Payment Provisions In Construction Contracts: Another Year On

In the last Annual Review Jonathan More reviewed the key cases that had been reported in respect of the amendments to the Housing Grants (Construction and Regeneration) Act 1996 ("the Construction Act") as introduced by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 ("the New Act"). This first wave of cases included: ISG Construction Ltd v Seevic College,1 Galliford Try Building Ltd v Estura Ltd,2 Caledonian Modular Ltd v Mar City Developments Ltd,3 and Henia Investments Inc v Beck Interiors Ltd. 4 Since then further case law has helped clarify the conclusions drawn from those cases. Jonathan More discusses these developments further.

The first wave of case law

Mr Justice Coulson, in the case of Severfield (UK) Ltd v Duro Felgura UK Ltd5 provided a summary of where we stood in 2015:

"Over the course of the last year there has been a flurry of cases in which Edwards-Stuart J has considered the situation in which a contractor has notified the sum due in a payment notice, and the employer has failed to serve either its own payment notice or a payless notice... In essence, these [cases] are authority for the proposition that, if there is a valid payment notice from the contractor, and no employer's payment notice and/or payless notice, then the employer is liable to the contractor for the amount notified and the employer is not entitled to start a second adjudication to deal with the interim valuation itself...

All of these cases concern the situation where the contractor is seeking to take advantage of the absence of any notices from the employer to claim, as of right, the sum originally notified. That approach is in accordance with the amended provisions of the 1996 Act. But because of the potentially draconian consequences, the TCC has made it plain that the contractor's original payment notice, from which its entitlement springs, must be clear and unambiguous. Thus:

(i) In Caledonian Modular Limited v Mar City Developments Limited... I said:

'... 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.';

(ii) In Henia Investments v Beck Interiors Limited... Akenhead J said:

'... 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... 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.'"

Clear and concise.

The second wave of case law

The second wave of case law by and large focuses on the application of the key principles established by the above cases. What can be said as a consequence of the newer case law, reviewed in more detail below, is that the following principles will be applied to payment provisions in construction contracts:

(i) A contractor relying on the noncompliance of the employer in respect of Payment and Payless Notices must itself have complied with its contractual obligations in respect of applications for payment.

(ii) In particular the contractor must:

issue its interim applications on the dates required by the relevant contract; ensure that what it issues as its interim application complies with the contract and clearly constitutes an application in accordance with the process in place between the parties; recognise that a schedule of application/payment dates may replace or supersede dates otherwise agreed in the body of the contract particulars and/or conditions of contract dependent upon the wording. The principles of the Estura case will only be relevant in...