Introduction
The construction industry continues to grapple with commercial protections, such as financial caps on an employer’s liability, and procedural payment mechanisms. This article examines the legal and practical challenges that arise when these seemingly incompatible contractual provisions collide, particularly in the context of letters of intent and interim payment applications.
The competing interests
This conflict arises from tension between two distinct contractual objectives. A financial cap acts as a risk management tool that protects employers from unlimited financial exposure during the early stages of construction projects. It is typically implemented through letters of intent allowing work to start before the final or eventual contract terms are agreed.
Payment notice requirements serve a different but equally important purpose. They are designed to ensure that contractors receive timely payment for work performed, while also providing a clear mechanism for employers to communicate what amounts they agree are due and what amounts they dispute. The consequences of failing to comply with these requirements are severe: if an employer fails to issue a valid payment notice or pay less notice within the specified timeframes, the contractor’s claimed amount becomes due, regardless of the underlying merits of the claim.
Principles of construction
The principles of construction are well settled and summarised by Carr J (as she then was) in EE Limited v. Mundio by reference to a well-known series of high-level authorities, including: ICS v West Bromwich; Chartbrook; Rainy Sky; Makdessi v Cavendish, and Arnold v Britton.
These decisions emphasise the importance of the words used. In short, interpretation requires a focus on the meaning of the words used in their documented, factual and commercial context.
A fundamental principle of contractual interpretation is that contracts should be read as a whole to give effect to the parties’ intentions. When applying this principle to contracts containing both financial caps and payment notice requirements, the challenge is to determine whether these provisions can be reconciled in a way that preserves their purpose or whether they are incompatible.
Precedence clauses
The interrelationship between financial caps and payment notice requirements operates within a legal framework that includes both statutory provisions and common law principles. In jurisdictions such as the United Kingdom, the Housing Grants, Construction and Regeneration Act 1996 (as amended) provides a statutory foundation for payment mechanisms in construction contracts, while common law principles of contractual interpretation govern how conflicting provisions should be reconciled.
Many contracts include explicit precedence clauses that establish the hierarchy of contractual documents and provisions. These clauses typically provide that in the event of inconsistency, certain documents or provisions take precedence over others. A clause that provides that the terms of a letter of intent prevail over standard contract conditions might be sufficient to establish the primacy of a financial cap, but the scope of the clause must be carefully considered.
What if there is no precedence clause
The presence of a precedence clause should simplify matters, but in its absence, parties face the challenge of applying general principles of contractual interpretation. This analysis may be necessary regardless, particularly where statutory payment mechanisms are argued to be mandatory.
The author is not aware of an authority addressing the interrelationship between financial caps and payment notice requirements. This lack of authority creates uncertainty for practitioners and adjudicators, who must rely on general principles of contractual interpretation to resolve the issue.
In a contract where a financial cap is present, the question arises whether an interim payment application that exceeds the cap can be considered valid or effective. If the cap operates as an absolute limit on the employer’s liability, then applications exceeding this limit may not trigger the payment notice requirements, since it could be argued that such applications do not result in a payment obligation.
Alternatively, it could be argued, as a matter of construction, that the financial cap overrides or disapplies the payment notice requirements. The principle that specific terms prevail over general ones could be relevant in this context. Financial caps are typically drafted with specific application to the particular project and the parties’ commercial relationship, while payment notice requirements are often standard terms derived from industry-standard contract forms; or where the contract does not comply with the 1996 Act (as amended), from the Scheme for Construction Contracts.
Contractual drafting solutions
The most effective way to resolve conflicts between financial caps and payment notice requirements is through careful contractual drafting that explicitly addresses their interaction. This may involve clarifying the scope and application of the financial cap, and establishing clear procedures for handling applications that exceed the cap.
Conclusion
The conflict between financial caps and payment notice requirements should be addressed by clearly defining the relationship between these provisions in the contract.
