How to avoid problems with payments in FM contracts
- Ron Cheriyan, Solicitor, Sharpe Pritchard LLP
- 15 Jan 2016
“Tis against some men’s principle to pay interest, and seems against others interest to pay the principle” said Benjamin Franklin.
In the world of facilities management, there are few thornier problems than a dispute over payment terms. The complexity of a facilities management contract, which usually includes such a broad range of activities, can create numerous opportunities for disagreement. This is further exacerbated by the fact that many agreements for FM services also form part of a construction contract.
Ron Cheriyan, a solicitor with Sharpe Pritchard, advises FM companies to be ultra-careful in paying attention to payment terms as there are potential traps for the unwary. A number of disputes have recently got as far as the courts, and the judgements have emphasised the scope for problems to arise in the nature and timing of payment applications.
Where FM services involve some element of construction, the contract will fall within the remit of the Construction Act and subject to a much stricter regime than a general contract for business services. Any provisions relating to the timing of payment applications will be strictly applied if a dispute reaches court, so it is important to bear this in mind during negotiation.
If you are the contractor seeking payment, make sure that your payment applications highlight the due date on which payment falls due. In the case of Henia Investment Inc v Beck Interiors Ltd, Beck’s interim payment application for a fit out contract was issued late and did not specify the due date to which it related. This resulted in the application being declared invalid.
If you are the employer, make sure that you respond to payment notices promptly. Be clear about the nature of payment applications and review all associated documents served on you. If in doubt, seek clarification from the other party about the intended nature of the documents.
If you do not serve a notice for payment, or a pay less notice if the amount is disputed, then you may be required to pay the whole amount applied for regardless of the value of the work actually done. In the case of ISG Construction Ltd v Seevic College, Seevic did not serve a payment notice or a pay less notice on ISG on receipt of the payment application. Consequently, the amount stated in ISG’s payment application was deemed to have been agreed as the value of the works by Seevic.
Be particularly careful when seeking to vary an earlier payment application, as this will not negate the payment provisions under the contract. Caledonian Modular Limited learned this to their detriment in Caledonian Modular Ltd v Mar City Developments Ltd. Mar City had issued a payless notice, disputing Caledonian’s interim payment application. Caledonian subsequently submitted documents to Mar City, seeking to vary its previous interim application, but Mar City successfully argued that it was not required to amend its payless notice.
Unfortunately for FM providers, it is not enough to check the contract, understand its payment provisions and make sure you comply with them.
Contractors can get themselves into trouble unwittingly if a pattern of conduct arises between you and the other contracting party.
You may find it much harder to rely on a contract’s payment provisions if such a pattern is found to exist. In Mears Limited v Shoreline Housing Partnership Limited, Shoreline relied on the contractual payment provisions to justify its action in withholding money from Mears. However, Mears was able to argue successfully that, as both parties had acted on an assumed state of facts (i.e. that Mears would be paid on the composite code rates and not the NEC3 contract terms), it was unfair for Shoreline to withhold the money. The strict terms of the contract were superseded by the parties’ pattern of conduct.
However, the mere existence of a pattern of conduct will not always negate the operation of a contract’s payment provisions. Interestingly, in Leeds City Council v Waco UK Ltd, Leeds argued that Waco’s interim payment application was invalid as it was sent six days before the contractual date. Waco had not issued its previous applications in strict accordance with the contract and historically this had not been challenged by Leeds. Waco argued that a pattern of conduct had arisen between the parties which validated the interim application. However, Leeds successfully argued that the pattern of conduct did not extend to interim applications that were made early.
The upshot of this is that, where a pattern of conduct has arisen between the parties, the timing of payment applications is fraught with uncertainty. So, from time to time it is advisable to check whether a pattern of conduct has arisen between you and the other party. If you are concerned that you may be prevented from asserting your contractual rights, inform the other party of the mistaken assumption as soon as possible to try and end any behaviour that might put you at a disadvantage,
Ron Cheriyan Solicitor Sharpe Pritchard LLP