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Published On: 23 June 2016
Where an amended contractual term rendered it impossible to issue a payless notice in compliance with either the Scheme for Construction Contracts or the Construction Act 1996, the court must imply a term to render the contract workable. In this case, the prescribed period before the final date for payment in which an employer can issue a pay less notice was reduced to nil.
The parties entered into an amended JCT Minor Works Building Contract which provided that payment was to be made within 72 hours of receipt of the invoice issued when the milestone is achieved. DSL issued an invoice on 23 October 2015 asserting that it had achieved the first milestone. On 28 October, Manor issued a pay less notice.
By 6 November 2015, DSL had not received payment of its Invoice and referred the dispute to adjudication.
The adjudicator ordered Manor to pay £72,500 plus VAT to DSL, and held that Manor's pay less notice had not been issued in accordance with the contract which required it to be issued 5 days before the final date for payment (known as the prescribed period). Manor brought Part 8 proceedings seeking a declaration as to the final date for payment of DSL's invoice dated 23 October 2015 ("the Invoice").
Mr Justice Edwards-Stuart held that the Invoice was the payment notice and the day on which it was issued became the due date. On that basis, he upheld the adjudicator's decision that the final date for payment was 26 October 2015, being 72 hours after Manor had received the Invoice.
The issue became however that, if this was so, when should Manor have issued its pay less notice.
Manor argued the due date was actually 72 hours after the Invoice was issued and that notice of the sum due could be given prior to the due date. The final date for payment would therefore become either 21 days (under the contract) or 17 days (under the Scheme) after the due date, permitting Manor's payless notice to have been submitted in time. Edwards-Stuart J dismissed this argument because "leaving aside the problem presented by the difficulty of knowing in advance the due date the precise sum that will be due on that date", the amended clause required that the Invoice (notice) was to be issued when the milestone was achieved.
DSL argued that the clause in the contract requiring the 5 day period survived the amendment, with the result that any pay less notice should have been issued by 21 October 2015. Again Edwards-Stuart J dismissed this argument on the basis that this outcome would contravene the prohibition in section 111(5)(b) of the Housing Grants, Construction and Regeneration Act 1996 ("the Act") on giving a pay less notice before the notice by reference to which the notified sum is determined.
The Court was therefore faced with the unusual situation in which neither party's construction of the contract produced a result that complied with both the express terms of the amendment or the Act.
It was necessary therefore for the court to imply a term into the contract to make it workable.
Edwards-Stuart J considered that there was only one interpretation which would save the amendment and give it contractual effect; that the parties impliedly agreed to reduce the prescribed period to nil. In other words, the pay less notice must have been issued within those 72 hours between the issuance of the Invoice (the payment notice) and before the final date for payment.
Edwards-Stuart J considered Belize Telecom  1 WLR 1988 and Marks & Spencer PLC  UKSC 72 as to the Court's ability to imply terms into contracts. He concluded that the court must be satisfied that the implication of the term is necessary in order to give business efficacy to the contract, or, in order to make the contract work as the parties must have intended.
In applying this reasoning to the case, Edwards-Stuart J noted that "the reasonable person in the position of the parties would understand the amendment to mean something else" and that "the parties must surely have intended" to reduce the prescribed period to nil to enable the contract to work. He went on to add "In my judgment such an agreement is necessary and it is not inequitable: if DSL wanted prompt payment within 72 hours of its invoice, it could not reasonably object to a corresponding reduction in the prescribed period.”
It is likely there will be only rare occasions where it will be appropriate to imply a term in lieu of importing the Scheme.