Payment provisions roundup – Where are we now with payment provisions?

This article was first published in Construction Law Review.

First for some background, with which readers are likely familiar: sections 109 to 113 of the Housing Grants, Construction and Regeneration Act 1996 (as amended in 2009) (“the Act”) set out the provisions a construction contract must have for making interim payments. The exact way these provisions work will be set out by the contract, but the contractual provisions have to be in keeping with the statutory requirements. If these provisions are absent they will be read into the contract by the Scheme for Construction Contracts. The Act describes various requirements, including the entitlement to interim payments, the right to suspend work for non-payment, the requirement and effect of payment notices and pay less notices, and what happens if the relevant notices are not served.

The case law explaining how these provisions actually work has been something of a moving target over the last 20 years. The provisions were first introduced, under a different pre-amended form, in 1996. Numerous cases followed concerning such scintillating topics as whether payment could be said to be ‘due’ under the contract. Given that one of the stated aims of the payment provisions was to improve cash flow in the construction industry, this was not an ideal outcome.

In an apparent attempt to resolve some of the scope for these often lengthy and expensive disputes, the provisions were amended in 2009 to require payment of the ‘notified sum’. However, there have still been a significant number of cases following this amendment dealing with how the new provisions work. These cases have looked at, among other things, what the various notices should look like, and how and when they can be challenged.

Given these frequent changes, it can be hard sometimes to keep up with the latest decisions on payment provisions under the Act. This article looks at some of the more significant authorities in this area from the past twelve months, focussing in particular on the case of Kersfield v Bray, and also looking at Surrey v Logan, and Balfour v Grove (in the Court of Appeal).

Kersfield v Bray [2017] EWHC 15 (TCC)

Kersfield deployed a range of arguments in an attempt to avoid paying an adjudicator’s award for a sum in excess of £1million due under the payment provisions of an amended JCT Design and Build Contract (2011 edition). These arguments ultimately failed. The judge held that the application for payment by Bray, Application No. 19, was valid, and that without a valid payment notice or pay less notice from Kersfield, Application No. 19 became a default payment notice, as set out by the contract and the Act. The sum in this notice – the notified sum – had to be paid. In giving this decision the judge offered helpful guidance on a number of topics relating to payment provisions, namely:

• What is required for a payment application to be valid.
• When a notice is deemed served by a contract.
• When a notice may be challenged by way of adjudication.

Validity of payment applications

Kersfield argued in court that Application No. 19 was invalid because it did not meet the Employer’s Requirements under the Contract. The Employer’s Requirements stated that payment applications must be “detailed” and supported by “all necessary information”. This included an elemental breakdown of the Contract Sum Analysis, which itself was to contain various detailed requirements.

Application No.19 included a breakdown of the works, materials and variations, and a loss and expense claim supported by a spreadsheet, narrative, sage records, and cost reports. However, Kersfield argued that in two places, items 128 and 112, this was not enough. Item 128 was a claim for “disruption – groundworks, brickwork and following trades”, which was not further explained. Item 112 was for additional labour to carry out additional works to the main contract, again not supported by detailed information. The two items totalled some £450,000. Kersfield said that because these items did not meet the Employer’s Requirements, the whole application was invalid.

The judge disagreed: the payment application was not invalidated by any lack of particularity in items 128 and 112. The judge said there was a distinction between validity of an application, and validity of the claims within an application. Inadequate substantiation may justify the rejection of a claim by a party, but did not mean it was not a valid application for payment, and, in the circumstances, a valid default notice.

The judge reiterated the requirement from previous case law that “an application for interim payment must be sufficiently clear and unambiguous in form, substance and intent so that the parties have notice of the application made” (at [31]), and the statutory requirement (mirrored in the Contract) that the application state the sum considered due, and the basis on which that sum was calculated. The judge noted that parties are free to agree further requirements of substantiation, provided they do not contradict the Act. But while the Contract stated that the information in the Employer’s Requirements must be provided, it failed to:

“expressly provide that applications are not valid in the absence of such supporting information. There is no basis for the implication of such a term; it would introduce uncertainty into the payment process.” (at [38])

The takeaway point from this is that in order to be valid an application or notice must meet the requirements set out above. Such an application will not be invalidated simply because it does not have all the contractually required substantiation, unless the contract specifically states that this will invalidate it. However, failure to provide such information may well justify the rejection of the application for payment, for example by way of a pay less notice.

When a notice must be served

Kersfield issued a pay less notice to Application No. 19 by email at 9.50pm on Friday 12 August 2016. The Contract required that this be served by 14 August 2016. The Contract further stated that any notice sent by email would take effect as being served on that day if sent by 4.00pm on a business day, or otherwise on the next business day. This mechanism would result in the notice being served on 15 August, out of time.

In court Kersfield argued that the mandatory provisions of sections 111(7) and 116 of the Act set out how time is to be calculated for fixing the end date of a prescribed period in a construction contract – the parties cannot contract out of this and the pay less notice was therefore in time.

Again, the judge disagreed. She said (at [75]) that there was:

“a distinction between the provisions in the Act that identify prescribed periods within which a notice must be given and any agreement between the parties which fixes the date by which the notice is deemed to be given”

The Act does not fix the method of service or the deemed date of various forms of service – in fact the parties are expressly free under section 115 to agree the manner of service. The judge held that:

“Different modes of service are likely to produce different times of actual notice to the other party. The deemed date of service of a notice is part of any agreement as to the manner of service.”

What this effectively means is that parties are strictly bound by what a contract says about the deemed date of service for different methods of service. If an email has to be sent by 4pm to be treated as served that day, 4.30pm will not do. The notice will be out of time and invalid.

Challenging a notice

There has been a long history of authorities dealing with this topic. In recent years these have tended to emphasise the importance of a valid notice being definitive of the amount due for an interim payment, such that an adjudicator cannot consider, for example, how much work had actually been done (see for example ISG v Seevic College, Galliford Try v Estura, and Kilker Projects v Purton).

None of these cases until Kerfield had considered the effect of section 111(8), which describes a situation where a payment notice or a pay less notice has been given, “but on the matter being referred to adjudication the adjudicator decides that more than the sum specified in the notice should be paid.” It was argued in Kersfield that these words gave an adjudicator power to open up a notice and consider how much was actually due.

Once again, the judge disagreed. She explained in some detail (at [93]-[95]) that where, as here, there is a default notice (because the employer has failed to serve a valid payment notice or pay less notice) there is no dispute to be referred to an adjudicator. There is only one valid notice stating the sum due and without a counter notice the other party is deemed to agree this. If the matter is referred to adjudication, the adjudicator can look only to the validity of the notices to establish the notified sum, which must be paid.

This outcome is in line with the previous authority, however what was perhaps not quite so clear was that the basis of this reasoning is the default notice situation and the deemed agreement. This potentially leaves the door open for adjudications on the true value of interim payments to take place where, for example, a contractor puts in a payment application, and the employer puts in a pay less notice, and there is therefore a dispute. It is possible on this reasoning that an adjudicator can decide such a dispute under section 111(8) of the Act. It is not entirely clear how this would work, and the question of whether the courts would adopt this approach and expressly allow such adjudications has yet to be tested.

Grove Developments v Balfour Beaty [2016] EWCA Civ 990

This case concerned a construction contract in which the parties agreed a schedule of 23 monthly interim payments, rather than simply agreeing payments at monthly intervals. The works were substantially delayed, and Balfour made an application for a 24^th interim payment. Grove refused to pay, saying that there was no contractual entitlement to a 24^th payment. The dispute proceeded to court where the High Court held that indeed there was no entitlement to further payments. The Act required that interim payments be provided for – and they were, they simply stopped after 23 months. In the judge’s view there was no reason to imply a term into the contract extending payments.

Balfour appealed to the Court of Appeal, but the appeal was rejected. The Court of Appeal held that the express terms of the contract provided for 23 interim payments, no more, no less. Jackson LJ stated (at [39]) that:

“this is a classic case of one party making a bad bargain. The court will not, indeed cannot, use the canons of construction to rescue one party from the consequences of what that party has clearly agreed. There is no ambiguity in the present case which enables the court to reinterpret the parties' contract in accordance with “commercial common sense”

He went on to say that there could be no implied term because:

“it is not obvious what the proposed term would say or what would be the critical dates for serving notices. Furthermore, the proposed term is not necessary to secure business efficacy. Nor can it be said that the contract would lack commercial or practical coherence without such a term.”

Longmore LJ agreed with this approach, because no agreement about interim payments was made beyond the content of the schedule: these were the only express terms, and no agreement had been reached or could be implied as to what was to happen after the 23^rd payment. Any attempt to do so would raise too many unanswerable questions as to what the parties would have agreed.

Voss LJ however disagreed with these conclusions, finding that the contract was ambiguous precisely because the schedule was silent as to whether interim payments would continue. He construed that ambiguity as meaning that the monthly payments should continue until practical completion. Sadly for Balfour, though, he was outvoted two to one.

The takeaway point then from this case is to emphasise the importance of spelling out at the start what is agreed for interim payments for the duration of the contract. Whether the parties are considering stage payments or periodic payments, if they include a schedule without agreeing what happens beyond the schedule, they may well be limited to a set number of payments.

Surrey and Sussex NHS Trust v Logan Construction (South East) Limited [2017] EWHC 17

This is another case looking at what a payment notice has to look like. The judge had to decide whether a payment application by the contractor and a pay less notice by the employer were valid notices. He found that both were.

As in Kersfield, he again agreed that the form, substance and, importantly in this case, the intent of the notice must be clear; also that, in accordance with previous case law, the document must be construed against the factual background.

The judge had little difficulty in finding that the payment application was a valid notice. The document was titled ‘Interim Payment Notice’, made reference to the relevant terms of the contract, and clearly set out the sum due, and why it was due. It was not relevant that the notice was sent with an email which concerned the ongoing final account discussions. This fact was not sufficient to detract from the intention of the sender to issue the notice, because (at [44]):

“The objective reader would also have been aware that the Contract provided a right to issue such a Notice by reason of the prior failure by the Contract Administrator to have issued an Interim Certificate.”

Essentially, even though the notice was hidden away in an email about the final account, a reasonable reader would have known the contractor had a right to send it, and upon seeing it would have understood what it was intended to be.

For the pay less notice, the court again stated that it must specify the sum considered due, and the basis upon which this was calculated. This pay less notice clearly did this, and so the only question left was one of intent. Logan argued that the document viewed objectively was not intended to be a pay less notice because the covering email referred to the Interim Payment Notice as void – there cannot have been an intention to issue a pay less notice to a payment notice that was considered to be invalid.

The judge rejected this argument, finding that the reasonable reader would have realised that the Trust was incorrect that the notice was void – on that basis the reasonable reader would have understood that the intention was to dispute the validity of the notice and in the alternative to serve a pay less notice to it.

The takeaway from this case is perhaps that while the form, substance and intent of notices should be expressed clearly and without ambiguity, overly technical and legalistic disputes are unlikely to find favour with the court. If a reasonable reader with a full working knowledge of the contract would understand the content and intention of the notice, then, so long as it is within time, it is likely to be valid.

Conclusions

There are a number of conclusions that can be drawn from these cases: perhaps the clearest lesson to take from the last twelve months is that so long as a notice is reasonably clear, precise questions of what it should look like and include may be interpreted with a certain leeway (unless the contract specifically states otherwise); by contrast, contractual provisions relating to when and how payments are to be made and notices are to be served will be rigorously and precisely enforced.

It is therefore vital that parties carefully consider such provisions before entering into a contract, and attempt to think about what should happen if things go wrong. As always, it continues to be vital to ensure notices are served in time, and to consider the contractual provisions relating to deemed dates of service. While it may be possible to get away with a notice which is a little rough round the edges, it will not be possible to get away with one which is either out of time, or for which no entitlement arises in the first place.

Finally, it should also be plain from the last year that there is still plenty of scope for further disputes in this area!