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Payment applications: Clear as mud…

TCC case highlights how ensuring payment applications meet contractual and statutory requirements is as vital as ever.

The recent TCC decision in Jawaby Property Investment Ltd The Interiors Group Ltd & Anor [2016] EWHC 557 (TCC) is the latest in a line of cases highlighting the importance of ensuring that payment applications comply with relevant contractual and statutory requirements.

Texcel Ltd employed the contractor, Interiors Group Ltd, under an amended JCT Design and Build Contract 2011 for refurbishment works at Holborn Tower.

The contract was subsequently novated to Jawaby Property Investment Ltd and, as part of the contractual arrangements, the parties deposited £1.1m in an escrow account.

During the course of the works, the contractor applied for interim payment by emailing valuations to the employer’s agent, on the 8th of each month.

The employer’s agent would then assess the work and issue a Certificate of Payment, which the contractor would invoice against.

Valuation 7

The contractor issued Valuation 7 on 7 January 2016, valuing the work at £2.35m. The valuation was described on its face as an “initial assessment”.

On 15 January 2016, the employer’s agent issued Certificate of Payment 7, valuing the work at £1.6m. This was a negative valuation of £125,600.

The contractor queried the certificate with the employer’s agent and requested a breakdown.

The employer subsequently issued a detailed breakdown on 18 January, although both parties accepted that this was given too late to constitute a payment notice under the contract.

The employer, fearing a demand on the escrow account, sought declarations that:

  • Valuation 7 was not a valid payment application because a) the contract did not permit notification by email, and/or b) the terms of the valuation were insufficient to constitute a valid interim application; 
  • In the alternative, if the valuation was held to be a valid application, then the email and breakdown sent by the employer’s agent on 18 January 2016 constituted a valid pay less notice.

Decision time

The court held that Valuation 7 was not a valid interim payment application under the contract.

In reaching its decision, the court rejected the employer’s argument that the contract did not permit notification by email.

On the contrary, it was clear that the parties had agreed to adopt an alternative payment procedure to that set out in the contract. Indeed, the six previous interim applications had all been made by email.

However, Valuation 7 was different to the previous interim applications in a number of significant respects:

  • By describing the application as an “initial assessment”, it was clear that the application did not constitute the contractor’s final assessment. Significantly, the earlier interim applications were not described in this way.
  • The contractor had not valued the works up to the due date of the 8th of the month, as they had done for the previous six applications.

Accordingly, the contractor had failed to comply with the contractual requirements for interim payment applications.

Following Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC), the court emphasised that the employer should be in no doubt that the payment period, and thus the obligation to pay, had been triggered.

Implications for contractors

The TCC also held that the email from the employer’s agent on 18 January 2016 was not a valid pay less notice.

For a pay less notice to be valid, the sender must have intended to serve one. It was “highly significant” that the email sent to the contractor was different from the two pay less notices previously served.

Just as the courts require payment notices to be clear and unambiguous, the same rules apply to pay less notices.

This case underlines the importance of taking care to ensure all payment notices and pay less notices are drafted and served in accordance with the contractual and statutory requirements.

Failure to do so will mean the party giving the notice cannot subsequently rely on it to demand or resist payment.

The decision also recognises that parties often adopt different payment procedures from those set out in the contract.

In such cases, the court will seek to give effect to the adopted payment procedure provided that it complies with the requirements of the Construction Act.

Alex Elmer is an associate in the construction team at Fladgate

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