Interim Payment Applications and Payless Notices

The recent decision of the Technology and Construction Court in Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Limited [2017] EWHC 17 (TCC) provides a useful reminder for the parties to a construction contract of the potential risks of failing to comply with the contractual payment regime and also the contractual requirements in respect of Interim Payment Applications and Payless Notices.

 Background

Surrey and Sussex Healthcare NHS Trust (the Trust) entered into a JCT Intermediate Building Contract with Contractor's Design 2011 (the Contract) with Logan Construction (South East) Limited (Logan) for the refurbishment of various operating theatres, a recovery ward and various associated works at East Surrey Hospital. The value of the works was £4,388,000 plus VAT.

 The Works were certified as having reached practical completion on 25 August 2015. Logan made no applications for interim payment in the following months. However, Interim Certificates were issued every two months by the Trust's quantity surveyor (Mr Stone) as required by the Contract.

 Following practical completion Logan failed to provide the Trust with the documents reasonably required by Mr Stone to calculate any adjustment to the Contract Sum. However, on 25 May 2016 Mr Stone issued his computation of the adjusted Contract Sum, in the sum of £4,901,308.70, and invited Logan's comments on his evaluation of the Contract Sum with a view to agreeing the Final Account.

 Between June and September 2016 there were eight meetings between Mr Stone and Logan's quantity surveyor (Mr Crook) to discuss the value of the final account.

 On 24 August 2016 Mr Stone issued the Certificate of Making Good Defects under the Contract. Two consequences flowed from the issue of this certificate:

• Firstly, the end of the Rectification Period under the Contract was the occasion of a due date for another interim payment cycle. Notwithstanding that another interim payment cycle had been triggered Logan did not submit an Interim Payment Application and neither did Mr Stone issue an Interim Payment Notice; and

• Secondly, the 28 day period for the issue of the Final Certificate under the Contract was triggered. Accordingly, absent any agreement to extend this period, the Final Certificate had to be issued by 21 September 2016.

A final account meeting was arranged between Mr Stone and Mr Crook for 21 September 2016. Shortly before midnight on 20 September 2016 Mr Crook sent an email to Mr Stone referring to the final account meeting enclosing an attachment entitled "ESH 724 – Logan Interim Payment Notice – Valuation No 24 – 20092016". The worksheets within the attachment valued the completed works at £5,961,465.46 and claimed that the sum of £1,105,557.95 was due to Logan.

At the meeting on 21 September 2016 Mr Stone and Mr Crook discussed the final account valuation at high level. However, the parties were unable to bridge the gap between their respective valuations in relation to the works. Accordingly, having regard to the contractual deadline, Mr Stone confirmed that he would issue the Final Certificate later that day based on his valuation of the Contract Sum as previously identified. It appears that at no stage during the meeting did the parties discuss that Logan had issued a document entitled "Interim Payment Notice".

As indicated at the meeting, on the evening of 21 September 2016 Mr Stone sent out an email to the Trust, copied to Mr Crook, which contained the Final Certificate. The Final Certificate identified the valuation date as 21 September 2016 and confirmed a gross valuation of £4,901,308.70. After taking into account previously certified sums, the balance certified as payable to Logan was £14,235.43. The attachments to the email enclosed a breakdown of the adjusted Contract Sum which explained the detail of the valuation.

The email also contained an acknowledgment of the Interim Payment Notice issued by Logan under Mr Crook's email of 20 September 2016. However, Mr Stone stated that the Interim Payment Notice was out of date and void. Mr Stone went on to state that in any event that the details stated in the Final Certificate would have been the same in respect of any Interim Certificate which may have been issued.

On 28 September 2016 Mr Crook emailed Mr Stone to challenge his assertion that the Interim Payment Notice was out of date and void. Mr Crook also noted that no Payless Notice had been issued on or before 24 September 2016 as required under the Contract and that, for that reason, Logan was expecting to be paid £1,105,557.95.

On 19 October 2016 Logan issued a Notice of Adjudication claiming payment of the sum set out in the Interim Payment Notice. The Trust defended the adjudication on the basis that:

• The attachment to Mr Crook's email of 20 September 2016 was not a valid Interim Payment Notice; and

• Mr Stone's email of 21 September 2016 and attachments constituted a valid Payless Notice.

The adjudicator rejected the Trust's defences and, in a decision dated 25 November 2016, upheld Logan's claim. The adjudicator decided that the Trust should pay Logan the sum of £1,015,557.95 together with interest. In anticipation of the adjudicator's decision the Trust issued Part 8 proceedings before the Technology and Construction Court (the Court) seeking declaratory relief from the adjudicator's decision.

The Court's Judgment

The Court was asked to decide two issues. The first was whether the attachment to Mr Crook's email of 20 September 2016 was a valid Interim Payment Notice. The second was whether Mr Stone's email of 21 September 2016 and attachments constituted a valid Payless Notice. On careful consideration of the parties' submissions the Court decided as follows:

• Notwithstanding the Trust's submission that Mr Crook's covering email of 20 September 2016 was unclear and was not transparent in respect of Logan's intention to make a claim for interim payment, on the basis that the attachment to Mr Crook's email of 20 September 2016 was entitled "Interim Payment Notice"; made specific reference to the relevant clauses of the Contract; and contained a detailed assessment of the sum claimed by Logan, the Court held that Logan had issued a valid Interim Payment Notice.
  
  
• However, on the basis that Mr Stone's email of 21 September 2016, together with its attachments, satisfied the limited contractual requirements for a Payless Notice and, when considered objectively, Mr Stone's email was intentionally responding to the Interim Payment Notice, the Court held that Mr Stone's email of 21 September 2016, together with its attachments, did constiute a valid Payless Notice and accordingly the Court granted the Trust declaratory relief from the adjudicator's decision.

Lessons Learned

The case of Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Limited [2017] EWHC 17 (TCC) provides a number of useful lessons and reminders to parties to a construction contract in relation to the principles underpinning the various payment regimes incorporated into contracts to reflect the requirements of the Local Democracy, Economic Development and Construction Act 2009.

• Firstly, it is vital that a party responsible for the administration of the payment regime under a construction contract is aware of the requirements of the contractual payment mechanism and ensures that all certificates and notices are issued on or before the dates specified in the contract. Failure to do so creates a significant risk for the employer that he may become liable to pay sums under the contract even where, on a detailed analysis of the sums claimed, the payment may not be due to the contractor. As the Judge stated in his decision ". . . the present dispute would never have arisen had the Contract Administrator issued an Interim Certificate in accordance with his contractual obligations."
  
  
• Secondly, given the potentially draconian consequences for an employer which flow from a failure to serve a compliant Payment Notice, in order to constitute a valid Payment Application or Payment Notice any application or notice must be clear and unambiguous and transparent as to what it purports to be. As stated by the Judge in his decision "There is a high threshold to be met by any contractor who seeks to take advantage of these provisions whereby a sum automatically becomes payable if a timely employer's notice is not served" and any ambiguity or lack of transparency by a contractor when submitting a Payment Application or Payment Notice runs the risk that the application or notice may be held to be invalid and unenforceable.
  
  
• Finally, unlike the position adopted in respect of a Payment Application or Payment Notice, again given the potentially draconian consequences for an employer which flow from a failure to serve a compliant Payless Notice, the law adopts a different, less prescriptive standard when considering whether a document constitutes a valid Payless Notice. In this instance the Court held that in order to constitute a valid Payless Notice the document was only required to:
  
  

• satisfy the contractual requirements for a Payless Notice (i.e. the notice must specify the sum which the employer considers is due to the contractor at the date of the notice and the basis upon which that sum has been calculated); and

• demonstrate the requisite intention, when considered objectively, to fulfil the function of a Payless Notice. There is no requirement for the document to state that it is intended to constitute a Payless Notice or refer to the relevant terms of the contract.

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