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Clarity in Return for Cash Flow: Interim Applications for Payment in Construction Contracts10 December 2020

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In RGB Plastering Limited v Tawe Drylining and Plastering Limited¹, the English Technology and Construction Court (TCC) has reaffirmed the now well-established principle that, in order to be valid, payment applications submitted by contractors must comply in substance, form and intent with the requirements of the contract to which said applications relate.

"The decision promotes certainty for employers, who face draconian consequences if they fail to respond to payment applications in the way required by the relevant contract."

The decision promotes certainty for employers, who face draconian consequences if they fail to respond to payment applications in the way required by the relevant contract. It also highlights to contractors that they must ensure that they comply with all contractual requirements when issuing payment applications, or those applications will likely be invalid.

Moreover, the decision confirms that it will usually be very difficult for a contractor to rely on the fact that an employer has already paid sums in respect of defective payment applications if the employer then decides to dispute a payment application on the basis that it is non-compliant with the contract.

Background

The minimum provisions for interim payments set out in the Housing Grants (Construction and Regeneration) Act 1996 (the “Construction Act”) are crucial to addressing cash flow issues in the construction industry. This has become all the more so during the Covid-19 pandemic, when contractors’ cash flows have been stretched even further than usual. Interim payment mechanisms promote efficient and timely remittance of amounts owed to the contractor as they become due. The most common interim payment regimes require the contractor to submit an interim payment application to the employer according to an agreed payment schedule or at agreed regular intervals. The employer is then required to submit a payment notice and/or pay less notice in response by specified deadlines. If the employer fails to issue either of those notices, it must pay the full amount of the payment application. The principle of “pay now, argue later” applies if an employer fails to issue a payment notice and/or pay less notice.

In RBG Plastering v Tawe Drylining and Plastering, the validity of an interim payment application issued by a drylining sub-contractor to its employer was considered. The employer, RGB, sought a declaration from the court that the interim payment application purportedly issued by its sub-contractor, Tawe, was invalid.

The parties had entered into a subcontract in December 2018, by which an interim payment mechanism was agreed, in line with the requirements of the Construction Act. Pursuant to the contract:

  • Tawe agreed to submit interim payment applications to RGB on agreed dates each month specifying the amount claimed to be due on the relevant Interim Application Date set out in the contractual payment schedule, how the amount was calculated and what the amount related to;
  • The payment schedule set out a table of relevant dates for each payment cycle, including the date on which Tawe should issue its interim payment application and the date up to which the works should be valued, being on or around the 2nd or 3rd of each month; and
  • Notes to the payment schedule provided that interim payment applications received after the 28th of each month would not be considered and would be administered with the following month’s payments. Further, all interim payment applications had to be submitted electronically via email to a specific RGB email address.

"This judgment is a timely reminder of the importance of strictly adhering to the requirements of payment mechanisms agreed in construction contracts."

Tawe issued an interim payment application on 7 May 2019 by email to various employees at RGB but not to the contractually specified email address. The application was headed “valuation” and specified that it related to works up to 30 April 2019. RGB did not pay any sum in response and soon after, in the context of ongoing litigation between the parties, notified Tawe of its intention to terminate the subcontract.

RGB argued that the interim payment application was invalid as it did not comply with the payment schedule – it was late for the April cycle, too early for the May cycle and did not value the works as at an agreed date. Moreover, RGB identified that Tawe did not send the interim payment application in dispute to the agreed email address.

In this case, the interim payment application was late, but the judge noted that pursuant to the particular terms of the contract this alone would not render it invalid, it would simply delay payment by a month. Instead, Tawe’s non-compliance with the payment provisions of the subcontract was crucial. The interim payment application did not value works up to a date specified in the payment schedule and was not sent to the correct RGB email address. It was not clear or unambiguous so that the parties could know what to do about it or when. HHJ Jarman QC therefore agreed with RGB, granting a declaration that the relevant interim payment application was invalid.

The Importance of Clarity

HHJ Jarman QC revisited the relevant case law on payment regimes, which establishes that valid payment application notices must be clear and free from ambiguity. He referenced Mr Justice Coulson (as he then was) in Caledonian Modular Ltd v Mar City Developments Ltd², who stated that contractors must submit their interim applications with clarity given the draconian consequences they are required to suffer if they do not respond in time. Henia v Beck³, a case of similar facts to the present dispute, was also considered. A late payment application was deemed invalid, despite argument that it was intended for the next payment cycle, as it was ambiguous as to the precise period it related to. Finally, in Jawaby Property Investments Ltd v Interiors Group Ltd and Black⁴ it was held that a document can only be an application if it is clear in substance, form and intent.

"Contractors should not assume that because an employer has previously paid sums applied for under payment applications which did not strictly comply with the contractual requirements, the employer will be prohibited from rejecting future payment applications on the basis that they do not comply with those same strict requirements."

Estoppel by Convention

Tawe also sought to raise an estoppel claim, contending that RGB had allegedly waived the need for strict compliance with the contract by previously making payments in respect of interim payment applications which were issued late or sent to the wrong address. Tawe’s case was not helped by the fact that it served its evidence in support of its estoppel case almost four weeks late, and the judge ultimately refused permission to rely on that evidence, given that RGB had prepared for the hearing on the basis that no estoppel claim would be pursued.

In refusing permission to raise the estoppel claim, HHJ Jarman QC commented that while the claim would have faced difficulties, it would not have been “bound to fail”. Nevertheless, he accepted that a contractor may find it difficult relying on the fact that an employer has previously paid sums due under defective interim payment applications, to argue that it is no longer required to comply with the contractual requirements in respect of subsequent interim payment applications.

Lessons Learned

  • This judgment is a timely reminder of the importance of strictly adhering to the requirements of payment mechanisms agreed in construction contracts. Failure to comply with the contractual payment procedure and requirements in this case led to a contractor’s interim payment application being declared invalid; and
  • In addition, contractors should not assume that because an employer has previously paid sums applied for under payment applications which did not strictly comply with the contractual requirements, the employer will be prohibited from rejecting future payment applications on the basis that they do not comply with those same strict requirements.

Parties to construction contracts should therefore ensure they are familiar with the payment regime in their contracts and if in doubt as to the requirements of that regime, seek legal advice to ensure they comply. Ongoing legal support from the outset of a project will help to prevent contractors and employers falling foul of their strict contractual obligations in respect of payments. This will ultimately help to avoid disputes similar to the one in this case from arising.

Watson Farley & Williams offers training sessions to contract administrators, project teams and in-house legal counsel in respect of ensuring compliance with contractual payment mechanisms. We are able to tailor these sessions to the form of contract(s) most frequently used by your organisation. Please don’t hesitate to contact us for more information.

This article was authored by Construction Disputes Partner Ryland Ash, Senior Associate Alexander Creswick and Gerard Rhodes, a trainee solicitor in our London office.

[1] [2020] EWHC 3028 (TCC)

[2] [2015] EWHC 1855

[3] Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC)

[4] [2016] EWHC 557 (TCC)

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