions sought. This is an interesting decision which highlights again in clear terms how the courts understand the payment provisions of the JCT contract. However, before considering taking a similar route, parties should exercise caution. The bar for showing that there is a genuine dispute before an insolvency court is not a high one, albeit it was one that COD could not reach. Accordingly, the specific facts of this case may make it somewhat unusual.