Requirements of a valid payment application
Pamela Chan reports on the recent case of Jawaby Property Investment Limited v The Interiors Group Limited  EWHC 577 (TCC).
This decision provides some useful guidance on what constitutes a valid payment application and reflects the rather strict approach taken by the Technology & Construction Court. Consistent with other recent authorities, the court recognised that ‘draconian consequences’ that may arise from the employer’s failure to comply with the contractual payment mechanism and therefore required a contractor’s payment application to be clear and unambiguous in substance, form and intent.
In this case, a contract was originally entered into between Tekxel Limited and the Interiors Group Ltd (‘TIG’) for refurbishment works carried out under a JCT Design & Build Contract, 2011 edition with amendments. Subsequently, the contract was novated to Jawaby Investments Ltd (‘Jawaby’), which became the new employer. Jawaby sought declarations from the court concerning payment obligations under the contract and a related escrow agreement. Under the contract, the payment mechanism was out as follows:
- TIG was to make monthly an interim application for payment (on the 8th day of each month)
- The due date for payment was the later of the monthly ‘specified date’ (on the 8th day of each month) or the actual date of receipt of the interim application
- The final date for payment was 30 days after the due date
- Not later than five days after the due date, Jawaby was required to give a Payment Notice stating the sum that TIG considered to be due
- A pay less notice was to be given by Jawaby not later than five days before the final date for payment.
TIG’s interim applications 1 to 6 were made under the following procedure. TIG would submit a valuation to Jawaby by email with detailed back-up sheets followed by a statement of the final sum applied for (or total work done) at the conclusion. From Valuation 5, TIG submitted a summary sheet followed by detailed back-up sheets. Each of these valuations 1 to 6 valued TIG’s works up to the due date of the 8th of each month and stated that the valuation was for ‘approval’ or ‘consideration’. Jawaby’s agent would ‘walk the job’ with TIG and issue a certificate of payment accompanied by detailed spreadsheets showing how the assessment had been made. Upon issue of a certificate of payment, TIG would proceed to issue an invoice for the relevant sum.
The main issue in this case related to Interim Application 7. The presentation of the 7th valuation did not follow the usual pattern and was materially different to that adopted on previous occasions. On 7th January 2016, TIG submitted the 7th valuation in the sum of £2.35m under cover of an email which stated ‘Please see our initial assessment for Valuation 007, this is based upon progress update and onsite review carried out earlier this week.’ On 11th January 2016, Jawaby visited the site and proceeded to issue a certificate of payment on 15th January 2016 with a negative value of £124,604 based on a total gross valuation of £1,634,540. This time, there was no breakdown of the figure, nor any accompanying back-up documentation. On 18th January 2016, further mark-up documentation explaining their valuation was submitted by Jawaby.
Jawaby argued that the valuation was not a valid interim application as the email did not comply with requirements for service prescribed by the contract and the terms of the email were insufficient to constitute an interim payment application. On the other hand, TIG submitted that there was no requirement for particular labelling to be an interim application.
The court adopted a strict approach and held that TIG did not make a valid interim application within the meaning of the contract. Consequently, no default event had occurred under the escrow agreement. Importantly, the court found that the valuation was described only as TIG’s initial assessment, which merely stated the sum that it considered might be due, subject to further consideration. Such a statement by TIG, if construed objectively by a reasonable recipient, would not have been regarded as unambiguously notifying what was considered to be due, to comply with Clause 4.8.1 of the contract. Further, this was not a situation which had arisen previously and the course of dealings between the parties did not extend to acceptance of an ‘initial’ assessment as a valid interim application. The valuation summary sheet was also incorrectly marked as Valuation 6 and unlike all previous applications, did not include valuation of the works up to the due date of 8th January. However, the court found that email notification was permitted as Jawaby had waived any requirement for hard copy documents when it accepted email communication for all previous interim applications.
While the court noted that this outcome may appear harsh for a contractor, there was ‘little scope for latitude’. This case, therefore, serves as a reminder that if a contractor wishes to have the benefit of the interim payment regime such as that contained in the contract, its application for interim payment must be clear and free from ambiguity. The case also highlights that parties’ conduct throughout the course of the contract will be taken into account when assessing whether the strict contractual requirements have been waived. If the parties choose to depart from the contractual procedure, the contractor is still required to act consistently with the procedure that the parties have adopted.
 Carr J referred to the judgment of Caledonian Modular Ltd v Mar City Developments Ltd  EWHC 1855 (TCC) and Henia Investments Inc v Beck Interiors Ltd  EWHC 2433 (TCC).
About the author: Pamela Chan is a solicitor at Irwin Mitchell
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This article was published on 6 Oct 2016 (last updated on 7 Oct 2016).