22 Feb 2017

This is the latest case in the TCC to consider interim payments in construction contracts under the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act), in particular the validity of payment notices. The case also provides a reminder of the court's principles when it considers whether to stay enforcement of an adjudicator's decision.

Background

Kersfield Developments (Bridge Road) Ltd (Kersfield) appointed Bray and Slaughter Ltd (Bray) under an amended JCT D&B Contract 2011 to carry out various works on a development in Somerset (the Contract).

In relation to payment, the Contract contained the following provisions:

  • Interim payments would be paid by Kersfield to Bray, with the first due on 5 February 2015 and then on the same date in each month, or the nearest Business Day
  • Not later than 5 days after the due date, Kersfield was to give a payment notice to Bray. Any pay less notice was to be served no later than 5 days before the final date for payment
  • The final date for payment was 14 days from the due date
  • Any "notices, certificates or other communication … under Section 4 (Payment)" should be sent by 4:00pm on a business day, or the communication would be deemed served on the following business day
  • Interim Applications could be made on or after completion of a relevant stage or the monthly date, and should be accompanied by information set out in the Employers Requirements
  • The Employers Requirements set out further details of the payment application process, including that Bray should submit its application for payment to the Employer's Agent (CS2) at least 2 days before the interim payment dates, with various supporting information including (i) the percentage completions in respect of each element of the Contract Sum Analysis; and (ii) supporting evidence of the above by means of progress reports.

Application 19

On 5 August 2016, Bray issued Interim Application 19 in the sum of £1,208,279.39 exclusive of VAT, with a final date for payment of 19 August 2016. Bray's application contained various supporting documents including (i) an excel spreadsheet, setting out a breakdown of the works, percentage completion and value, materials on site and variations; (ii) a loss and expense claim, set out in the variations part of the above spreadsheet and a supporting spreadsheet, containing a narrative of the claims, pictographs and extracts from Bray's Sage records, and pdf cost reports from individual agency resources; and (iii) an excel spreadsheet showing a breakdown of the external works.

Kersfield's payment notice was due on 10 August 2016. However, CS2 issued it on Friday 12 August 2016. This meant that the sum due to Bray was the sum Bray had applied for in its application, unless Kersfield submitted a pay less notice. CS2 acknowledged that the payment notice was late and served a pay less notice on the same day. However, the pay less notice (sent via email) was timed at 9:50pm, therefore deemed served on 15 August 2016 (as 13-14 August 2016 was a weekend i.e. not Business Days). The payment notice and pay less notice both showed a sum due of £78,224.26.

Kersfield subsequently paid the sum stated as due in its payment notice, i.e. over £1million less than the sum in Application 19. As a result, on 23 September 2016, Bray commenced adjudication proceedings in respect of the outstanding sum in its Application 19.

The adjudication

Bray claimed payment of Application 19, due to Kersfield's failure to serve a valid payment notice or pay less notice. Kersfield argued that Bray's application did not clearly or unambiguously set out how the sums claimed had been calculated, and therefore was not a valid application under the contract. Kersfield particularly disputed two items on Application 19 that were worth a combined total of £457,695.

The adjudicator, Mr Gracia, agreed with Bray, that Application 19 was valid and Kersfield had not issued a valid payment notice or pay less notice, and ordered Kersfield to pay Bray the Application 19 value, and to pay the adjudicator's costs (£17,836.50). Kersfield did not pay up; so Bray applied to the TCC to enforce the decision. In parallel, Kersfield issued a Part 8 application seeking final determination of the dispute.  

Enforcement

The court considered both the adjudication enforcement and the substantive dispute at the same time. In relation to the substantive dispute, Kersfield and Bray ran the same arguments as they did in the adjudication. Bray also argued that the Application 19 was in the same format as all previous interim applications and CS2 had accepted these as contractually compliant, and therefore Kersfield was estopped from arguing that Application 19 was invalid.

Mrs Justice O'Farrell agreed with the adjudicator's decision and ruled that the Contract did not expressly provide that Interim Applications would be invalid in the absence of the supporting information in the Employers Requirements. Application 19 was also not in breach of the Construction Act. The court therefore agreed with Bray that Application 19 was a valid application and therefore that Kersfield had to pay up.

In relation to Bray's estoppel argument, this was not strictly relevant but the court did briefly consider it, saying (obiter) that the mere fact that payment had been made against earlier applications did not mean Bray had a contractual entitlement to further payment against an invalid application.

Stay of enforcement

Kersfield then argued that the enforcement of the adjudicator's decision should be stayed on two grounds: (i) that Kersfield was unable to pay the sums awarded by the adjudicator, meaning that there would be a manifest injustice if the decision were enforced; and (ii) that Bray would be unable to repay the judgement sum at a future date, relying on the principles in the case of Wimbledon v Vago.

The court reviewed the principles about staying enforcements. It agreed that it could grant a stay to prevent an injustice, however the court reiterated previous authority that it would be "rare and exceptional" to order a stay based on the paying party's inability to pay. Further, the court said that Kersfield was not technically insolvent, even if it was "nearly at the limit of its funding facility". The court also rejected the idea that Bray could not repay the judgement sum, as the evidence suggested otherwise.

Key lessons

This case serves as a reminder that:

  • The content of Interim Applications must be clear and unambiguous
  • The parties must comply with the deadlines for notices/payments defined in the building contract
  • When applying for a stay on enforcement, evidence to enforce the stay must be solid
  • As an Employer, it is crucial to serve any notices in response to Interim Applications on time
  • Estoppel arguments will not succeed where an application is fundamentally invalid.