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Amending payment provisions in Construction Contracts is a risky business. If you are not careful, your amendments may have knock-on effects which may make other, related provisions unworkable. This is what happened in a recent Technology and Construction Court case [1], and it was with great difficulty that the Court eventually resolved the situation.

The problem

The employer, Manor Asset Limited (Manor) entered into a JCT Minor Works Building Contract with Contractor’s Design 2011 with Demolition Services Limited (DSL).

The contract contained standard provisions relating to interim payments, including a provision that if the employer intended to pay less than the sums stated in the interim certificate or payment notice, then it should issue a payless notice not later than five days before the final date for payment. The final date for payment was 21 days from the due date.

All good so far, or it would have been, but the parties amended the standard payment provisions so that, instead of payments becoming due at four week intervals, payments would be due on achievement of a series of milestones. The parties also agreed that payment was to be made within 72 hours of receipt of each invoice.

The reduction of the time for payment to within 72 hours of receipt of the invoice reduced the final date for payment from 21 days to 3 days.

The parties did not amend the provisions relating pay less notices, which led to an unworkable situation. DSL issued its first invoice on 23 October 2015, and according to the amended payment provisions, payment was due by 26 October 2015.

Since the provision relating to issue of pay less notices had not been amended, Manor would have had to have issued its pay less notice no later than five days before 26 October 2015, which would have been 21 October 2015. This was, of course, before DSL had even issued its invoice, an unworkable situation that also contravened the Construction Act, which provides that no pay less notice can be served before a payment notice is served[2].

The Judge took the view that the Court could remedy the situation by implying a term into the contract in order to give it ‘business efficacy’.

The solution

The solution that the Judge came up with, was that there was an implied term that the pay less notice would have to served during the three day period between the due date and the final date for payment. In other words, Manor only had 3 days from receipt of the invoice to issue its pay less notice (not the contractually agreed 5 day period).

Conclusions

The case highlights the importance of considering the knock-on effects of amendments to payment provisions, and in particular the need to consider their impact on the issue of payment or payless notices.

Although in this case the Court stepped in to imply a term in order to make an unworkable provision work, parties should not rely on this. The Court will only imply a term when it is necessary to make the provision workable. It will not imply a term simply because the parties have made a bad bargain.

In fact, another Judge may well have come to a different decision. The Construction Act does not require every Construction Contract to include provisions for the issue of a pay less notice. It simply provides that, if the payer wishes to pay less than the notified sum, it must give notice of its intention to do so not later than the “prescribed period” (usually seven days) before the final date for payment.

In other words, a provision for the issue of a pay less notice is not a requirement of the Construction Act, and as such it is arguable that such a provision is not necessary to give a Construction Contract business efficacy.

For more information, email blogs@gateleyplc.com.

[1] Manor Asset Limited v Demolition Services Limited [2016] EWHC 222

[2] Section 111(5)(b) of the Housing Grants, Construction and Regeneration Act 1996


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.