It pays to be clear

Contract administrators should always be diligent with interim payments even if other parties aren’t

Recently a number of employers have found themselves paying significant sums to contractors either because of failings by their contract administrators (CAs) or because they have themselves been unaware of ‘pay less’ requirements. The case of Henia Investments Inc v Beck Interiors Ltd provides important guidance for architects who act as CAs about payment applications and pay less notices under the JCT Standard Building Contract (2011 edition) – the Standard Form. 

Applications for payment

Three requirements dominate this part of the Standard Form: a contractor may make an interim application for payment up to seven days before the due date of each interim payment; the CA must issue an interim certificate setting out the sum due to the contractor within five days after the due date; and the employer may issue a pay less notice up to five days before the final date for the interim payment, specifying the sum that it considers due to the contractor and the basis on which it is calculated.

The employer must pay the full sum included in an interim application if the CA does not issue an interim certificate and no pay less notice is issued for the employer.  This is regardless of whether or not the contractor is entitled to the sum it has claimed.

Unfortunately, in several recent cases employers have had to pay contractors substantial sums, either because CAs have failed to issue interim certificates, or employers have not appreciated the need to serve a pay less notice because the contractor did not make clear that a document was intended to be an interim application, or to which due date it related.  

Pay less notices can be based on the employer’s valuation and include deductions

In the Henia case, the court determined that if a document submitted by a contractor is to take effect as an interim application ‘it must be clear and unambiguous that an application relating to a specific due date is being made [so that] the parties know what to do about it and when.’   If it is not clear, it will not be a valid interim application; no payment will be due to the contractor if the CA does not issue an interim certificate’ and there will be no need for the employer to serve a pay less notice in response.  

Pay less notices

Beck argued that pay less notices can only be used to deduct sums (such as liquidated damages for delay) from the amount stated as due in the CA’s interim certificate or the contractor’s interim application.  It claimed, therefore, that the pay less notice served on behalf of Henia was invalid because it calculated the sum due to Beck by reference to the employer’s valuation of the works.  The judge disagreed.  Pay less notices can be based on the employer’s valuation and include deductions.  

Practical impact

While CAs can take some comfort from this case, it is important that they issue interim certificates in respect of each due date, whether or not the contractor submits an interim application. They must also advise employers to issue a pay less notice if either: an interim certificate has not been issued in respect of a due date and there is reason to believe the contractor may claim that a document it has submitted is an interim application for that due date, or if other sums should be deducted by the employer.

A CA failing to take those steps may find their employer seeking to recover any resulting losses from them.  Generally, employers will not suffer material losses as they will be able to recover overpayments from the contractor. However, substantial claims may be made against CAs if contractors become insolvent before any overpayments are recovered or where material legal costs are incurred. •

Douglas Wass is a partner at Macfarlanes LLP

 


In plain English: Collateral warranties

These are contracts entered into between the members of a professional team, the contractor and the sub-contractors and third parties (such as tenants, purchasers or funders of the development). The consultant, contractor or sub-contractor warrants that they have complied with the terms of their appointment, building contract or sub-contract and often give a copyright licence to the third party allowing them to use documents the consultant, contractor or sub-contractor has created for the development. The warranty allows the third party to recover losses they incur in the event that the development is defective.