Payment Notices – A Second Chance?

11th April 2018 | Written by Michael Mulcare
Michael Mulcare, Dispute Resolution Associate

Introduction

Payment Notices have always been a contentious area in construction, leading to the great majority of disputes.

At times, contractors have benefitted from the tight timetable governing the payment process, encouraging a “Smash and Grab” approach to adjudications, where if an employer fails to serve a valid payment or pay less notice in time, the contractor can claim the full amount as set out in their application.

This type of adjudication increased following ISG Construction Limited –v- Seevic College [2014], which decided that where there had been a “smash and grab” adjudication, it was not possible to then make a cross adjudication as to the “true” value of the interim payment. A failure to serve a notice was deemed to be an acceptance of a contractor’s application for payment.

Grove Developments Ltd v S&T (UK) Ltd

However, in a significant departure from ISG Construction Limited, a well-reasoned judgment from Mr Justice Coulson appears to be aimed at reducing this practice by allowing an employer to subsequently have an interim payment valued at a further adjudication.

Background to Dispute

  • In the case of Grove Developments Ltd –v- S&T (UK) Ltd, the parties entered into a JCT Design and Build 2011 contract for the construction of a £26 million new hotel at Heathrow
  • The contractual completion date was October 2016 with actual completion on 24 March 2017
  • Disputes arose regarding S&T’s interim application for payment as well as Grove Developments’ application for liquidated damages
  • In response to the interim payment application, Grove issued a payment notice which contained sufficient information to enable S&T to assess the basis of the valuation. But, it was issued out of time
  • Grove then issued a pay less notice in time but did not re-attach the detail of the calculation. Instead, it referred to their calculation in the earlier payment notice, which it argued was expressly incorporated. S&T persuaded an adjudicator that this was insufficient to stand as a valid pay less notice
  • Over a number of adjudications, the adjudicator decided that the pay less notice was invalid because Grove’s calculation of S&T’s figure was set out in a separate document, contrary to the contract, which stated that a pay less notice should “specify” both the sum due to the contractor and the basis on which that sum had been calculated
  • That decision meant that, on the face of it, S&T was entitled to be paid over £14 million under its interim application.

Decision

Following an application to the Court, Coulson J decided that:

  • The pay less notice complied with the requirements of the contract, as Grove had specified the basis of their calculation
  • The adjudicator’s decision on the pay less notice should not be enforced, as it was no longer binding
  • Upon payment, Grove was entitled to commence a separate claim seeking a decision about the “true” value of the interim application, even if both of its notices had been invalid
  • Grove had properly served notices in respect of liquidated damages, despite there being an interval of a few seconds between the “warning notice” and the “deduction notice” being sent. The contract did not specify any minimum time interval to send the notices and they had been served and received in the correct sequence and were not defective.

What Does it Mean to Employers?

This decision differs from ISG Construction Limited and will be welcomed by employers.

  • If an employer fails to serve a valid or any payment notice, it does not mean that it was deemed to agree the contractor’s application. Although it could pay a contractor the sum stated to be due in their interim application, it would then be free to commence adjudication proceedings to dispute that the sum paid was the “true” value of the works, so arguing a reduction
  • It maybe more beneficial for the employer to rectify the over-valuation at the next interim payment date to avoid the cost and delay of adjudication by issuing a corrected application the next month. However, if the payment cycle did not allow for this, or there was a significant delay before the next due date, an employer who has failed to serve notices can now seek to rectify matters.

What Does it Mean to Contractors?

  • This does not disadvantage a contractor
  • The contractor’s cash flow is preserved because the employer is still obliged to pay the sum in the payment application. However, if this is an over-valuation, the contractor loses nothing by having to repay the amount of the over-payment.

At Rix & Kay, we can advise you on payment disputes and other contentious construction issues. Contact Michael Mulcare on 01273 766905 or email michaelmulcare@rixandkay.co.uk