Payment notices: a balance redressed?

This year has seen the rise of the headline-grabbing “smash and grab” adjudication; but to what extent are the courts attempting to redress the balance which, under the Construction Act, favours the contractor as payee?

8 December 2015

This year has seen the rise of the headline-grabbing “smash and grab” adjudication; but to what extent are the courts attempting to redress the balance which, under the Construction Act, favours the contractor as payee?

What is a “smash and grab” claim?
The payment provisions of the Housing Grants, Construction Regeneration Act 1996 (the “Construction Act”) were amended by the Local Democracy, Economic Development and Construction Act 2009, with effect from 2011, to introduce strict time limits for the issue of payment notices and, importantly, pay less notices, for payments under construction contracts. Under the amended rules, a properly issued contractor’s payment notice becomes payable in full if it is not met by a valid and timeous employer’s pay less notice. This is the case regardless of the amount properly due, which can result in a windfall accruing to a contractor in the case of an inflated contractor application.

What approach have the courts taken?
This year has seen a plethora of cases in which contractors have looked to found on these amended rules to secure payment, sometimes on the basis of an ambiguous communication purporting to be a payment notice, to which the employer has failed to submit a valid pay less notice. Initially, adjudicators considered their hands to be tied if the provisions of the Construction Act had not been complied with to the letter. However, more recently, adjudicators have looked carefully at the whole circumstances, rather than confining their approach to the narrow question of whether the correct employer’s notice has been given. This has followed an apparent shift in approach by the courts when considering actions to enforce adjudicators’ payment decisions. 

Recent case developments
In Caledonian Modular, June 2015, the contractor’s interim application was met by the employer’s valid pay less notice. Negotiation ensued and the contractor reissued an updated version of its payment application to reflect the settlement discussions. The employer did not reissue an updated version of its pay less notice. The contractor claimed that the reissued documents constituted a fresh application for payment, and therefore the full amount claimed was due in the absence of an employer’s pay less notice. The TCC rejected the contractor’s submission that simply updating an application for payment meant it ought to be construed as a brand new application and require a pay less notice to be issued in response. Much turned on the fact that the documents were not clearly labelled as being an interim payment application. The contractor was therefore unable to rely on its retrospective argument that the documents were intended to be an application for payment. Mr Justice Coulson commented that if contractors want to have the benefit of the amended provisions, then they should be obliged to set out their interim payment claims to the employer “with proper clarity”. 

In Henia Investments, August 2015, Mr Justice Akenhead commented that the document relied upon as an interim application “…must be in substance, form and intent an Interim Application…and must be free from ambiguity”. He followed the approach that if there are to be potentially serious consequences flowing from a document being an interim application, it must be clear that this is what the document purports to be so that the parties know what to do about it and when. 

In Harding v Paice, December 2015, the court confirmed that the failure to issue a pay less notice against a final application for payment does not preclude an employer from adjudicating on the true valuation of the final payment in a subsequent adjudication. This contrasts with the position for interim applications for payment which remains as determined in ISG v Seevic, December 2014, and Galliford Try Building v Estura, February 2015. In both of these cases, the court found that the employer could not raise a separate adjudication to challenge the amount payable on the merits, if its failure to issue a payment notice or pay less notice had resulted in the interim application becoming due in full; instead the employer had to await the next interim application and make an adjustment at that stage.

Unfairness, history and lessons
Despite the cases of Caledonian Modular and Henia having redressed the balance somewhat, contractors or sub-contractors, as payees, remain in the more favourable position. This position is that provided payment applications are validly made and on time, they will become due in full in the absence of the correct employer notices being issued in response. Whilst this might seem unfair, it is important to remember that this position has been arrived at by legislators in response to the widespread payment set-off abuse that was practised by employers in the 80’s and 90’s, which led to contractor cash-flow problems. Also, the potential unfairness of a windfall accruing to a contractor based on an inflated payment application can be avoided by the correct employer notices being validly given, on time. Employers and their representatives should therefore diligently adhere to payment notice requirements.