What happens if the contractual payment terms agreed between the parties do not comply with the Construction Act and the problem can’t be fixed by implying the Scheme?

Manor Asset Limited v Demolition Services Limited [2016] EWHC 222 (TCC)

Manor Asset Limited (MAL) commenced part 8 proceedings in the TCC seeking a declaration that an adjudicator’s decision was unenforceable due to a breach of natural justice and requesting that the TCC decide the correct deadline for submitting a pay less notice.

The contract was in the form of the JCT Minor Works with Contractor’s Design 2011 with bespoke amendments and was dated 13 April 2015 (the Contract). The Contract as originally entered into provided the following interim payment mechanism:

Due date – 4 week intervals from the Date for Commencement of the Works.

Deadline for Interim Certificate – 5 days after the due date
Final date for payment – 21 days from the due date
Deadline for a pay less notice – 5 days before the final date for payment

The section of the Contract which related to payment was amended on 13 August 2015 to provide for payment to Demolition Services Ltd (DSL) of a percentage of the contract value upon the achievement of certain milestones.

The amendment provided that 60% of the contract value would be paid when demolition passed the black line as illustrated on a photograph of the site. The amendment said that payment was to be made within 72 hours of receipt of the invoice, issued when the milestone was achieved. The amendment did not refer to payment notices or pay less notices.

The parties’ disagreed as to how this amendment should be interpreted.

On 23 October 2015, DSL issued an invoice for 60% of the contract price asserting that it had achieved the first milestone under the amended contract.

On 28 October 2015 MAL issued a pay less notice. DSL argued that the pay less notice was invalid and that DSL’s invoice should have been paid within 72 hours of MAL receiving the invoice.

DSL commenced adjudication and the Adjudicator found that DSL had achieved the first milestone on 23 October 2015 and that MAL had failed to serve its pay less notice in time. He decided that the final date for payment was 26 October 2015, being 72 hours after MAL had received the invoice and the pay less notice should have been issued 5 days before this date. This meant that MAL should have issued the pay less notice before the invoice was received.

MAL did not agree with this and asked the TCC to provide its view as to the timing of the pay less notice. The TCC considered that the Adjudicator had failed to appreciate that the service of a pay less notice prior to the payment notice is not permitted by the Construction Act 1996.

The Construction Act contains detailed requirements regarding payment under construction contracts. If a construction contract does not comply with these requirements, the provisions of the Scheme for Construction Contracts 1998 (the Scheme) will be implied into the contract. Under the Construction Act (and the Scheme), the pay less notice cannot be served until after the payment notice. The Scheme provides that a pay less notice must be served not later than 7 days before the final date for payment.

If the final date for payment of the invoice was 72 hours after receipt of the invoice then MAL could not serve a valid pay less notice either in accordance with the original contractual provisions (5 days before the final date for payment) or under the Scheme (7 days before the final date for payment), because both of these timescales meant that the pay less notice needed to be served before the invoice was received and the pay less notice would therefore be invalid under the Construction Act.
The Court’s Decision

The court considered that neither party had advanced an interpretation of the contractual provisions which complied with both the express terms of the amendment to the Contract made by the parties and the Construction Act. The court acknowledged that the most usual interpretation of the contractual provisions would be that the parties intended there to be no provision in relation to pay less notices (as they did not include such a provision).

However, that would mean that the deadline for serving the pay less notice was seven days before the final date for payment (as the Scheme would be implied), which would be before the date of service of the invoice. This was expressly prohibited by statute.

In light of this problem the court held that this was one of those cases where a reasonable person in the position of the parties would understand the amendment to mean something else. Therefore in order to resolve this problem and give business efficacy to the Contract the court concluded that it was necessary to imply a term confirming the deadline to serve a pay less notice.

The court said that if faced with a choice between the amended provisions being wholly ineffective or enabling the Contract to work, the parties must surely have intended the Contract to work. The only way in which the Contract could be made to work was to say that the prescribed period before the final date for payment in which a pay less notice must be served was nil i.e. that the pay less notice could be served at any time between receipt of the invoice and the expiry of the 72 hours following its receipt.

This meant that MAL’s pay less notice had been served late and was not valid.
Comment

If there is ambiguity in the contractual payment provisions agreed between the parties, or they do not comply with the Construction Act, the court will imply the provisions of the Scheme instead. This judgment demonstrates that the court can also imply bespoke terms if the provisions of the Scheme will not resolve the ambiguity.

Following this judgment there has been much legal debate as to whether the court should have implied all of the provisions of the Scheme rather than attempting to fit the Scheme around the contractual provisions relating to due date and final date for payment which had been agreed between the parties. There has also been speculation that MAL deliberately chose to give up their right to serve a pay less notice when the amendments to the contractual provisions were made. If this were correct, the court’s decision here would have gone against the intention of the parties.

If the parties to a contract wish to avoid the contractual provisions being interpreted in a way which is contrary to what was intended they should ensure that when making amendments to the standard form they carefully consider both the contractual and statutory implications of such changes and ensure that the mechanism for payment can be clearly understood by an objective third party.

This article was written and published on the internet by Walker Morris in April 2016.

This article is intended to provide general information about legal topics. Nothing in this article or in the documents available through it, is intended to provide legal advice. You should not rely on any information contained in this article, or in the documents available through it, as if it were legal advice.

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