Building contracts: The importance of accurate and clear Interim Applications and Pay Less Notices

The recent decision of Mr Justice Akenhead in Henia and Beck Interiors ([2015] EWHC 2433 (TCC)), provides some helpful guidance regarding the validity of Interim Applications for Payment and Pay Less Notices¹.

The case concerned a JCT Standard Building Contract without Quantities 2011 (subject to amendments).  The payment mechanism set out in the Contract followed a timeline commonly found in Building Contracts, in line with the requirements of the Housing Grants, Construction and Regeneration Act 1996 (“HGCRA”):

• The due dates for payment were stated to be 29th day of every month or the nearest “Business Day”;
• The Contractor had the right to submit Interim Applications for Payment at least seven days before the relevant due dates;
• The Contract Administrator (“CA”) had to issue the Interim Certificate no later than five days after each due date;
• Any Pay Less Notice needed to be served no later than three days before the relevant final payment dates (which were stated to be 28 days after the due dates).

The sequence of payment-related events which the decision was concerned with was as follows:

• On 28 April 2015, the Contractor submitted an Interim Application for Payment (no 18), which included a valuation of Works up to 30 April 2015;
• On 6 May 2015 the CA issued Interim Certificate no 18;
• On 4 June 2015 the CA issued Interim Certificate no. 19; and
• On 17 June 2015, the Employer issued a Pay Less Notice in connection with Interim Certificate no. 19.

Mr Justice Akenhead’s decision addressed, amongst other things, the effectiveness/validity of:

1. The Contractor’s Interim Application; and
2. The Employer’s Pay Less Notice,

both in the context of the of the 29 May 2015 due date for payment.

As the Contractor’s Application no 18 could not have constituted an effective Interim Application in respect of the 29 April 2015 due date (having been submitted less than seven days before such due date), the question remained as to whether it could be considered a valid Interim Application regarding the next due date under the Contract (i.e. 29 May 2015). 

The Judge’s answer to this question was negative for various reasons including the fact that the application made it clear that it related to the 29 April 2015 due date and works were valued up to 30 April 2015, which would have meant leaving out the valuation for 29 days’ worth of work. 

The decision underlines the importance of the parties to a building contract complying with the payment provisions and requisite timelines.  If for example, an Employer fails to issue an Interim Certificate, the amount stated as due in a valid Contractor’s Interim Application will be the sum to be paid by the Employer (subject to any deductions pursuant to a Pay Less Notice).  As such, a Contractor’s Interim Application must be unambiguous and clear as to the amount it considers is due and which due date the application relates to.

With regards to the second issue, as the Contractor’s Interim Application in question was found not to be valid in relation to the 29 May due date, it would have logically followed that the Employer’s Pay Less Notice could not stand either, if it were to be considered in the context of the Contractor’s Application only.  However, the CA had issued Interim Certificate no. 19 on 4 June 2015 and Mr Justice Akenhead held that there is nothing stopping an Employer to re-evaluate the Works and challenge a valuation carried out by the CA, just as an Employer could disagree with a Contractor’s Interim Application.

In conclusion, although the HGCRA requirements for payment are relatively complex, it is extremely important to follow them closely (as they may be amended by the parties).  The various notices that CAs, Employers and Contractors must or may issue under a Building Contract, must comply with the requisite timelines and be clear as to the relevant amounts and next steps expected to be taken.  All such notices are interlinked and the whole payment chain mechanism can be disrupted, affecting not only the Contractor’s cash flow, but also making a potential adjudication process more difficult.  Whilst these considerations are made in the context of a building contract, they are just as relevant in the context of a consultant’s appointment.

¹ A Contractor’s application for extension of time was also discussed and an obiter determination made, but this note does not discuss this particular point.

If you require legal advice in relation to a building contract or another aspect of construction law, please contact Brandusa Tataru-Marinescu.