Read your payment terms first!

Barrister Professor Rudi Klein suggests that it is absolutely essential to double-check that the payment terms of a proposed contract make sense and that they comply with the Construction Act.  Prof. Klein advises about the importance of being clear on your payment terms.

What should you do? Go to your payment terms first

When initially presented with contractual documentation, always check the payment terms first. If they are not satisfactory, any issues should be resolved at the outset. It is not unusual for discrepancies to arise where payment provisions are contained in more than one document. Confusion over the key dates relating to payment due dates, issuing of pay less notices and final dates for payment could lead to unnecessary and costly disputes. This occurred in the recent case of Bouygues (UK) Ltd v Febrey Structures Ltd.

The facts

Febrey Structures (FS) entered into a sub-contract with Bouygues (B) to build an in-situ concrete frame and structural topping for a new building at the University of Bath. The contract sum was £626,315. The sub-contract order incorporated the terms of the GC/Works Sub-Contract (now rarely used); the key terms were deleted and replaced by a host of amendments. Confusingly, the payment dates were to be found in:

• clause 21 of the Sub-Contract Conditions;
• a schedule of amendments to clause 21;
• Appendix 10 to the contract (setting out a schedule of payment dates); and
• the “Sub-Contract Pre-Let Meeting Minutes” which made reference to the “Sub-Contract Payment Schedule”.

To add to the confusion, the schedule of amendments to clause 21 required FS to submit applications for interim payment on dates stated in any schedule of dates for applications for payment that “may be contained in Appendix 8”. There was no schedule in Appendix 8, which, in fact, contained delivery route information. Potentially, in this confusion of documentation, key payment dates were to be found in five different locations.

The dispute

The dispute related to an interim payment application issued by FS on 23 October (this date was in Appendix 10). The sum claimed was £144,582. B argued that it had until 23 November to issue a payment notice or pay less notice. FS’s position was that any notice had to be served before this date.

Since the works had started, FS had been submitting its interim payment applications in accordance with the schedule in Appendix 10. In relation to the October application, the dates are set out here.

23 October:     Issue of Interim Payment Application

16 November: Payment due date

20 November: Issue of any pay less notice

23 November: Final date for payment and date for B to issue the payment notice

It can be seen from these dates that they were not compliant with the statutory payment notice requirements in the Construction Act; an initial payment notice must be served not later than five days after the due payment date. Therefore, service of this notice on 23 November would have been too late; it should have been served by 21 November.

B served a payment notice on 23 November which valued FS’s entitlement at minus £2,041.27. Since this notice was too late, FS claimed that the amount it applied for was due.

B sought a declaration from the court to the effect that:

• Appendix 10 should not apply since it wasn’t compliant with the Construction Act; and
• therefore the payment dates in clause 21 (as amended) should be preferred since they were compliant with the Act.

The judgement

The issue for the court was one of interpreting the meaning of this contract. The court took due note of a warning given by Lord Neuberger in the recent Supreme Court case of Arnold v Britton that contracts should not be re-written “in an attempt to assist an unwise party or to penalise an astute party”.

From looking at the surrounding documents (such as the Pre-Let Meeting Minutes which specifically referred to a “Sub-Contract Payment Schedule”), the court concluded that the reference to Appendix 8 in clause 21 should be regarded as a reference to Appendix 10.

Having found that the Appendix 10 schedule was applicable, the court confirmed that it was not compliant with the Construction Act. In such a case, they are replaced by the equivalent provisions in the fall-back regulations known as the Scheme for Construction Contracts. Therefore, the payment notice had to be issued by 21 November.

But this created a problem. The date in the schedule for issuing a pay less notice was 20 November. Under section 111(5) (b) of the Construction Act, a pay less notice cannot be issued prior to the deadline for issuing a payment notice. But, under the Scheme, this notice would have to be issued seven days prior to the final date for payment (i.e. on 16 November, which would be in advance of the issue of the payment notice).

After analysing the pattern of the other monthly payment applications, the court concluded that any pay less notice would have to be issued on the same date as the initial payment notice. Therefore, in relation to FS’s October application, any payment notice – whether an initial notice or a pay less notice – would have to have been issued on 20 November. B’s notice served on 23 November was, therefore, too late to qualify as a payment notice or pay less notice. Consequently, B was required to pay the sum in FS’s October application.

Comment

The facts in this case are typical of the sloppy approach to gathering together contractual documentation. This is why it is absolutely essential to double-check that the payment terms make sense and comply with the Construction Act. Whilst the subcontractor in this case recovered the amount he applied for, it required an initial adjudication and a court case to get the result. Whilst it would have got back most of its legal costs, the cost to the business in resolving the dispute were likely to have been substantial.