Payment notices: new TCC guidance

A TCC decision published last week has given further consideration to when a failure to serve payment or pay-less notices will preclude a paying party from subsequently challenging the true valuation of a payment application. This decision is particularly of note because it considers the Scheme for Construction Contracts and appears to give guidance which is potentially of general application.

“Smash and grab” adjudications explained

The so called “smash and grab” adjudication is one where payment is claimed under a construction contract in the absence of any payment or pay-less notice. In such circumstances, the amount claimed in any application for payment will have become the “notified sum” in accordance with section 111 of the Housing Grants Construction and Regeneration Act 1996 (as amended) (the “Construction Act”). The paying party is obliged to pay that sum regardless of any dispute over the proper valuation of the application.

In response to such adjudications, some paying parties had commenced parallel adjudications requesting a determination of the true value of the application in question. If commenced promptly these could effectively “cancel out” any decision in the “smash and grab” adjudication. A number of cases in 2014 and 2015 considered whether such parallel adjudications were permissible:

• In Harding v Paice an Employer failed to serve a payment or pay-less notice in response to a final application for payment from its Contractor following termination for default under the JCT Intermediate form. The Contractor was awarded the full amount of its application in an initial adjudication, but the Employer was held to be able to challenge the proper valuation of the application in a subsequent adjudication despite the absence of notices. This decision was upheld by the Court of Appeal late in 2015. See our Law-Now on the appeal decision here.
• In ISG v Seevic and Galliford Try Building v Estura a different conclusion was reached in relation to the interim payment provisions of the JCT Design and Build 2011 form of contract. Employers who had failed to serve payment or pay-less notices in relation to interim applications for payment, were deemed to have accepted the sums claimed in those applications and could not challenge the true value of the applications through adjudication (although they would be free to argue for a different valuation on subsequent interim applications). See our Law-Nows on these two cases here and here.

Kilker Projects Ltd v Purton

In this most recent case, the TCC has considered a scenario similar to Harding v Paice but under an oral contract governed by the Scheme for Construction Contracts. The Contractor submitted a final account application, which the Employer failed to respond to. The Contractor obtained an adjudication decision in its favour for the amount of its application in the absence of any payment or pay-less notice from the Employer. The Employer commenced a second adjudication to determine the true value of the final account and received a decision in its favour ordering the partial repayment of amounts awarded by the first adjudicator.

Applying Harding v Paice, the court ordered the enforcement of the second adjudicator’s decision. The court noted that the Construction Act provisions with regard to payment and pay-less notices were concerned “only with cash flow and not the contract sum”. It was not necessary for the parties to expressly state in their contract that the true value of a final account payment could be challenged as “payment of any final sum due to either party is based on enforcement of the contractual bargain”.

By contrast, the court noted that interim payments would not usually be able to be reopened. That was because, subject to any express terms to the contrary, “usually there is no contractual basis on which the contractor's entitlement to that payment can be re-opened”. Accordingly, if no payment or pay-less notice is given, the Employer will have lost its opportunity to challenge the valuation of an interim payment and will be required to wait until the next interim or final application before being able to correct any overpayment.

Conclusions and implications

The court’s decision in relation to the final account application before it is unsurprising in light of the Court of Appeal’s decision in Harding v Paice. In relation to interim payments however, the court’s obiter comments may go further than the TCC’s previous decisions in Seevic and Estura. Those decisions appeared to place at least some reliance on the particular provisions of the JCT Design and Build 2011 contract in differentiating between interim and final payments. The court in the present case, however, appears to indicate a more fundamental difference between interim and final payments which would “usually” apply in the absence of express terms to the contrary.

This decision is likely reignite debate as to the extent to which the Seevic and Estura cases, and now this present decision, are to apply across differing forms of contract. In that respect:

• The Court of Appeal in Harding v Paice had refrained from commenting on the correctness of the Seevic and Estura cases, noting that “In almost all construction contracts special contractual provisions apply to interim payments.”
• The distinction between interim and final payments may be more difficult to justify on contract forms, such as the NEC, which do not differentiate between the two.
• The court’s suggestion that there would usually be no contractual basis on which to reopen an interim payment in the absence of payment or pay-less notices can be contrasted with the contractor’s ability to reopen an interim payment where such notices are served.

Employers who fail to serve payment or pay-less notices in relation to interim payments will usually be better off waiting to correct the account in subsequent interim payments. In special circumstances, however, an attempt to have the proper valuation of the Contractor’s interim application determined by adjudication may be preferable. The remarks made in present case suggest that will rarely be a course open to the Employer, but it remains to be seen how broadly these will be applied in future cases.

References:

Harding (t/a M J Harding Contractors) v Gary George Leslie Paice Kim Springall [2014] EWHC 3824 (TCC)

ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC)

Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC)

Harding (t/a M J Harding Contractors) v Paice & Anor [2015] EWCA Civ 1231

Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 3352 (TCC)

Kilker Projects Ltd v Purton (t/a Richwood Interiors) [2016] EWHC 2616 (TCC)