Payment Notices under the Construction Act – Where are we now?

Tom Collins of Weightmans explores the implications of the latest rulings for healthcare construction companies who regularly negotiate default clauses

Tom Collins

In this article, Tom Collins, an associate at national law firm, Weightmans, outlines the implications of the latest rulings for healthcare construction companies who regularly negotiate default clauses and the issues that should be considered by those involved in drafting these complicated documents

The Housing Grants, Construction and Regeneration Act 1996 (‘the Construction Act’) was amended in 2009, affecting construction contracts entered into after 1 October 2011.

Payers have statutory and contractual rights to challenge applications for payment from payees. If the payer fails to exercise those rights then it is still very much at risk of having to pay the sum applied for, whether overvalued or not

Provision for the service of default payment notices was brought in, while preserving the employer’s right to withhold payment through a pay-less notice. There have been a number of recent court decisions on interpretation of the amendments - so what can be learned from these cases?

The general rule was considered in ISG Construction Limited v Seevic College [2014] EWHC 4007 (TCC) . A contractor applied for payment and the employer failed to serve any payment notice or pay-less notice. The contractor successfully adjudicated for the sum it had applied for and that had to be paid. The employer, believing that the sum claimed was overvalued, sought to commence a second adjudication seeking a determination of the ‘true value’ of the contractor’s application for payment, which it could then set off against the contractor’s adjudication award. The employer considered it should only be bound to pay what was properly due. However, the court held that where a paying party failed to respond to an interim application it was deemed to have agreed that the true value of the works was that as applied for – whether that valuation was right or wrong. In its judgement, the court said: “The statutory regime would be completely undermined if an employer was allowed a further opportunity to challenge the payment application when it had failed to exercise the rights already open to it.”

In what would otherwise seem to be a similar situation, a different decision was reached ( Matthew Harding (t/a M J Harding Contractors) v Paice and Springall [2014] EWHC 3824 (TCC)) . Here, the court was prepared to allow the employer to commence a second adjudication to determine the true value of the contractor’s application for payment. The decision was also upheld on appeal. Why? On an interim application if the paying party fails to serve the required notices then it has to pay what was applied for and can try to remedy, or claw back, the position in future payment application cycles. However, that is not the case when valuing a final account as in Harding, which was a case relating to the valuation of a final account following termination of the contract. The final account provisions in question also made clear that what had to be paid was ‘….the amount properly due’.

The courts, therefore, draw a distinction between payment obligations that arise on an interim payment application and those that arise when considering a final account on termination of the contract. The court in Harding did not say expressly that its decision would apply to all final accounts (whether a termination account or not), but the general principle appears to be that on a final account the sum to be paid should be that which is properly due.

The courts have also made rulings on how and when a payee (usually a contractor) should make an interim application for payment. This in part dealt with the situation whereby a paying party may be inundated with applications for payment and not respond to all of them. In one case a contractor applied for payment and the employer properly responded. The contractor then immediately applied again. This time the employer did not respond. The court refused to allow payment to the contractor saying that applications had to be made in accordance with the contract. Repeated issue of applications to ‘catch out’ an employer would ‘make a mockery’ of the contract payment provisions (Caledonian Modular Limited v Mar City Developments Limited [2015] EWHC 1855 (TCC)) .

The courts may allow a challenge to valuation where the payment relates to a final account, but to look to avoid any dispute payers should ensure they and their professional team are ready and prepared to respond to payment applications and to reject those which are not made in accordance with the contract

If a contractor applies for payment, but is out of time, then can it claim its application is simply an early application for the next payment round? The court has sought to rein in on this approach, saying payment applications have to be clear as to what they purport to be and clearly set out the sum due and the relevant due date. To allow a late application to become an early application by default leads to uncertainty and litigation (Henia Investments Inc v Beck Interiors Limited [2015] EWHC 2433 (TCC)).

Payers have statutory and contractual rights to challenge applications for payment from payees. If the payer fails to exercise those rights then it is still very much at risk of having to pay the sum applied for, whether overvalued or not.

The courts may allow a challenge to valuation where the payment relates to a final account, but to look to avoid any dispute payers should ensure they and their professional team are ready and prepared to respond to payment applications and to reject those which are not made in accordance with the contract.

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