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Contractors: Beware of Interim Payment Applications

Following a recent success in defending a ‘smash and grab’ adjudication, we thought it might be wise to remind ourselves of the importance of properly constructed Payment Notices and the Construction Act’s important payment scheme.

Although there is an identifiable Court trend moving away from the enforcement of such adjudications, and towards a more proportionate approach, an employer or main contractor can still be caught out.  Where a Payment Notice is accepted as valid, the paying party has little room to manoeuvre.  However, to be valid, a Notice must be properly communicated, clear and unambiguous.  It was on this concept that Gregg Latchams fought and won the above adjudication.

The facts

The question was whether a document titled ‘Interim Application for Payment No.10 Draft Final Account’ was a valid Payment Notice. The Contract Administrator (“CA”) received that document after Practical Completion, within time and during the Final Account discussions, but did not respond to it with a Pay Less Notice.

The document outlined the Due Date, but was sent in an email with the subject header ‘Re: Draft Final Account’; it also stated towards the bottom of the document ‘Total Draft Final Account’ before it detailed the sum due. This was in common with previous draft working documents seeking to arrive at a Final Account sum. Even though the email read ‘Please find attached Interim Application for Payment on the above following issue of Practical Completion’, the CA responded to that email considering the document to be another working draft, not a Payment Notice.

The Law

Lord Goff in Mannai Investment Co Ltd v Eagle Star Assurance [1997] UKHL 19 stated:

“The agreement between the parties provides what notice has to be given to be effective to achieve the relevant result. The question in each case is: does the notice which was given, properly construed, comply with the agreed specification? If it does, it is effective for its purpose. If it does not, it is not so effective;”

Bingham L.J. sitting in the Court of Appeal in Delta Vale Properties Ltd. v Mills [1990] 1 W.L.R. 445 observed:

“The authorities show that a notice will be invalid and ineffective unless it gives the precise notice which the contract requires and leaves the recipient in no reasonable doubt as to the effect of the notice.”

On the wider context, in Mannai, Lord Steyn held:

“The notices must be construed taking into account the relevant objective contextual scene.”

In Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC), in not dissimilar circumstances to the facts within our adjudication, Coulson J observed that:

“It is quite common for the contractor’s account to be regularly updated as part of those discussions, but that does not mean that each update is a new claim for an interim payment.”

Coulson J went on to state:

“If contractors want the benefit of these 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.”

The above cases were considered in last year’s case of Jawaby Property Investment Limited v Ors [2016] EWHC 557 (TCC). The court also considered the judgment of Akenhead J in Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC) who stated therein:

“…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.”

Finally, in the same case, the Hon. Mrs Justice Carr DBE stated:

“If a contractor wishes to have the benefit of the interim payment regime such as that contained in the Contract, then its application for interim payment 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.”

The Result

Gregg Latchams argued that the primary issue was whether the document put forward by the contractor was an effective Interim Payment Application, being clear and unambiguous.  Further, the document failed to meet the standard identified in recent case-law.  This could be identified from both the content of the document and the surrounding correspondence between the parties, establishing an ongoing dialogue as to the value of the Final Account.

The Adjudicator found the document and the covering email to be ambiguous and so the document was not deemed to be an effective Interim Payment Application under the contract.

Lessons Learned

Contractors beware, Interim Payment Applications must be clear and unambiguous to be effective. And Employers, continue to be aware; if in doubt, ask for clarification from your contractor and make sure you respond to anything that might be capable of being a Payment Notice.

For specialist advice from Gregg Latchams’ construction dispute resolution team, please contact us…

Andrew Evans

Andrew.evans@gregglatchams.com

0117 906 9252

Marcus Lavell

Marcus.lavell@gregglatchams.com

0117 906 9452

David Morris

david.morris@gregglatchams.com

0117 906 9433

 

To find out how we can help you or your business, get in touch.

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