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Adjudication - Be sure before you smash and grab [December 2015]

The facts

By way of a contract between the parties, Beck agreed to undertake fitting-out works at 45-47, Cheval Place, London. Subject to any extension of time entitlement, the Works were to be completed by 5 September 2014.
The Works were delayed and, as at the date of the court hearing, there had been no final determination as to whether Beck was entitled to any extension of time. On 5 September 2014, the Contract Administrator issued a Non-Completion Certificate to the effect that the Works had not been completed in accordance with the contract.
On 28 April 2015, Beck submitted to the Contract Administrator its interim application for payment number 18 identifying the “balance applied for this period” of £2,943,098.95 against a gross value of £6,518,953.63 (the “Application”). The Application included over 100 pages of back-up which indicated that the Works were valued up to 30 April 2015.
Beck did not issue an interim application for payment in May 2015. On 6 May 2015, the Contractor Administrator issued its interim certificate number 18 in the gross sum of £3,988,108.69, showing a net sum payable of £226,248.95.
On 4 June 2015, the Contract Administrator issued its interim certificate number 19 in the gross sum of £4,007,586.56, showing a net sum payable of £18,893.53. On 17 June 2015, Henia issued to Beck a pay less notice in which it stated that the amount due to Beck was “£0” based on its previous valuation, interim certificate number 19 and its entitlement to deduct liquidated damages for 40 weeks delay at the weekly rate of £15,000.
On 25 July 2015, Henia commenced legal proceedings against Beck.
Issues in the legal proceedings
The issues in the case were as follows:
(1)   Was Beck’s Application an effective or valid interim payment notice in respect of the 29 May 2015 payment due date?
(2)   Was Henia’s notice dated 17 June 2015 an effective or valid pay less notice?
(3)   Would a failure on the part of the Contract Administrator to make a decision in respect of a contractually compliant application for extension of time render the Contract Administrator's Non-Completion Certificate invalid or otherwise prevent Henia from deducting and/or claiming liquidated damages?
Issue 1
Generally speaking, the court concluded that interim applications have the following features:
(a)   The interim application can be put in at any time more than 7 days before the payment due date (paragraph 18(a)).
(b)   The interim application had to state the sum that the contractor considers will become due to it at the relevant due date, as to which the use of the future tense must permit the contractor to allow for work which it anticipates it will do between the date of the interim application and the due date (paragraph 18(b)).
(c)   The interim application should relate to the gross valuation (paragraph 18(b)).
(d)   The contractor must state clearly what it considers due at the relevant due date, as to which, while it is not absolutely necessary that the specific due date is expressed in the interim certificate, it must be clear and unambiguous that an application relating to a specific due date is being made (paragraph 18(c)).
As to the payment timetable under JCT, the court stated that:
(a)   The payment due dates were agreed to be 29 November 2013 and thereafter the same date in each month or the nearest non-public holiday or non-weekend day in the following months (paragraph 15(a)).
(b)   Beck may but did not have to submit an interim application at least 7 days before the due dates of 29 April 2015 and 29 May 2015 (namely, 22 April 2015 or 22 May 2015) (paragraph 15(b)).
(c)   An interim certificate must be issued no later than 5 days after each due date (namely, no later than 5 May 2015 (allowing for the May public holiday) and 3 June 2015) (paragraph 15(c)).
(d)   The final dates for payment would be 28 days from the due dates (namely 27 May 2015 and 26 June 2015) (paragraph 15(d)).
(e)   Any pay less notice would need to be served no later than three days before the final payment dates (namely, by 23 May 2015 and 23 June 2015) (paragraph 15(e)).
Upon an analysis of the facts of the case, the court concluded that:
(a)  the parties had not followed the requirements of the contract (paragraph 16) in that:
       (i)    the Application was late by 6 days (paragraph 16(a)); and
       (ii)   both interim certificates numbers 18 and 19 were issued late (paragraph 16(b)).
(b)   For the Application, the relevant due date was on 29 April 2015, as to which the use of the words “Interim Application for Payment No: 18” suggest that Beck’s Application was to relate to that due date (paragraph 19(a)).
(c)   There was nothing, expressly, in the Application which pointed to it relating to the May payment due date and, in particular, the work was valued up to 30 April 2015 meaning that, if the Application was intended to relate to the May payment due date, either Beck was anticipating doing absolutely no work of value between 30 April 2015 and 29 May 2015, or that it was foregoing any interim entitlement to whatever work it was anticipating doing (paragraph 19(b)).
(d)   The only argument supporting the submission that the Application was intended to be for the May payment due date is that, because it was out of time for the April payment due date, it must be taken as relating to the later due date as being the next in time (paragraph 19(c)).
Based on that, the court found that the Application could not be considered an interim application for the May payment due date and that the Application was not free from substantial ambiguity. Accordingly, the court answered issue 1 in the negative and said that Beck’s Application WAS NOT an effective or valid interim payment notice in respect of the 29 May 2015 payment due date.
Issue 2
As to issue 2, the court concluded:
(a)   The pay less notice in this case could challenge the Contract Administrator's certification or any interim payment notice (paragraph 27).
(b)   The payment regime in the contract was not materially inconsistent with the 1996 Act (paragraph 31).
(c)   The pay less notice can raise deductions specifically permitted by the contract and legitimate set-offs, and also deploy Henia's own valuation of the works (paragraph 32).
(d)   Henia was acting in a bona fide way when it challenged Beck’s Application (paragraph 32).
(e)   The payless notice of 17 June 2015 (served in time for the May payment due date) would have provided an adequate agenda for an adjudication as to the true value of the works and the validity of the alleged entitlement to liquidated damages for delay (paragraph 32).
Accordingly, the court answered issue 2 in the positive and said that Henia’s notice dated 17 June 2015 WAS an effective or valid pay less notice.
Issue 3
Although the court’s observations on this issue were obiter, the court formed the view that a failure on the part of the Contract Administer to operate the extension of time provisions does not debar Henia from deducting liquidated damages where the express conditions precedent have been complied with. Accordingly, the court answered issue 3 in the negative.
Conclusion
The moral of this story is follow the time requirements of the contract and the 1996 Act (where the contract does not provide an adequate payment mechanism) when issuing applications for payment, payment notices and payless notices in order to successfully succeed or defend a “smash and grab” adjudication. If you are making an application for payment, make sure that the application is clear and unambiguous as to the payment due date to which it relates, and on time…otherwise, like Beck, you may smash but not grab anything.

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