Payment notices: no second bite of the cherry

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

The Technology and Construction Court (TCC) recently considered the validity of an updated application for payment as a new application in the case of Caledonian Modular v Mar City Developments [2015] EWHC 1855 (TCC).

Background

Mar City as employer entered into a letter of intent with Caledonian as contractor for the carrying out of extensive construction works (the contract). As the contract did not contain express payment terms or the right to adjudicate, the relevant provisions of the Scheme for Construction Contracts (the scheme), as amended, was implied into the contract.

Caledonian submitted with its interim applications a letter which attached the detail of the application, the amount due, the amount previously certified and the net payment due. The application also set out the date by which Mar City was to serve a payment notice and the date for final payment. The payment cycle was “based upon 28-day payment terms”.

On 30 January 2015, Caledonian submitted its interim application 15 in the same format as above, identifying a net payment due of around £1.5m. As set out in the previous applications, the date by which Mar City was due to serve a payment notice was set out (5 February 2013) as was the final date for payment (28 February 2015).

On 5 February 2015 Mar City served a pay less notice setting out a net amount due of just under £6,500 to Caledonian. The parties continued negotiations surrounding the account and reached agreement with respect to one item following which Caledonian emailed an updated version of the interim application 15 on 13 February 2015 (the February Documents) and requested Mar City to “amend/update the current payment notice” to reflect this agreement. Mar City did not issue another payment notice until after Caledonian's next application for payment (number 16).

Caledonian claimed that the February Documents were a fresh application and due to Mar City's failure to serve a payment notice (or a pay less notice with an amount of zero) the total amount claimed (around £1.5m) was due. An adjudicator agreed with Caledonian who then brought enforcement proceedings.

The TCC was asked to finally determine whether the February Documents constituted a new application for payment. Despite the fact that this point had been considered at adjudication the TCC noted that as this was “one of those rare cases where the substantive point in issue can be determined at the enforcement hearing” as the issue was a short and self-contained point with no need for oral evidence.

Decision

The TCC found in Mar City's favour noting that the February Documents did not constitute a new application for payment or a valid payee's notice. Therefore, application 15 submitted on 30 January 2015 was a valid interim application for payment which was met with a valid pay less notice. The reasons for this decision were that Caledonian did not make it clear on the face of the February Documents that it was a new application subject to a new payment notice date or new final date for payment nor did it state as much when the purpose of the new documents was queried by Mar City. This omission was considered “significant” by the TCC and suggests that Caledonian's case was “something of an afterthought”. Further, the TCC did not agree that Caledonian could serve an updated application earlier than the 28-day payment cycle.

The TCC noted that the “draconian consequences” of the employer's failure to serve a pay less notice in accordance with the relevant payment notices has caused a large increase in the number of cases of contractors claiming an automatic right to payment of the full amount claimed. Further, the TCC stated that to decide in favour of Caledonian would encourage any contractor to submit new applications 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 pay less notice, thus entitling the contractor to a wholly undeserved windfall”. This, according to the TCC, was not the intention or purpose of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA) (as updated) or the scheme.

Comment

This case confirms the TCC's continuing strict interpretation of payment provisions (see our earlier briefing on the consequences of failing to submit interim applications on the specified contractual dates).

Parties should carefully consider the impact their discussions surrounding payment applications has on the payment provisions set out in their contracts. In any event, it is clear that updated applications for payment submitted earlier than the payment cycle anticipates will not circumvent the payment provisions under the HGCRA or the scheme.