In Jawaby Property Investment Limited v The Interiors Group Limited & Another:

• Tekxel Limited employed The Interiors Group (“TIG”) for certain works at Holborn Tower, London under an amended JCT DB 2011 form of contract
• The contract sum was over £4 million
• Ashford Property Services Limited (“Ashford”) was appointed as the Employer’s Agent
• Tekxel was required to deposit £1 million in a designated escrow account held by Tekxel’s solicitors as security against any failure by Tekxel to pay sums properly due to TIG

The building contract and escrow agreement were subsequently novated from Tekxel to Jawaby, the freehold owner of the property.

The following procedure was followed for payment on the first six valuations:

1. TIG sent a valuation to Ashford up to the due date (the 8^th of each month)
2. Ashford would then “walk the job” with TIG and assess and check the work done
3. Ashford would then issue a Certificate for Payment, accompanied by detailed Excel spreadsheets showing how the assessment had been made
4. TIG would then issue an invoice in the relevant sum

In January 2016, following a request by Ashford, TIG issued valuation 7 for a total gross sum of £2.3 million. It was referred to in TIG’s cover e-mail as “our initial assessment for Valuation 007”. 

Ashford and TIG “walked the job” and Ashford issued Certificate for Payment No 7 in the amount of minus £124,604.00. This negative figure was based on a total gross valuation of £1.6 million. The Certificate for Payment had no breakdown of that figure or any accompanying backup documentation.

At TIG’s request, Ashford provided an explanation in an e-mail dated 18 January 2016 following which TIG’s solicitors gave a notice of intention to suspend performance and a notice of default under the escrow agreement. 

Jawaby’s solicitors responded by stating that: (1) TIG had not issued a valid Interim Application; and (2) Ashford’s reply to the queries made by TIG on 18 January 2016 constituted a valid Pay Less Notice.

Jawaby issued Part 8 proceedings seeking a declaration that TIG was not entitled to trigger payment from the Escrow Account because:

1. Valuation 7 was not a valid Interim Application under the building contract; and
2. Alternatively, if valuation 7 was a valid Interim Application, Ashford’s e-mail of 18 January 2016 constituted a valid Pay Less Notice.

The Court held that TIG had not made a valid Interim Application and thus no default event had occurred within the meaning of the escrow agreement, because:

1. Valuation 7 did not describe itself as an Interim Application; it did not mention clause 4.8.1 of the Building Contract and it did not apply for anything;
2. it did not state that TIG considered that a sum was due to it;
3. it was described as an “initial” assessment, indicating a degree of provisionality;
4. it did not provide information and documentation which would support the claim and it did not comply with the contractual requirement to show the basis on which the valuation had been calculated.

Therefore, valuation 7 did not comply with the requirements of the building contract for Interim Applications (clause 4.8.1). Referring to previous case law, the Court pointed out that an employer’s failure to serve a Pay Less Notice can have draconian consequences. Therefore, if contractors want the benefit of those provisions they are obliged, in return, to set out their interim payment claims with proper clarity. An Interim Application must be in substance, form and intent an Interim Application stating the sum considered by the contractor as due at the relevant due date and it must be free from ambiguity.

COMMENT: If parties fail to comply with their contractual obligations it can have serious consequences, especially when it comes to payment – the lifeblood of the construction industry. Indeed, the judgment mentions that TIG was in severe financial difficulties. If contractors want the benefit of statutory or contractual payment provisions, they must be mindful of their burden in meeting the requirements applicable to applications for payment.