The validity of payment notices that are both late and early

Leeds City Council v Waco UK Ltd [2015] EWCH 1400 (TCC)

Facts

This case concerned the question of whether a payment notice from Waco was valid, meaning Leeds City Council (LCC) had to pay the sums set out in it.  However, to understand this case and its importance, we must look at the history of it.

The contract contained detailed payment provisions including specific dates on which Waco had to submit its payment applications.  In actual fact Waco submitted its payment applications late, usually by between 2 – 5 days.  LCC's contract administrator, Jacobs, did not object to this and the applications were treated as if they were submitted on time.  Jacobs routinely certified the sums set out in Waco's late applications which were then paid.

Following practical completion, Waco submitted a further application but this time 2 days' earlier than the specific date.  Jacobs objected on the basis that the application was premature.  It was resubmitted after the date and paid.

A few months later, Waco again submitted an early application for payment, this time by 8 days.  This time, Jacobs certified it.  It is important to note that this application was for £13,000, a modest sum relative to the value of the contract and previous applications.

Waco then submitted its Application 21, for £500,000, 6 days early.  LCC failed to issue a payment or pay less notice and no payment was made.  Waco adjudicated for the value of its Application 21 and won, on the basis that LCC had failed to issue a payment notice in response to the application.  However, LCC continued to refuse to pay and Waco had to launch summary proceedings to enforce the decision.  It failed, and LCC was given leave to launch proceedings to overturn the adjudication.  This came before Edwards-Stuart J in the TCC.

Held

The TCC found that there was "a course of conduct" in allowing late applications for payment.  This gave Waco a reasonable grace period to submit late payment applications.  Therefore LCC could not hold Waco to the payment application dates in the contract.  However, if Waco's applications fell outside of this reasonable grace period, Jacobs would not be required to accept the application.

In summary, the court concluded that Waco was effectively under an implied obligation to submit its applications within a reasonable time of the dates set out in the contract.

In relation to Application 21 however, the TCC held that it was invalid because it was premature.  There was no mechanism in the contract that allowed the early submission of applications, nor had either party's conduct modified the contract terms in any way.  The TCC did look at the early application for £13,000, which was certified and paid, but considered that this was a one off payment for a small sum which did not affect the rights and obligations of the parties.

Comment

First and foremost, parties need to be aware that their conduct can alter how contracts work.  In this case, if Jacobs decided that it would no longer accept any late payment applications from Waco, and Waco subsequently adjudicated, then Waco would have won.  This is despite Waco's conduct being, strictly speaking, in breach of contract.  The case illustrates that the court is willing to recognise practical realities and apply them to the contract.  This is positive, but it means that parties need to have a greater awareness of how their actions can affect the interpretation of contractual terms.

A word of caution, however.  This case is very much dependent upon its specific facts.  It would be unwise to conclude that following this decision, the courts will routinely construe a course of conduct by the parties as modifying the express terms of the contract.  For an example, please see our article on Henia Investments Inc v Beck Interiors Limited, in which the court showed no leniency for a late application.

A word on Waco's failed Application 21; Waco could be forgiven for thinking that early applications were valid, given both Jacobs' readiness to allow late applications and its action in certifying payment following the early application for £13,000.  However, this claim ultimately failed, as the application was found not to be contractually valid.  Therefore, when the contract includes a payment regime with specific dates for compliance, contractors would be well advised to adhere strictly to those dates to ensure that all applications for payment remain valid.

For more information, help or advice please contact Rob Langley on 0191 211 7975 or [email protected].