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Rowan Turrall
Rowan Turrall,
SENIOR ASSOCIATE - SOLICITOR
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More on payment provisions in construction contracts
21 August 2015

In Henia Investments Inc v Beck Interiors Limited [2015] Mr Justice Akenhead had to decide (1) whether the contractor’s interim application was a valid interim payment notice (2) whether the employer’s notice in response was a valid pay less notice and (3) whether a failure on the part of the contract administrator (“CA”) to make a decision regarding an extension of time (“EOT”) application rendered a non-completion certificate invalid or prevented the employer from deducting and/or claiming liquidated damages (“LADs”).

The facts

Henia engaged Beck to carry out extensive fitting out (as well as some new construction) works in London. The works were due to be completed (subject to any EOT) by 5 September 2014. Interim payment due dates were 29 November 2013 and thereafter the same date (or nearest business day) in each month. The works were delayed but there had been no final determination of whether Beck was entitled to an EOT.

On 28 April 2015 Beck submitted “Interim Application for Payment No: 18” which identified a “Balance applied for this period” of £2,943,098.95 and a gross figure of £6,518,953.63. The works were indicated to be “Valued to 30/04/15”. On 6 May 2015 the CA issued Interim Certificate No 18 in the gross sum of £3,988,108.69 showing a net sum of £226,248.95.

There was no interim application in May 2015 but on 4 June 2015 at 00:03 the CA issued Interim Certificate No 19 in the sum of £4,007,586.56 showing a net sum of £18,893.53. Henia issued a pay less notice on 17 June 2015 stating there was “£0” due to Beck based on Interim Certificate 19 being £18,893.53 and it having an entitlement to LADs for 40 weeks at the weekly rate of £15,000.

The decision

The judge considered first the question of whether the 28 April 2015 submission was a valid interim payment notice. The contract was an amended JCT Standard Building Contract without Quantities 2011 pursuant to which the judge decided that the contractor could, but did not have to, submit an interim application at least 7 days before the due date. For April and May 2015 this meant on or before the 22 of the month. Interim certificates had to be issued no later than 5 days after each due date i.e. no later than 5 May (allowing for the May Bank holiday) and 3 June for the April and May due dates. Beck’s Application No 18 was therefore 6 days late (if intended to be in respect of the 29 April due date). Both interim certificates were issued late – No 18 by one day and No 19 by 3 minutes.

The judge looked next at the content of Application No 18. He stated:

“…I consider that the document relied upon as an Interim Application under Clause 4.11.1 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. In this context, the Interim Application should be considered in the same light as a certificate. If there are to be potentially serious consequences flowing from it being an Interim Application, it must be clear that it is what it purports to be so that the parties know what to do about it and when.”

He went on to say that the contractor must state what it considers is due at the relevant due date. It need not state the specific due date but it must be clear and unambiguous that an application relating to a specific due date is being made. Having decided that the application of 28 April 2015 was too late for the due date of 29 April, he looked at whether it could be taken to be an application for 29 May. He decided it could not on the following grounds:

  • 29 April 2015 was the 18th relevant due date under the contract. The reference to “Interim Application for Payment No 18” suggested it was to relate to that due date.
  • There was nothing which expressly referred to the 29 May due date.
  • Beck did not acknowledge that the 29 April date had been missed and say that the application was intended to relate to the 29 May due date.

As a result of his decision on this point the judge did not need to decide whether the pay less notice was effective or valid but he still did. The issue primarily resolved around whether or not a pay less notice can challenge the valuation certified by the CA or in an interim payment notice or if it is limited to cross claims and other deductions expressly envisaged by the contract. Having reviewed the contract the judge concluded that there was nothing in it that suggested the employer could not legitimately challenge either the amount certified or the amount claimed in an interim payment notice. He stated that:

“the Pay Less Notice can not only raise deductions specifically permitted by the Contract and legitimate set-offs but also deploy the Employer’s own valuation of the Works”.

Lastly the judge considered whether liquidated damages could be deducted even though the CA had not reached a decision in relation to the EOT. The judge made clear his comments were obiter and proceeded on the assumption that the contractor had submitted an effective and particularised notice of delay compliant with the contract’s provisions and that the CA had failed to reach a decision.

The judge was referred to commentary in Keating on Construction Contracts which suggested that where a contract imposes a duty on the architect to extend time and he fails to do so in accordance with the contract then the employer is unable to deduct liquidated damages. In this case the language of the contract was such that there were two specified condition precedents – a requirement of a Non-Completion Certificate and notification from the Employer within the relevant timescale. The judge felt that if there was to be a condition precedent that no liquidated damages could be deducted until an EOT claim had been addressed then that would have been spelt out in the contract. He therefore formed the view that a failure to operate the EOT machinery did not prevent the employer from deducting liquidated damages provided the two express conditions in the contract had been met. There were mechanisms available by which the contractor could challenge the deduction of LADs or the failure to grant the EOT which meant the contractor was not left without a remedy.

Conclusion

Yet another case before the court regarding interim payment applications serves to remind contractors and contract administrators of the importance of understanding the payment mechanisms in their contracts both in terms of content and timing of applications, certificates and notices. Failure to do so can result in significant wasted time and legal costs.

For more information about payment provisions in construction contracts or to find out more about how the construction team can help you please contact Rowan Turrall on [email protected] or 0118 952 7206. 

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.

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