Varying Payment Terms by Conduct

The recent case of Leeds City Council v Waco UK Limited [2015] EWHC 1400 (the "Waco Case") serves as a warning to many construction clients to be wary of accepting late applications for payment from contractors, or they could be held to have varied the contractual payment terms by their conduct.

In the Waco case Leeds City Council (the "Council") had contracted with Waco UK Limited ("Waco") under a JCT Design and Build contract for the design, manufacture and installation of new factory assembled modular Classroom Buildings at Roundhay Primary School in Leeds. The contract contained detailed provisions relating to payment; in particular that prior to practical completion applications were to be made on specified dates at monthly intervals, and that after practical completion applications were to be made at two monthly intervals unless otherwise agreed. Throughout the contract, both before and after practical completion, Waco made a number of interim applications for payment which were not made on the contractually specified dates; often being 3 or 4 days late. The Council's agent certified all of these applications bar one. In the course of a dispute relating to an application made early that was not paid, the court considered:

• Whether the agent had either agreed to vary the post-practical completion application dates or waived the Council's right to challenge an application made on a different date.
• Whether the Council's agent had authority to vary the contract and application dates prior to practical completion.
• Whether the contract terms had been varied due to a course of dealing.

In relation to the first point, the court held that there was no waiver of the Council's right to challenge an application, but that the agent had merely been acting under a condition - the key part of the post-practical completion conditions being the option for the parties to agree different application dates. This meant the agent has both ostensible and actual authority to agree different dates for post-practical completion applications. Waco's applications post-practical completion, which were made 3 or 4 days later than the contractually specified date, were therefore valid as, by regularly accepting such applications, the Council's agent had agreed with Waco that valid applications could be made 3 or 4 days after the contractually specified date.

The court's decisions in relation to the remaining points are the most significant to employers of construction contractors as there was no contractual provision that allowed for any alteration to the application dates prior to practical completion. Any change in these application dates would therefore amount to a variation of the Contract.

In the absence of evidence of actual authority, the court held that the agent did not have ostensible authority to vary the Contract. However, as all of the applications made prior to practical completion which were 3 or 4 days late were accepted by the Council's agent and duly paid by the Council, the court held that the parties had established a course of dealing during this time. The Council was therefore unable to reject applications made 3 or 4 days late, as to do so would have been inconsistent with the established conduct and unconscionable as such conduct had led Waco to believe that applications would be accepted even if not made on the contractual valuation date.

The Court did, however, allow some concession to the employer, stating that the established conduct did not permit Waco to submit an application outside of this 3 or 4 day leeway. Therefore the applications made in 2014 that were more than 10 days early could not simply be considered late applications from the previous application date and the contract had not been varied to validate applications made before the contractually specified date. The Council was therefore not required to pay the sum claimed in the 2014 application.

Lessons to be learnt

This decision, although not new law, is a useful reminder to employers that accepting late payment applications can eventually lead to a variation of the construction contract, and can prevent the employer from later claiming an application was invalid. Whether a contract has been varied in this manner will become particularly important where an employer has failed to serve a payment notice or payless notice and could therefore be required to pay the full amount applied for by the contractor. The Council was fortunate in this case that it was an early application that had not been responded to. If this application had been late by 3 or 4 days then, in the absence of a payment notice or pay less notice, the Council would have had little defence to being required to pay the full sum claimed - which in this case was some £450,000 - due to their prior conduct.

Employers should be wary of paying applications made late and should ensure their agent has clear instructions on whether such applications would be acceptable, to ensure the contractual terms relating to payment are not unintentionally varied.