Are communications protocols necessary to support the payment process?

Peter Hibberd

Recently I heard of a situation where there was a failure to issue both a payment notice and a pay less notice because of the way the contractor’s interim application had been submitted. Under the Construction Act 2009 a failure by the payer to issue a notice means that the amount stated as due in the interim application must then be paid.

This is something now generally well understood but to avoid the problem there must be absolute clarity as to when payment becomes due and what amount is requested. Under a JCT Design and Build 2011 (DB) contract, the due date is the later of the specified date and the date of receipt by the employer of the interim application.

The date of receipt point reminds me of Calladine-Smith vs Saveorder Ltd [2011]. The notice server argued that its proof that the envelope containing the notice had been properly addressed, prepaid and posted was conclusive evidence of effective service, whereas the intended recipient contended that the Interpretation Act 1978 allowed it to prove that the letter had not been received. The case revolved around the phrase “unless the contrary is proved” in Section 7 and the judge held that the intended recipient’s proof of non-receipt was conclusive. Such situations illustrate how important it is to set out the rules, whether by express contract terms or by a protocol that supports it - those rules must be complete and without ambiguity. Sometimes it is the small thing that trips one up - the giving and receiving of notices is such a point.

Rules must be complete and without ambiguity. Sometimes it is the small thing that trips one up - the giving and receiving of notices is such a point

As the Interpretation Act only applies to acts and its subordinate legislation one is left wondering how communications under a construction contract are dealt with in this regard. Section 115 of the Construction Act 1996 (which still applies) covers notices but, as 115(1) gives the parties the freedom to agree on the manner of service of any notice, 115(2 to 4) are only relevant when the contract does not provide accordingly.

Most standard contracts tackle this issue: take DB 2011 clause 1.7, for example, which spells out rules around notices and other communications. But despite such details, there are still issues to be dealt with. Clause 1.7.2 says that notices, and so on, “may or (where so required) shall be sent or transmitted by the means (electronic or otherwise) and in such format as the parties from time to time agree in writing”. Attached to this is a footnote referring to the need to agree a communications protocol when entering into the contract, something frequently overlooked.

Under DB 2011 a notice must be in writing but there is no requirement, save for stating the basis of calculation, as to how an interim application is set out; this is left to the payee, unless the parties agree otherwise. Format is not generally considered an issue but may become one if the payer fails to recognise that an application has been made because it did not look like one.

Not only is its format important, so is the means of transmitting the application, which may be electronic or otherwise unless the parties agree a specific means of transmission. Regardless as to whether it is electronic or not it is necessary to establish the precise means so that the recipient can recognise it is an application. The sender may also wish to know it has been received. There is no deemed date for receipt, which only applies under clause 1.7.4 (not relevant to payment applications unless the contract is amended accordingly). Where a communication is by electronic means surely it must be the receipt that is important. So when is it received? As there are a number of possible answers it is necessary to set out what is to be taken as receipt. Where the communication is hard copy then it “shall be duly given or served if delivered by hand or sent prepaid post to the specified address or failing that the recipient’s last known principal business address or (where a company) its registered office”. Clear enough when it comes to delivery by hand because the date of delivery and receipt coincide (even though the notice may not be delivered to the person required to action it) but as to the post there is reference only to it being sent. Where does that leave the recipient if it is not received? Issuing notices of termination is different (clause 1.7.4) because it provides a deemed date of receipt which is then subject to proof to the contrary, for instance, the issue in the Calladine case.

A protocol therefore is essential but, before agreeing on one, the parties must ensure it works for them. For example, an email sent to the wrong person, or to the right person but who is on sick leave, can mean missing notice deadlines. An approach often adopted is one of belt and braces, whereby an email is confirmed by a hard copy but it does not take much imagination to see that just as many problems can arise unless provisions are properly drafted. Both a protocol and a proactive approach on the part of the payer are what is needed.

Peter Hibberd is the chairman of the Joint Contracts Tribunal