Payment - sometimes it pays to be late, not early...

15 June 2015


A cautionary word on the pitfalls of local agreements in relation to payment under a construction contract.

Many cases have reached the Technology and Construction Court (TCC) over the years concerning the payment provisions in construction contracts and whether the parties to that contract have agreed to vary or even waive what is expressed in the contract itself.

The recent case of Leeds City Council v Waco UK Limited [2015] is the latest such case, and unusually gives a contractor a stark warning that it doesn't always pay to be overly efficient - here, making a payment application too early.

Leeds City Council (LCC) engaged Waco UK Limited (Waco) under an amended JCT Design & Build Contract 2005 (Rev 2 2009) to design, build and install modular classrooms at a school in Leeds. As you might expect, the contract contained detailed and comprehensive provisions governing Waco's entitlement to make applications for interim payments, how and when payment fell due, and when any notices regarding those payments were to be served by LCC, through its agent.

Prior to practical completion, the contract required applications to be made on a series of dates that were set out in a payment calendar included with the contract particulars. Clause 4.9.2 provided for applications for interim payments to be made:

"...on the dates provided for in the Contract Particulars ....... up to the date named in the Employer's Practical Completion Statement or the date within one month thereafter. Applications for Interim Payment shall thereafter be made at intervals of two months (unless otherwise agreed)....."

Generally speaking, during the time prior to practical completion, Waco's applications were not made strictly in accordance with the dates specified in clause 4.9.2 (the Valuation Dates) - they were often a few days late. Nevertheless, LCC ignored these irregularities and the applications were paid.

Practical completion occurred in March 2013 and following this, as before, Waco's applications were mostly made several days after the relevant Valuation Date. On a few occasions however, it made its application prior to the Valuation Date and it was one of these early applications that later ended up being considered by the TCC.

Back to the sequence of events leading up to the dispute - after the payment application received in February 2014 (that was subsequently paid), no further payment applications were made by Waco until 18 July 2014, despite the post practical completion two-month cycle provided by clause 4.9.2 setting Valuation Dates of 28 March and 28 May 2014.

Part of the TCC's later consideration related to the 18 July application, and the following "starter for 10" - was the submission of 18 July 2014:

  1. a late submission for March or May 2014; or
  2. an early application in respect of the Valuation Date of 28 July 2014?

Ten points to LCC on this occasion, as the TCC concluded that it was an early application for the July Valuation Date, and in all probability, would have been a contractually invalid application.

The TCC however was not troubled to consider that application further, as LCC had chosen not to take a point on the July 2014 application and it was simply paid - probably because the payment was only for £13,000.

In contrast, the next application for payment made by Waco on 22 September 2014 was in the sum of nearly £500,000 - this in fact was made and received six days before the (bi-monthly) contractual Valuation Date specified by clause 4.9.2 (28 September 2014). On this occasion, LCC did not serve a payment notice or a pay less notice and did not pay the application.

The parties fell out: Waco succeeded in an adjudication over payment of its application of 22 September but then failed to get that decision enforced - instead, LCC was given leave to defend but also ordered to pay the sum awarded to Waco by the adjudicator. The key substantive matter that now came before the TCC concerned the validity of the 22 September application (and if ostensibly valid, whether LCC was estopped or precluded from challenging its validity in any event), and the status of the adjudicator's decision.

The TCC found for LCC - in short, Waco's application of 22 September 2014 was declared invalid by the TCC. Consequently, the adjudication decision against LCC could not stand and Waco had to refund with interest the payment previously ordered to be made by LCC (ie the sum that had been awarded to Waco by the adjudicator).

By way of background to the TCC's decision, the parties were in agreement that a valuation date was the date on which the work comprising the subject of the application was to be valued ie each application should set out the financial position and the total value of the work properly executed as at that Valuation Date. This being the case, and after consideration of the terms of the contract and the parties' conduct in relation to applications, the TCC concluded that an application could not be made before the relevant Valuation Date.

This also reflected the Judge's clear view that under this contract, an application for interim payment had to be made on the Valuation Date (inferentially, on the basis that an early application could obviously not cover work between the date of the early application and the later Valuation Date).

So in this case, being early was not a good option for Waco - but what about a late submission?

In contrast, the TCC concluded that, as a result of the conduct of the parties, there was an implied term giving Waco a degree of flexibility as to when it could submit a valid application as long as this was on or after the Valuation Date. As Waco had generally made its applications within a few days after the Valuation Date and LCC had accepted and paid those applications, applications could be made within a reasonable time after the Valuation Date ("...up to three to four business days after the [Valuation Date]...") and still be valid.

Conclusion

Although this case could be seen to show that it doesn't pay to be over efficient, the real message here is the stark reminder that the milestone dates set out in the contract are important - "local" agreements create uncertainty for all and should be avoided.

Possibly, the decision to make an early payment application resulted from a lack of awareness of when the application should have been made, and the potential effects of not sticking to the specified date - alternatively, it may have been a result of an efficient or over eager contractor being ahead of the game.

But whatever the case, it (literally) pays to minimise your risks and stick to the clear terms of the agreement - the over-eager bird doesn't always get the contractual worm.


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