The recent case of Kersfield Developments (Bridge Road) Ltd v Bray and Slaughter Ltd (2017) EWHC 15 has reinforced the strict contractual interpretation applicable to claims for interim payments under construction contracts, and the extravagant claims for payment often colloquially referred to as “smash and grab” claims.
Such a claim is a manipulation of the prompt payment provisions within the Local Democracy Economic Development and Construction Act 2009 (“the Construction Act”). As everyone will be aware, this created a payment system where the payee may raise an invoice for an interim payment, and if it is not contradicted by an interim certificate or payless notice, then the invoiced sum becomes due.
“Smash and grab” claims are where an interim payment invoice raised is for a sum substantially excess of expectation (7 figure sums are not uncommon). If the invoiced sum is not correctly adjusted by an interim certificate or payless notice, the payee (usually the main contractor) applies for payment of the invoiced sum. If this is not forthcoming, an adjudication is raised regarding the issue.
It is the content of the interim payment application which matters, and not the actual value of the works at the date of application. In the absence of correctly issued interim certificates or payless notices, the figure in the application is taken as an agreed figure.
The operation of the provisions has led to jaw-droppingly expensive and inequitable results in the past. Whilst most of experience to date has been in relation to the JCT D&B 2011, in principle there is no reason why the same issues do not apply to other contract forms, given the fundamental nature of the Construction Act payment regime.
However, optimistic notes have been sounded in the last 12 months regarding the treatment of such claims. It was perceived that there was resistance to obviously inflated claims from the contractor on the part of adjudicators and the judiciary. In these cases, any defect in the payment application or the issuing of the application too early had been cited as reasons why the application could not succeed.
However, Kersfield illustrates that contractual certainty cuts both ways, and where there is no defect in the application, it will succeed. As such the threat of smash and grab claims very much remains.
Kersfield Developments was a case which proceeded to the Technology and Construction Court and where the Court was invited to intervene to prevent an injustice. The Court declined to intervene, on the basis that there were existing provisions to allow interim payment applications to be disputed (ie interim certificates), and as such the matter was not sufficiently rare and exceptional for the Court to use its powers.
The facts of the case were nothing unusual in cases of this sort. Kersfield Developments appointed construction firm, Bray and Slaughter, to refurbish a mansion house and stable block and build detached houses in North Somerset. The parties used an amended JCT Design and Build 2011 contract, which allowed for a series of interim payments.
Bray issued payment applications monthly throughout the development which were initially all accepted. When it issued payment Application 19 for £1.2 million, Kersfield decided that works set out in the application had not been completed. Under the terms of the contract Kersfield needed to issue a pay less notice to dispute the amount requested within 5 days of Bray’s application. Kersfield sent the pay less notice by email and by pre-paid first-class post on the last day. Critically the contract stated that notices sent by email after 4pm would be taken as received on the next working day. Therefore, for Application 19 Kersfield missed the pay less deadline by one working day.
Instead of paying the claimed £1.2 million, Kersfield paid Bray just over £78,000, the amount it believed was due for the completed works. As a result, Bray took Kersfield to adjudication to enforce payment of the remaining £1.1 million. The adjudicator found in Bray’s favour and when Kersfield failed to pay, Bray took the developer to the Technology & Construction Court to demand payment.
The Court found in favour of Bray, and as a result Kersfield were reported to be facing financial difficulties.
As part of underlining the strict interpretation of the contract payment provisions, the case also highlighted the importance of notice provisions within the contract. In the present case, the provisions stated that emails sent outside of working hours would not be treated as having been received on that date. This is a minor, common and on the face of it reasonable contractual provision – but it had drastic consequences for Kersfield. The contents of notice provisions and variations of the same therefore need to be carefully considered. For example, are emails prohibited (commonplace in bespoke contracts in our experience) or are notices sent by post valid when received or 2 working days later, and so on.
The dangers of smash and grab claims are immediately faced by the contract administrator/employer agent and employer, but awareness of the issues is relevant to all participants in the construction project. On the basis that an extravagant payment application can lead to substantial and unexpected payments being required, funding for a project can be critically affected.
Most obviously, the cashflow issue may render the Employer insolvent and threaten the continuation of the project. Future insolvency of the contractor is also an issue, as they would effectively have been paid in advance, and then no longer be participating in the project.
However more subtly, the advance payment may fundamentally alter the approach to the project and relationships of the parties. If cash is tight and a cost cutting approach taken to ongoing and future work, it can have a host of detrimental knock on effects. Professional indemnity insurance experience is that if there is less money in the system, more issues become entrenched problems and turn into liability claims aimed at any available candidate, with members of the professional team an inviting target.
It is therefore in the professional team’s interest to try to avoid these issues arising. Selection of contractor is obviously relevant, and positive steps may be taken to encourage clients and Employers to work with firms who promote a mutually supportive approach to projects. Ensuring that the participants are on top of the interim payment process is also very relevant. Whilst you would want to avoid any suggestion of assuming responsibility for the payment process yourself (“mission creep”), quietly monitoring the exchange of interim applications and interim certificates with the opportunity of giving a timely informal reminder that the deadline is due may provide real risk management benefits.