Construction Contracts: Applications, Notices and Notified Sums – A New Year Review

Where a Construction Contract requires or permits a party seeking payment to submit a payment application (setting out the sum he considers due at the due date and the basis of the calculation) in advance of the payer’s payment certificate and the party seeking payment complies with this, then the sum applied for can become the ‘notified sum’.

The first major case concerning this was ISG Construction Ltd V Seevic College (2014) EWHC 4007 (TCC). This established two key principles, namely that interim payment applications can become the notified sum and, at least when considering interim applications (and more on this below), there is no difference between a sum due on a ‘technical/notified sum’ basis and a sum due on a ‘substantive’ basis – it is the same dispute. Whilst the first point came as no surprise, the second caused a sea change in the way these adjudications were approached. It is significant as it means that if, say, an adjudicator finds that an application for payment is payable on the basis of being a ‘notified sum’ , the aggrieved party can’t adjudicate on the substantive assessment of that application as adjudicating the same dispute twice is not permitted. Pre ISG, this is exactly what aggrieved parties would do.

Whilst this established the general principles that a payment application constituting a notified sum is due and payable and can’t be reopened, a number of cases followed that provided some guidance as to when an application may fall short of being such a notified sum thereby preventing the payee relying on a ‘technical knockout’.

In Caledonian Modular Ltd v Mar City Developments Ltd (2015) EWHC 1855 (TCC) the contractor issued a payment application and then a week later submitted further related documents, which were described as a ‘final account application summary’ and ‘updated account’. These documents were also submitted right in the middle of the contract’s payment cycle and the Employer’s query as to the status of the later documents was left unanswered.

The contractor adjudicated claiming that its payment application was a ‘notified sum’ as the employer had not issued a valid payment certificate or pay less notice. The adjudicator agreed and the contractor sought to enforce the award in Court.

The Court examined the requirements of the Act in relation to what constitutes a valid payment application. Just to pause here, it should be stressed that when we refer to a valid ‘payment application’ we are considering whether or not it satisfies the requirements of being a ‘notified sum’ not a payment application in the wider sense. In other words, an application may be enough to crystalize a dispute as to the substantive sum due but not satisfy the higher standard of a notified sum.

The Court concluded it was not a valid payment application and declined the enforcement. The fact that the application was ‘ambiguous’ as to its status together with the mistiming of the application (an argument that it was a very early application for the following month was rejected) was enough to invalidate the application. In essence the Court concluded that, given the potentially draconian impact of these provisions, if a referring party/claimant wishes to rely on a ‘technical knockout’ it must submit its applications with proper clarity.

This was followed by Henia Investments Inc v Beck Interiors Ltd (2015) EWHC 2433 (TCC) which reinforced the above. In this case, the contract had due dates on 29 of each month with a requirement that any interim applications be submitted no later than 7 days earlier. On 28 of April (6 days after the date it should have been issued) the contractor issued an interim application valuing works days up to 30 April. The contractor submitted no application in May and then tried to argue that the 28 April application was an early application for that Month. The Judge disagreed.

The fact that the application was issued so early and referred to the wrong due date meant that the application was, at the very least, ambiguous. The Judge stated that an application for payment must be an application in “substance, form and intent”, “free from ambiguity” and state “the sum considered due at the relevant due date”; the application failed on all counts.

The message from the Courts is clear. If there is material deficiency in a payment application, then it simply won’t be a payment application/‘notified sum’ for the purposes of the Act. This means that if a party seeking payment in an adjudication puts all its claim eggs in the notified sum basket, it is gambling everything on a technicality - satisfying the ‘notified sum test’; fail that test and the payee loses the adjudication. So what would be a material deficiency that would fail this test? Whilst not exhaustive, this is likely to include mis-labelling (final account when making an interim application), undermining its formal status (‘draft’, ‘not for contract’, ‘without prejudice’), getting the due date wrong or putting in a payment that is out of sequence (too early or too late compared to when the other party may expect it– even if the contract technically permits this).

If you are on the paying side and an application for payment lands on your desk that you may dispute, it is clearly not advisable to try and rely on a deficiency in the application as the grounds for non payment. Under a typical contract, the payer effectively get two bites of the cherry to ensure that a payment application does not become the ‘notified sum’ as there is an opportunity to submit a payment certificate/notice and then a pay less notice.

In many ways, the certificate/pay less is more straightforward than the application. Both notices must contain the sum considered due and the basis of calculation and be issued no later than the specified dates. The only significant difference between the two is that the former must state the sum as at the due date and the latter as at the date of the notice. If validly served, the sum certified/notified will become the notified sum due and payable by the payer.

So what happens if the paying party misses the deadline for the payment notice? Can the pay less contain the same information? The short answer to this is yes. There seems to be a common misconception in the industry that the payment notice is some sort of ‘valuation’ whereas the pay less is a means of ‘set-off or deduction’. This is not correct and may be a hangover from the old Construction Act where the payment and withholding notices were (at least superficially) distinct. Both notices simply have to set out the sums due and the basis of calculation. This can be valuation items, damages, deductions and so on. Each document stands or falls as a separate assessment – either will do. This also means that if, say, the payer issues a payment notice that contains all the correct information but it is simply out of time, he could incorporate it by reference into the later pay less notice and the latter would still be valid.

A further point to consider is whether the payment concerned is interim or final.  If dealing with an interim payment assessment, the Courts have made clear that they will enforce an adjudicator’s decision in relation to a valid notified sum and it can’t be opened up.

This means that once a sum has become due as a ‘notified sum’ on an interim basis, that particular payment can’t be reassessed.  However, where there are cumulative interim valuations (as is usually the case), the valuation can be revisited at the next interim stage. To explain, if, say, a payee submits a valid payment application no. 10 and the payer fails to issue the notices and the sum applied for is a ‘notified sum’ the payer has to pay it.  However, there is nothing to prevent him reassessing the cumulative account at the next monthly interim and then adjudicating on it as it will be probably be a different dispute.  However, this is not as straightforward as it first appears.  The first issue is the contract itself.  Some forms (such as JCT) do not permit negative interim valuation payments (that is payments from the contractor to the employer) until the final account stage. So, whilst the employer can issue a negative later certificate if he thinks there has been an overpayment in respect of an earlier one, he can’t claim it back at an interim stage.

Secondly, it has to be a ‘different dispute’; what does this mean?  Well, a dispute can be ‘different’ for one of two reasons – substantively or contractually. A dispute will be substantively different if the subject matter is materially different to the previous dispute. For example, if works are progressing and the interim payments are monthly and cumulative, an interim assessment will be materially different to the one preceding it as it will contain an additional months worth of work. 

A dispute will be contractually different if it arises under a different provision of your contract.  Thus, a final account is different from an interim assessment – even if the substantive content is the same.

So, what if your interim application is, say, post practical completion and no works are progressing?  It may be that each interim would be found to be the ‘same’. This would mean that a successful adjudication on a ‘notified sum’ basis on any such interim could not be opened up until the final account – which can potentially be an extended period of time. 

A further consideration is what is the notified sum position in relation to final accounts themselves?  The Act required these provisions to apply to all payments – including final accounts. So what happens if a party attempts to get paid on a notified sum basis on a final account?  The problem being that there are no further assessments to open it up again.

The Courts have considered this in the recent cases of Matthew Harding (t/a M J Harding Contractors) v (1) Gary George Leslie Paice (2) Kim Springall (2015) EWCA Civ 1231 and Kilker Projects Ltd v Rob Purton (t/a Richwood Interiors) (2016) EWHC 2616 (TCC). In Harding, there was a dispute over a ‘final account’ following a contractual termination. The contractor ran a notified sum adjudication on the final account as the employer had failed to issue its payment notice and/or pay less notice. There was no issue as to the validity of the payment application or the absence of the notices. The adjudicator found for the contractor and the employer paid it.  However, the employer then commenced adjudication on the substantive ‘final account’ valuation.  On the face of it, this would appear to be the same position as ISG referred to above.  What was also significant is that this was under the Scheme for Construction Contracts (“the Scheme”) and there is no material difference between its interim and final account payment provisions in relation to notified sums.

Therefore, it would seem that the contractor had a ‘nailed on’ defence to the employer’s claim as both adjudications seem to concern the same dispute.  However, the Court made clear that it would permit the employer to adjudicate on the substantive ‘final account’ notwithstanding the previous ‘notified sum’ adjudication. It distinguished the position from ISG on the basis that the case concerned an interim assessment that would be superseded by later assessments whereas here the employer could not be permanently deprived of the right to challenge the contractor’s account valuation. Whilst difficult to reconcile with the actual wording of the Scheme, the decision does seem to make commercial sense in that interim notified sums were due and couldn’t be opened up whereas final account applications may be payable as notified sums but the employer could still dispute the actual valuation.  In essence, the Court treated a dispute as to the ‘final account’ notified sum and its ‘substantive valuation’ as separate and distinct. However, as this case concerned a valuation post termination, there remained a question mark as to whether the Courts would take the same approach to more standard final account disputes.

In Kilker Projects Ltd v Rob Purton (t/a Richwood Interiors), this issue finally came before the TCC and it now seems clear that this principle will indeed be of general application.  Here, there was an oral contract in respect of which the Scheme applied.  A ‘final account’ application was submitted by Purton and Kilker failed to issue its notices. Purton commenced a successful ‘notified sum’ adjudication and this was (eventually) enforced by the Court.  Kilker then started a second adjudication as to the ‘true’ value of the final account. Purton resisted this on the basis that this had already been decided by the previous adjudicator. It relied on the ISG case above and argued that Harding was not relevant because this was based on a termination valuation. The Court disagreed and enforced the adjudication. Mrs Justice O’Farell confirmed that whilst a notified sum due in respect of a ‘final payment’ must be paid, there was nothing to prevent either party from having the ultimate value of the contract sum determined later (unless of course the contract expressly provides otherwise). Thus, applying the Harding principle, the decision was justified on the basis that whilst a ‘final account’ notified sum has to be paid, it is not the same dispute as the actual substantive ‘final account’ valuation.

Whilst the above seems to make sense commercially (if not always contractually), it assumes of course that there is in fact a final account at the end of the payment process, which is not always the case.  It remains to be seen how the Courts will treat ‘notified sum’ claims in relation to applications for payment towards the end of a project where there is no final account (NEC forms and most consultant appointments being just two examples).

Happy New Year...