Payment provisions - timing and clarity are of the essence

In the recent case of Henia Investments v Beck Interiors Ltd, Akenhead J in the Technology and Construction Court (TCC) took the opportunity to remind parties to construction contracts about the importance of complying with the payment provisions of such contracts.

The facts

The employer (Henia) appointed the contractor (Beck) for fitting out works at a property in Knightsbridge. They entered into an amended JCT Standard Building Contract without Quantities, 2011 Edition, with the original contract sum being just under £4 million and the works due to complete in September 2014. The contract administrator was Turner & Townsend (“T&T”). The contract set out various provisions regarding payment:

No later than seven days before the Due Date	29th of each month	No later than five days after the Due Date	No later than 3 days before the date for payment	28 days from the Due Date
Contractor to issue interim application for payment for sums due for payment by the Due Date	“Due Date”	Employer to issue interim certificate specifying sums payable for period up to the Due Date	Employer may issue pay less notice	Date for payment – by reference to pay less notice (if issue) / interim certificate. If neither validly issued, employer must pay sums set out in interim application.

The parties did not expressly follow the payment provisions in the contract. Most notably:

• The contractor issued an interim application for payment (Interim Application 18) six days late, and which included sums for payment after the Due Date for that period
• The contract administrator issued an interim certificate (Interim Certificate 18) one day late
• The contractor did not issue an Interim Application 19
• The contract administrator issued Interim Certificate 19 three minutes late

Shortly afterwards, the employer issued a pay less notice based on Interim Certificate 19. It deducted liquidated damages (the works were delayed by around 11 months) and re-evaluated the sums due. The pay less notice stated that £0 was payable to the contractor and was issued in time. The contractor argued that no such liquidated damages were due because the contract administrator had not properly dealt with the contractor’s application for an extension of time.

The dispute

The contractor referred the payment dispute to adjudication. The decision was largely in the employer’s favour. The employer subsequently issued Part 8 Proceedings in the TCC. The issues before the court were:

• Was the contractor’s Interim Application 18 effective?
• Was the employer’s notice a valid pay less notice?
• Was the employer entitled to liquidated damages even though it had not properly dealt with an application for an extension

Decision

Akenhead J found in favour of the employer on all issues (although the last issue was obiter). The contractor’s Interim Application 18 was not valid because it was not issued in time, it included sums that could not have been due for that period, and it was not “free from substantial ambiguity”. Akenhead stressed the importance of being able to ascertain whether a document was an Interim Application or not.

As Interim Application 18 was not valid, and the contractor had not issued Interim Application 19, the remaining issues were superfluous given that no sums were due. However, the court also found that the pay less notice was valid. It concluded that a pay less notice could re-evaluate the works and effectively challenge the certified works, rather than just including cross-claims or other deductions.

As the adjudicator had decided that the contractor had not made an application for an extension of time (and this issue was not before the court), the third issue was noted as obiter. Akenhead J found that an employer could still make a claim for liquidated damages despite the fact that the employer had failed to deal with an application for an extension of time. The contract did not state that it was a condition precedent that the employer should have dealt properly with the extension of time provisions before it could deduct liquidated damages (and there were other conditions precedent in the contract regarding liquidated damages, namely regarding non-completion certificates and giving notice before the date of the final certificate).

Comment

The Construction Act payment provisions as amended have led to complex payment provisions and significant litigation in the courts and by way of adjudication. All parties to a construction contract should be aware of the court’s strict application of the payment provisions of a contract and aim to adhere to these as well as possible. This is a cautionary tale to all parties to a construction contract, particularly contract administrators whose duty it is to ensure the employer complies with these provisions, and who may find themselves in the firing line if disputes subsequently arise. Whilst the employer can still claim liquidated damages even if there has been no formal view on any requested extensions, it is sensible to assess a contractor’s application for an extension of time and see if it affects any Certificate of Non-Completion. Otherwise, the contract administrator could end up in trouble for failing to review its judgment.