In Henia Investments v Beck Interiors, Akenhead J gave important guidance on the implications for contractors of submitting late payment applications. While, understandably, this aspect of the judgment has received most of the attention, Henia provides equally helpful guidance to employers.
In Henia, Akenhead J confirmed that:
- An application received late does not have to be considered for that payment cycle and does not by default become an application for the next payment cycle.
- A valid reason for issuing a pay less notice can be a wholesale revaluation of the works.
- Failure by a contract administrator (CA) to make a decision about a claimed extension of time (EOT) does not invalidate a non-completion certificate issued under a JCT contract (in this case, JCT SBC/XQ 2011) or otherwise prevent an employer from deducting or claiming liquidated damages.
Using a pay less notice to challenge a valuation
As anyone involved with construction contracts in the UK will already know, unless an employer issues a valid pay less notice within the timescales set out in the contract, it must pay the notified sum (that is the amount specified in a payment notice) on or before the final date for payment, whether or not that is what the contractor is entitled to on a proper analysis. If the employer fails to issue a pay less notice, but does not pay the notified sum, subject to other conditions, the contractor is entitled to suspend performance pursuant to section 112 of the Construction Act 1996. In an adjudication, the adjudicator may order the employer to pay the notified sum, without considering the reasons why the employer considered that the contractor was entitled to less. Employers usually use pay less notices to reduce the notified sum, to take into account cross claims or deductions that the employer may be entitled to under the contract, for example, liquidated damages. However, Akenhead J confirmed that they may also be used to challenge the valuation itself.
It seems to me there are two circumstances where this might be very useful to an employer:
- The employer does not like the CA’s valuation. Although invariably engaged by the employer, the CA is not meant to be the employer’s puppet! Its valuations should represent its own independent view of what is due. In the same way that contractors often believe that they are due more than the CA certifies, it is not uncommon for the employer to believe that the CA has been too generous. Rather than be stuck with paying the sum certified, Henia v Beck confirms that the employer may issue a pay less notice on the basis of its own, different valuation.
- The CA’s valuation/certificate is issued late. One impact of the Construction Act 1996 is that the payment provisions in the standard form contracts are sometimes overly complicated. Consequently, even the most efficient CA can get into a muddle and issue its payment certificates late. The impact can be devastating for an employer. In the absence of a valid pay less notice, the sum “due” in that payment cycle is the sum applied for by the contractor. As in Henia v Beck, this could be substantially more than the CA and/or employer consider appropriate. Rather than be stuck with the contractor’s interim application, Akenhead J confirmed that it is valid for the employer to issue a pay less notice equal to the sum of the CA’s valuation. Essentially, this gives the employer a chance to correct the CA’s mistake.
Of course, issuing a pay less notice is not the final word on the proper value of the works. It remains open to the contractor to challenge the pay less notice and valuation in an adjudication or court proceedings. However, in terms of the immediate cash flow and the amount to be paid in that payment cycle, the employer may use the pay less notice mechanism to issue its own valuation. This gives the employer a little more control.
Can the employer deduct liquidated damages if the contract administrator fails to assess an extension of time claim?
Although his judgment on this issue was only obiter, Akenhead J also confirmed that, in the context of a JCT contract, the CA’s failure to assess an EOT application submitted prior to issuing the notice of non-completion does not invalidate the notice and the employer may start to claim liquidated damages from that time. As with the pay less notice, this is not necessarily the final position: a contractor could start an adjudication to challenge the liquidated damages and to claim an EOT. However, if responsibility for delay is not agreed, this decision means that the employer can deduct the money now and argue about it later.
In my experience, contractors, employers, employers’ agents and quantity surveyors regularly find it difficult to apply the payment provisions of the Construction Act 1996. If something irregular happens, the whole payment mechanism can unravel quite quickly. Consequently, the issues that Akenhead J considered in Henia v Beck crop up surprisingly often and all parties should take note of the guidance given in this case.
This article was first published by Practical Law Construction as part of our regular construction blog series in which we share our practical experiences of working in construction and engineering and give our opinion on the current and future legal developments that shape and will shape the industry. To read more from the series, visit the Practical Law blog.