Final Payments on Termination and Insolvency: Does the Construction Act Apply?

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A recent High Court decision ruled that the payment provisions of the Building Act did not apply to the final account provisions of the JCT minor works contract arising from termination or insolvency. The court also found that the three-month time limit for providing an account statement under these provisions was not a “strict” time limit prohibiting the employer from providing such a statement at a later date. The same termination and insolvency provisions are found in other JCT contract forms and this decision is likely to have wider application.

Levi Solicitors LLP vs. Wilson

JKR Property Development Limited (“JKR”) engaged Farrar Construction Ltd (“farrar”) to carry out work under a 2011 JCT Petits Travaux contract. In September 2016, Farrar became insolvent, entering into a voluntary enterprise agreement (“stroke”).

Like other JCT contracts, the contract provided that in the event of Farrar’s insolvency, no further payments were to be made until the work had been completed by others and a report had been given showing 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 that would have been paid to Farrar had it completed the work in accordance with the contract. Any excess was to be a debt owed to JKR by Farrar.

Under clause 6.7.3 of the contract, this statement was to be included in a certificate issued by the contract administrator or a statement prepared by JKR within three months of completion of the work and remedying of the defects. As with other JCT contracts, nothing has been said as to the due date or time limit for payment of any amount claimed in such certificate or statement.

After completion of the work, JKR failed to issue a statement of account within the 3 month period required by clause 6.7.3, but then issued proof of debt on the grounds that it had significantly overpaid for the works, as well as a claim for damages. Levi, who was a major creditor of Farrar, filed a motion challenging JKR’s claim, on the grounds that CVA supervisor Mr. Wilson was wrong to admit evidence of the debt because she had no not been sufficiently established.

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

  1. If the three month time limit for a certificate or declaration under clause 6.7.3 was a ‘strict’ time limit, such that no declaration could be made after that period; and

  2. If JKR could give notice to the beneficiary under section 110B of the Housing Construction and Regeneration Grants Act 1996 (as amended) (the “building law“) in any case.

The final account mechanism: a three-month prescription?

The court held that the three-month period provided for in clause 6.7.3 was not a hard time and that a certificate or declaration under this clause could be issued at any time before the expiry of the period. prescription.

The court’s starting point was that there was nothing in the wording of the clause, or anywhere else in the contract, that indicated that the time limit had to be strict. The Court also relied on the decision of the Court of Appeal in Henry Boot Construction Ltd v Alstom Combined Cycles Ltd, who determined that the effect of having a prescribed time limit (in this case for providing a certificate of payment) was to provide a date after which a cause of action for payment arises, and the contractor may submit the matter to arbitration or commence proceedings. The court rejected Levi’s argument that unless the three-month deadline was met, there was no reason to specify a deadline.

Accordingly, JKR has not been precluded from issuing the statement under clause 6.7.3 and seeking the balance due to it, notwithstanding its failure to issue the account statement within the three month period.

Does the Construction Act apply?

In the event that it would have been barred from submitting a statement under clause 6.7.3, JKR argued that it could still submit a notice to beneficiaries under section 110B(2) of the construction. This was rejected by the court on the grounds that the Construction Act did not apply to these payments:

“… an entrepreneur could not avail himself of article 110B(2) … because this article does not apply to the type of account provided for in c.6.7.3. For section 110B(2) to apply, there must be a failure of the payer or designate to give notice of payment within 5 days of the due date for payment. This is a date on which the contract provides for 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 must be provided. This is not only a question of semantics: the regime c.6.7.3 is different from the regime of interim and final payments within a specified time from a payment due date specified in the contract. Section 110B applies to this regime for the interim and final payment terms of a construction contract, where a payment due to the beneficiary is not quantified. It does not apply to terms such as c.6.7.3 which deal with the balance in the account after termination or deemed termination of the contract and completion of the work by another person.

Conclusions and implications

This ruling provides helpful clarity on the impact of final account deadlines in termination and insolvency scenarios under the JCT form. Although the decision relates to the JCT minor works contract, the terms considered by the court are substantially the same as those contained in the standard construction contract and the JCT design and construction contract. As such, the court’s findings are likely to be of general application to these other forms of JCT contracts.

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

The references:

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

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

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