The right to claim in a smash and grab adjudication all depends on having a valid payment notice. Getting your payment notice in the right form is important, but not every error will be fatal. In this article we look at guidance from the courts on what makes a valid payment notice, and review the latest case on this topic: 1st Formations Ltd v LAPP Industries Ltd.
Sections 110A, 110B and 111 of the Housing Grants Construction and Regeneration Act 1996 provide for the giving of payment notices and the obligation on the payer to pay the notified sum unless they have served a valid pay less notice. To be a valid payment notice, it must state the sum that is considered to be due at the payment due date and the basis of the calculation. There may also be provisions in the contract about what the payment notice must contain, and these must be complied with too. Section 111(2) defines the notified sum as the amount stated on a payment notice which complies with the requirements in the Housing Grants Construction and Regeneration Act 1996 and the contract.
The ‘notified sum’ regime has been in place for many years, but still gives rise to problems.
The importance of the payment notice was emphasised in Rupert Morgan Building Services (LLC) Ltd v Jervis case where the Court of Appeal said:
| ‘…it is not the actual work done which either defines the sum or when it is due. The sum is the amount in the certificate… In the absence of a withholding notice, s.111(1) operates to prevent the client withholding the sum due. The contractor is entitled to the money right away. The fundamental thing to understand is that s.111(1) is a provision about cash flow…Their duty to pay now and the sum they have to pay arise only because of the certificate.’ |
Problems can arise if the document relied on as a payment notice does not clearly and obviously state the ‘notified sum’. That might be because the sum said to be due is not clearly identified, or if the basis of the calculation is unclear. The Housing Grants Construction and Regeneration Act 1996 and the courts require payment notices to be clear in order to be classed as a ‘notified sum’ due to the draconian effect of that notice if no, or no valid, pay less notice is given. The court explained it this way in the Caledonian Modular Limited v Mar City Developments Limited case.
| ‘…if contractors want the benefit of [section 111(1)’s ] 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.’ |
The latest case in a long list of disputes, where a payer has argued that they do not need to pay because the document claiming to be a payment notice does contain a ‘notified sum’, is the 1st Formations Ltd v LAPP Industries Ltd case. LAPP was appointed by Formations under a construction contract to carry out construction works at a property in London. There was no formal contract, and the payment provisions of the Scheme for Construction Contracts applied. LAPP sent an application demanding an interim payment from Formations, with attachments giving details showing how the sum claimed as due was calculated. The application was sent with an email an extract of which is set out below:
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‘“Please find attached an application for an interim payment for work carried out at Shelton Street. The amount is based on my provisional valuation of the works carried out, and may be subject to any agreed adjustment following assessment by Jonathan Grubb of Northcote Building Consultancy. Payment requested on account: £100,000.00 ex VAT Total Interim Payment Requested £120,000.00 Payment is due within 14 days from the date of this application.”’ |
Formations did not issue a payment notice, nor did it give a pay less notice in response to the application, and in the adjudication and the subsequent trial maintained that LAPP’s application was invalid.
The judge rejected that argument. The judge held that LAPP’s application was in substance, form and intent a valid interim payment notice. There was a ‘notified sum’ as LAPP set out their valuation of the works as a whole and confined the application for payment to a lesser sum, and set out the basis on which that sum was calculated.
The court also dismissed Formations' challenge that the application was invalid because it gave the wrong dates for the due date and final date for payment: ‘It may be that one or other of these dates was erroneous. But, in my judgment, that would not invalidate the Application…’ Nor was the court persuaded that the fact the application was stated to be a request for a provisional sum prevented it being a valid payment notice with a notified sum in accordance with the Housing Grants Construction and Regeneration Act 1996.
Formations’ challenges to LAPP’s application failed, and it was liable to pay the notified sum as it had not served a pay less notice. The case goes to show the importance of serving pay less notices, even if your primary position is that the application is invalid. It also serves as a reminder that payment applications are not always as clear or obvious as we may expect or prefer and any form of demand for payment should be treated carefully and responded to contractually for the avoidance of doubt.
For further information, please contact our construction team.
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