Interim payment notice – Payless notice – Liquidated damages – Challenging assessment
The TCC had to determine whether an interim application for payment made by a contractor was valid where it was ambiguous which payment date the application had been made for. Akenhead J determined that this ambiguity would be construed against the contractor and in favour of the employer, with the result that the contractor could not reap the benefit of his own valuations becoming the sum due without having made absolutely clear to the employer the nature and purpose of each application.
Akenhead J also determined that the employer could claim a different valuation of the works in a payless notice and was not confined to merely making cross claims and deductions. Finally, he determined that an extension of time decision was not a condition precedent for the employer to make a claim for liquidated damages under the particular wording of the contract between the parties.
Henia Investments Inc (‘Henia’) engaged Beck Interiors Ltd (‘Beck’) for the construction and extensive fitting out of a property in Cheval Place, London. The contract price was £4 million and the works were to be completed by 5 September 2014. The Contract Administrator (‘CA’) was Turner & Townsend.
The contract between the parties was the JCT Standard Building Contract without Quantities 2011 standard form. The payment provisions read as follows:
“4.9.1 For the period up to practical completion of the Works, the due dates for interim payments by the Employer shall be the monthly dates specified in the Contract Particulars up to either the date of practical completion or the specified date within one month thereafter.
4.10.1 The…Contract Administrator shall not later than 5 days after each due date issue an Interim Certificate, stating the sum that he considers to be or have been due at the due date to the Contractor in respect of the interim payment
4.11.1 In relation to any interim payment the Contractor may not less than 7 days before the due date make an application to the Quantity Surveyor (an 'Interim Application'), stating the sum that the Contractor considers will become due to him at the relevant due date in accordance with clause 4.9.2 and the basis on which that sum has been calculated.
4.11.2 If an Interim Certificate is not issued in accordance with clause 4.10.1, then:
.1 where the Contractor has made an Interim Application in accordance with clause 4.11.1, that application is for the purposes of these Conditions an Interim Payment Notice;
.3 If the Interim Certificate is not issued in accordance with clause 4.10.1, but an Interim Payment Notice has been given under clause 4.11, the sum to be paid by the Employer shall, subject to any Pay Less Notice under clause 4.12.5, be the sum stated as due in the Interim Payment Notice.”
The net effect of these terms was that Beck could make an interim application to the CA not less than 7 days before the due date, and this would stand as the sum Henia would be required to pay where the CA failed to issue a valid interim certificate and Henia failed to issue a valid payless notice.
The construction works were delayed for a period of 11 months, resulting in the CA issuing a Non-Completion Certificate on 5 September 2014. The parties had failed to follow the payment scheme under the contract with any precision and the decisive interim application was issued by Beck on 28 April 2015, 6 days later than was required for the April 29 due date but well in advance of the May 29 due date. The CA failed to issue an Interim Certificate in time for the May due date and so Beck sought to argue that the interim application had been made in respect of that date, and, unchallenged, would determine the sum now due from Henia.
Henia issued a payless notice on 17 June 2015 asserting that no payment was due on the basis of a different valuation of the works and an entitlement to liquidated damages.
There were three key issues to be determined by Akenhead J in the proceedings:
- Was Beck’s interim application an effective or valid interim payment notice in respect of the May 29 due date?
- Was Henia’s payless notice effective or valid?
- Would a failure on the part of the CA to make an extension of time decision render the Non-Completion Certificate invalid or otherwise prevent Henia from deducting and/or claiming liquidated damages?
Issue 1 – Application No 18
Akenhead J considered that the April 28 application would have to be carefully scrutinised in order to determine whether it could stand as an interim application in respect of the May due date. The requirements for each interim application were stringent, and the rationale behind this was clear:
“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.”
Akenhead J found that the application could only have been intended in respect of the April due date. This was exceedingly likely because:
- The document was titled ‘Interim Application for Payment No:18’ and April 29 was the 18th due date;
- The application only took account of work done up until the 30 April, suggesting this was the intended due date the application was made in relation to; and
- The only realistic proposition to support the argument that the application was made for the May due date was that it was too late for the April due date, but if this was the case then one would have expected Beck to acknowledge that the April date had been missed and the application was intended to relate to the May due date.
He therefore concluded that there was, at the very least, substantial room for confusion about the April 28 application, and since Beck purported to rely on this ambiguity to gain substantial financial advantage, the contractual requirements would be construed strictly against them. This obligation was crucial because it was only where the application was clear that Henia would be able to respond appropriately to it and avoid the potentially draconian consequences that followed. The due date uncertainty was therefore fatal to interim application 18, and Akenhead J determined it was not valid.
Issue 2 – the payless notice
The second issue for Akenhead J to determine was whether a payless notice could be used by an employer to advance a different valuation of the construction works or was merely confined to raising setoffs and cross claims. This was a somewhat controversial issue, as it would require determination of the exact nature of the payless notice as envisioned by Parliament when passing the Local Democracy, Economic Development and Construction Act 2009 (‘LDEDCA’).
Akenhead J was persuaded by the fact that under the regime agreed between the parties, the contractor could assert his valuation of the works in an interim application, the CA could assert his independent valuation of the works in the Interim Certificate, and so it was only a matter of commercial common sense that the employer should have the chance to assert his own valuation of the works. The exact wording of the contractual terms did not expressly exclude this as a possibility, and Akenhead J therefore did not consider that this was contrary to the HGCRA as amended by the LDEDCA.
Issue 3 – the extension of time
Although obiter in this case, Akenhead J also determined whether the obligation on the part of the CA to operate the extension of time provisions was a condition precedent for Beck to deduct liquidated damages. He was ultimately persuaded that the wording of the contract did not lend itself to such a reading because there were already two explicitly spelled out conditions precedent for Beck claiming LADs in the contract, and it would have been unusual if this further condition had been intended but not spelled out. He also considered that there was no other pressing need to read this as a condition precedent, as Beck already had the means to challenge the decision through adjudication or litigation, and any short term disadvantages were not sufficient reason to construe the clause as a condition precedent.
The case of Henia demonstrated the vital requirement for parties to obey the time limits set out in the contract in respect of payment. The TCC issued a harsh rebuke for a contractor intending to rely on an interim application that fell afoul of the need for absolute clarity of purpose and freedom from any kind of ambiguity, emphasizing that a contractor must be explicit when making an interim application. Akenhead J’s dicta also gives the clear sense that the courts will not be lenient towards attempts to disguise an out of time application for something else in circumstances where such an interpretation seems an unlikely stretch of the truth.
The case served as a double blow for contractors as Akenhead J was not persuaded by the argument that a payless notice could only challenge sums on the basis of cross claims or other foreseen deductions, with the courts insisting on a mechanism for the employer to assert his own valuation of the works. Whether this determination would have been different if the contract had provided that the employer was responsible for issuing the Interim Certificate rather than the CA (and therefore already had the means to assert his own valuation of the works) is uncertain, but for now the position would appear to be that the employer would get two bites of the cherry, able to advance one valuation in the Interim Certificate and an entirely different one in the later payless notice.