In the last post we looked at three basic documents that are a consequence of the Payment Mechanism, these being:
• The Interim Application for Payment (AfP)
• The Payment Notice
• The Payless Notice
How important these relatively straight forward contract requirements are has been highlighted in a court case that has recently been concluded in the Technology and Construction Court (TCC) between Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC). In particular it has given some legal position in relation to the three documents, but in particular the AfP and Payless Notice.
Background to the case
Henia Investments Incorporated (Henia) entered into a Joint Contract Tribunal (JCT) Standard Building Contract without Quantities 2011 (as amended) with Beck Interiors Limited (Beck) to undertake an extensive Fit Out to a property in Kensington, London.
The Payment Mechanism was intended to reflect The Housing Grants, Construction and Regeneration Act [1996], as amended by The Local Democracy, Economic Development and Construction Act [2009] where the interim AfP due date was the 29th of each month with interim AfP’s to be made no later than 7 days before the due date. Therefore Beck could apply between the 22nd and 29th of each month. The Contract Administrator was required to issue an Interim Payment Notice no later than 5 days after the due date, this being usually the 3rd or 4th of the following month, save February where it would be due on the 5th March. The final date for payment was 28 days after the due date and any Payless Notice were to be issued no later than 3 days before the final date, therefore on or before the 26th of the next month following the AfP.
What led to the Dispute
The dispute centred round AfP’s and if legally delivered and the consequence thereof. Although it should be noted that the presiding judge, Mr Justice Akenhead noted that the parties “have not followed with any precision the contractual requirements”. This is perhaps a masterpiece of understatement as this case could be a case study in how not to administer a Contract.
The dispute centres on Interim AfP Number 18, due on 29th April 2015 and AfP Number 19, which was due to be submitted on 29th May 2015.
Beck lodged their Interim AfP Number 18 for the sum of £2,943,098.95 six (6) days late. Crucially this was for works completed to 30th April 2015. On 6th May 2015 the Contract Administrator issued a Payment Notice to Beck detailing the sum a payable as £226,248,98. This payment Notice where it related to AfP number 18 was issued one (1) day late, although effectively the Contract Administrator could not issue a Payment Notice in time as the AfP was delivered after he was compelled contractually to provide his Payment Notice. Although the Contract Administator could have issed a Payment Notice in time, in all probability showing £0 due in period.
Beck failed to produce and lodge their Interim AfP Number 19 (due on or before 29th May 2015). Despite this the Contract Administrator issued a Payment Notice to Beck on 4th June 2015 at 00:03, therefore 3 minutes later than when it was due, although in reality one (1) late, detailing the sum a payable as £18,893,953.
Henia issued a Payless Notice within the agreed contractual timescale on 17 June 2015. This was based on Payment Notice Number 19, of which part of the computation was the deduction for Liquidated & Ascertained Damages (LAD’s) of £373,751.05. This Payless Notice stated that Becks entitlement in relation to AfP number 19 was £0.
It was Beck position that the AfP lodged six (6) days late was a valid Interim AfP relating to the next Valuation Date of 29th May 2015 and that as the Contract Administrators Payment Notice was late (effectively by 3 minutes) the sum claimed in this AfP was now due. Beck argued further that the Payless Notice issued by Heina on 17th June 2015 was invalid. Their challenge to its validity was on the grounds that in a Payless Notice, Henia could only apply cross-claims, such as LAD’s but otherwise not challenge the Contract Administrator’s valuation.
In Part 8 proceedings commenced by Heina (Part 8 – Alternative Procedures for Claims is explained in greater detail at this link: http://www.justice.gov.uk/courts/procedure-rules/civil/rules/part08 ) Judge Akenhead had three very clear and distinct arguments to consider. These being:
• Was Beck’s Interim AfP Number 18 valid
• Was Henia’s Payless Notice valid
• Would the failure by the Contract Administrator to make a Determination in respect of an Extension of Time (EoT) claim by Beck prevent Henia from claiming LAD’s
While these were the three primary points to be considered, the essential element was the timing of these documents in relation to the Payment Mechanism within the Contract.
Judgment
Beck’s Interim AfP’s
The Contract enabled Beck to lodge an AfP on or before the 29th of each month stating the sum it considered would become due for payment. The works would be valued from the 30th of the previous month to the 29th of the current month, under normal circumstances. Beck’s Interim AfP Number 18 stated the sums applied for were “Valued to 30/04/2015”. The Contract was clear and unambiguous that an AfP on a valuation of the works could only happen on either 29 April or 29 May. 30 April was therefore not an option.
Judge Akenhead therefore rules that Beck’s Interim AfP was invalid. However he was silent with regards the timing of Becks AfP being six (6) days late.
In effect on this issue four points can be made to summarise the position that was decided by Judge Akenhead, these being:
1. The relevant AfP date of 29th April 2015, which would have been the 18th relevant due date under the Contract.
2. Nothing in the AfP dated to 30th April 2015 suggested the works were valued to 29th May 2015. The AfP stated the works were valued up to 30th April 2015 meaning that if was a valuation to the 29th May 2015 AfP date, Beck were not anticipating doing any work of value during May 2015. This was not plausible.
3. There was no indication in the AfP dated 30th April 2015 to suggest the 29th April 2015 AfP date had been missed and this AfP related to the 29th May 2015.
4. The AfP dated 30th April 2015 in substance, form and intent not an Interim AfP relating to the 29th May 2015 AfP date.
Henia’s Payless Notice
Due to the finding in relation to the validity of Beck’s Interim AfP, the dispute over Henia’s Payless Notice was rendered irrelevant. As the Contract Payment Mechanism had not been followed, it meant that there was no valid Interim AfP or indeed Payment Notices and both had been issued late. As a consequence no interim payment became due to Beck.
Judge Akenhead did however go on to consider the parties’ arguments in relation to the Payless Notice.
If Beck’s Interim AfP Number 18 was valid then Henia would have been compelled by the Act to pay the sum applied for, as there was no valid Payment Notice, which was effectively the subject of Henia’s Payless Notice.
Beck argued that a Payless Notice only allowed Henia to pay less than the sum in the Payment Notice (or Interim AfP) on the basis of counter or cross claims, in this case LAD’s.
Henia countered this argument and claimed that in addition to any cross claims, it was also entitled to state its own valuation of the works in its Payless Notice. This valuation was based on the late Payment Notice Number 19, which contained their claim for LAD’s and this claim outweighed this, hence Henia’s view that no sums were due to Beck.
Judge Akenhead sided with Henia and held the contract compelled Henia to serve a Payless Notice if it intended to “pay less than the sums stated as due.” Further no explicit wording in the Contract implied this was restricted to cross-claims.
Contract Administrators failure to Determine the EoT
Judge Akenhead found that any failure by the Contract Administrator to Determine the EoT provisions would not give rise to a Condition Precedent debarring Henia from claiming LAD’s and any potential short term unfairness to Beck could be resolved through the Contracts dispute resolution mechanism. He stressed this finding was obiter where prior to judgment being handed down, in an Adjudication commenced by Beck, the Adjudicator had found that no valid application for an extension of time had been submitted.
The Judgement in Summary
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.”
Employers will welcome this outcome as it has blurred the lines between a Payment Notice and a Payless Notice and at what stage each one could arguably serve as the other.
What is the general implication of this ruling?
This judgment confirms the principle that The Housing Grants, Construction and Regeneration Act [1996] and it’s amendments in The Local Democracy, Economic Development and Construction Act [2009] where the Employer is not barred from challenging an amount previously certified by the Contract Administrator and undertaking its own valuation. However this will obviously need to be specific to the terms of the Contract.
Further where a Contract has a clear and unambiguous date for the lodging of an Interim AfP doubt will arise if the sequence is not followed.
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