It's all in the timing

It has been an eternity, there have been tears and tantrums aplenty on the way, budgets have been stretched to breaking point and that was not the quality of finish you really wanted, but practical completion has been reached and you can expel a hugh sigh of relief. You now move to any snagging issues and resolving the final account in due course. Why should there be anything else to worry about: the project has been valued and paid for, bar retention and a bit of tidying up?

As ever, life is not always that simple. In many cases there are still money issues as to the value of variations and delay claims at the very least, that are to be resolved when keys are handed over.

Many contracts whether amended or otherwise, have express provisions regarding interim payment applications after practical completion, often at two monthly intervals, and sometimes stated to be open to agreement, unlike the rigid regime of such timing during the contract period.

Throw in the joys of the statutory payment regime and the ever popular trap for the unwary of requirements for pay less notices, and the potential for disaster looms large.

Indeed a contractor or subcontractor which has, in its opinion, been badly treated in the valuation and certification of its claimed sums during the contract period (probably including a dispute as to entitlement to extensions of time and loss and expense) may, while dialogue focuses on addressing the final account, put in an “interim application as part of our ongoing dialogue” submission. Discussions continue and then out of nowhere an adjudication notice appears for the full amount in the further application due to a failure to serve pay less notices, with the recipient of the notice and its professional team staring into an abyss of financial disaster for sums previously valued at very little in the last interim certificate covering the contract period.

In the case of Leeds City Council vs Waco UK Limited [2015] (TCC), which addressed issues as to the timing of interim applications, the council entered into a contract with Waco for the design, manufacture and installation of some modular classrooms for a Leeds primary school. The contract was in the form of a JCT Design and Build Contract, 2005 Edition, Revision2 2009 as amended. It contained detailed interim payment provisions.

Out of nowhere an adjudication notice appears for the full amount with the recipient staring into an abyss of financial disaster for sums previously valued at very little

During the course of the contract period, interim payment applications were made by Waco albeit not always strictly in accordance with the contract terms. Practical completion occurred on 28 March 2013 and thereafter further interim payment applications were made, the key one for the purposes of the case being made on 22 September 2014. This was not paid and Waco took that default to adjudication and was successful in getting an award for payment of the sum applied for - about £485,000. The council challenged the decision based on their view that under the contract, the interim application had been made prematurely.

As is often the case with disputes concerning payment procedures, there were a number of interwoven issues. Because the wording of the clause on payment applications expressly stated that the parties could otherwise agree timings for applications, as opposed to the strict timetable during the contract, it was found that the parties could, in principle, agree different dates under the mechanism in the contract and that was not a variation of the contract terms.

As to evidence concerning conduct regarding applications during the contract period, it was found that due to a course of dealing, any submission of interim applications three or four days later than stated in the contract would not entitle the council to reject them for being too late.

As to post practical completion payment applications, one application had been made 10 days early and still paid by the council, but that one instance did not constitute any waiver or form of estoppel preventing the council from rejecting any other premature application.

As a result, the September 2014 application, which had been made six days early, was premature and invalid, and the adjudicator’s decision could not stand.

In all payment process arguments a decision will turn on its own facts, but what this shows is that great care must be taken over payment procedures and timings before and after practical completion, as ignoring them can prove to be a very expensive exercise.

Laurence Cobb is a partner in the construction and engineering team at Taylor Wessing