A recent TCC decision has considered the proper approach to be taken to contracts which fall foul of the payment provisions of the Construction Act. The court decided a term could be implied into a construction contract to avoid rendering the contract’s payment provisions invalid and to ensure the provisions were compliant with the Act. This appears to be the first time the court has taken such an approach.
Manor Asset Limited v Demolition Services Limited
Manor Asset Limited (“MAL”) and Demolition Services Limited (“DSL”) entered into a contract for demolition works in April 2015, which was later amended in August 2015 to provide for interim payments on achievement of certain milestones. The amendment agreement was intended to provide for swift payment and stated simply that: “Payment to be made within 72 hours of receipt of invoice, issued when the milestone is achieved.”
On 23 October, DSL issued an invoice for 60% of the contract price for achievement of the first milestone in accordance with the contract amendment. On 28 October, MAL issued a pay less notice.
On 6 November, DSL referred a dispute to adjudication contending that the invoice was required to be paid within 72 hours of MAL receiving the invoice (by 26 October) and that MAL’s pay less notice was invalid as coming after the final date for payment.
MAL argued that the payment provisions amended by the August amendment were not compliant with the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”). MAL contended that the 72 hour date (i.e. 26 October) should be taken as the due date for the purpose of the Construction Act, with a final date for payment and the deadline for MAL’s pay less notice being implied by the Scheme for Construction Contracts (the “Scheme”).
The Adjudicator decided in DSL’s favour and awarded payment of DSL’s invoice. On the hearing of DSL’s application to enforce the Adjudicator’s decision, the court was asked to determine the effect of the revised payment provisions of the August amendment.
An implied term?
The court disagreed with MAL’s submission that the 72 hour date should be taken as the due date for the purpose of the Construction Act. The requirement for DSL to submit an invoice after the achievement of a milestone showed that the parties had intended the milestone date to be the due date and the 72 hour date to be the final date for payment.
However, this interpretation posed difficulties with identifying the correct period prior to the final date for payment for service of a Pay Less Notice. Given the tight timeframes agreed by the client, both the 5 day period specified in the original agreement and the 7 day period prescribed by the Scheme would result in a Pay Less Notice being required prior to DSL’s invoice. This would contravene section 111(5)(b) of the Construction Act which prohibits a pay less notice being given prior to the notice by reference to which the “notified sum” is determined (in this case, DSL’s invoice).
To solve this dilemma, the court implied a new term into the contract requiring simply that a pay less notice be served before the 72 hour date. As the court noted:
“Faced with a stark choice between rendering the amendment wholly ineffective or enabling it to work, the parties must surely have intended the latter … The only way in which it can be made to work, whether by so construing the contract or implying a term, is to say that the prescribed period was to be nil - thus enabling MAL to serve a pay less notice at any time within 72 hours after receipt of the invoice.”
Conclusion and implications
This decision offers useful guidance as to how the court might interpret contractual payment provisions that do not comply with Act in situations where the Scheme provisions do not offer a suitable fall-back. Whilst the scope for implying terms where contractual payment mechanisms are lacking may be limited, this decision opens up the possibility that terms may be implied in order to make a contract Construction Act-compliant.
The decision may also increase the scope for arguing that construction contracts ought generally to be interpreted so as to achieve compliance with the Construction Act, so as to avoid too ready an adoption of the Scheme’s provisions. Such an approach may be thought to be supported by the Court of Appeal’s decision in Ferguson Contractors v Levolux (decided in 2003). In considering whether to strike down a clause as contrary to section 108 of the Construction Act (the right to adjudicate at any time), the court noted that the “contract must be construed so as to give effect to the intention of Parliament rather than to defeat it” and that the clause should only be struck down “if that cannot be achieved by way of construction”. The court in the present case was forced into such an approach due to the unsuitability of the relevant Scheme provisions, but it remains to be seen whether such an approach might also be justified where the Scheme provisions provide a solution which although not unworkable, is contrary to what the parties must have intended.