Making an interim payment claim? Then make it obvious (Part 3)

Those of you who are avid readers of our construction blogs will recall that we commented on the issue of Payment Notices in two blogs in 2015, first in relation to the judgment in Caledonian Modular Ltd v Mar City Developments Ltd and then following a similar theme in Henia Investments Inc v Beck Interiors Ltd.

At the time we commented that Contractors wishing to succeed in using the Construction Act payment provisions for so-called ‘smash and grab’ adjudications would need to ensure that their interim payment applications were sufficiently obvious as to their substance, form and intent.

For anyone interested in this theme I commend the first TCC judgment of 2017 in Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) [2017] EWHC 17 (TCC) as a useful summary of the law to date, as well as providing an interesting distinction as to the differing rules that will be applied to paying and receiving parties notices.

Briefly, in Surrey and Sussex v Logan the Contractor was arguing that during final account negotiations it had served a valid default payment notice in accordance with the contract which had been unanswered, thus entitling it to the claimed sum of circa £1 million (a classic ‘smash and grab’ argument).

The Employer on the other hand disputed that a valid default payment notice had been issued by the Contractor and argued that in any event it had issued a pay less notice (in the form of its Final Certificate) meaning that it was only obliged to pay the sum of circa £14,000.  Unusually the dates of the respective notices were not in dispute, but rather the content.

Without reciting the detailed facts, the Contractor had issued an e-mail the night before (shortly before midnight) a meeting with the Contract Administrator to discuss the final account, attaching a spreadsheet which included a worksheet headed “Interim Payment Notice (Clause 4.10)” and setting out the amount of its claim and further worksheets of detailed backup to the gross amount.  The Employer did not issue a pay less notice as such but instead, following the unsuccessful meeting, issued its Final Certificate setting out its contention that the Contractor was entitled only to a further £14,000.

A valid Interim Application?

In finding that the Contractor’s default payment notice was valid, Mr Alexander Nissen QC (sitting as a High Court Judge) reiterated that:

“There is a high threshold to be met by any contractor who seeks to take advantage of these provisions whereby a sum automatically becomes payable if a timely employer’s notice is note served”.

Mr Nissen was satisfied that the application was in “substance, form and intent” an Interim Payment Notice.  You will recall in our previous blog we identified that making reference to the applicable clause reference could assist in these circumstances and in this case the fact that the Contractor did exactly that was persuasive in coming to this finding.  Further, the application was labelled ‘Interim Payment Notice’ and the valuation date cited was consistent with the relevant due date under the contract, all of which pointed toward the Interim Payment Notice being valid.

A valid pay less notice?

Unfortunately for the Contractor the Court also found that the Employer’s Final Certificate was an adequate Pay Less Notice, therefore entitling the Contractor to the £14,000 valued as opposed to its claimed £1 million.

In reaching this decision the Court explained that notices from the paying party such as a Pay Less Notice could be construed more generously than notices from a Contractor, focussing upon the “overall message and purpose which the email and attachments would have conveyed to the reasonable recipient”.  In this case the Court decided that the Final Certificate broadly conveyed the overall message and purpose that as against the Contractor’s £1 million claim it was only entitled to £14,000 and this was sufficient to demonstrate the requisite intention to pay less.

Comment

This judgment provides a useful reminder to Contractors that they must ensure that applications for payment and default payment notices are correct in timing, substance, form and intent.

It also confirms that notices issued by paying parties can be construed far more generously, with significant additional leeway afforded against the technical requirements of such notices.  Having said this, our advice to paying parties would always be to avoid any doubt and ensure that notices such as pay less notices are properly labelled and issued in order that a reasonable bystander could be in no doubt as to the intention of that notice under the contract.

Contractors may argue, perhaps justifiably, that it was not the intention of parliament to introduce such differing standards and that this judgment produces an imbalance between the parties that assists the kind of cash flow problems that the Construction Act was introduced to prevent.

On the other hand paying parties such as Employers may argue that such a distinction is justified on the basis that a pay less notice does not signal the end of the Contractor’s entitlement as it is entitled to refer the value of the payment to adjudication or litigation/arbitration.

For advice on these or any specific construction related matters, please contact our team for a free initial consultation.