Payment and Construction Contracts: Is My Late Application for Payment Valid? Court of Appeal guidance

Charles Edwards, Construction Barrister and Head of Chambers at New Temple Chambers, reviews the Court of Appeal case of?A & V Building Solutions Ltd v J & B Hopkins Ltd?[2023] EWCA Civ 54,?an appeal from the Technology and Construction Court (High Court).??Charles acted for the successful Sub-Contractor,?A & V Building Solutions Ltd?(“AVB” or “Sub-Contractor”) in the Court of Appeal.??J & B Hopkins Ltd, the Respondent in the Court of Appeal proceedings is referred to as JBH.

The appeal by the Sub-Contractor before the Court of Appeal involved multiple grounds of appeal.??However, the key issue at hand for the Sub-Contractor was whether its interim application for payment 14 which was submitted one day late on a Monday, was valid according to the Sub-Contract. An Adjudicator decided that the late payment application by AVB was valid.??In Part 8 proceedings in the Technology and Construction Court (“TCC” or “High Court”), the Judge in the TCC held amongst other things that AVB’s interim application for payment 14 was not valid.??The TCC judgment on this issue was based on the requirement stated in the Sub-Contract, which specified that the AVB’s application for payment should have been submitted on a Sunday. However, the Court of Appeal disagreed with the TCC Judgment on this issue, allowing AVB’s appeal and overturning the judgment of the High Court.??The Court of Appeal held that AVB’s interim application for payment 14 was valid despite being submitted one day late, based on the provisions of the Sub-Contract.

The Moulsecoomb University Project in Sussex involved JBH as the main mechanical and electrical contractor.??JBH engaged AVB by?a written Sub-Contract dated 18 December 2019,?to carry out certain mechanical and electrical engineering works on the project. The Sub-Contract sum was ￡368,000.??The Sub-Contract contained various provisions, including one pertaining to the timing of interim applications.??The Sub-Contract provided amongst other things that:?

“…9.1. The Sub-Contractor shall be entitled to payment by instalments.

9.2. It is a?condition precedent to payment that the Sub-Contractor shall make monthly applications ("Interim Application") for payment to the Contractor on the dates specified in Appendix 6…”.

On Monday 22 March 2021, AVB submitted it’s interim application number 14 to JBH, one day later than the required submission date of 21 March 2021, which happened to fall on a Sunday. The application showed a gross value of the works in the sum of ￡601,000 and a net amount due to AVB in the sum of ￡211,773.60.

On 1 April 2021, JBH responded to AVB’s interim application 14 by email which stated amongst other things that:?

“Please see attached our initial summary of your application number 14 dated 21/3/21 and issued 22/3/21. We note that you have issued two applications for the period, the first being application 13, dated and issued 15/3/21 are we to assume number 14 supersedes the aforementioned application 13?...

…A full and formal sub-contract payment or payless notice should be issued in due course and in accordance with the dates set out within appendix 6 of the Sub-contract.”

Further, on 16 April 2021, JBH sent AVB a “sub-contractors payment certification”.??According to JBH’s valuation, AVB had been overpaid in the sum of ￡68,946.25. Subsequently, between April and November 2021, the parties engaged in discussions and exchanged correspondence concerning AVB's claim based on interim application for payment 14.

On 17 November 2021, AVB commenced adjudication proceedings against JBH.??The adjudicator found in favour of AVB and declared that interim application for payment 14 was valid despite being submitted one day late and that JBH should pay AVB the sum of ￡138,010.86.??

The adjudicator’s decision in AVB’s favour was overturned by the Technology and Construction Court (TCC) and the Judge found that AVB’s interim application for payment 14 was not valid as it?could only be made on the specific date set out in Appendix 6 of the Sub-Contract. The TCC’s reasoning for its judgment?included:

“26. First, the use of the words "condition precedent" in clause 9.2. Those words are followed by a reference saying that the Sub-Contractor "shall" make monthly applications and that those applications should be made on the date specified in the Appendix.?

27. Next at the date of the contract 21st March 2021 was going to be a Sunday. It was always going to be a Sunday. It was known to all concerned or capable of being known by all concerned that it would be a Sunday.?

28. Next, the dates in the second column in Appendix 6, the dates when the applications were to be made, are not all the 21st day of the relevant month. They are all there or thereabouts but for example in cycle 16 the date is 18th February and in other cycles, it is the 19th of the month, in others 20th and in others the 21st…

33.?Mr Edwards did say that the consequence of the interpretation that the Payment Application has to be on 21st March would lead to an unfair result.?He says that as a consequence and applying normal principles the court should hesitate before adopting an interpretation which comes to an unfair result in the absence of clear words.?However, although the consequence of an interpretation requiring the notice to be on the Sunday is an unusual one it is not one in my judgment which leads to an unfair result such as to cause the court to say clear words are needed before that conclusion can be reached."

Further, paragraph 36 of the approved judgment from the TCC which was appealed stated as follows:?

"...

36.??The Defendant says that the dealings in 2020 and the response to the service of the Application Notice are relevant.?Mr Edwards put the matter thus. He says that the Defendant's case was that the Payment Application was valid by reference to the contract as properly interpreted and that such interpretation was supported by the fact of the way in which the Claimant treated the application and the way in which the Claimant acted in September 2020.?However, other than as a matter of forensic advocacy, the post-contract dealings of the parties to a written contract cannot be relevant to the interpretation of that written contract. Such interpretation is to be an exercise undertaken by reference to the wording of the contract and the circumstances as they existed at the time of the contract."

The Court of Appeal disagreed with the TCC on the interpretation of the Sub-Contact and the payment provisions. Further, the Court of Appeal noted at paragraph 25 of the Court of Appeal judgement that AVB’s secondary submission was rejected by the Judge in the TCC at paragraphs [40] and [41]:?“…that there had been a variation or a waiver of the date of 21 March 2021, either by reference to a similar event in 2020, when JBH had without objection made an interim payment in respect of an application notice due on a Sunday but sent on the following Monday; or by reference to the parties' contemporaneous treatment of application 14. The judge did not expressly address estoppel…”.

Further, paragraphs 15 and 16 of the Court of Appeal judgment stated as follows:?

“…

15.??Throughout this period, JBH apparently treated application 14 as having been validly made: the dispute was on the detail. On 12 October 2021, a dispute having arisen in respect of application 14, AVB's consultants wrote indicating that, if the sum due was not paid, they would commence adjudication. In their reply dated 19 October 2021,?JBH's solicitors asserted, for the first time, that application 14 was not served in accordance with the provisions of the Sub-Contract.?The letter did not explain how or why that was the case. At no time prior to the commencement of the first adjudication did JBH expressly take the point that application 14 was invalid because it was issued one day late.??[Emphasis added].

16.??On 17 November 2021, AVB commenced adjudication proceedings seeking a net payment of ￡211,773.60 plus VAT, interest and fees, based on application 14.?JBH's submission that application 14 was provided one day late was first expressed in their solicitors' letter dated 26 November 2021, after the adjudication had commenced.”??[Emphasis added].

Was Application 14 A Valid Interim Application?

Yes. The Court of Appeal disagreed with the TCC judgment on this issue and its interpretation of the Sub-Contact.??The Court of Appeal overturned the TCC’s judgment, allowing AVB’s appeal. The Court of Appeal held that AVB’s Interim?Application for Payment 14 was a valid Interim Application for Payment. The Court of Appeal agreed that there was indeed flexibility within the payment provisions of the Sub-Contract within Appendix 6 and where a contract contains general terms which conflict with specific or bespoke terms, usually the specific or bespoke terms would outweigh the general terms.?

With regard to the correct approach to contractual interpretation and law on this issue, the Court of Appeal, stated at paragraphs [45] and [46] of the their judgment that:?The correct approach to contractual interpretation is set out in the trilogy of Supreme Court cases of?Rainy Sky SA v Kookmin Bank?[2011] UK SC50;?Arnold v Britton?[2015] UK SC36; and?Wood v Capita Insurance Services?[2017] UK SC24. In particular, it has been emphasised that what is sometimes referred to as commercial common sense should not be invoked to undervalue the importance of the language of the provisions being construed [45].?There are two canons of construction, as summarised in Chapter 7 of?The Interpretation of Contracts?(7th?edition) by Sir Kim Lewison, which are potentially relevant to the dispute between the parties. The first is that, when interpreting a contract, all parts of the contract must be given effect where possible, and no part of it should be treated as inoperative or surplus: see, for example,?Merthyr (South Wales) Limited v Merthyr Tydfil County Borough Council?[2019] EWCA Civ 526. The second principle is that, where a contract contains general provisions and specific provisions which potentially contradict each other, the specific provisions will be given greater weight: see, for example,?Woodford Land Limited v Persimmon Homes Limited?[2011] EWHC 984 (Ch), in which this principle was described as "a principle of common sense” [46].

The Court of Appeal, further stated at paragraphs [49], [50] and [58] that:?If all the dates in Appendix 6 were rigidly fixed, then the interim payments would only be due on those specified dates, not (as clause 9.4 provided) “calculated from the date when the first payment was due” [49].?More significantly, there are the two paragraphs after the table in Appendix 6, set out at paragraph 7 above. On any view, those paragraphs are plainly designed to allow for flexibility in the interim valuation/payment timetable.?The first of those paragraphs expressly talks about payments becoming due “beyond the dates set out in the schedule”. It allows for (different) due dates continuing to occur "at the same intervals" set out in the table.?That seems to me to be contrary to the general suggestion that the dates for valuation and payment were inflexibly set in stone as per the table in Appendix 6?[50]…it is important to remember the second canon of construction noted in paragraph 46 above,?in the event of a clash or an inconsistency between different types of contract terms, specific or bespoke terms will usually outweigh the general. Here, the condition precedent provision in clause 9.2 was a part of the general provisions within JBH’s standard terms. Appendix 6, on the other hand, was a bespoke agreement between the parties relating to this particular Sub-Contract.?To that extent, therefore, if there is a clash between clause 9.2 and the second paragraph of Appendix 6, the second paragraph - as a specific provision rather than a general one - must prevail…”?[58]. [Emphasis added].

Variation/Waiver/Estoppel

Further, although it was strictly unnecessary for the Court of Appeal to reach a concluded view on Ground 4?of the appeal, the Court of Appeal stated amongst other things that:

“69…I consider that the necessary ingredients of a simple estoppel would appear to be made out here. JBH said in their email of 1 April 2021 that they would deal with application 14 as a valid application; that they would assume that it had replaced valuation 13. What is more, they then proceeded to do just that. They considered the detail of application 14 and responded to that detail with their own valuation in the email of 1 April and their Payment Notice of 16 April 2021. These documents assumed throughout the validity of application 14. Neither document suggested that application 14 was invalid, and did not even seek to reserve the position in respect of validity. In this way, I consider that JBH unequivocally affirmed the validity of application 14.”

Conclusion

The key points for Contractors and Sub-Contractors to note from the Court of Appeal judgment include:

1. ?If an application for payment is submitted late by a Contractor or Sub-Contractor, it does not follow in every instance that the application for payment is invalid.
2. Ensure that payment mechanisms within your construction contract are properly drafted to ensure that there are no conflicting terms.?
3. Where a?contract contains general terms which conflict with specific or bespoke terms, usually the specific or bespoke terms would outweigh the general terms.?
4. When interpreting a contract, all parts of the contract must be given effect where possible, and no part of it should be treated as inoperative or surplus.
5. The treatment of an application for payment may give rise to an estoppel.
6. If you disagree with validity of an interim application for payment, raise this as soon as possible or reserve your position in relation to it.

The above is for general information only and does not constitute legal advice.?The author does not assume any responsibility for the accuracy of any statements made and appropriate legal advice should be taken and relied upon before taking or omitting to take any action in respect of any specific matter.

Should you or your organisation be experiencing similar issues in relation to payment and construction contracts and require legal advice, please do not hesitate to contact me to find out chambers could assist you or your organisation.??

Charles Edwards, MSt(Cantab) MSc(Lond) FCInstCES Barrister

New Temple Chambers

28th Floor

30 St Mary Axe (The Gherkin)

London EC3A 8BF

E: [email protected]

W:?www.newtemplechambers.com

11th April 2023