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When it comes to getting paid, it’s all in the paperwork.

Napthens - June 7th 2016

All commercial construction contracts are required by law to contain adequate payment provisions dealing with: how and when payments are to be made, the final date for such payments and the service of certain payment and non-payment notices in the right form, at the right time, by the right party. If these payment provisions are missing, then the law implies terms dealing with those matters through a statutory scheme.

A number of recent court cases have highlighted again the importance of ensuring that parties to a construction contract adhere to the contractual payment provisions or the statutory scheme, whichever is applicable.  Where a contract is missing some, but not all, of the required payment provisions, the statutory scheme will plug those gaps so the parties may find themselves with a mixture of the two.

The serious consequences of failing to observe the payment provisions is seen most recently in COD Hyde Ltd v Space Change Management Ltd [2016] EWHC 820 (Ch) where the court prevented an employer from resisting the contractor’s winding up petition for non-payment of its interim applications, on the grounds that the employer had failed to issue valid pay less notices. Not only was the employer liable to pay the contractor’s interim applications as submitted (in this case, amounting to just over £680,000) but the employer would also have to defend the winding up petition at some cost and, if unsuccessful, could face the insolvency of its business.

In ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) and Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC) the TCC was clear that failure to issue a pay less notice in time means the employer is deemed to have agreed the value of the works as stated in the contractor’s payment application and that sum is then due and owing.

However, it is equally important for the contractor to have its paperwork in order.  In Jawaby Property Investment Ltd v The Interiors Group Ltd and another [2016] EWHC 557 (TCC) the court found that the contractor had not issued a valid interim application notice, as the form of notice differed from those previously submitted by the contractor.  It is crucial to make sure all interim applications are in the same form and labelled clearly.

In two further decisions, Leeds City Council v Waco UK Ltd [2015] EWHC 1400 (TCC) and Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC) the court held that the contractor’s application was invalid because it was made too early. If the contract sets out a date for submitting an application, the contractor should ensure it does not issue its applications any earlier or later than specified.  If the contract makes provision for the parties to agree different application dates (usually something along the lines of “or as may be agreed between the parties from time to time”), then any amendment to those dates should be clearly recorded in writing between the parties.

Similarly, a decision in February this year in Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWHC 168 (TCC), emphasised how important it is to make sure any contractual schedule for the contractor’s applications is fit for purpose.  In this instance, the contract specified the contractor would make 23 interim applications which meant when the project overran, the contractor was prevented from making any further applications until completion of the works. Therefore, there must be an adequate mechanism to either: revise any payment schedule; or better still, refer to monthly instalments, to deal with delays in the works.

Top tips for staying on top of the payment process for both parties can be summarised as:

  • Ensure the contract contains payment provisions setting out how and when the contractor is to be paid – if not, make sure you are familiar with the default statutory requirements
  • Stick to any payment provisions whilst works are ongoing
  • Clearly label all payment correspondence
  • Adhere to any payment timetable set out in the contract or if appropriate, as agreed between the parties at a later date