Construction snapshot: resisting default payment notices from contractors

In this Construction Snapshot we consider a recent case which provides some direction to employers seeking to avoid the consequences of a failure to issue a Payment Notice in the face of the relevant application for payment by a contractor being presented as a Default Payment Notice.

Default Payment Notices

The Local Democracy, Economic Development and Construction Act 2009 was enacted to address perceived deficiencies in the practical application of the statutory payment regime for all construction contracts which had been laid down by the Housing Grants Construction and Regeneration Act 1996.

In particular, consultation with the industry had identified that the obligation to issue payment notices for each interim payment was often ignored by payers since there was no consequence of a failure to issue.

Section 110B of the 2009 Act addressed this so that where a payer fails to issue a payment notice following a due date for interim payment it is open to the payee to issue a default payment notice or, where the contract requires or permits applications for payment, an application already submitted by the payee prior to the relevant due date can become the default payment notice.

This significant change has seen a trend in recent years of contractor claims to be paid sums applied for in full due to employers or their consultants failing to issue payment notices in good time.

This, in many circumstances, has resulted in an immediate obligation on an employer to pay a contractor’s valuation of work which may be significantly greater than the value considered to be properly due, with difficulty and risk in recovering any overpayment.

Caledonian Modular Ltd v Mar City Developments Ltd

The recent case of Caledonian Modular Ltd v Mar City Developments Ltd dealt with the enforcement of an adjudicator’s decision that a payment was due to the contractor, Caledonian Modular Ltd, following an application for payment becoming a Default Payment Notice.

The Contract Payment Terms

The contract between the parties was based on a Letter of Intent which contained no express provisions for payment. The statutory Scheme for Construction Contracts payment terms were therefore applicable.

The Scheme terms provide that where parties to a construction contract do not agree on the intervals at which interim payments shall become due under the contract then each interim payment will be due seven days after the later of (i) expiry the relevant interval of 28 days or (ii) the date of the relevant application for payment by the payee.

The Circumstances of the Case

Throughout the works, Caledonian issued interim applications for payment using the same format towards the end of each calendar month. The applications were issued with a cover letter setting out the total amount due, the amount previously certified, and the net payment due with a detailed breakdown of the sums attached which made plain that it was in line with JCT standard terms of contract and based upon 28 day payment terms.

Caledonian’s application for payment number 15 was issued on 30 January 2015 and sought payment of £1.5 million. It was consistent in form with previous applications. The application was met by a valid Pay Less Notice from Mar City stating the true payment due as £6317.

Subsequently, Caledonian sent an email on 13 February 2015 attaching several documents largely in the exact terms as those submitted as their application number 15 but adjusted to include for a small additional amount related to a variation and with the words Final Account added. This was never treated by Mar City as a new interim application for payment although they did ask Caledonian what exactly they had been given. Caledonian’s response did not confirm whether or not it was to be considered a fresh application.

On 19 March 2015 Caledonian delivered an invoice to Mar City in the same amount as set out in the documents of 13 February 2015. This was met by a Pay Less Notice from Mar City on 26 March 2015. Caledonian claimed and the adjudicator concurred that the invoice was actually a Default Payment Notice in respect of the application for payment made on 13 February 2015 and that Mar City’s Pay Less Notice was therefore out of time.

The Decision of the Court

The Court held that the email of 13 February 2015 did not constitute a valid interim Application for Payment for the following reasons:

• The application was not submitted in line with the contract timescales. The contract envisaged a period of 28 days between interim payments. There had been an interim application issued only two weeks previously and it would reasonably envisaged that the next interim application should have been towards the end of February.
• Without any express notification to the payer that it was intended to be an early interim application for the next interim payment falling due, then it was not considered reasonable that it should be treated as such. Mar City had queried the purpose and nature of the 13 February email and attached documents and the explanation provided by Caledonian did not begin to suggest that these were to be considered a fresh application for interim payment.
• Neither the email of 13 February 2015 nor the documents attached contained any statement that they constituted a fresh application for an interim payment.
• Where Caledonian had a record of issuing clearly identified applications for payment which all followed the same format the failure to identify the February documents as a new interim application could be considered a significant omission. The document still made reference to being Application 15 which had been issued on 30 January 2015. Caledonian themselves never referred to the February documents as Application 16 until their 19 March 2015 invoice which of course was met with a Pay Less Notice.
• The invoice of 19 March 2015 did not indicate in its terms in any way that it was a default payment notice or that a payee’s notice had been provided on 13 February 2015.
• The consequences of the 2009 Act changes to enable application for payment (as a default payment notice) creates an obligation for full payment by an employer without an examination of the substance of the amount applied for were regarded by the court as draconian. It was held by the court that for a contractor to receive the benefit of these statutory provisions there must be an obligation for the contractor to provide proper clarity to an employer that any period for a payment notice has been triggered.
• It did not seem to the court to be appropriate that contractors should benefit of the statutory provisions without meeting basic requirements for clarity that these could be applicable.

Directions for Practice

The circumstances of the case are not unusual. We have encountered many examples of correspondence by contractors, more appropriately characterised as parts of a negotiating process, being retrospectively badged as interim applications for payment following which no payment notices have been issued by an employer. The Caledonian Modular v Mar City case will now provide clear support for employers in their resistance of such claims.

For contractors it is now even more important that any document which is properly intended to be an application for payment should:

• be clearly submitted as such;
• be clear in its terms that it is an application for payment; and
• meet any statutory or contractual requirements of a default payment notice

If not, then technical arguments for payment due to lack of payer notices should not be relied upon and contractors should be prepared to substantiate their valuation of their entitlement to payment.

Get in touch

If you would like any advice or assistance on any of the issues covered please contact one of the partners in our Construction team.

• Michael Conroy   |   0141 227 9316