Interim Payment Applications – Substance over form

It is important that parties to construction contracts comply with the contract’s payment provisions in order to be entitled to payment. In the recent case of RGB Plastering Limited v Tawe Drylining and Plastering Limited [2020] EWHC 3028, the Technology and Construction Court found that a sub-contractor’s interim payment application was invalid as it failed to strictly comply with the sub-contract’s payment provisions.

Clear and unambiguous

Applications for interim payment must be clear and unambiguous in their intention. In Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433, the court stated: "…the document relied upon as an Interim Application must be in substance, form and intent an Interim Application… stating the sum due by the Contractor as due at the relevant date and it must be free from ambiguity.”

Interim payment process in the sub-contract

The subcontract between the parties set out a detailed mechanism for interim payments, which included the following requirements:

(a) Applications must be submitted on or before a certain date in the payment cycle;
(b) Applications were to be valued up to a certain date in the payment cycle; and
(c) Applications must be submitted electronically to a particular email address.

The subcontract contained a payment schedule. For the April 2019 cycle, the sub-contractor (Tawe) was required to issue its application on or before 28 April and the valuation date was 3 May. The corresponding dates for the May 2019 cycle were 29 May and 2 June. The payment schedule also stated that any applications received after the 28th of the month would not be considered but would be administered with the following month’s payments.

The dispute

Tawe issued an interim payment application on 7 May, valuing works up to 30 April. The interim payment application was issued to a number of email addresses of employees at RGB, but not the one stipulated in the subcontract.

RGB argued that Tawe failed to comply in three crucial respects:

• The interim payment application was issued too late for the 28 April payment cycle and too early for the May payment date;
• It valued works up to the 30 April, contrary to both the 3 May and 2 June valuation dates in the payment schedule; and
• It was not emailed to the email address stipulated in the subcontract.

The decision

The judge held that the contractual mechanism had not been complied with and the interim payment application was invalid. It was not just late (which would simply delay payment by a month), but it did not value the works to the correct date and had been sent to the wrong email address. It was not clear to RGB what to do with the application for payment and when.

The judge rejected Tawe’s argument that the application was early for the May/June deadline of 29 May because the valuation date for the May/June cycle was 2 June and the application only valued works up to 30 April. An application with a 30 April date would make sense for a due date at the start of May and any reasonable recipient would think it was a late application for the April payment cycle. The application was “not clear or unambiguous in substance form or intent”.

The provision in the payment schedule stating that applications received after the 28th would be administered the following month did not help. It merely meant that an application for the same sums could be made the following month, not that it became an application for payment for the next month.

The fact that the application was made on RGB’s template and accompanied by supporting documentation setting out a breakdown of the works also made no difference. It is how the application is filled out that is important rather than the template used and supporting documents do not help answer questions of compliance.

Estoppel argument

Tawe sought to rely on an estoppel argument, arguing that RGB knew or ought reasonably to have known what to do and when. There had been instances where RGB made payments on interim payment applications which were made late or sent to the wrong address.

However, this was first raised in a witness statement that was filed only two days before the hearing, nearly four weeks late, and the judge did not give permission for this evidence to be relied upon. He concluded that it would be unfair to give permission for the witness statement to be relied upon without giving RGB a chance to file evidence in response, which would ultimately lead to further delay and expense.

Comments on the estoppel argument

However, the judge did make some points about this potential estoppel argument.

RGB submitted that the estoppel argument would fail for several reasons, including:

• RGB had made its own valuations in past applications, and it was not inequitable for RGB to insist on the strict requirements in relation to this application when Tawe would still be able to recover the true value of the works it had carried out.
• Clause 38 of the subcontract provided that nothing contained in any approval or consent should prejudice, modify, affect or otherwise relieve Tawe of any of its obligations under the subcontract and that no purported waiver or amendment to the subcontract provisions should be construed as an amendment to those terms and conditions.

The judge agreed that these were difficulties which the estoppel claim would face (though he stopped short of agreeing that it was bound to fail).

We cannot know if the estoppel argument would have made a difference, but it would have been interesting to see what the court would have made of it based on the facts in this case.

Going Forward

This case confirms the well-established position that interim applications for payment must be clear and unambiguous and, importantly, comply with any contractual requirements however precise.

As the judge said in this case, the interim payments regime under the Construction Act 1996 is intended to provide a speedy interim payment procedure to promote cash flow during the contract period, and a balancing procedure at the end. It is important that each party has the right to have a balancing payment made at the end so that the true value is paid.

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This article was written by Isabella Eacott and Eveline Strecker. For more information, please contact Isabella on +44 (0)1483 252 512 or at isabella.eacott@crsblaw.com or Eveline on +44 (0)20 7438 2272 or at eveline.strecker@crsblaw.com.