Final payments on termination and insolvency: does the Construction Act apply?

United Kingdom

A recent High Court decision has decided that the payment provisions of the Construction Act do not apply to the final account provisions of the JCT Minor Works contract arising on termination or insolvency. The court also concluded that the three-month time limit for giving of a statement of account under those provisions is not a “strict” deadline shutting the employer out from giving such a statement at a later date. Materially the same termination and insolvency provisions appear in other JCT forms of contract and this decision is likely to be of wider application.

Levi Solicitors LLP v Wilson

JKR Property Development Limited (“JKR”) engaged Farrar Construction Ltd (“Farrar”) to carry out building work under a JCT Minor Works 2011 contract. In September 2016, Farrar became insolvent, entering into a company voluntary agreement (“CVA”).

In common with other JCT contracts, the contract provided that upon Farrar’s insolvency no further payments were to be made until the works had been completed by others and an account rendered setting out the additional costs and losses incurred by JKR. These costs were to be added to the amounts previously paid to Farrar and compared to the amount which would have been paid to Farrar had it completed the works in accordance with the contract. Any excess was to be a debt due to JKR from Farrar.

Under clause 6.7.3 of the contract, this account was to be set out in a certificate issued by the Contract Administrator or a statement prepared by JKR within three months following the completion of the Works and the making good of defects. In common with other JCT contracts, nothing was said as to the due date or final date for payment for any amount claimed in such a certificate or statement.

Following completion of the works, JKR did not issue a statement of account within the 3 month period required by clause 6.7.3, but later issued a proof of debt on the basis that it had substantially overpaid for the works, as well as making a claim for liquidated damages. Levi, who was a major creditor of Farrar, made an application to challenge JKR’s claim, on the basis that the CVA supervisor, Mr Wilson, was wrong to have admitted the proof of debt as it had not been sufficiently established.

There were a number of issues before the court, including:

  1. Whether the three-month time limit for a certificate or statement under clause 6.7.3 was a “strict” deadline, such that no statement could be rendered after that period; and

  2. Whether JKR could give a payee’s notice under s.110B of the Housing Grants Construction and Regeneration Act 1996 (as amended) (the  “Construction Act”) in any event. 

The final account mechanism: a three-month time-bar?

The court held that the three-month time limit under clause 6.7.3 was not a strict time limit and that a certificate or statement under that clause could be issued at any time before the expiry of the limitation period.

The court’s starting point was that there was nothing in the language of the clause, or anywhere else in the contract, which indicated the time limit was intended to be a strict one.  The court also relied on the Court of Appeal’s decision in Henry Boot Construction Ltd v Alstom Combined Cycles Ltd, which determined that the effect of having a prescribed time limit (in that case for the provision of a payment certificate) was to provide a date after which a cause of action for payment accrues, and the contractor can refer the matter to arbitration or start proceedings. The court rejected Levi’s argument that unless the three-month deadline was adhered to, there was no purpose in specifying a time limit. 

Accordingly, JKR was not time-barred from issuing the statement under clause 6.7.3 and pursuing the balance owed to it, notwithstanding its failure to issue the statement of account within the three-month window. 

Does the Construction Act apply?

In the event that it had been time-barred from submitting a statement under clause 6.7.3, JKR argued that it could still submit a payees notice under section 110B(2) of the Construction Act. This was rejected by the court on the basis that the Construction Act did not apply to such payments:

“… a contractor could not rely on s.110B(2) … because that section does not apply to the type of account provided for in c.6.7.3. For s.110B(2) to apply, there must be default by the payer or the specified person in giving a payment notice within 5 days of a payment due date. That is a date on which the contract provides for a payment to become due: s.110A(6). Condition 6.7.3 does not specify a payment due date: it only specifies a date by which an account is to be provided. This is not merely a matter of semantics: the c.6.7.3 scheme is different from the scheme for interim and final payments within a specified time of a due date for payment that is specified in the contract. Section 110B is directed at this scheme for interim and final payment terms of a construction contract, where a payment that is due to the payee is unquantified. It does not apply to terms such as c.6.7.3 that deal with the balance of account following termination or deemed termination of the contract and completion of the works by another person.”

Conclusions and implications

This decision provides helpful clarity as to the impact of the final account time limits in termination and insolvency scenarios under the JCT form. Although the decision concerns the JCT Minor Works contract, the conditions considered by the court are materially the same as those contained within the JCT Standard Building Contract and Design and Build Contract. As such, the court’s findings are likely to be of general application to these other JCT forms of contract.

What may perhaps provoke further debate, are the court’s obiter comments in respect of the application of the Construction Act and a payee’s ability to serve its own payment notice for a debt arising under clause 6.7.4. Section 110 of the Construction Act requires a construction contract to provide an adequate method for determining what payments become due under a construction contract. In the absence of such a mechanism, the relevant provisions of paragraphs 4 to 7 of the Scheme for Construction Contracts apply to imply a due date and final date for payment in respect of any given payment. It is unclear whether these statutory provisions were brought to the court’s attention or, if not, whether they would have affected the court’s conclusion as to the application of the Construction Act.

References:

Levi Solicitors LLP v Wilson & Anor [2022] EWHC 24 (Ch)

Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] EWCA Civ 814