Ensuring Valid Payment Applications in Construction Contracts: Consequences And Best Practices

Construction

31 Mar

Introduction

Failing to serve a valid payment application in a construction contract can have serious consequences for both the paying party and the receiving party. If the receiving party fails to serve a valid payment application, it may not be entitled to any payment at all and may have to wait until the next payment cycle to receive payment.

To be entitled to payment, the receiving party must ensure that its payment application is valid. The authorities are clear that, to found an entitlement to payment in a construction contract within the meaning of the Housing Grants Construction and Regeneration Act 1996, an application for payment must be served strictly in accordance with the relevant contract terms, both as to substance and form.

Serve it on Time

There have been several relevant cases in the UK that have highlighted the consequences of failing to serve a valid payment application. One such is Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC), where Beck Interiors submitted late Payment Applications. It was accepted that the Applications could not, therefore, be valid for the periods to which they purported to refer. However, Beck argued that a late Application for one month could be interpreted as constituting a timeous Application for the subsequent month. That interpretation was rejected by Akenhead J (as he then was). The Application was made out of time, and it was not certain as to what period it related. Akenhead J stated, at Paragraph 17:

“If there are to be potentially serious consequences flowing from it being an Interim Application, it must be clear that it is what it purports to be so that the parties know what to do about it and when.”

The Judge’s findings reflect the imperatives of the Housing Grants Construction and Regeneration Act 1996, as amended. The Act provides a rigorous structure for interim payments with specific dates; and where the parties’ contract does not comply with the Act, the omissions or errors are to be rectified by incorporation of the implied terms of the Scheme for Construction Contracts (England and Wales) Regulations 1998, as amended. It is plain from the legislation that the periods specified by the Act, by contractual terms, or by the Scheme are absolute: if a payment application is late, even if only by three minutes as in Henia, it is invalid.

Ensure Accuracy

Additionally, the receiving party must ensure that it does not make any errors on the face of the payment application; otherwise, it will be deemed invalid. This was made clear in D McLaughlin & Sons Ltd v East Ayrshire Council [2021] CSOH 122, where the payment application contained the wrong due date for payment. The contract stated that the due date was 28 June 2017. However, the payment application referred to 27 June. Albeit, the date was wrong by only one day, the payment application was still deemed invalid.

Conclusion

Receiving parties must ensure their payment applications are valid in order to receive payment. Payment applications must not contain any inaccuracies and must be served strictly in accordance with the relevant contract terms to maintain their entitlement to payment.

For more information and to secure your construction project's financial success, email Dr Julian Critchlow.