Interim payment applications

When it comes to interim payment applications: be on time, be late, but don't be early. Louis Foscolo and John Farrell look at the lessons from a recent Technology and Construction Court ruling involving a local authority.

In the recent decision of Leeds City Council v Waco UK Limited [2015], Hon Mr Justice Edwards-Stuart was asked to consider whether the Interim Payment Applications (“Applications”) submitted by Waco (both early and late) were valid.

Background

Leeds City Council (LCC) and Waco UK Limited (“Waco”) had contracted on the basis of an amended JCT Design and Build Contract (2005 Edn, Rev 2, 2009) which contained detailed payment provisions governing Waco’s entitlement to make Applications. The contract was for the design, manufacture and installation of new factory assembled modular classroom buildings at Roundhay Primary School.

Prior to Practical Completion

Between April 2012 and Practical Completion on 28 March 2013, Waco made Applications approximately one month apart, although not in strict accordance with the contract provisions, which required that Applications be made on the dates specified (i.e. 26th day of each month or the nearest business day). Generally, the Applications were submitted two to five days late.

LCC’s agent and the Contract Administrator, Jacobs, ignored the irregularities and treated the Applications as if they had been submitted on the specified contract dates. The Applications were certified and payments were duly made.

Post Practical Completion

Practical Completion took place in late March 2013 and the contract provided that after Practical Completion, Applications were to be made at intervals of two months, rather than monthly.

Waco submitted Applications in April, July and September 2013, and although these Applications were, again, late and contrary to the contract requirements, no objection was raised by Jacobs and LCC. These Applications were also certified and paid.

On 26 November 2013, Waco submitted Application No. 16 two days earlier than the date specified by the contract. Jacobs objected to this premature Application, requesting the Application be resubmitted, which it was in December 2013 and subsequently paid. The next Application, in January 2014, was submitted late but no objection was raised and Jacobs certified that payment was due and LCC paid.

No further Applications were submitted until July 2014 when Waco made their Application eight days prematurely. Whilst Jacobs certified this Application (in the sum of £13,000) and it was paid, Edwards-Stuart J did conclude that it was probable that the Application was contractually invalid. However, LCC had not objected, probably given its limited value.

On 22 September 2014 and six days before the contract date, Waco submitted Application No. 21 in the sum of just under £500,000. LCC failed to issue a payment or pay less notice and refused to pay. As a result, Waco referred the matter to adjudication and the Adjudicator made an award in Waco’s favour on the basis LCC failed to serve the relevant payment notice in response to the Application. LCC continued to object to payment and Waco issued an application for Summary Judgment to enforce the Adjudicator’s decision.

Summary Judgement was not granted and LCC were given leave to defend. Accordingly, LCC brought proceedings under Part 8 of the Civil Procedure Rules for a declaration that Application No. 21 was not valid and that the Adjudicator’s decision was therefore wrong.

Issue

Edwards-Stuart J had to consider whether Application No. 21, submitted on 22 September 2014, was valid. In particular, whether Jacobs either agreed to vary the dates for the making of Applications post Practical Completion or, alternatively, waived LCC’s right to challenge an Application submitted on a different date, on the basis of the prior course of conduct.

Decision

Edwards-Stuart J decided that Jacobs, on behalf of LCC, had embarked on a course of conduct whereby they had agreed to accept Applications that were submitted three to four days (“a reasonable time”) after the contract date. Accordingly, it would be unconscionable to allow LCC to resile from the understanding that had been established from the course of conduct.

If, however, the Application was submitted significantly outside the three to four day (‘grace’) period established by the conduct of the parties, Jacobs would not be under any obligation to accept it, since it would not be a valid or permissible Application.

Waco was under an implied obligation to submit the Application within a reasonable time, being a matter of a few days after the date in the contract, so as to ensure that LCC knew when an Application was likely to be submitted and could put in place resources to respond within the limited time allowed under the contract.

Edwards-Stuart J moved on to Application No. 21, which he declared invalid on the basis that it was premature. The contract required that Applications state the financial position as at the date they were submitted, including a value of the works carried out by that date. An Application submitted earlier than the date in the contract simply did not comply with the contact requirements.

Whilst LCC had certified and paid the Application in July 2014 (which was submitted prematurely), it was considered to be a one-off payment for a nominal sum and did not constitute waiver of LCC’s rights under the contract or implied representation.

Lessons learned

Edwards-Stuart J’s judgment is important for three reasons:

1. For Contractors, it confirms that adherence to the dates specified in the contract remains critical, so as to avoid any uncertainty regarding the date of payment. Commercially, this is an important cash-flow consideration for Contractors.
2. For Employers (and their Contract Administrators), who consistently accept Applications early or late, they need to be aware that such conduct could create a course of dealing which may affect future rights, including the time for submitting payment or pay less notices. LCC were fortunate and were able to avoid the consequences of failing to submit the relevant payment notice by challenging the validity of Waco’s Application.
3. The case also acts as a reminder that pursuing proceedings under Part 8 of the Civil Procedure Rules, for declaratory relief, can have the same effect as appealing the Adjudicator’s decision, resulting in a legally binding decision from the Courts.

Louis Foscolo is a solicitor and John Farrell is a partner at Kennedys. Louis can be reached on 020 7667 9645 or This email address is being protected from spambots. You need JavaScript enabled to view it., while John can be contacted on 020 7667 9108 or This email address is being protected from spambots. You need JavaScript enabled to view it..