What Sum Has Been Notified for Payment?

As I sit down to write this piece on sunny but a cold(ish) autumn morning, prior to a round of golf (better known as a good old fashioned hack in my case!) this afternoon, I hope everybody who reads this piece is coping OK in these prolonged challenging times and is keeping themselves and their family, friends, colleagues and associates safe. If we all look out for one another then I feel sure we will all again be able to share in one another’s pleasurable company in the not too distant future.

The last 6 months have certainly been the busiest period I have ever personally encountered in terms of adjudication proceedings. The references to adjudication have been coming to me thick and fast since March, both as advocate and adjudicator, with little time to come up for air. 

One of the things which has surprised me the most, recently, is the number of proceedings in which the responding party has elected not to serve a response. Prior to the last 6 months it was very rare indeed for me to be involved in an adjudication where the responding party has not served a response, and I think the fact that I have seen this happening so often recently is definitely a sign of the times in which we currently find ourselves. It appears to me that many parties are not actually disputing that sums are due for payment, but are merely buying themselves some additional time in which to make payment by way of ‘forcing’ the payee to first go through the adjudication process before making the payment due. I suspect this may in part be due to the restrictions placed on creditors by the Corporate Insolvency and Governance Act 2020, but that is a topic for another day.

In this piece, I have considered the view (which is not necessarily my own) that given the draconian consequences of failing to comply with the notice provisions of the Act, parties seeking payment should be held to a standard of strict compliance, and so-called “technical” defences to payment claims should be permitted. Against that background, I go to discuss one particular “technical” defence which, while not necessarily meritorious, could cause real problems for a “smash and grab” claimant.

Technical Defences to Payment

Before moving on to discuss two particular potential arguments which may be used as a defence to a payment claim where the payer has failed to serve either of the notices (payment notice or pay less notice) required by the amended Construction Act, I quote Coulson J (as he was then) in Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC) in which he said [at para 36}

“One of the more baleful effects of the amendments to the 1996 Act has been a large increase in the number of cases before adjudicators (and thus before the TCC), in which the claimant contractor argues that the employer failed to serve its notices on time, and that therefore there was an automatic right to payment in full of the sum claimed” [my emphasis added]

and [at para 37]

“In the UK (unlike other jurisdictions with mandatory construction adjudication, such as Malaysia) 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. That is what the run of recent TCC cases on this topic, including ISG v Seevic College [2014] EWHC 4007 (TCC) and Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC), are all about. But it seems to me that, 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” [my emphasis added]

It seems to me that what Lord Justice Coulson (as he is now) appeared to be saying in Caledonian Modular is that he viewed the consequences of failing to serve the notice(s) required the amended Construction Act as baleful and draconian therefore, in essence, if a party wishes to rely upon any such failure in order to advance a right to payment then it must, itself, come before the tribunal with ‘clean hands’.  In other words, if a party wishes to rely strictly upon the requirements of the amended Construction Act, and a failure to comply with those requirements, in order to advance a right to payment then it must, itself, also have complied strictly with any requirements of the amended Construction Act.

A particular technical defence: ambiguity in the notified sum

All of this sets the scene for the particular potential defence to payment which I discuss further in this piece.

One of the ‘features’ of applications for payment which I see on a regular basis (in those applications submitted by main contractors, sub-contractors and sub-sub-contractors alike), both when acting as advocate and sitting as adjudicator, is the practice of arriving at the ‘sum due’ by way of a calculation which takes the cumulative value of the works undertaken to date and then deducts the cumulative value of the works included/claimed in the previous application for payment. 

There is, of course, no issue with this method of calculation if the payer has paid the cumulative value of the works included/claimed in the previous application for payment. However, what if the payer has not paid the cumulative value of the works included/claimed in the previous application for payment, but has instead actually paid a lesser sum (for example, the payer has only paid the cumulative value of the works included/claimed in the application for payment prior to the previous application)? This will lead to the application for payment being ‘understated’ and there being an ‘underclaim’ and subsequent ‘underpayment’ because the method of calculation assumes that the value of the works included and claimed in the previous application for payment has been paid by the payer.

This is, of course, unlikely to be problematic where the payer issues the requisite notice(s) (payment notice and/or pay less notice) in response to the application for payment. However, what if the payer fails to issue any notice at all in response to the application for payment and the payee wishes to rely upon its application for payment as a ‘default notice’? Is the payee entitled only to payment of the sum stated as due in the application for payment (which, as aforesaid, has been calculated by deducting the sum claimed in the previous application rather than the sum paid to date), which would, in effect, be an underpayment? Or is the payee entitled to have the sum claimed/stated as due in the application for payment adjusted to account for the sum which has actually been paid to date, and which would then, in effect, reflect the actual payment position?

This is a situation which I have encountered numerous times, both as an advocate and as an adjudicator. The correct answer is, probably, that it depends (isn’t it always thus??!!). 

However, let us for a minute take a fairly typical example of a contract (such as a JCT contract) which generally reflects the requirements of the amended Construction Act. As most of us will by now be well aware, following a spate of ‘smash and grab’ adjudications since the floodgates were opened by Edwards-Stuart J in ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC), save for limited circumstances (some of which I discussed in the Adjudication Society Spring 2019 newsletter), where the payer fails to issue any notice at all in response to an application for payment then the sum stated as due in the application for payment becomes the notified sum and the payer is obliged to pay that sum on or before the final date for payment (all as per sections 110A, 110B and 111 of the amended Construction Act).

The question which then arises is - what is the sum stated as due and thus the notified sum? This then leads to more questions – does the sum stated as due in the application for payment (which, remember, in the circumstances described above has been calculated by deducting the sum claimed in the previous application rather than the sum paid to date and which, in effect, results in an ‘underclaim’) become the notified sum which the payer is obliged to pay? Is the sum stated as due in the application for payment actually the cumulative sum stated therein, with the notified sum which the payer is obliged to pay is then being calculated by deducting the sum paid to date (instead of deducting the previous application)? Would the notified sum being something other than the sum stated as due in the application for payment not be contrary to Sections 110A, 110B and 111 of the amended Construction Act, which expressly provide that the sum stated as due becomes the notified sum which the payer is obliged to pay if it has not issued a pay less notice? Is the adjudicator empowered under paragraph 20 of Part I of the amended Scheme to ‘correct’ the application for payment by deducting the sum paid to date (rather than deducting the previous application), so to arrive at a different sum due/notified sum?

I have seen many arguments run in the circumstances described above. Whilst for the purposes of this piece I won’t discuss what were those arguments, what I will discuss briefly are two arguments which I haven’t yet seen advanced as a defence by a payer (I will not divulge whether or not they are arguments that I have run as advocate (successfully or otherwise)!).

The arguments are thus –

i)                   The amended Construction Act (at sections 110A, 110B and 111) envisages the notified sum being the sum stated as due in the relevant notice (be that a payment notice, or a payee notice in default (such as an application for payment)). The amended Construction Act (at section 111) requires the payer to pay the notified sum if it has not issued a pay less notice; nothing more, nothing less. Accordingly, in the circumstances described above the only sum which the payer is obliged to pay is the sum stated as due in the application for payment (which has become the notified sum, and which has not been adjusted by a pay less notice). There is no mechanism by which that sum can now be adjusted (whether by way of deducting the sum paid to date instead of the previous application, or otherwise) to be something other than that sum; and

ii)                  In Systems Pipework Ltd v Rotary Building Services Ltd [2017] EWHC 3235 (TCC) Coulson J (as he was then) said [at para 31]

“…..it is plain to all that the 2 September 2016 documents did not identify, for example, what the defendant said had already been paid, or what the defendant said had been deducted and/or was now payable by way of retention. As Mr Sareen put it at paragraph 13 of his skeleton argument, if the 2 September documents had notified the amount due, it would have been quite unnecessary for the claimant to have to do any calculation at all”; [my emphasis added]

and [at para 33]

“Neither would the reasonable recipient have regarded the documents as a notification of the sum due: for it to be that, the minimum that was required was the actual identification of the sum due…..”; [my emphasis added]

and [at para 35]

“All of this simply goes to confirm the basic principle that, if X is supposed to be notifying Y that a sum is due, under a clause that provides for a deemed agreement that binds the parties unequivocally, then it is a prerequisite of the arrangement that the sum due and the clause are clearly set out in the relevant notice. It is not good enough to say that the recipient could have worked it out for themselves”. [my emphasis added]

Accordingly, in the circumstances described above the only sum which the payer is obliged to pay is the sum stated as due in the application for payment (which has become the notified sum). There is no mechanism by which that sum can be adjusted (whether by way of deducting the sum paid to date instead of the previous application, or otherwise) to something other than that sum and, indeed, any such adjustment would be contrary to the principles adopted in Systems Pipework.

Let us then assume, for present purposes, that an adjudicator agrees that the sum which the payer is obliged to pay in the circumstances described above is the sum stated as due in the application for payment because it is that sum which has become the notified sum. Can the adjudicator adjust the sum stated as due in the application for payment to account for the sum paid to date; thereby correcting what would otherwise have been, in effect, an underpayment?  If the adjudication proceedings were being conducted pursuant to Part I of the amended Scheme, could the adjudicator utilise the powers given by paragraph 20 thereof to make such an adjustment if, in order to properly do justice, the adjustment was necessary? If the adjudicator decided that (s)he did have the power to make such an adjustment pursuant to that paragraph, would (s)he not be offending the principles adopted in Systems Pipework? Should a distinction now be drawn between the powers of the adjudicator to make such an adjustment in a ‘true value’ adjudication (in which, I would suggest, it is not uncommon for the actual sum paid to date to be used when calculating the sum due for payment, regardless of what is stated in the application for payment) on the one hand, and the powers of the adjudicator to make such an adjustment (or not, as the case may be) in a ‘smash and grab’ adjudication on the other?

To add a further twist to the plot, what about what O’Farrell J had to say in Kersfield Developments (Bridge Road) Ltd v Bray and Slaughter Ltd [2017] EWHC 15 (TCC) [at para 94]?:

“I reject Mr Mort's submission that section 111(8) and the scheme empower an adjudicator to open up and revise a payment notice or pay less notice. A payment or pay less notice is not a decision taken or a certificate given by any person referred to in the contract. The notice sets out the sum that the employer considers is due and payable to the contractor in response to the contractor's application”. [emphasis added]

Does O’Farrell J’s judgement in Kersfield Developments apply equally to a default payment notice, in that a default payment notice is not a decision taken or a certificate given by any person referred to in the contract, therefore an adjudicator is not empowered by paragraph 20 of Part I of the Scheme to open up and revise it? Would the foregoing not better align with the intention of sections 110A, 110B and 111 of the amended Construction Act and Coulson J’s (as he was then) judgement in Systems Pipework?

I have my own views on what the answers to the questions posed above should be, but in the current circumstances perhaps we may see the courts grapple with these questions in the not too distant future; therefore, I shall keep my powder dry for the time being and leave you to form your own views. Alternatively, you may well discover my views should you come before me when I am sitting as adjudicator!