Legal

Payment notices: don’t wait until the midnight hour

12 July 2017 | By Theresa Mohammed and Helen Stuart

Robyn Mackenzie/Dreamstime

Theresa Mohammed and Helen Stuart on a recent case that could put an end to tactics used to avoid enforcement of payment applications.

Parties to construction contracts are still making use of what we would call “smash and grab” adjudications. This is where the paying party has failed to serve a valid pay less notice which can render the payment application payable in full, regardless of the true value of the application.

Towards the end of a project, when the applications are becoming higher and higher in value, and the parties are not so concerned with preserving commercial relationships, a tactic has been to issue a notice of adjudication asking for full payment as soon as the paying party has defaulted on a pay less notice.

As the consequences can be severe, there have been numerous attempts to avoid the enforcement of adjudicator’s decisions that have awarded full payment of applications.

One way to resist enforcement has been to successfully argue that there was not a valid payment application in the first place so the obligation to issue a pay less notice has not been triggered.

In the recent case of Kersfield Developments (Bridge Road) Ltd (Kersfield) v Bray & Slaughter Ltd (Bray), the court considered, among other issues, whether a payment application was valid when its substantiation did not comply with the requirements of the contract.

Kersfield had appointed Bray to carry out the refurbishment of a mansion house and stable block and the construction of detached houses for £4.95m under an amended JCT D&B form of contract. Bray had submitted an interim application for £1.2m.

Unfortunately, Kersfield’s employer’s agent only sought to issue a payment notice and a pay less notice by email late on a Friday evening (9.50pm). The final date the pay less notice could be served was the Sunday. Under the contract provisions a notice served by email after 4pm was not deemed served until the following business day which was the Monday. The pay less was therefore late, if only by hours.  

The court unsurprisingly found that Kersfield had not served a pay less notice in time. Consequently Kersfield argued that as clause 4.8.4 of the contract provided that Bray’s applications were to be “accompanied by such further information as may be specified in the Employer's Requirements”, and the necessary information was not provided in respect of certain claims, the application was invalid.    

The court reiterated the previous case law on the validity of payment applications, namely that they must be obviously identifiable as such and set out, as a minimum, the sum claimed as due and the basis on which such sum is calculated.

It went on to say that the parties were free to agree additional requirements as to their form, content and substantiation (provided that they don't conflict with the statutory regime). However, clause 4.8 did not state that applications would be invalid in the absence of the specified substantiation (and there was no basis for the implication of such a term).

Consequently the lack of substantiation did not render the application invalid. Kersfield’s remedy when faced with an application that failed to include the required substantiation in respect of certain claims was to exclude such claims from the valuation in its payment notice or to issue a pay less notice to deduct such sums. As Kersfield had failed to do so, the amount claimed in Bray’s application was due.

This case is noteworthy as we have seen similar arguments claiming invalid payment applications being used successfully in adjudications. So parties should note that this is unlikely to be the case going forward. It would also be interesting to know whether the court would have come to a different conclusion if the contract had expressly stated that applications would be invalid in the absence of the specified substantiation.

Bray also raised an interesting argument on estoppel, although this did not need to be decided, as its payment application was valid. The court held that the fact that payment had been made against earlier applications did not mean that the Bray had an entitlement to payment against an invalid application.

Partly this was because the employer’s agent did not have authority to vary the terms of the contract but also because the payment of interim applications could be equivocal so Bray couldn’t establish that there was a shared assumption communicated between the parties. 

This is interesting given that in previous cases the courts have found that a course of dealing has saved payment applications that were not made in accordance with the contract (either because they were late or not served by the correct method). 

As such, parties should note that a failure to comply with long lists of requirements for payment applications will not necessarily render your application invalid and that previous digressions from contractual requirements may not prevent them from being imposed at a later date.

Theresa Mohammed is partner and Helen Stuart a senior associate at Trowers & Hamlins

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