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Clarity at last on payments
in the construction sector

Clarity at last on payments in the construction sector

November 19, 2018
Construction Payments

At least in England and Wales

In January 2017, the Sheriff Appeal Court issued a decision about rights to payment under a Construction Contract, in Trilogy Services Scotland Limited v Windsor Residential. Solicitors acting for Trilogy had issued letters to the respective partners of Windsor, in which they demanded payment of sums claimed due to their client under a contract, threatening that if payment was not made within fourteen days, court action would be raised – Normal practice for Court practitioners. Trilogy’s solicitor argued that there was no entitlement to the payment claimed. The contract was a Construction Contract to which the payment provisions of the Housing Grants Construction and Regeneration Act 1996 (as amended) applied. Neither party had had any regard to the payment provisions in the Act, either within their contract or subsequently. Trilogy had not served a valid and effective default notice, as required by the Act. Therefore, a ‘notified sum’ had not been created, so no entitlement to payment had been established.

The letters by Trilogy’s solicitors could not constitute the required default notice, Windsor said. It was obvious from the terms of the letters and the conduct of both Trilogy and its solicitors, that Trilogy had not intended the letters to constitute the required default notice.

Windsor relied upon the following words:

A by Mr Justice Akenhead in the Technology and Construction Court in England, in Henia Investments Inc v Beck Interiors Limited [2015] EWHC 2433 (TCC):
“Although it is not apt to talk in terms of conditions precedent, I consider that the document relied upon as an Interim Application under Clause 4.11.1 must be in substance, form and intent an Interim Application stating the sum considered by the Contractor as due at the relevant due date and it must be free from ambiguity. If there are to be potentially serious consequences flowing from it being an Interim Application, it must be clear that it is what it purports to be so that the parties know what to do about it and when…”

And

B by Mr Justice Coulson, again in the Technology and Construction Court, in Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC):
“[I]n all three documents where the claimant had the opportunity to say clearly that these documents were what they now say they were, namely a new application for an interim payment and/or a payee’s notice, the claimant failed to do so. I consider that this omission is significant. It suggests that the claimant’s case now, that the documents were in fact a fresh claim, is something of an afterthought. The only other alternative is that the claimant believed that it was in its best interests to be studiedly vague about the nature of the documents, so as to set up precisely the argument they advanced successfully in the adjudication. On any view, if they intended to serve a valid payee’s notice on 13 February, they could and should have said that that was what they were doing.”

As a lack of intention was apparent, the document(s) relied upon could not in law constitute the valid and effective notice required to open the gate to payment. That was the end to the matter, argued Windsor. The Sheriff Appeal Court disagreed, remarking: “We do not read the decision of Akenhead J. in Henia Investments Inc at paragraph 17 as importing a requirement of “intention” in each and every case…”

The appeal to the Sheriff Appeal Court had come from the decision at first instance of Kirkcaldy Sheriff Court. Apart from within another decision of Kirkcaldy Sheriff Court, which was issued in February 2017, the decision of the Sheriff Appeal Court has not been remarked upon by the Courts, either in Scotland or England, since.

However, the Courts have continued to require to determine disputes about the payment provisions of the Act, since January 2017.

In October 2017, the Court of Session determined that a purported notice (required by the contract to pay less than the sum otherwise due) was not valid because it did not: “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 were arrived at.”

Intention was not brought into issue.

In April 2017 a dispute arose between parties about the amount to be paid against an interim certificate. The contractor had applied for a greater amount. The dispute, between DC Community Partnership Limited and Renfrewshire Council found its way to the Court of Session, which issued its decision on 22 November 2017. It held that it was not a prerequisite to arguing against the payment of a higher sum than the amount of the certificate, that a pay less notice had been issued detailing that argument. Again, the issue of intention did not arise.

Meanwhile, in England the Technology and Construction Court again confirmed the requirement of intention on 13 January 2017. In Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Limited [2017] EWHC 17 (TCC), Mr Alexander Nissen QC upheld that a document had to be free from ambiguity and had to be in form, substance and intent, in order to constitute a notice. The essential requirement was that: “the sender should have the requisite intention, that intention must be derived from the manner in which [the purported notice] would have informed the reasonable recipient”

That settled the issue of intention, in England at least. However, there have been other issues about the interpretation of the statutory payment provisions. For example, there has been debate about the circumstances in which the payment provisions of the Act apply; and about how those provisions impact upon payment, or repayment, to represent the true value of the work.

In Adams Architecture Limited v Halsbury Homes Limited [2017] EWCA Civ 1735, the Court of Appeal in England confirmed in November 2017, that the payment provisions apply to all payments under a Construction Contract. They apply to interim payments, final payments and termination payments. The court also said that the payer must pay the notified sum, or the lesser sum of a valid and effective pay less notice, and then argue about the true value later.

In his decision of 16 March 2017, in Hutton Construction Limited v Wilson Properties (London) Limited [2017] EWHC 517 (TCC), Mr Justice Coulson recognised that since the decision in Caledonian Modular the: “…significant increase in these sorts of claims seems to me to arise principally from the ill-considered amendments to the 1996 Act, and the over-prescription of the payment terms included in the standard forms of contract, which have led to provisions of unnecessary complexity. I am also aware of the widely held view that this problem has been inadvertently compounded by the run of authorities starting with ISG…”

Finally, perhaps, we may have an end to the uncertainty. Sir Rupert Jackson, sitting in the Court of Appeal in England, has just undertaken a comprehensive review of the salient cases, which have passed judgement on Act pre and post amendment, observing that he found it: “…impossible to reconcile all of the first instance decisions with one another or to say that all of them are right in every particular…. This is not a criticism of the judges concerned. We are all trying to hack out a pathway through a dense thicket of amended legislation, burgeoning case law and ever-changing standard form contracts.”

Sir Jackson has done so in his decision of 7 November 2018, in S&T (UK) Limited v Grove Developments Limited [2018] EWCA 2448. Before embarking upon his review, Sir Jackson observed that the payment regime and the adjudication regime, introduced by the Housing Grants Construction and Regeneration Act 1996, and amended by the Local Democracy Economic Development and Construction Act 2009, play a critical role in the functioning of the construction industry.

He clarified that whilst the Act spoke of the “sum due” and the amended Act speaks of the “notified sum”, both were the same – the sum due with reference to the notices given under the contract. Neither mean the true value of the work. The change in wording was made to elucidate the point. Payment by application of the statutory payment regime is not about ascertainment of true value. It is about cashflow.

The following points of clarity are taken from Sir Jackson’s decision:

  • Determination of whether a document constitutes a valid and effective notice, in form, substance and intent, depends upon how the reasonable recipient would understand it.
  • The notice requires to set out the sum considered to be due and the basis upon which that sum has been calculated.
    a. It may do so with reference to another document or other documents.
    b. Whether or not the purported notice gave the requisite degree of specificity, on its own or by refence to other documents, was a question of fact and degree in each case.
    c. Accordingly, the other documents need not accompany the purported notice as an essential to validity.
  • A building contract is an entire agreement. This means that the builder has no entitlement to interim payments, save as provided by the contractual terms or by statute.
  • The payment provisions of the amended Act are the operative provisions, not those of the contract. The contract is therefore referred to in application of the statutory provisions, only to the extent that those provisions allow agreement between the parties (for example on the period before the final date for payment, by which a Pay Less Notice must be given).
  • The obligation to pay by the final date for payment is immediate. That is to say that it cannot be delayed beyond the final date for payment, whilst the true value of the work may be disputed.
  • Any question of the true value of the work remains justiciable, notwithstanding the immediate obligation to pay the notified sum, or the lesser sum of any pay less notice, by the final date for payment. Therefore, either party may challenge the correctness of the notified sum, or sum of the pay less notice, in adjudication, arbitration (if agreed) or litigation. The adjudicator, arbitrator or judge has the power to open up and review the operative notices and can order repayment of any excessive payment as against the true value of the work.
  • The adjudication provisions are subordinate to the payment provisions of the amended Act. The obligation to pay the notified sum (or lesser sum of any pay less notice) by the final date for payment, has direct effect.
  • Therefore (and it is submitted this is the most important point of all), the payer is prohibited from embarking upon adjudication or other proceedings to obtain a true valuation of the work, unless and until it has complied with the immediate obligation to pay.

Sir Jackson’s decision may be a breakthrough, or as the culmination of judicial and stakeholder thoughts for over two decades.

Whilst it deals with a U.K. wide statute, it is not binding in Scotland. In Scotland, no higher authority has reviewed the decision in Trilogy, so in Scotland the circumstances in which intention is required and how that it to be judged with reference to the Act, is unanswered. No similar review to that by Sir Jackson has been undertaken by the Scottish Courts.

Having said that, in Hoe International Limited v Martha Goodnow Anderson and Sir James Alexander Frederic Aykroyd [2017] CSIH 9 the dispute was about whether a notice under a share purchase agreement was valid and effective. Sitting in the Inner House of the Court of Session on 3 February 2017, Lord Drummond Young relied upon the words of Lord Hoffman at paragraph 14 of his decision in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101): “…the exercise of construction is essentially one unitary exercise of which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other”

In doing so, Lord Drummond Young aligned with the opinion of Mr Alexander Nissen Q.C. in Surrey and Sussex Healthcare NHS Trust. Though not yet expressed, perhaps the UK courts do agree on the position of intention to the validity and enforceability of notices under the amended Act. But the case was not about the Act, so doubt remains.

It is commended to stakeholders in the Scottish construction industry, including Adjudicators, Arbitrators and the Judiciary, that Sir Jackson’s conclusions are adopted in the management of payment disputes in the construction sector in Scotland too.

Unfortunately, that is not the end. There will inevitably be further disputes about the operation of the statutory payment provisions. The real issue in Trilogy remains unresolved in both jurisdictions. That issue is the extent to which the payee is entitled to payment of the true value of the work, when it has not itself first applied the statutory payment provisions. There is merit in confirming such a requirement. Not least, application of the payment provisions assists in narrowing the scope of any dispute between the parties.

Wishful thinking it may be, but perhaps it is time for further amendment to the Act, so that there is no contractual discretion within the statutory payment regime, by which all parties must abide to create an entitlement to payment, or to withhold payment, before any argument about true value may be adjudicated. Perhaps that is the only way to achieve the immediate payment instructed by Sir Jackson, and to achieve the intent of the Act – as Sheriff Taylor put it in the Scottish Sheriff Court in 2002 (in Clark Contracts Limited v The Burrell Co (Construction management) Limited 2002 SLT (Sh. Ct.) 103): “…to pay now and litigate later.”

A. Ross Taylor
Solicitor
Taylor Law

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