In the TCC case of Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC), the courts turned their spotlight on the administration of the payment mechanism, or in this case the maladministration of said mechanism. In particular the Contractor’s Interim Application and the Employer’s Pay Less Notice.

If you are like me then you are already acutely aware of the hurdles involved in getting this mechanism right, either pre or post contract. In many cases you are left looking at five documents! These are the original Construction Act, the 2011 amendments, the Scheme and the amendments and then of course the Contract itself. It can sometimes leave you pulling your hair out, if unlike me you have any that is.

In the case of Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC), the Court focused on the contents of a Contractor’s Interim Application and an Employer’s Pay Less Notice.

Background

Henia appointed Beck to undertake construction and fit out works under a JCT Standard Building Contract without Quantities 2011.

The payment process under this contract was:

• Not later than seven days before the Due Date, Beck was allowed to issue an Interim Application setting out the sum it considered would become due on the due date
• The Due Date was the 29th of each calendar month
• Interim Certificates were to be issued by the Contract Administrator not later than five days after the Due Date. Any Certificate was to set out the sum the Contract Administrator considered was due on the Due Date.
• The Final Date for Payment was 28 days from the Due Date. Henia had to pay the sum stated in the Interim Certificate on or before this date. If Henia did not issue or there was not a valid Interim Certificate, then Henia had to pay the sum set out in Becks Interim Application
• If Henia wanted to Pay Less than the sum in their Interim Certificate or Becks Interim Application, they had to issue a Pay Less Notice. This Notice had to be issued not later than three days before the Final Date for Payment.

What followed appeared to be a master class in how not to administer a contract. With the judge noting that the parties “have not followed with any precision the contractual requirements”.

The Dispute

The dispute centred around Interim Application numbers 18 and 19:

• Beck issued Interim Application 18, six days late. They applied for a sum of £2,943,098.95 for the period ending 30 April 2015
• The CA issued Certificate 18 one day late. It detailed a sum payable to Beck of £226,248.95
• Beck failed to issue Interim Application 19
• The CA issued Certificate 19 on 4 June 2015 at 00:03 hours (three minutes late). This detailed a sum payable to Beck of £18,893.53
• Henia issued a Pay Less Notice on 17 June 2015 (which was in the agreed timescales). This was based on Certificate 19 and included deductions for liquidated damages of £373,751.05. It stated that no payment was due in relation to Interim Application 19.

The Judge had to consider two very distinct arguments in relation to the payments:

• Was Beck’s Interim Application 18 valid?; and
• Was Henia’s Pay Less Notice valid?

The Judgment

Beck’s Interim Application

The Contract enabled Beck to issue an Interim Application stating the sum it considered would become due on each due date (which in this case was the 29th of the month). Crucially, Beck’s Interim Application 18 stated the sums applied for were “Valued to 30/04/15”.

The Contract was clear in that an application based on a valuation of the works could only happen on either 29 April or 29 May. 30 April was therefore not an option. For this reason, the Judge decided that Beck’s Interim Application was invalid.

Interestingly the Judge did not make any comment or finding as to the effect of the timing of Beck’s six day late Interim Application. Given recent case law, it is fairly safe to assume that had he done so he probably would have interpreted such provisions strictly. You can refer to recent cases Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC) and Leeds City Council v Waco UK Ltd [2015] EWHC 1400 (TCC). An exception to that rule is where there has been a course of operation between the parties showing they have varied the contract payment provisions, e.g. by allowing applications which are a few days late.

Henia’s Pay Less Notice

Due to the previous finding in relation to Beck’s Interim Application the dispute over Henia’s Pay Less Notice was rendered irrelevant. As the contractual payment mechanism had not been followed, it meant that there was no valid Interim Application or Interim Certificates (both of which had in fact been issued late), for that reason no interim payment was due to Beck.

I am sure to the delight of Employers throughout the land, the Judge went on to consider the parties’ arguments in relation to the Pay Less Notice.

In the scenario that Beck’s Interim Application 18 had been valid, Henia would have been compelled by the Act to pay the sum in that application (as there had been no no valid Interim Certificates issued by Henia), this was of course subject to the effect of Henia’s Pay Less Notice.

Beck argued that a Pay Less Notice only allowed Henia to pay less than the sum in the Interim Certificate (or Interim Application) on the basis of counter or cross claims (e.g. liquidated damages).

Henia countered that, in addition to any cross claims, it was entitled to state its own valuation of the works in its Pay Less Notice. That valuation was based on their late Interim Certificate 19, which contained their claim for liquidated damages. This claim far outweighed this so Henia considered that no sums were due to Beck.

The Judge sided with Henia. He held that the contract compelled Henia to serve a Pay Less Notice if it intended to “pay less than the sums stated as due”. There was nothing explicit in the wording to suggest this was restricted to cross-claims.

Blurred Lines?

The judgment in Henia vs Beck found that a –

“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”.

This decision, while most welcomed by employers, has blurred the lines between a payment notice and a pay less notice to the stage where each one could arguably serve as the other.

This was not the purpose of the amendments to the Act and I will discuss a further recent case in which again the TCC missed an opportunity to clarify this rather worrying ambiguity.

As always the advice remains the same for both parties to a contract, get advice and make sure you always follow the contract (assuming of course it is Act compliant…).

This article was published by Yosef Ewing on Linked in on 21/03/16.

This article is intended to provide general information about legal topics. Nothing in this article or in the documents available through it, is intended to provide legal advice. You should not rely on any information contained in this article, or in the documents available through it, as if it were legal advice.

 

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