Clarity in Payment Applications - What you need to know

By Darren Cayton,  Director at Knowles Ltd 

Introduction

People of a certain age will remember the darker days of contracting when ‘pay-when-paid’ and ‘back-to-back’ payment provisions were rife. It is hard to imagine that not so long ago an employer/contractor (payers) could strike its red pen through a contractor/subcontractor’s (payees) application without producing a payment certificate.

Nowadays, the strict payment regime imposed by Part II of the Housing Grants, Construction and Regeneration Act 1996 (as amended) and assisted by the Scheme for Construction Contracts as the fall-back position, has gone a long way to redress the balance.

Indeed the main requirement’s imposed by the Construction Act mean construction contracts must contain ‘due dates for payment’ and ‘final dates for payment’, whilst it prohibits ‘pay-when-paid’ or ‘pay-when-certified’. Additionally the Act imposes a regime for providing payment notices (s.110A(1)), default payment notices (s.111B) and payless notices (s.111).

Despite this, over the past year or so there have been several cases which have caught unsuspecting parties out, particularly with the payment application process.

Be clear what you agree to

It is important that you understand, particularly with specific payment arrangements, what you are agreeing to. In Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] the parties had agreed to incorporate in their contract a schedule dealing with the making of 23nr interim applications and payments, but failed to provide a default provision for what would happen should the project overrun.

In court, the judge held that Balfour Beatty had no contractual right to make or be paid in respect of their interim application nr. 24 (or any subsequent application), and no contractual right to apply for further payments until the contracts final payment mechanism kicked in after practical completion.

It is therefore vital for payees (receiving payment) to ensure that there is a continuing right to payment if a schedule of dates is included in the contract.

Payment Applications: Don’t be too early or too late

Although there is no mechanism in the Construction Act, many contracts require the contractor/subcontractor to submit applications for payment. It is important that they are submitted within the time frame stipulated within the contract.

In Caledonian Modular Ltd v Mar City Developments Ltd [2015] the court held that an application issued half-way though a payment period and outside of the agreed contractual payment mechanism was not a valid application as its status was not clear.

The judge helpfully suggested that contractors should ensure their payment claims were clear and that they give the employer reasonable notice that the payment period has been triggered.

Similarly, in Henia Investments Inc v Beck Interiors Ltd [2015] the judge stated that the due date should be stated on the application for payment.

Make it clear

The importance of clarity is equally important when it comes to the applications themselves.

In Jawaby Property Investment Ltd v The Interiors Group Ltd and another [2016] Carr J considered the validity of The Interiors Group’s [TIG] purported interim application. The issue concerned TIG’s seventh application for payment made in January 2016. The procedure which had been followed for the first six applications was that TIG would send a valuation by email, complete with a spreadsheet and back up sheets, and a statement of the sum applied for. Each valuation was up to the 8^th of the month (as required under the contract) and would state that the valuation was for ‘approval’ or ‘consideration’.

This time though, Jawaby started the ball rolling with an email on the 5 January 2016 requesting a valuation for the next day. TIG responded on 7 January 2016 saying ‘[p]lease see our initial assessment for Valuation 007’. On 15 January 2016 following a site visit Jawaby issued a Certificate for Payment. The valuation was low and a dispute arose.

As to the validity of TIG’s application for payment, the court agreed with Jawaby in particular that TIG had described its valuation as an ‘Initial Assessment’, the court found that it could not be construed as a statement by TIG of what it considered it was due. The impression of provisionality was also supported by the incorrect labelling of the summary sheet, and the fact that the valuation went up to the 7 January, and not the 8 January 2016.

The court held that TIG’s interim application was invalid because it differed from previous applications in several respects; most notably it was named ‘initial assessment’.

Such applications must be an application in ‘substance, form and intent’ and must be clear and unambiguous in their terms.

Conclusion

Although the Construction Act (as amended) and the Scheme provide a mechanism to enable a clear payment regime, Contractors and Subcontractors must ensure that they adhere to the strict requirements of the contract when making applications for payment.

You must ensure that you have a contractual entitlement to submit an application for payment.

The checklist below will assist Contractors and Subcontractors in making sure applications are submitted in the correct manner:

• State the sum due at the relevant due date and include all back-up information
• Submit applications at the correct intervals/dates as set out in the contract
• Make sure that they are issued in the right manner (post/email etc and sent to the nominated person) as stated in the contract
• Ensure they are clearly identified as an interim application for payment

Please note that this information provided is for general knowledge only and therefore specific advice should be sought for individual cases.