Cornerstone – The requirements for valid payment applications are in your contract for a reason. Ignore them at your peril!

We are always droning on about making sure you issue valid applications for payment and payment notices. A case we were involved in last month – RGB Plastering LTD v. Tawe Dry Lining and Plastering Limited [2020] EWHC 3028 (TCC) – illustrates why we do.

Because a party failing to serve a valid payment or pay less notice becomes at risk of becoming liable for the full amount claimed by the subcontractor, a document will be a valid application for payment only if it strictly complies with the contract requirements, it is clear that it is intended to be a payment application. In this case we successfully argued on behalf of RGB that as the application wasn’t made strictly in accordance with the relevant sub-contract, it was an invalid application.

Contract requirements

In this case, the subcontract stated Tawe’s payment applications for the April/May and May/June interim payment cycles needed to be submitted by, and works valued up to, 28 April and 28 May respectively. Tawe sent an application on 7 May and claimed that it was an early application for the May/June cycle.

The Court rejected this argument. In the eyes of a reasonable person, the payment application was a late application for the April/May cycle. The Court found that if interpreted differently, it ran the risk of opening the floodgates for all subcontractors to make this argument when applications were submitted late.

The contract also specified that, in order for the application for payment to be valid, it had to be emailed to a specific email address. Tawe did not send the payment application to this address and that was therefore a further reason why the application was invalid.

Clear it is intended to be a payment application

Tawe’s argument, that the application was valid, was largely based on the premise that it was clear that the application was what it purported to be and so the parties knew what to do about it and when. The application was made on RGB’s template and accompanied by supporting documents. Still, this was not enough to persuade the court that the application was valid. The application valued the works up to 30 April, which was not a valuation date set out in the subcontract. This added confusion rather than clarity. An application must be clear in substance, form and intent.

A key component of Tawe’s defence was that, although the application was not sent to the email address specified in the subcontract, it was sent to the email address of an RGB employee who was dealing with applications for payment at the time. In addition, RGB had made payments previously based on similar applications from Tawe. This was not sufficient to successfully argue that a convention had been formed between RGB and Tawe. Ultimately, RGB had not agreed to accept defective applications for payment, but was making payments based on RGB’s own valuations of the works in order to help Tawe with its cash flow. Now for the word of warning…

In support of Tawe’s argument that a convention had been formed, Tawe made a late filing (two days before the hearing and four weeks late in light of the court’s directions) of a witness statement from the employee from RGB who was dealing with payment applications at the time. The Court did not give permission for Tawe to rely on the witness statement, highlighting the late submission was “towards the high end of seriousness”. This was detrimental to Tawe’s case: had the witness statement been filed on time, or at least well before two days before the hearing, the Court may have considered the argument and decided differently.

Conclusion

The Court confirmed that a document will be a valid application for payment only if it is clear that it is intended to be a payment application and strictly complies with the subcontract requirements. If not, the subcontractor is at risk of missing payment that month as no ‘notified sum’ will become due. This is important for subcontractors who rely upon regular monthly cash flow from applications.

Although some might think of this decision as harsh on Tawe, the reality is that the sub-contract was clear. So the moral of the story is to check your contract, read, and understand what the requirements are for your applications for payment – and then implement them. If applications have to be written in red pen, then write them in red pen!

This article is from the December 2020 issue of Cornerstone, our newsletter for those working within the construction industry. For further information please contact a member of Birketts’ Construction Team. To download the latest issue, please visit the newsletter section of our website.