Blog author: Peter Hibberd
Following Galliford Try vs Estura  EWHC412 (TCC), a case concerning summary judgement to enforce the decision of an adjudicator as to payment of an interim application, there were various comments by observers on whether or not the payer has a right to repayment by the contractor on account of an overpayment and speculation as to whether there should be an express term to this effect.
JCT Design and Build Contract 2011 (the contract in that case) makes it absolutely clear that the contractor shall make an application to the employer for each interim payment and when such application may be made. The due date, which is vitally important, is the later of the date for completion of the stage/specified date (whichever option applies) and the date of receipt of the contractor’s application. It determines the final date for payment, the date by which the payment notice is issued, and the date by which any pay less notice must be issued. It is also clear that where the employer (or someone authorised to do so) fails to give both notices then the amount stated in the contractor’s interim application becomes the amount due and payable (the default position). In that situation and for the purpose of that payment only it does not matter whether or not the amount set out in the application is accurate (ISG Construction vs Seevic College  EWHC4007 (TCC)) save for fraud. So does this mean that where there is an overpayment on an interim payment there is a need to have an express term providing for repayment?
Firstly, the employer can prevent the operation of the default mechanism by issuing either a payment notice, which is the intention under the contract, or a pay less notice within the stipulated timescales. There are two opportunities to avoid paying an amount stated in a contractor’s interim application with which one disagrees. Missing both opportunities would or certainly now should be a rather rare event. The main reason why this might arise is one of uncertainty as to when the contractor’s application is made. A communications protocol is necessary to support the payment process so as to ensure that it is known that an application for payment has been made. A proper application should provide the trigger to issue a payment notice and any pay less notice that may be required.
Payment that arises as a consequence of the default position should be few in number but what of those payments that do arise? The contract states that the sum due as an interim payment is the gross valuation less the aggregate of; any retention that may be held, the cumulative total of any advance payment that has become due and the amounts paid in previous interim payments. That means for each interim payment a new calculation is made. This is accepted practice and means any over assessment or error in calculation of the previous payment would then become adjusted in a subsequent interim payment unless the same error arises. It also means that any over payment that has been made by making a payment in excess of that which would have been made had a payment notice or pay less notice been correctly issued would also be adjusted. Mr Justice Edwards-Stuart in Galliford Try said there is nothing to prevent the employer challenging the value of the work on the next application, even if he is contending for a figure that is lower than the (unchallenged) amount stated in the previous application. Therefore except for relatively few cases the amount of any over payment will be recovered through the interim payment process. There is of course the possibility of an over payment arising towards the end of the interim payment process or a significant over payment which cannot be so recovered: however the contract makes express provision for the possibility of repayment at final account stage.
Furthermore, as stated in Rupert Morgan Building Services (LLC) Ltd v Jervis  EWCA CIv 1563 at paragraph 14:
“If (the client) has overpaid on an interim certificate the matter can be put right in subsequent certificates. Otherwise he can raise the matter by way of adjudication or if necessary arbitration or legal proceedings.”
Additionally, the Supreme Court in Aspect Contracts (Asbestos) Limited v Higgins Construction Plc  UKSC 38 at paragraph 23 held the following implied term under the Construction Act:
(A paying party) “must have a directly enforceable right to recover any overpayment to which the adjudicator’s decision can be shown to have led, once there has been a final determination of the dispute”
This would of course mean a delay in recovery of any overpayment or indeed the possibility that the contractor becomes insolvent in the meantime. There is not only a cash flow problem but the consequences of any insolvency that one has to guard against.
All contracts are reliant on the parties using proper procedures so as to comply with the terms of their contract and this is particularly important in terms of payment. It is often appropriate for a contract to provide for what happens in the event of failure to comply but it is generally accepted that it is not appropriate to try to cover every what-if situation. In that regard, an express term for repayment during the interim payment stage to cover a situation that should only apply in rare and exceptional circumstances would add little, if anything, to the existing processes and current position in law.
It is submitted that the payment provisions within JCT Design and Build Contract 2011 have got the balance right and that they provide a sound legal framework within which to operate.
Note: Blog posts are the views of the author(s), and do not necessarily represent the views of JCT.