The New Stomping Ground: Validity of Payment Applications

This article was first published in the Practical Law Construction Blog.

Since the consequences of failing to serve a valid and timely payment notice or pay less notice can be severe (see ISG Construction Ltd v Seevic College¹), it perhaps should come as no surprise that in recent cases, there has been increasing attention on the validity of the application for payment because, without this, there can be no “notified sum” due to the contractor and, therefore, no requirement to serve a payment or pay less notice.

Three recent TCC decisions show that the court requires applications for payment to be clear and unambiguous. A requirement which may, in the future, be more strictly applied to employers' notices.

Caledonian Modular Ltd v Mar City Developments Ltd

In Caledonian Modular v Mar City Developments,² Coulson J took some of us by surprise with his approach.  We had all been operating on the basis that as long as the Adjudicator asked the right question, the fact that he got the wrong answer was not relevant on enforcement. The court would not disturb the Adjudicator’s decision.  Although emphasising that this case was intended to be the exception and not the norm, Coulson J considered whether an Adjudicator had been right to find that the contractor’s application for payment was a valid application for payment under the contract, since this was a short point of interpretation that could be decided by looking only at the written evidence.

Coulson J disagreed with the Adjudicator’s finding that a valid application for payment had been made:

“if contractors want the benefit of [the Construction Act’s payment provisions], they are obliged, in return, to set out their interim payment claims with proper clarity. If the employer is to be put at risk that a failure to serve a payless notice at the appropriate time during the payment period will render him liable in full for the amount claimed, he must be given reasonable notice that the payment period has been triggered in the first place.”

Therefore, contractors must ensure that their applications for payment are sufficiently clear, so that an employer is given reasonable notice that the payment period had been triggered.

Henia Investments Inc v Beck Interiors Ltd

In Henia Investments v Beck Interiors Ltd,³ the court was asked to consider, amongst other things, the validity of an application for payment by way of Part 8 proceedings the employer issued. The payment application number provided on the application itself indicated that it related to a due date in April but, as it had been served too late in respect of the April due date, the contractor sought to argue that the application related to a due date in May.

Akenhead J accepted that, in principle, there was nothing preventing a contractor from providing payment applications early (indeed a contractor could submit all of its payment applications at the beginning of the contract if it wished). However, the problem with the application the contractor relied on was that it did not make it clear that it was an application in respect of the May due date. In fact, on the contrary, its terms (for example, the application number and the valuation date) suggested it was for the April due date.

As a result, Akenhead J found that the application was ambiguous and could not constitute a valid application under the contract:

“the document relied upon as an Interim Application… must be in substance, form and intent an Interim Application stating the sum considered by the Contractor as due at the relevant due date and it must be free from ambiguity. In this context, the Interim Application should be considered in the same light as a certificate. If there are to be potentially serious consequences flowing from it being an Interim Application, it must be clear that it is what it purports to be so that the parties know what to do about it and when.”

Similarly to Coulson J in Caledonian, Akenhead J emphasised the need for the application to be sufficiently clear to enable the employer to know what was being applied for, on what basis and in respect of what due date. Since the employer could not reasonably have understood the application to relate to the April due date (as it was too late) or the May due date (as it was early and only expressed to be an update to the April application) the employer’s notice provisions were not triggered.

Severfield (UK) Ltd v Duro Felguera UK Ltd

The above cases were applied by Coulson J in Severfield (UK) Ltd v Duro Felguera UK Ltd.⁴ This case concerned the payment regime in a steelwork contract where the works comprised of works that fell within the definition of “construction operations” under section 105(1) of the Construction Act 1996 and works which did not (they were exceptions under section 105(2)). 14 interim applications for payment had been made that did not differentiate between the two different types of works. By application 15, the parties were in dispute. The contractor then purported to bring a “revised” claim for only those sums in application for payment 15 that (it said) fell within the definition of “construction operations”. Therefore, the contractor relied on only part of application for payment 15. It argued that payment for the construction operations works was due, since no timely payment or pay less notice had been served.

The contractor sought to argue that because the interim application was supported by a spreadsheet with a number of line items, the “notified sum” consisted of each of the sums in each line item, so that it was entitled subsequently to rely on just some of the line items and ignore the others.

Coulson J disagreed, stating that:

“it would make for unnecessary complexity to say that the notified sum was not the net total claimed, but each (or just some) of its individual components.

The whole point of the default provisions in the 1996 Act, by which an employer becomes liable for the sum notified, is to encourage simplicity and clarity. …Introducing the possibility of a partial claim… by reference to a gloss put on an accompanying spreadsheet, would be to confuse the simple system of notification envisaged by the 1996 Act.

That interpretation is reinforced by a consideration of the next statutory requirement, that in order to be payment notice, the notice has to set out the basis on which the sum claimed has been calculated. Because the notice of December 2014 and the accompanying spreadsheet did not begin to address the complexities of what were and were not construction operations… it was not a payment notice in respect of the claim for £1.4 million for construction operations, because the basis for the calculation of that figure, let alone the figure itself, is nowhere explained or set out in interim payment application 15.

…in so far as it is now said that the notice of December 2014 is a payment notice for £1.4 million in respect of construction operations, such a claim is not at all clear or unambiguous from a perusal of either the notice or the accompanying spreadsheet. How could it be, when the claimant was claiming for everything, regardless of whether or not the works were construction operations within the Act?”

Once again, the focus was on the clarity of the application and what the employer could reasonably have understood the contractor to be applying for. The decision is eminently sensible in respect of the assertion that the “notified sum” is the total and not each individual line item in the accompanying documents.

Summary of Applicable Principles

In Severfield, Coulson J summarised the requirements for a valid application for payment, namely that it must:

1. Set out the total sum said to be due;
2. Set out the basis on which that sum has been calculated; and
3. Be clear and be free from ambiguity.

While the first two requirements are provided for in the Construction Act 1996, the third is based not on the Act itself, but its interpretation and application in Caledonian and Henia.

Practical Consequences

What this means in practice is that it may be futile to hunt for a document that could loosely be identified as an application for payment in the hope that it will be accepted as such by a sympathetic Adjudicator if it cannot sensibly be said that the application is clear as to what is being applied for, on what basis and in respect of which due date.  Without a clear and unambiguous application for payment, the requirement on the employer to serve its notices will not arise.

Further, even if an Adjudicator is sympathetic and generous in respect of his interpretation of the application, the TCC is ready, willing and able to grapple with whether the application is a valid application, either by way of Part 8 proceedings, as in Henia, or in enforcement proceedings, as in Caledonian.

The Future

What remains to be seen is whether the clarity requirement will be more strictly applied to employers’ payment notices and pay less notices. While the draconian consequences of a contractor’s payment application do not arise from employers' notices, in principle, there is no reason why a contractor’s application should have to be any clearer than an employer’s payment notice, which is also required to set out the sum due and the basis on which that sum has been calculated.

Indeed (following Henia), an employer can revalue the works in its pay less notice to a sum different to that the contractor included in its application and the contract administrator provided in the payment notice. Therefore, it is arguably of equal importance to a contractor that it understands why the employer disputes the valuation of the works in order that any complaints or criticisms can be taken into account in future payment applications.

If the courts adopt the same approach to employers’ notices as contractors’ applications, it is conceivable that, in the future, there may be fewer payment disputes. This is because employers and contractors will be aware that everyone should know where they stand, that they cannot rely on draft emails, updated accounts or vague documents which cannot reasonably be said to be payment applications, payment notices or pay less notices as they are not clear and free from ambiguity. On the other hand, since these provisions have now been operating in a similar form for almost 20 years, that may be somewhat of a pipe dream to those who do not have an appetite for litigation.

¹[2014] EWHC 4007 (TCC).

² [2015] EWHC 1855 (TCC).

³ [2015] EWHC 2433 (TCC).

⁴ [2015] EWHC 3352 (TCC).