There have been several recent cases concerning payment notices and the effect of late delivery of employers’ notices. The latest of these cases is Kersfield Developments (Bridge Road) v Bray & Slaughter Limited (2017). This case confirmed the line of authority that employers wishing to challenge payments at the interim payment stage need to comply strictly with the time frame for service of the relevant payment notice or pay less notice otherwise they are unlikely to prevent an adjudication decision being made against them.
The case also considered the validity of contractor’s contractually deficient payment applications.
The employer (Kersfield) engaged the contractor (Bray) under an amended JCT Design and Build Contract 2011 edition, with bespoke amendments, to carry out the refurbishment of a mansion house and construction of a number of detached houses in North Somerset. The contract sum was approximately £5 million.
The dispute concerned interim Payment Application 19 for £1.2 million which the employer failed to pay. The employer also failed to serve a Payment Notice or a Pay Less Notice within the relevant time-frame. The contractor succeeded in its adjudication on the basis that its interim application was valid and that no valid Payment Notice or Pay Less Notice had been issued by the employer. The contractor sought to enforce the adjudicator’s award.
The employer issued proceedings seeking, amongst other things, a declaration that the contractor was not entitled to the sums awarded by the adjudicator because Payment Application 19 was not a valid application, and a declaration that the employer could commence a further adjudication concerning the proper valuation of Payment Application 19. The contractor maintained that the application was clear and unambiguous and was in the same format as all previous applications which had been approved by the Employer’s Agent.
What was the effect of a contractually-deficient payment application?
It is well established that an interim payment application should be clear and unambiguous in form, substance and intent so that the parties have sufficient notice of the application being made (Jawaby Property Investment v The Interiors Group (2016). At a minimum an interim payment notice must set out the sum claimed and the basis on which such sum is calculated. Parties are free to agree additional requirements as to the form, content and substantiation of a payment application (provided that this does not conflict with the statutory regime).
In this case, the contract required that interim applications should be accompanied by substantiation as set out in the Employer’s Requirements (clause 4.8). The employer argued that Payment Application 19, which comprised an excel spreadsheet setting out a breakdown of the works and a loss and expense claim, failed to comply with the substantiation requirements of the Employer’s Requirements, and therefore could not constitute a valid payment application. As an example, item 128 for disruption claimed £150,000 for groundworks, brickworks and following trades but contained no detailed calculations, required substantiation or supporting documentation. Similarly, item 112 was a claim for £307,965 for additional labour and supervision but again failed to include any substantiation.
The court acknowledged that there was a difference between deficiencies which invalidate an application and those which invalidate claims within an application. While a deficiency in substantiation of a claim might justify rejection of a claim in part or in full, it did not of itself mean that the payment application was invalid.
The employer’s usual remedy in the event of a failure to provide adequate substantiation as required by the contract would be to issue a Payment Notice excluding that part of the claim, or to issue a Pay Less Notice deducting the unsubstantiated claim from the sums due.
Payment Application 19 therefore did constitute a valid payment application. It was clearly identified as an application for payment and set out the basis of calculation in the accompanying spreadsheets.
Was the Pay Less Notice late and therefore invalid?
The issue of late delivery of Payment Notices or Pay Less Notices has been the subject of a number of unsuccessful attempts by employers to resist adjudications against them in such a situation. Often known as smash and grab adjudications the outcome of the adjudication is usually decided by a technicality (the late or absent notice) as opposed to a consideration of the substantive claim.
In this case, it was common ground that the due date for payment of Application 19 was 5 August 2016. Under the contract, the date for the issue of a Payment Notice by the employer was 10 August 2016 and any Pay Less Notice had to be served by 14 August 2016.
On 12 August 2016 the employer’s agent emailed the contractor. In it the employer’s agent served the Payment Notice (acknowledged to be late) and also the Pay Less Notice. Unfortunately for the employer, the email was sent at 9:50 pm and 12 August was a Friday. The contract contained a deeming provision that any notices in relation to payment if sent by email and delivered after 4.00pm were deemed delivered on the next business day. Although the contractor received the email on 12 August 2016 because the email was sent after 4 pm the Pay Less Notice was deemed served on Monday 15 August 2016 and was therefore late.
Failure to serve the Pay Less Notice by 14 August 2016 meant the Payment Application 19 became a default notice and that the contractor became entitled to payment of the sum claimed in Payment Application 19 without any deduction.
Was the employer entitled to dispute the valuation of Payment Application 19 in another adjudication?
The employer argued that the employer was entitled to refer the dispute concerning the proper valuation of Payment Application 19 to a further adjudication taking into account the matters that could have been raised in the Pay Less Notice, such as overstated value and inadequate substantiation.
The court held that there was in fact no dispute that the employer could refer to adjudication. The absence of a valid payment notice or a pay less notice meant that the payment due under Payment Application 19 had been fixed by the “default notice mechanism” in the contract and there was no provision for that sum to be revised. In the course of the decision, the Court also rejected the employer’s argument that the adjudicator could open up, revise and review a payment or pay less notice under section 111 (8) of the Construction Act.
As a result judgment enforcing the adjudicator’s award was made in the contractor’s favour.
Falling foul of the payment deadlines will mean that employers are unlikely to succeed in re-opening the valuation of an interim payment applications. This case follows others such as (ISG Construction v Seevic (2014), Galliford Try v Estura (2015) and Kilker v Purton (2016). The message for employers is clear: if a Payment Notice or Pay Less Notice is missed then the appropriate action for employers is to challenge the overpayment in a later interim valuation or in the final account process.
The case also confirmed that the parties are free to agree additional requirements as to the form, content and substantiation of the payment application (provided this does not conflict with the statutory regime in the Construction Act). However, deficiency in substantiation of a claim is likely to justify rejection of a claim, rather than render the application itself invalid.