Payment applications must be clear and unambiguous to attract the draconian consequences of the Construction Act. This case is a reminder that if payment applications lack the clarity required, then the requirement for the paying party to issue a payment notice or pay less notice will not be triggered.
Background
I was recently instructed by an employer client to defend a ‘smash & grab’ adjudication referred by the main contractor under an amended JCT DB 2016. The matter concerned the payment of Application Nr. 9 (AFP9) and our client’s failure to issue either a payment notice or a pay less notice in response.
We successfully argued that it was not necessary for our client to issue a payment notice or a pay less notice as AFP9 had failed to provide the level of clarity required for it to constitute a valid application for the purposes of the Construction Act. As a result, we said, AFP9 had not triggered the corresponding requirement to issue a payment or pay less notice.
The Law on Payment Applications
There is a long line of authorities in which the Courts have considered the requirements of a valid application for payment. It is clear from those cases that, if a party wishes to rely on the draconian provisions of the Act to assert that a notified sum is due, that party must have properly complied with the requirements of the Act in serving its application. Broadly, the application must:
- set out the total sum said to be due;
- set out the basis on which that sum has been calculated, and;
- be clear and be free from ambiguity.
Failure to comply with these requirements will result in the application being invalid and, as a result, the sums claimed under it will not become due as a notified sum with no enquiry into the merits.
In Caledonian Modular Limited v Mar City Developments Ltd [2015] EWHC 1855, Coulson J noted that:
“failure to serve a pay less notice within a short period challenging the payee's notice can have draconian consequences.”
And 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.”
Similarly to Coulson J in Caledonian, Akenhead J in Henia Investments Inc v Beck Interiors Limited [2015] EWHC 2433 emphasised the need for the application to be sufficiently clear to enable the employer to know what was being applied for, on what basis, and in respect of what due date.
In Henia, Akenhead J emphasised the need for applications to be free from ambiguity stating that:
“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.”
Further, in Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 3352 (which is, incidentally, a case in which I acted for the successful party), Coulson J summarised the requirements for a valid application for payment, namely that it must; (i) set out the total sum said to be due (ii) set out the basis on which that sum has been calculated and (iii) be clear and be free from ambiguity. While the first two requirements come from the Act, the third is based the interpretation and application of the Act in Caledonian and Henia.
Our Submissions
As a result of the contractor’s serious failings including, but not limited to, the persistent refusal to issue quotes and other information as required by the open book principle of the Contract, our client served a formal notice of default under the Contract. Following the notice, without prejudice discussions ensued between the parties in relation to the final account. AFP9 was then submitted in reply to an email issued ‘Without Prejudice’. The email with which AFP9 was attached itself referenced the ‘Without Prejudice’ email below.
We argued that it was clear that the contractor had intended to submit AFP9 on a “without prejudice” basis. Where correspondence is issued on such basis, both parties are entitled to claim that the communication is privileged and we confirmed that such privilege was not waived. We raised a separate, but related, jurisdictional challenge disputing the contractor’s entitlement to request the Adjudicator to determine a dispute based on a document that was protected by privilege.
We further argued that it is clear from cases such as Henia that interim applications must be free from ambiguity. Where they lack the required clarity, the payment application will not become due in accordance with the contractual mechanism or for the purposes of the Act. We argued that it was not clear to our client, and that it would not have been clear to any reasonable observer, that AFP9 was in fact an interim application issued in accordance with the Contract. In addition, we submitted that the lack of clarity surrounding whether AFP9 was submitted on a without prejudice basis made AFP9 ambiguous. Following Henia it is clear that such applications will not engage the draconian consequences of the Act.
The Decision
A key deciding point, leading the Adjudicator to find in our client’s favour, was that there was confusion in the Adjudicator’s mind as to whether AFP9 was part of the ongoing without prejudice discussions or whether it was a new interim application for payment served in accordance with the payment schedule. Whilst the Adjudicator did not go as far as to say that that AFP9 was in fact without prejudice, he did agree that AFP9 and its cover email were ambiguous in this respect. As a result, the Adjudicator concluded that AFP9 was invalid. Our client was not, therefore, obliged to serve a payment notice or pay less notice in response.
Conclusion
Whilst this was obviously a fantastic result for our client and was certainly fair in the circumstances, the case was decided on the facts of this particular matter. The fact remains that failing to issue a payment notice or a pay less notice in response to an application for payment is always going to be a risky strategy. Whilst there are options open to a responding party to defend a smash & grab adjudication on grounds such as those deployed in this adjudication, it would have been far easier (and less expensive) to have issued a pay less notice, notwithstanding any arguments over the validity of the application.
The moral of the story? Paying parties should ensure that they respond to anything that comes in from a contractor that looks as though it could potentially be an application for payment. If they don’t then they could find themselves on the receiving end of an adjudication and having to incur time and cost defending the same.
If you have any questions arising out of the issues raised in this article, please don’t hesitate to contact Jennie Jones.
