Construction contracts – Adjudication – Part 8 – Payment Applications – Payless notices
The TCC determined that an ambiguous set of accounts sent by email were not a valid application for interim payment, with the result that the corresponding payless notice had been issued in time. The case serves as a reminder to contractors that the substantial benefits of the HGCRA payment provisions come with the clear obligation to make the nature and content of any application for interim payment obvious to an employer, or else the courts will likely find such an application to be invalid.
Caledonian Modular Ltd (‘Caledonian’) was engaged to carry out construction works for Mar City Developments Ltd (‘Mar City’) at Greenpoint in Colindale, North London. The contract was concluded by letter of intent dated 19 December 2013 and incorporated the payment provisions of the 1998 Scheme in lieu of any bespoke arrangements. Accordingly, each application for interim payment was to be made in a 28-day cycle agreed between the parties.
Caledonian made the first 15 interim applications following the specified format, with application 15 made properly and Mar City serving a timeous payless notice in response. There then followed an exchange of emails between Caledonian and Mar City in which both disputed the proper valuation of the Combisafe variations that had been agreed in respect of scaffolding works. In the course of this exchange, Caledonian had sent an email on 13 February 2015 advancing their own valuations of the variations along with an updated account, and it was this email that they later argued was interim application 16.
Caledonian sent an invoice on 19 March claiming the entire sum as due, and Mar City issued a corresponding payless notice on 26 March 2015. The dispute was referred to Adjudication on the basis that the February 13 email had been the interim application and the payless notice was therefore out of time, which the Adjudicator ultimately agreed with. Enforcement proceedings were brought in the TCC, and Mar City sought to raise the invalidity of the interim application as a counterclaim to Caledonian’s action by seeking declarations to that effect.
Coulson J found against Caledonian that the interim application was not valid. His reasoning relied on a common sense reading of the documents in the context of the contractual agreement between the parties, with a clear reluctance to award Caledonian with a knockout-blow on the basis of an ambiguously worded email. It was clear to him that:
- At no point did the Combisafe email or the three attached documents state that they were a new application for interim payment;
- Neither did the invoice of 19 March 2015 anywhere claim to be a default payment notice or make any reference to the payee’s notice that had, according to Caledonian, been provided on 13 February; and
- Caledonian’s own explanation of the email did not begin to suggest that it was a new interim application sent a mere fortnight after the previous one, a considerable omission considering it would have broken the 28-day cycle that had been used for the previous 15 months.
In these circumstances it was abundantly clear to Coulson J that Caledonian had either been purposefully vague about the nature of documents in order to set up the very argument they now used, or that it was just a clever afterthought fabricated after the event. Coulson J stressed the point that interim payment applications had to be set out with absolute clarity, as “the employer's failure to serve a payless notice within a short period challenging the payee's notice can have draconian consequences. A failure to serve a notice in time will usually mean a full liability to pay.” Such measures would only make sense where the contractor had clearly and expressly indicated to the employer that an interim payment application was being made, and the onus was on the contractor to meet this obligation if they sought to reap the benefits of the provisions.
Coulson J also gave a number of other free-standing reasons as to why his conclusion was unavoidable. First, it was clear to him from the email that the documents were just an update of the final account and not a new claim for interim payment, which indeed had been confirmed by Caledonian in the covering email. Second, the parties had agreed with and followed a 28-day payment cycle for 15 months, and an interim claim purporting to break this chain by being made early would need to be expressly drawn to Mar City’s attention to be successful. Finally, it defied common sense that updating a claim 8 days after a valid payless notice to add one small variation worth £6000 would miraculously allow the Claimant to become entitled to some £1.5 million.
The case of Caledonian showed that the TCC was not willing to allow payment provisions to be abused by a contractor for the purposes of scoring a knockout-blow in court. Coulson J highlighted the need for some mitigation for the contractor’s strong position of potentially being able to determine the full amount owed by an employer, which could only be balanced with an obligation to fully inform the employer of any application to enable an appropriate response or challenge to be made. This accords with the clear need for a workable approach to the 1998 Scheme to ensure that a party is not granted an automatic win through trickery and sleight of hand, and reinforced that “the whole purpose of the Act and the Scheme is to create an atmosphere in which the parties to a construction contract are not always at loggerheads. I consider that the claimant’s approach would achieve the opposite result.”