A striking feature of construction dispute resolution is the frequency of disputes between contracting parties concerning the lawfulness or otherwise of set-offs, counter-claims, cross-claims, withholdings and non-payments of sums claimed as due and owing.
As a seasoned practitioner, I never cease to be impressed by the ingenuity of some of the arguments raised by payers to avoid making a payment to a payee. Let's assume a very simply set of facts. Imagine a UK client has a construction contract with a contractor that is caught by Housing Grants, Construction and Regeneration Act 1996 ('the 1996 Act'). The client receives an application for payment for work done. The client inspects the works and concludes that not all of the work claimed for in the application has been completed and/or that he has overpaid. The contractor has also damaged some paint work which the client has had to pay to have repaired. However, the client fails to issue a payment notice and/or a pay-less notice as required by the terms of the contract (whether express or implied). In those circumstances, the question is how much does the client have to pay the contractor? Must the client pay the sum claimed by the contractor notwithstanding the work being incomplete, defective and a claim of overpayment? The answer may not be so straightforward.
Under the 1996 Act and the subsequent case law concerning payment and withholding, a distinction is drawn between contracts in which payment notices are independently certified and those in which the contractor himself assesses how much is due to him. Where an independent third party (like a project manager or architect) makes the assessment, the client must serve a withholding notice in order to dispute the sum to be paid to the contractor. The rationale for this is that the sum requested here is the sum due under the contract. The contract provides that a third party should assess the sum, and the sum provided by that third party is therefore the sum contractually due (irrespective of the actual situation). A withholding notice would also be required in order to bring a counter-claim or cross-claim, here for the paint work job.
Where the sum requested is assessed by the contractor himself, the situation is different. The client is able, even where a withholding notice had not been served, to dispute/challenge the sum claimed by arguing (say in an adjudication) that aspects of the application for payment are overstated. The client here, therefore, is able to properly challenge/dispute the amount requested for payment by bringing evidence that not all of the work had been done. It was said that as a matter of contract law, the sum due under the contract was the cost of the actual works done which may or may not correspond to the amount requested by the contractor. Payment cannot be due in respect of works not yet done. However, regardless of who assessed the sum, the situation in relation to the counter-claim or cross-claim was the same and the client was barred from bringing a counter-claim or cross-claim without a withholding notice.
Following the implementation of the Local Democracy, Economic Development and Construction Act 2009 which amended the 1996 Act, the wording of the relevant payment provisions changed. Under the 2009 Act, the client is required to pay the contractor the "notified sum", which in our example, where the client has issued no payment notice and/or pay-less notice, is the sum in the application for payment. The statutory provisions make no distinction between a sum certified as being due by a third party and a sum requested by the contractor himself.
It has been understood by practitioners and the industry in general that this change in the law fundamentally alters the statutory payment scheme and requires a client to pay the sum requested in a payee's payment application in the absence of a payer's payment notice and a pay-less notice, whoever assesses the sum and whether or not the client disputes it. The 'notified sum' must be paid unless a pay-less notice is served or there is an insolvency event.
However, this change appears to steamroller the legal distinctions drawn in the existing (and apparently still good) case law. Did Parliament intend to do this? It is unclear whether a client would be able to dispute/challenge the notified sum, where the notified sum had been proposed by a party to the contract (here, the contractor) and not independently assessed, by relying on the current (albeit pre 2009 Act) case law. I for one am not necessarily convinced that the law in this area (on the facts as given) is perhaps as clear cut as some may have thought and the absence of a pay-less notice may not necessarily relieve the claiming party of the ordinary burden of showing that he is entitled to receive the payment he claims in his application for payment or preclude the defending party from contending that he has been overpaid.