The Technology and Construction Court (TCC) has recently considered the important issue of what constitutes a valid interim application for payment in the case of Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC).
Background
Mar City (Employer) retained Caledonian (Contractor) to carry out extensive construction works at a site at Greenpoint, in Colindale, North London.
The Contractor’s interim applications for payment 1 to 14 all followed the same format. They were accompanied by a letter which set out the detail of the interim application, the total amount due, the amount previously certified, the net payment due, the date on which a payment notice was to be received and the final date for payment. The interim applications were made towards the end of each successive calendar month. The document attached to the letter was called an “application summary”.
On 30 January 2015, the Contractor issued application for payment number 15. This was in the same form as all the previous applications. On 5 February 2015, the Employer sent a pay less notice which resulted in no further payment being necessary to the Contractor.
As is often the case, commercial negotiations between the parties in respect of the value of the Contractor’s works was ongoing.
On 12 February 2015, the Employer sent an email to the Contractor in respect of the ongoing negotiations. The next day, the Contractor sent a reply which stated:
“Given your interim assessment below, please amend/update the current payment notice issued by Gareth [Waton] to take into account the interim assessed figure for the Combisafe hire of £125,792.87. We ask that you review the instruction given on the variation 020 as issued and we have updated our account as attached.”
The email enclosed three documents. The first was entitled “Final Account updated 13/2/2015”. This document set out exactly the same figures as interim application 15 with the addition of extra over costs from the extended Combisafe hire. The second was a breakdown document in similar form to that attached to the previous interim applications, but with the words “Final Account” added immediately before the words “Application Summary”. The document still stated the words “Application number 15”. The third document attached to this email was entitled “Variations to works after CSA Revision 10 December 2013”. It included the Combisafe hire extra over in the sum of £6,643.25, but there was no document identifying a claim for £125,792.87 as mentioned in the 12 February email.
On 16 February 2015, the Employer received by registered post the same three documents attached to the email of 13 February. The TCC noted that the Employer was “puzzled” as to what these documents were and so they asked the Contractor “can you confirm who this was sent by and to what it pertains in regards to the standing of the account, is it just an update for information only?”
The Contractor didn’t immediately know the answer to this question but four days later they stated “Re: posted update of the account, there is nothing in the paperfile but I can see from looking at the e-file that James [Stimpson] did an update on the upstream fa and appln as a result of the change of proprietary scaffold dates – previous summary went past 8th”.
Nothing further happened until 19 March 2015 when the Contractor sent the Employer five different invoices, dated 19 March 2015, in the total sum of £1,524,903.37. Attached was a breakdown, which was a copy of the ‘Final Account Application Summary’ sent on 13 February. The figures were precisely the same. A week later, on 26 March 2015, the Employer responded to that invoice and breakdown, attaching a payless notice, breakdown and supporting documents.
The Contractor argued that the email of 13 February 2015, together with its attachments, amounted to a new application for payment and/or a payee’s notice to the same effect and therefore the pay less notice issued by the Employer on 26 March 2015 was ineffective.
The Court’s decision
Perhaps unsurprisingly, the court decided that the Contractor’s email of 13 February 2015 was not a valid application for payment.
In part it seems the court was persuaded by the fact that:
- none of the documents attached to the email of 13 February (or indeed the email itself) stated it was a new interim application for payment (in fact, it still referred to “Application number 15”);
- the invoice of 19 March did not say that it was a default payment notice or that the contractor’s notice had originally been provided on 13 February;
- when the Employer asked what the documents were, the Contractor didn’t say it was interim application for payment 16. The Judge stated that this omission was significant and that the Contractor’s case was “something of an afterthought”; and
- the Contractor’s own correspondence indicated that the documents of 13 February were simply updating the overall value of its final account to include the scaffolding.
Equally as interesting for the sector, the Judge held that the Contractor could not apply for payment early, as that was inconsistent with the 28-day payment cycle the parties had agreed and followed. The Judge held:
“… it is wrong in law, because interim application 15 had been provided only a fortnight before 13 February, and had been the subject of a valid payless notice. No further interim application could validly be made here until the end of February, in accordance with the 28-day cycle that the parties had agreed and followed. If (which I reject for the reasons already noted) the 13 February documents were otherwise a valid claim for an interim payment, I do not accept that such a claim could be made ‘early’, without at the very least that fact being expressly drawn to the [Employer’s] attention.”
Finally, it is worth reading what the Judge said about the suggestion that the documents of 13 February gave rise to an undisputed entitlement to over £1.5 million:
“I consider that the suggestion that the documents of 13 February give rise to an undisputed entitlement to over £1.5 million defies common sense, and would be contrary to the purpose of the notice provisions in the 1996 Act. It is simply not permissible for a contractor to make a claim for £1.5 million (interim application 15 on 30 January); to have it knocked back through the payless notice mechanism; to update that same claim 8 days later by adding one small variation worth £6,000; and then, by reason of that update alone, miraculously to become entitled to the £1.5 million, despite the fact that the claim for the vast bulk of that sum had already been the subject of the valid payless notice. Such a sequence would make a mockery of the notice provisions under the Act and the Scheme. It would encourage a contractor to make fresh claims every few days in the hope that, at some stage, the employer or his agent will take his eye off the ball and fail to serve a valid payless notice, thus entitling the contractor to a wholly undeserved windfall. The whole purpose of the Act and the Scheme is to create an atmosphere in which the parties to a construction contract are not always at loggerheads. I consider that the claimant’s approach would achieve the opposite result.”
Comment
This is the latest TCC decision that strictly interprets a contractual and/or statutory payment process. It appears from this decision that if a Contractor wishes to make an interim application for payment then they must clearly state this intention in the documentation sent to the paying party.
The case is also warning against abusing the payment provisions contained within the Construction Act. It seems that the court will not hesitate to look at the entire context of any application for payment in order to determine the intentions of the parties and the reality of the situation.
