Payment in Construction Contracts – What’s new?

Payment provisions are an industry “hot topic” and the wave of litigation since the 2009 amendments to the Construction Act remains relevant. If you would like a reminder of the principles to follow when applying for or making payment, then see our previous articles here and here.

While the position has stabilised somewhat, payment disputes continue to plague the courts. In this article, we take a look at some more recent cases and the guidance offered to assist in navigating the payment mine field.

Balfour Beatty v Grove Developments [2016] – losing your entitlement to interim payment

In this case, the parties agreed that stage payments would apply to their JCT Design and Build 2011 contract, but included only 23 payment dates in their payment schedule. As works were in delay, there was a dispute over entitlement to future payments once that schedule had expired. When Balfour Beatty attempted to make a 24^th application, Grove argued that the contract gave them no entitlement to do so, and the Technology and Construction Court agreed.  It was appealed to the Court of Appeal which ruled that:

• the contract plainly allowed for 23 interim payments, which was adequate provision as required by the Construction Act;
• there was no reason to imply a term into the contract allowing for further interim applications beyond these 23; and
• the Court would not rescue Balfour Beatty from what was perceived as a “bad bargain”.

Had the contract stated that interim payments would be at monthly intervals (as opposed to 23 distinct monthly intervals), or made clear what would happen beyond the 23rd application date, this problem would likely never have arisen

Kilker Projects Ltd v Rob Purton [2016] – challenging a final account after adjudication

Kilker was ordered following an adjudication to pay the full £147,223 claimed in Purton’s final account, having failed to issue a payment or pay less notice, but commenced a second adjudication for assessment of the true value of works. Kilker was successful and Purton was ordered to repay almost £67,000, but refused on grounds that the first adjudicator had decided how much he was entitled to and the second adjudicator had no jurisdiction to determine this amount again.

As in the Court of Appeal in Harding v Paice (2014), the court disagreed and ruled that:

• the second adjudicator did have jurisdiction and the decision should be enforced;
• notice provisions were intended to encourage cash flow, not to finally determine the value of the contract; and
• a party could challenge the value of a final account after being ordered to pay the full amount, but not of an interim application.

A party who fails to issue a notice in respect of an interim application will not be able to rectify any overpayment until the next application is made.

Kersfield v Bray [2017] – you still can’t reopen an interim application

A dispute arose between the parties over an interim payment and Kersfield’s failure to serve a valid payment or pay less notice.  An adjudicator awarded that Bray should be paid the full amount of their interim application, but in subsequent enforcement proceedings. Kersfield argued that:

• Bray’s application was invalid as two claimed items were not sufficiently substantiated;
• the notice was issued inside the Construction Act timeframes, which could not be contracted out of and therefore must apply; and
• it was entitled to commence a second adjudication to assess the true value of Bray’s interim application.

The court stressed that while failure to substantiate might warrant rejection of a claim, it did not in invalidate the application.

The court also disagreed with Kersfield’s second argument, noting that the Act was not concerned with methods and deemed date of service, which the parties were free to agree between them. Nothing in the Act would restrict the terms of the contract in this regard.

Kersfield’s final argument was an interesting one. The Scheme provides that an adjudicator may “open up, revise and review” any non-final decision or certificate, and Kersfield believed this should include Bray’s application (as default payment notice). They also suggested that section 111(8) of the Construction Act permitted an adjudicator to reopen and consider the true value of an application. The court disagreed, ruling that Bray’s notice was not a decision or certificate for the purposes of the Scheme, and section 111(8) did not permit revision of a notice, rather the award of additional sums by an adjudicator. In any event, it only applied when a valid notice had been issued.

Summary

The outcome of the cases above is not especially surprising and serves only as a stark reminder of the consequences of failing to issue notices on time or at all.

If you would like some practical guidance on how to avoid falling foul of payment provisions, see our “Top Tips” article here, which summarises and addresses all the issues detailed in this and our previous payment articles.