Waiver and estoppel in interim payment disputes

Angus Nice (pictured left) is an associate and Mark Breslin is a partner at law firm CMS 

A recent Court of Appeal decision is the first to comment on whether a contractor would be prevented from challenging the validity of an interim payment application received from one of its subcontractors if it failed to raise any concerns immediately, only disputing the timing of the payment application at a later date.

Case overview

J&B Hopkins (JBH) was the main mechanical and electrical contractor on a university project in Sussex. JBH subcontracted some of the works to A&V Building Solutions Ltd (AVB) and the subcontract entitled AVB to payment by instalments. Specifically, the subcontract provided that, as a “condition precedent”, AVB had to make monthly applications for payment on the dates specified in an appendix to the subcontract. 

“The case is a useful reminder for paying parties to raise issues with respect to the validity of interim payment applications or payment notices received at the outset”

On 22 March 2022, AVB issued an interim payment application to the sum of £211k (the IPA), despite the appendix to the subcontract providing that the IPA ought to have been issued on 21 March 2022, the day before. On receipt of the IPA, JBH considered that no further sums were due and that AVB had been overpaid.

However, at no point over the next seven months did JBH claim that there was an issue with the validity of the IPA or that it hadn’t been served in accordance with the terms of the subcontract. In fact, during subsequent discussions and correspondence between the parties between April and October regarding AVB’s claim, JBH treated the IPA as having been validly issued.

It was only on 19 October 2022 that JBH’s solicitors asserted, for the first time, that the IPA was not served in accordance with the provisions of the subcontract. The letter did not explain how or why that was the case. 

The dispute

In November 2022, AVB commenced an adjudication seeking payment based on the IPA issued in March 2022. AVB was successful and, in his decision, the adjudicator awarded payment of £138k to AVB. In doing so, he agreed with AVB that the IPA was validly served and rejected JBH’s argument that the application was served late.

However, at the same time and while the adjudication was ongoing, JBH commenced proceedings in court against AVB seeking a declaration as to the invalidity of the IPA.

Contrary to the decision reached by the adjudicator, the court found in JBH’s favour and held that (i) a valid IPA could only be made on the specific date set out in the subcontract, and (ii) the IPA was one day late and therefore invalid. 

The Court of Appeal

AVB appealed the decision and was successful in overturning the interpretation of the subcontract presented by JBH. In considering the parties’ position, the court provided helpful guidance on waiver and estoppel issues, noting that such issues “regularly arise in adjudication enforcement, particularly arising out of ‘smash and grab’ adjudications”. 

Of particular interest were the arguments presented by AVB in respect of JBH’s treatment of the IPA.

The first relied on a prior event, in 2020, when the application date fell on a Sunday and the application made on a Monday was paid by JBH. AVB sought to argue that this was enough to show that JBH had somehow waived the dates in the subcontract as to when payment application was to be made. However, this was rejected by the court: “One instance of paying a late payment application is not generally sufficient to amount to a waiver.”

The second argument relied on JBH’s treatment of the IPA between March and November 2022. However, disagreeing with the first judge, the Court of Appeal commented that the necessary ingredients for an estoppel had been made out. Specifically, that (i) no attempt was made by JBH to reserve the position in respect of validity; and (ii) throughout the period between March and November 2021, both parties were operating on the basis that the IPA was a valid application. If, at any point prior to that time, JBH had indicated that it considered the payment application to have been served one day late, AVB could have taken the necessary steps to resolve that debate by repeating the claim for the next monthly cycle. Accordingly, JBH had unequivocally represented that the payment application was valid.

Commentary

This appears to be the first Court of Appeal decision in which waiver and estoppel arguments in relation to payment applications or payment notices have been considered. The guidance given by the decision is particularly welcome given, as the court acknowledged, the frequency with which such arguments arise in “smash and grab” disputes.

However, first and foremost, the case is a useful reminder for paying parties to raise any potential issues with respect to the validity of interim payment applications or payment notices received from their supply chain at the outset or to expressly reserve their position where there is any doubt as to questions of validity.

If not, as the commentary provided by the Court of Appeal suggests, a paying party may be prevented from running perfectly good arguments later and find itself on the wrong side of an undesirable adjudication decision or judgment.