Appropriation of monies

Problem:  I work for a building company that has enjoyed quite a long relationship with one particular client.  The client is a housing developer operating at the high end of the market constructing one-off bespoke houses.

Although procurement of us pre-contract has been fine, with every contract awarded having been covered by a purchase order that included terms and conditions, including a price, it is the client’s post-contract administration has not been so good, in particular the accountability of monies paid against each contract and the issue of payment and pay less notices.

However, this has now come to a head because of the pandemic, which has hit our client’s business hard, and its cash-flow has suffered, which has had a knock-on effect on us.

What has happened is that although we have issued regular payment applications for our work, the client has had a tendency to make irregular global payments – that is payments on account against more than more contract.  That would not have been so bad if the global payments had identified the contracts that was being paid and / or the payments made had equalled the value of the payment applications which would have allowed easy identification.

We are now at the stage where according to our account records, there is about £96,000 outstanding against the total value of our payment applications, whilst the client is arguing that we have been paid against certain payment applications apart from 2 contracts, which our client is arguing it is withholding monies due to defects.

The client has never issued any payment or pay less notices and its payment remittances do not allocate which contracts were paid.  What do we do?

 

Response:  This pandemic has certainly caused many problems in the construction industry, and unfortunately the effects will be felt for some time after the pandemic is over.

Under each contract you have entered into, save where the contract specifies that the duration of the work is to be less than 45 days or it is agreed that the duration of the work is estimated to be less than 45 days, you are entitled to stage payments, even if the terms and conditions of the contract are silent on stage payments.

You are therefore entitled to issue application for payments and providing the same are valid (having regard to the period and the content of the applications), you are entitled to receive payment unless your client has issued in time a valid payment notice or pay less notice.

As regards to the global payments that your client has made, the general rule in law is that where payments have not been allocated by the payer and there is more than one debt, the payee can exercise its legal right to appropriate those payments to whichever debt it deems fit.

In your situation therefore, you can decide which of the payment applications the payments have been appropriated against, leaving you to then decide how to resolve the payment application/s that remain unpaid – perhaps suspend performance of your obligations under the contract/s, make a referral to adjudication (or more than one referral if the payment effects more than one project), litigate or arbitrate, or some other form of dispute resolution.

All that said however, given the amount in dispute and the complexity of the legal arguments, I would recommend that you seek legal advice before you make any decision.

 

© Michael Gerard 2021

The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.

Author background

Michael is a Solicitor, Chartered Builder & Registered Construction Adjudicator, and is a director at Michael Gerard Law Limited, a solicitors practice regulated by the SRA.

Top