Interim applications and pay less notices – learn from the mistakes of others

Posted 14/08/2017

Those who attended my series of Construction Law seminars earlier this year will have heard me talking about smash and grab Adjudications and giving employers (and their agents) a grave warning about the ongoing risks of not keeping on top of their payment and pay less notices.

One recent Technology and Construction Court (“TCC”) judgment that I discussed was that given by Mrs Justice O’Farrell in the case of Kersfield Developments (Bridge Road) Limited v Bray and Slaughter Limited.

That judgment dealt with a number of interesting points.  I am keen to share two of them (relating to the validity of interim applications and pay less notices) for the benefit of those who did not manage to attend our seminars.

Validity of Interim Applications

It is now well established by the Courts that if contractors want to benefit from the default payment provisions under the Housing Grants Construction and Regeneration Act 1996 (as amended) (“the Act”), then they need to set out their interim payment claims with proper clarity.  Over the last few years there has been a long line of TCC decisions which have all stressed the requirements of form, substance and intent in relation to interim applications (with some unfortunate results for the contractors in question!).

In this case, the outcome was more favourable to the contractor, Bray.

The contract between the parties required Bray’s interim applications to be supported by various documents to substantiate the claims being made.  However, it did not expressly state that failing to provide the necessary substantiation would render the entire application invalid.

In considering whether Bray’s Interim Application 19 (which lacked substantiation in relation to a number of items claimed within the application, worth approximately £450,000) was valid, the Judge drew a distinction between:

  1. The validity of an application that must be issued in accordance with the contract, such that it is a valid application which falls to be considered and valued by the employer; and
  2. The validity of claims within an application, that may or may not be sufficiently substantiated so as to entitle the contractor to the sums claimed.

Her point was that lack of substantiation might justify rejection of certain claims within an application, but it would not of itself render the entire application invalid.  Clearly a contract could provide for that, but in this case it did not.

As the honourable Judge concluded, where an unsubstantiated application is issued, the employer’s remedy lies in issuing a payment or pay less notice which excludes or deducts the unsubstantiated elements from the sum due.

Pay Less Notices

As it happened, Kersfield had issued a pay less notice (by email, timed at 9:50 pm on Friday 12 August 2016).  However, the contract provided that notices sent by email after 4:00pm would be deemed served on the next business day, in this case Monday 16 August.  The problem that arose for Kersfield is that the deadline for issuing its pay less notice was 15 August 2016, so it was deemed to be late and therefore invalid (notwithstanding that Bray had in fact received it on 12 August).

Kersfield argued that the contractual term regarding deemed service by email frustrated the timetable for the giving of notices under the Act.

That argument was rejected on the grounds that s.115 of the Act allows the parties discretion to agree the manner or service of any notice.  The Judge held that the clause in question allowed the parties the convenience to serve by email whilst providing certainty as to the date on which such notices would take effect.  She considered that to be a reasonable and sensible provision which did not frustrate the timetable under the Act.   

Comment from a Construction Law solicitor

These two points raise two interesting issues to me as a construction solicitor

Firstly, they highlight the fact that the Courts are not (as some people have assumed from recent TCC decisions) necessarily bending over backwards to try to limit the scope for contractors to commence smash and grab Adjudications; employers are still at significant risk and need to take the necessary organisational steps to protect themselves (or to be able to rely on their agents to do likewise). 

Secondly, although simply issuing a payment or pay less notice in compliance with the contract would have allowed Kersfield to avoid these problems, there is another way in which it could have protected itself.  Simple amendments could have been included in the contract to protect Kersfield in the specific circumstances that arose.

Sam Bawden

Posted 14/08/2017 by:
Sam Bawden
Partner & Head of Litigation Team

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