Payment notices: new TCC commentary

We have recently reported on a run of three TCC decisions concerning the effect of failures to serve payment and pay-less notices in response to applications for payment (click here for our last Law-Now on the topic). A TCC decision last week has provided further commentary in relation to this issue and has sought to dissuade parties from attempting to take undue advantage of these recent decisions by submitting multiple payment applications in a given period or by alleging that payment notices have been submitted by informal means.

Caledonian Modular v Mar City Developments

Caledonian and Mar City entered into a letter of intent contract for extensive construction works in North London. The letter of intent did not contain Construction Act compliant terms and the Scheme for Construction Contracts applied both in relation to payment and adjudication.

On 30 January 2015, Caledonian issued its payment application number 15 claiming approximately £1.5 million. The application included a summary of amounts claimed from Mar City together with a statement that the deadline for the submission of Mar City’s payment notice was 5 February 2015 and the final date for payment was 28 February 2015. Mar City issued a payment notice on 5 February 2015 certifying just over £6,000 in respect of the application.

The parties persisted with ongoing negotiations in relation to the account and in respect of an agreement reached in relation to one item, Caledonian emailed an updated version of its payment application number 15 to Mar City on 13 February 2015. Caledonian’s email requested that Mar City update its payment notice to account for the agreement reached.

Mar City did not issue another payment notice until Caledonian’s payment application number 16. Caledonian claimed that its updated application on 13 February 2015 was a fresh application and that Mar City’s failure to serve a fresh payment notice (or pay less notice) in response to it rendered it liable for the full £1.5 million claimed by Caledonian. The claim was upheld by an adjudicator and Mar City resisted enforcement of the adjudicator’s decision by requesting the court to finally determine the status of Caledonian’s updated application of 13 February 2015.

“Not so fast Caledonian …”

Mr Justice Coulson disagreed with the adjudicator’s decision and found that Caledonian’s updated payment application was not a valid payment application pursuant to the Scheme. The court noted that the point appeared to have been raised in hindsight and that the parties themselves had not treated the update as a separate application at the time. The court also rejected the ability of Caledonian at law to serve an updated payment application before the period for payment application 16 had elapsed. To decide otherwise would “make a mockery of the notice provisions under the Act and the Scheme” and “would encourage a contractor to make fresh claims every few days in the hope that, at some stage, the employer or his agent will take his eye off the ball and fail to serve a valid payless notice”.

The court also confirmed the serious consequences which flow from the failure to serve a payment notice and warned that, “if contractors want the benefit of these provisions [of the Construction Act], they are obliged, in return, to set out their interim payment claims with proper clarity.” The court described the Construction Act position as “draconian” and summarised the recent Seevic and Estura decisions as deciding that “A failure to serve a notice in time will usually mean a full liability to pay … [it] will render [the employer] liable in full for the amount claimed .”

Conclusions and implications

This decision provides confirmation from a separate judge of the TCC as to the draconian consequences which can follow the failure to serve payment or pay less notices upheld in the Seevic and Estura decisions (reported in our previous Law-Nows). Unfortunately, the decision does not seek to address the criticisms of these cases which have since been raised in various quarters of the construction industry. In referring to the effect of the amended Construction Act provisions, the court noted that the amendments now emphasise “the sum being notified as the sum now due”. It is unclear, however, precisely how such a position is to be arrived at given that the relevant section of the Act states only that a party must “pay” a notified sum rather than making that sum “the sum now due”.

This decision will therefore do little to clarify the debate as to whether these amendments to the Construction Act are to have cashflow consequences only or whether they apply more fundamentally to adjust the rights of the parties as to amounts due under a given construction contract. An appeal in one of the court’s previous decisions on this issue (in Harding v Paice) is due to be heard in November 2015 and it is hoped that the Court of Appeal’s guidance will be received before the end of the year. In the meantime, however, the position of the TCC would appear to be hardening in favour of a more stringent interpretation.

To register or adjust your preferences for our updated Law-Now service, please click here.

References: Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC)