Payment Applications – Strict Approach Regarding What Constitutes a Valid Payment Application and Pay Less Notice

By Nita Mistry, K&L Gates , London

In Jawaby Property Investment Ltd v The Interiors Group Ltd [2016] EWHC 557 (TCC), refurbishment works were carried out under a JCT Design and Build Contract, 2011 edition with amendments. The procedure followed for the first six payment applications involved the contractor (“TIG”) emailing a valuation to the employer’s (“JPIL”) agent with supporting documents specified in the contract. The agent would then assess the sum due and issue a payment certificate.

For the seventh payment application, a different approach was taken. TIG provided a valuation that it described as an “initial assessment”. This suggested that it was not firm and final. In addition, the valuation did not value the works beyond 5 January, whereas previous valuations went up to and included valuation of the works up to the due date (8 January). Nevertheless, JPIL’s agent assessed the sum due in the usual way and issued a payment certificate, this time with a negative sum. TIG requested some clarification, to which JPIL’s agent responded by attaching a record of the site visit and valuation assessment. The courts considered whether the “initial assessment” issued by TIG was a valid payment notice and whether the certificate for payment issued by JPIL was a valid pay less notice.

Payment Notice

The court held that the “initial assessment” was not a valid payment notice under the contract because (a) it did not comply with the provisions of the contract, namely, it did not state the sum that was due and the basis on which that sum has been calculated, and it merely stated the sum that it considered might be due; (b) it did not unambiguously inform the recipient that it was an interim application and did not “follow the usual pattern and was materially different to that adopted on previous occasions”; and (c) it did not include works up to the contractual due date. The application for interim payment needed to be in substance, form and intent an interim application.

Course of dealings

The case highlights that the conduct of the parties throughout the course of the contract will be taken into account in assessing whether strict contractual requirements have been waived. The fact that the “initial assessment” was served by email did not preclude it from being a valid payment notice. The claimant had waived its right to rely on strict compliance with the notice clause, due to previous course of dealings. The court observed, “this is not a case of a single swallow, but rather a significant number of separate valuations being treated in the same way. There was a sufficient course of dealing”.

Nevertheless, the court also observed that the fact that JPIL’s agent treated the “initial assessment” in the same way as it had previous valuations (interim applications) did not ultimately matter. The judge noted, “it is clear that throughout [JPIL’s agent] was proceeding not with an eye to the contractual detail, but rather the aim of progressing the valuation process”.

The important lesson from this case is that where significant consequences may arise for the paying party, the party making the application should be clear on what it is submitting, and it is sensible to follow the contractual requirements for making an application. However, the parties’ conduct throughout the course of the contract will be taken into account, and a party may be said to have waived strict contractual requirements where the parties’ previous course of dealings have departed from the strict contractual requirements.

Pay Less Notice

Given the court’s decision that TIG had not served a valid interim application/payment notice, it did not need to decide whether the pay less notice was valid. The court did, however, indicate that it would have held that no valid pay less notice was served on the basis that JPIL’s email was not intended to be a pay less notice, there was no other response to TIG’s request and JPIL’s email was completely different from the pay less notices served previously.