Adjudication in Construction Law

Darryl Royce

Document

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CHAPTER 10 Payment under the UK statutory framework

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10.1 Stage payments and dates for payment under the Act

10.1.1 Requirements for stage payments

10.1 A party to a construction contract subject to the Housing Grants, Construction and Regeneration Act 1996 is entitled to payment by instalments, stage payments or other periodic payments for any work under the contract unless it is specified in the contract that the duration of the work is to be less than 45 days, or it is agreed between the parties that the duration of the work is estimated to be less than 45 days.1 The parties are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they become due.2 In the absence of such agreement, the relevant provisions of the Scheme for Construction Contracts apply.3 Every construction contract should provide an adequate mechanism for determining what payments become due under the contract, and when, and provide for a final date for payment in relation to any sum which becomes due. The parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment.4 10.2 Where a construction contract provides for interim payments to stop at the contractual date for practical completion, and there is not an express term which enables the payee to receive interim payments after the last contractual valuation there is not an implied term to that effect. It is not obvious what the proposed term would say or what would be the critical dates for serving notices. Furthermore, the proposed term is not necessary to secure business efficacy. Nor can it be said that the contract would lack commercial or practical coherence without such a term. The payee will receive full payment for its work in due course, but will have to wait until the final payment date.5 Neither does ‘any work’ in section 109(1) of the Housing Grants, Construction and Regeneration Act 1996 mean ‘every single piece of work’ so that the relevant provisions of the Statutory Scheme will apply if a construction contract fails to provide a regime of interim payments covering the whole of the work which the contractor performs. The subsection is a more general one saying that work done under construction contracts shall (except in very short projects) be subject to a regime of interim payments. Section 109(2) gives the parties considerable latitude as to the system of interim payments which they may agree. They can decide for themselves the frequency of interim payments and the amounts to be paid. For example, the parties may agree that interim payments shall be less than the full value of work done. Indeed, parties normally do agree that, so that the payer holds retention

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moneys, usually releasing half at practical completion and the other half when all defects have been made good.6 10.3 On the issue of timing, there may be no mechanism by which, once sign-off has been reached, a payment would be made; no date for an invoice, no date that the sum fell due; and no final date for payment. But such details may not be necessary. Parties are always free to agree interim payments by reference to percentages of completion. Thereafter, the courts expect the parties to adopt business common sense as to the arrangements for invoicing and payment.7 If the parties are going to exclude the operation of the Statutory Scheme, they must draw up a system of interim payments in good faith. It is doubtful that a cynical device to exclude the operation of the Statutory Scheme by prescribing one interim payment ‘of an insignificant amount’ would suffice, but this has not been decided.8

10.1.2 Certificates

10.4 The courts had held that under the unamended Act an adequate mechanism could include a certificate issued by a third party (for example, an architect or quantity surveyor) under a superior contract. This was thought to have caused difficulties – a sub-contractor might not be aware that a certificate had been issued in a superior contract and, where such a certificate covered work undertaken by other sub-contractors, payment to the sub-contractor was often delayed until all of the other work had been completed. Under the Act as amended, it is not an adequate mechanism for these purposes to make the determination of what payments are due, or when, dependent upon the performance of obligations in a different contract (for example, in a superior contract) or upon someone's decision as to whether obligations have been performed in a different contract.9 Under the amended legislation, if or to the extent that a contract does not contain an adequate mechanism for determining what payments become due under the contract, and when, and provide for a final date for payment in relation to any sum which becomes due, the relevant provisions of the Scheme for Construction Contracts apply.10

10.2 Payment notices under the Act

10.2.1 Payer or specified person to give notice to payee

10.5 A construction contract subject to the Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development

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and Construction Act 2009 must in relation to every payment provided for by the contract require the payer (the person from whom the payment is due) or a specified person (a person specified in or determined in accordance with the provisions of the contract)11 to give a notice to the payee (the person to whom the payment is due) not later than five days after the payment due date (the date provided for by the contract as the date on which the payment is due), or require the payee to give a notice to the payer or a specified person not later than five days after the payment due date.12

10.2.2 Requirements for notices

10.6 A payment notice given by the payer must specify the sum that the payer considers to be or to have been due at the payment due date in respect of the payment and the basis on which that sum is calculated, which could be done, for instance, by identifying any relevant moneys paid before the payment concerned actually became payable, or by identifying any set-off or abatement applied by the payer.13 A payment notice given by a specified person must specify the sum that the payer or the specified person considers to be or to have been due at the payment due date in respect of the payment, and the basis on which that sum is calculated, which could be done, for instance, by identifying any relevant moneys paid before the payment concerned actually became payable, or by identifying any set-off or abatement applied by the payer.14 A payment notice given by the payee must specify the sum that the payee considers to be or to have been due at the payment due date in respect of the payment and the basis on which that sum is calculated.15 It is immaterial that the sum is zero and such a notice is also to explain (for instance, because of any set-off or abatement) why no sum is believed to be payable.16 10.7 It cannot realistically be contended that a payment notice accurately stated the sum which the payer considered to be due at the payment due date where the covering email

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said that a further notice would be issued. The payer clearly envisaged that the further notice would set out a different figure which would be the figure which the payer in fact considered to be due. Nor will a notice have set out the basis of the calculation of the sum owing because it set out a figure for the gross valuation and deducted from that the retention and the amounts previously certified showing that a balance resulted as a matter of arithmetic. That is not sufficient to show the basis of the calculation because in the absence of any accompanying material the notice does not show how the payer had arrived at the crucial figure of the gross valuation.17

10.2.3 Effect of non-compliance

10.8 If or to the extent that a contract does not require the giving of a payment notice as specified in the Act, the relevant provisions of the Statutory Scheme for Construction Contracts apply and the consequence of this is that terms providing for the giving of a payment notice by the payer to the payee will take effect as implied terms of their contract.7 The provisions of the Statutory Scheme as to payment will only be imported and apply so as to govern the legal relations of the parties to the extent that they have not already concluded binding contractual arrangements that can remain operative. They will not automatically or necessarily be imported in their entirety. It is, of course, possible that the existing arrangements under a given contract are not capable of forming part of a payment scheme when read with the relevant provisions of the Statutory Scheme. If that were the case it may be necessary to import the Statutory Scheme's payment provisions as a whole. But that is not a necessary or correct outcome if the existing contractual arrangements are capable of co-existing with some of the payment provisions of the Statutory Scheme to form a coherent whole.18

10.2.4 Hybrid contracts

10.9 Under a hybrid contract that relates to both construction operations and other matters, there can be two very different payment regimes. Although that is uncommercial, unsatisfactory and a recipe for confusion, it is the inevitable result of Parliament's desire to exclude what would otherwise have been obvious construction operations from the ambit of the 1996 Act.19 Under a hybrid contract, a notice is not a payment notice in respect of construction operations when the payee is claiming for everything, regardless of whether or not the works are construction operations within the Act. Because it is a hybrid contract, it is imperative that the payee spells out the fact that, regardless of

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the position in relation to excluded operations, this is a payment notice (with all that that entails) in respect of a claim for construction operations.20 10.10 Whilst parties cannot contract out of the Act (i.e. agree terms of a construction contract which do not contain the minimum requirements set out in sections 109–111 inclusive), it is perfectly permissible for parties to contract in, and the parties are at liberty to agree payment terms which complied with the Act in respect of both construction and non-construction operations. Such ‘contracting in’ now appears to be commonplace in the standard forms of sub-contract used in those industries which, at the time that the Bill was originally before Parliament, appeared anxious to avoid such minimum payment requirements. In other words, through the principle of freedom of contract, the construction industry seems to have found a practical way around at least some of the complications introduced by hybrid contracts.21 10.11 If the terms of the construction contract are, in some way, in contravention of the minimum requirements of the Act, then of course any non-compliant terms will not apply and, by operation of sections 109–111, the Statutory Scheme will apply instead. A potential non-compliance could be whether there is some part of the Act which requires, in a hybrid contract, payment terms which provide for the separate or distinct notification and breakdown of sums due in respect of construction operations only. There is, however, nothing in the Act which sets out such a requirement. Subsection 104(5) expressly recognizes that, because of the distinction that the Act makes between construction and non-construction operations, there will be hybrid contracts. This part of the Act created such contracts: without its distinction between construction and non-construction operations, there would be no such thing as a hybrid contract at all. But although the Act created such contracts, it does not provide that a hybrid contract must contain a term requiring the separate or distinct notification and breakdown of sums due in respect of construction operations only. If it were important for hybrid contracts to contain terms which provided for the notification and breakdown of sums due in respect of construction operations only, then the Act could easily have said so. For example, it could have provided that ‘the notified sum’ in sections 110 and 110A was a sum in respect of construction operations only or must not include any sums in respect of non-construction operations, or both. But the Act does not do that. Nowhere in sections 110, 110A, 110B or 111 does the Act provide that the expression ‘the notified sum’ should be modified in this way.22 10.12 Moreover, this would be a significant modification. As has been pointed out in numerous authorities, the parties’ critical obligations begin and usually end with the payment of ‘the notified sum'. If it were right then, in every hybrid contract created by section 104(5), ‘the notified sum’ would not be the full sum due to the payee, but just that part which related to construction operations. Alternatively, it would lead to there being two different notified sums, one in respect of construction operations, and one in respect of

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non-construction operations. Such significant qualifications to the parties’ statutory or contractual rights would need to be clearly expressed in the Act. But they are not. For example, section 110A contains clear stipulations as to what the relevant payment notices must contain. It specifies that the payment notice must identify the sum due and the basis on which that sum has been calculated. There are no other requirements. Thus, the requirement that the notified sum must be in respect of construction operations only cannot be found in the relevant sections of the Act.23 10.13 It is neither necessary nor appropriate to read the words ‘only in so far as it relates to construction operations’ in section 104(5) into all the later sections of the Act. That is always a difficult argument, because it suggests, however gently, that the drafting of the statute is deficient or, at the very least, incomplete. It also faces a further obstacle in circumstances where, as here, the Act can be construed perfectly well without reading in any words at all. The Act created hybrid contracts in sections 104 and 105. It must therefore be taken to have them very much in mind in its subsequent provisions. What is more, those provisions cannot be read in isolation, ignoring what has come before. The sections of the Act with which this argument is concerned relate to construction contracts and (if that is what the parties agree) hybrid contracts too. It is therefore no answer to say that the words relied on as being ‘read in’ were not expressly stated because the relevant sections of the Act presupposed that the contract in question was a construction contract. Section 104(5) makes clear that any such presumption is erroneous.24 It is making plain that parties can have a hybrid contract if that is what they want but, if they do, they cannot contract out of the Act in respect of construction operations. Section 104(5) does not prevent the parties from contracting in, if that is also what they want. It would therefore be contrary to section 104(5) to use it as a means of restricting the parties’ rights and liabilities.25 10.14 This interpretation is in accordance with the purpose of the Act, with its emphasis on stage payments. It does not undermine the purpose of the Act; on the contrary, it confirms that purpose, by upholding the validity of stage payments for the totality of the works under this hybrid contract, regardless of whether they were for construction or non-construction operations. In addition, the Act also aimed at greater certainty and greater transparency in relation to such stage payments. The approach outlined above provides that too. Under contracts to which the Act applies (whether construction contracts or hybrid contracts), both the paying party and the payee will be primarily concerned with what they are contractually required respectively to pay and to receive at each stage of the works. Certainty and transparency are achieved if the stage payment is a single sum based on a monthly valuation or on the achievement of a particular milestone. Neither the payer nor the payee wants to end up in the position of the parties in Severfield v Duro Felguera,26 with two separate processes, subject to different

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procedural requirements, to produce two separate sums. That level of uncertainty is contrary to another of the purposes of the Act.27

10.2.5 Payee's notice where no payer's or specified person's notice

10.15 Where the contract requires the payer or a specified person to give the payee a notice not later than five days after the payment due date, but notice is not given as so required, the payee may give to the payer a notice at any time after the date on which the notice was required by the contract to be given.28 Where the payee gives such a notice, the final date for payment of the sum specified in the notice shall for all purposes be regarded as postponed by the same number of days as the number of days after the date that the notice was given.29 The effect of this new provision is to postpone the final date for payment of the sum in question by the same number of days after the date by which the payer (or specified person) ought to have given the payment notice, as the number of days after that date that the default notice was given. If, for example, a sum becomes payable on the 2nd day of the month (such that the date by which the payment notice should have been given was the 7th day) and must be paid, at the latest, on the 17th day, the effect of a payee's notice in default served on the 14th day would be to postpone the date on which the relevant sum must finally be paid to the 24th day of the month (17 + 7 = 24).30 If the contract permits or requires the payee, before the date on which the notice is required by the contract to be given, to notify the payer or a specified person of the sum that the payee considers will become due on the payment due date in respect of the payment and the basis on which that sum is calculated (what in the construction sector is known as a payee's ‘application'),31 and the payee gives such notification in accordance with the contract, that notification is to be regarded as a compliant payment notice and the payee may not give another such notice.32 10.16 The document relied upon as a notification must be in substance, form and intent an application stating the sum considered by the payee as due at the relevant due date and it must be free from ambiguity. In this context, the notification should be considered in the same light as a certificate. If there are to be potentially serious consequences flowing from it being an application, it must be clear that it is what it purports to be so that the

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parties know what to do about it and when.33 The necessity for a notification to be in intent an application does not, however, import a requirement of ‘intention’ in each and every case. Such an interpretation would drive a horse and cart through the provisions of the 1996 Act. Thus, where the payee has made application for payment of a further sum by sending to the payer an invoice and the payee's solicitor later sends a letter accompanied by a copy of the outstanding invoice, referring to the previous invoices having been paid in accordance with the contract and to the payment remaining outstanding despite the fact that the relevant work had been completed in accordance with the contract, asserting that payment was due and that previous demands for payment had been ignored, culminating with a threat to raise proceedings for recovery in the absence of payment, stating a preference to avoid proceedings and the payer's entitlement to obtain advice on the issue, the factual context is clear. There can be no doubt as to the payer's intentions. The payer wishes to be paid the amount it has first claimed some months earlier.34 10.17 If a sum subsequently claimed was not said to be the sum due in the notice, and was not the notified sum, the payee cannot convert the sum notified by refining it later on. Nor can the payee get round that difficulty by saying that, because the application was supported by a spreadsheet with a number of line items, the ‘notified sum’ consisted of each of the sums in each line item, so that the payee was entitled subsequently to rely on just some of the line items and ignore others. That is not the purpose or intention of the provisions of the Act: it would make for unnecessary complexity to say that the notified sum was not the net total claimed, but each (or just some) of its individual components. The whole point of the default provisions in the Housing Grants, Construction and Regeneration Act 1996, by which a payer becomes liable for the sum notified, is to encourage simplicity and clarity. If X notifies Y of a claim for £1,000, and Y does not respond in the prescribed time to challenge that claim, £1,000 becomes due because it is the notified sum. Introducing the possibility of a partial claim for £675, by reference to a gloss put on an accompanying spreadsheet, would be to confuse the simple system of notification envisaged by the Act.35 A valuation described only as the payee's ‘initial’ assessment makes it clear that it was not the payee's firm or final assessment. Thus it was not (and cannot objectively be construed as) a statement by the payee of what it considered was due to it for the purpose of the contract but rather only of what it considered it might be due, subject to further consideration.36 10.18 Where the parties have been progressing under rather more old-fashioned payment provisions with a relaxed attitude and it is clear from the exchanges between them that, up to a particular point, neither party has given any thought to the much more immediate and draconian timetable incorporated by the 1996 Act, it would be inequitable to penalize the payer for failing to respond within the limited time prescribed by the Act, in circumstances where the parties had been operating the contract in a different way, and

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when an interim application does not give any indication that it is a payment notice in respect of a specific part of the claim. If the payee wants to take advantage of the rights that it has under the Act, then it has to do so in an open way.37

10.3 Payment of notified sum under the Act

10.3.1 Withholding notices and pay less notices

10.19 As originally enacted, the Housing Grants, Construction and Regeneration Act 1996 provided that a party to a construction contract could not withhold payment after the final date for payment of a sum due under the contract unless that party had given a notice of the intention to do so (colloquially known as a ‘withholding notice'). The amendments made by the Local Democracy, Economic Development and Construction Act 2009 replace this provision in respect of withholding notices with (generally speaking) a requirement on the part of the payer to pay the sum set out in a payment notice. They also make provision for the sum in such a notice to, in effect, be challenged or revised by the giving of a type of counter-notice (colloquially known as a ‘pay less notice').38

10.3.2 Payment of notified sum and pay less notices

10.20 Subject to the other requirements of the Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009, where a payment is provided for by a construction contract, the payer must pay the notified sum (to the extent not already paid) on or before the final date for payment.39 The notified sum is the sum notified in a payment notice served by the payer, a specified person or the payee.40 This requirement to pay the notified sum is intended further to facilitate cash flow by determining what is provisionally payable. What is properly and ultimately payable as a matter of the parties’ contract is unaffected (see Rupert Morgan Building Services (LLC) Limited v Jervis).41 The payer or specified person may give notice to the payee of the payer's intention to pay less than the notified sum.42 The pay less notice must specify the sum that the payer considers to be due on the

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date the notice is served, and the basis on which that sum is calculated, for instance, by identifying any moneys already paid by the date of the notice or by identifying any set-off or abatement applied by the payer.43 It is immaterial that the sum is zero.44 10.21 Where:

• from none of the information provided could the reasonable recipient work out the basis on which the zero sum figure has been calculated;
• there is no calculation put forward which would allow the reasonable recipient to understand how that figure has been arrived at;
• there is no specification which would allow the reasonable recipient to make any sense of the figure arrived at; and
• the responding party sets forth no figures and thus no basis substantiating the zero sum figure in the pay less notice or in any of the other documentation upon which it relies;

it amounts to no more than saying the sum retained is not a large one and, given the number and nature of problems founded upon in the pay less notice, the cost of remedying these would clearly amount to a figure well in excess of the retained sum and thus a basis for the zero sum figure was provided. That is not providing a basis for the figure. A pay less notice in order to properly provide a basis needs at least to set out the grounds for withholding and the sum applied to each of these grounds with at least an indication of how each of these sums was arrived at.45

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