Another recent case in the Technology and Construction Court serves as a stark reminder to contractors to ensure they follow contractual processes and timings for interim valuations.
In Jawaby Property Investment Ltd v Interiors Group Ltd and another (2016), the claimant employer sought declaratory relief against the defendant contractor. The proceedings were issued in the context of the operation of an escrow agreement but the key issue of whether the contractor had made a valid interim payment application is one that has wider application in construction disputes.
The contract was for the refurbishment of a property on High Holborn, London. It was a JCT Design and Build 2011 contract with amendments.
In summary the contract provided that the contractor would make an interim application for payment on the 8th of each month. The later of the monthly “specified date” or actual date of receipt of the interim application was the “due date”. The final date for payment was 30 days after the due date. The Employer was to serve a payment notice not later than 5 days after the due date setting out the sum it considered to be due. If it failed to do so the interim payment was to be in the sum set out in the application, subject to any pay less notice which had to be served not later than 5 days before the final date for payment. The Employer’s Requirements contained various obligations in relation to interim payments including the need to include supporting information.
Valuations 1 to 6 were submitted to the Employer’s Agent by email. They were in the form of Excel spreadsheets with detailed back up sheets and a statement of the final sum applied for. The valuations valued the contractor’s work up to the due date of the 8th of each month. The covering email referred to the valuation being for “approval” or “consideration”.
On 5 January 2016 the Employer emailed the Contractor and asked:
“Please can you issue me your valuation tomorrow morning so that I can review it prior to our meeting on Monday.”
The Contractor did not respond the following day but on 7 January 2016 sent an email in the following terms:
“Please see our initial assessment for valuation 007, this is based upon Progress update and onsite review carried out earlier this week. If you could kindly confirm a time for Monday’s meeting I can ensure that it does not clash with prior diarised meetings.”
The assessment was for the gross sum of £2,352,937.29 and was set out in a summary sheet and attached spreadsheets.
On 15 January 2016 the Employer’s Agent emailed the Contractor as follows:-
“Please find attached our Certificate for Payment No 7 in the amount of £-124,604.”
It was common ground in the proceedings that this was too late to serve as a payment notice. The document contained no breakdown of the figure or accompanying back up documentation. In a response to a request from the Contractor to explain the logic behind the calculation, the Employer’s Agent sent a further email on 18 January 2016 enclosing an Excel valuation spreadsheet and an explanation of the negative valuation.
The deadline for the Employer to serve a pay less notice was 2 February 2016.
On 8 February 2016 the Contractor’s solicitors gave notice of the Contractor’s intention to suspend performance for non-payment. Initially the Employer’s solicitor argued that the email of 18 January 2016 amounted to a valid pay less notice but subsequently sought to argue that there had not been a valid payment application.
In deciding that the email of 7 January 2016 did not amount to a valid payment application Carr J made the following observations:
- The valuation sent on 7 January did not follow the pattern of the previous valuations and was materially different.
- Critically the valuation was described as an “initial assessment”. It could therefore not be objectively construed as the Contractor’s assessment of what was due.
- The impression of provisionality was reinforced by an error in the summary sheet (which described the gross total as being for Valuation 6 not 7. The attachment to the email was also entitled “Copy of Section Split Valuation (007) to 05 Jan.” The summary sheet stated the work was valued to 7 January. Whichever date was correct, the valuation did not include a valuation of the work up to the due date as in the case of the previous valuations.
In conclusion, the valuation was an initial assessment only. The reasonable recipient of the valuation would not have regarded it as “unambiguously informing it that this was an Interim Application” and there was no relevant course of dealing on which the Contractor could fall back. Carr J emphasised:
“Whether or not this conclusion can be said to lead to a harsh result [for the Contractor] this is an area where, as the authorities make clear, there is little scope for latitude. If a contractor wishes to have the benefit of the interim payment regime such as that contained in the Contract, then its application for interim payment must be in substance, form and intent an interim application stating the sum considered by the contractor as due at the relevant due date and it must be free from ambiguity. The Valuation here was not such an application.”
Although his decision that there had not been a valid application meant that he did not need to consider whether a pay less notice had been served, the judge still expressed his opinion that the email of 18 January 2016 did not amount to a valid pay less notice. He found that it was highly significant that the email was completely different to two formal pay less notices that had been served previously. Objectively construed the email was not intended to be a pay less notice but was intended to provide a mark-up of the valuation and to provide an explanation of the certificate attached to the email of 15 January 2016.
Over the course of the last year or so there have been a number of cases which have stressed the importance of complying with the interim payment regime if parties want to have the benefit of interim payments. This case serves as yet another stark reminder of the potentially serious consequences of not doing so. The judgment indicated that if the interim payment had been made by the Employer the Contractor would have been expected to continue to trade. However, it had fallen into arrears with subcontractor payments and was subject to a winding up petition, such that without the interim payment being paid it would be unable to survive.
Whether submitting a payment application, a payment notice or a pay less notice, parties to construction contracts need to ensure it is clear precisely what document it is they are submitting and leave no room for ambiguity. They should make sure that there are no mistakes such as valuing the work to the wrong date or referring to the wrong valuation number. Failing to do so can be a costly mistake as the Contractor found out here.
For more information about the issues raised in this article or to find out more about how the Construction team can help you please contact Rowan Turrall on 0118 952 7206 or email [email protected].
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.