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Caledonian Modular Ltd v Mar City Developments Ltd

12 August 2015

Recent cases have confirmed that the lack of a payment or pay less notice means an employer is deemed to have agreed the value of the works claimed in an interim certificate, effectively entitling a contractor to the amount stated in its interim application - irrespective of the true value of the work actually carried out. Further, the employer cannot have the relevant interim application re-valued at a later date (see our bulletin here). However, Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC) has provided some comfort for employers, confirming that contractors must provide reasonable notice that the payment period has been triggered in the first place.

Background

In December 2013, Mar City Developments Ltd (Mar City) issued a Letter of Intent to Caledonian Modular Ltd (Caledonian) to carry out extensive construction works. The letter of intent did not include any express payment provisions or any express adjudication provisions, so the Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment (England) Regulations 2011 (SI 2011/2333) (the Scheme) was implied into the contract.

Caledonian submitted 14 applications for payment, which all followed the same format. Each application was sent with a covering letter setting out:

  1. the total amount due
  2. the amount previously certified
  3. the net payment due
  4. the date on which a payment notice was to be received from Mar City
  5. the date for final payment.

The application also stated that it was “in line with JCT standard terms of contract” and was “based upon 28 day payment terms”.

Caledonian issued interim application 15 on 30 January 2015 for approximately £1.5m in the same format as previous applications. On 5 February, Mar City sent a pay less notice to Caledonian. A dispute arose as to the value of Caledonian’s account and on 13 February, Caledonian sent an updated version of application 15 entitled 'Final Account' to Mar City by email. Mar City did not issue any payment or pay less notice, but did question the nature of the documentation provided. On 19 March 2015, Caledonian sent a final account application summary to Mar City and on 26 March 2015 Mar City issued a pay less notice in respect of that application.

Caledonian’s case was that its email dated 13 February constituted interim application 16 and/or a payee’s notice. Mar City’s case was that no interim application had been submitted until 19 March 2015. This issue was important, because the date of submission would determine whether or not Mar City’s pay less notice dated 26 March 2015 was valid. Ultimately it was the subject of an adjudication, with the adjudicator finding that the documents sent on 13 February 2015 were a valid application for payment and that the pay less notice issued on 25 March 2015 was out of time and invalid. Caledonian sought to enforce the adjudicator’s decision.

Decision

Whilst the Technology and Construction Court (TCC) accepted that, as a general rule, it could not re-open on enforcement an issue that the adjudicator had already decided, it noted that there were exceptions. Relying on previous case law1 it held that if the point was short and self-contained, and required no oral evidence (other than elaboration that could be provided during a relatively short hearing), then a declaration may be appropriate. This was a rare case where the procedure could be used to determine a substantive issue during the enforcement hearing, particularly as there was so much common ground between the parties regarding the effect of a valid pay less notice.

On this basis, the TCC reviewed the substance of the adjudicator’s decision and found that:

  1. the documents sent by Caledonian on 13 February 2015 were not an interim application or a valid payee’s notice
  2. the interim application made by Caledonian on 30 January 2015 was met with a valid pay less notice
  3. the next interim application was made on 19 March 2015.

The TCC came to this decision as Caledonian did not state that (1) the documents sent on 13 February 2015 were a new payment application; (2) the invoice dated 19 March 2015 was a default payment notice; or (3) the original notice had been sent on 13 February 2015. Further, when Mar City queried what the 13 February 2015 documents were, Caledonian did not state that they were a new payment application. The TCC considered that this omission was 'significant', which suggested that Caledonian’s case was “something of an afterthought”.

The TCC considered that it would defy common sense to find that that 13 February 2015 documents gave Caledonian an undisputed entitlement to approximately £1.5m and that it would be “contrary to the purpose of the notice provisions in the Construction Act"2. The TCC considered that to find in favour of Caledonian could encourage contractors to make a fresh claim for payment every few days in the hope that the employer would “take his eye off the ball and fail to serve a valid payless notice”, which would have the effect of entitling the contractor to a “wholly undeserved windfall”. This would "make a mockery" of the notice provisions under the Construction Act and the Scheme.

Comment

This case follows the decisions in ISG v Seevic College [2014] EWHC 4007 (TCC) (reported by us here) and Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC), which considered the effects of failing to serve payment/pay less notices in accordance with the contract and is consistent with the ruling in Leeds City Council v Waco UK Limited [2015] EWCA 407 (TCC) where the TCC stressed the importance of timing of applications for payment.

Of particular interest is the following comment from the court:

“In the UK (unlike other jurisdictions… ) the employer’s failure to serve a payless notice within a short period of time 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…if contractors want the benefit of these [payment] 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 TCC has made clear here that where there is a contractual and statutory payment process, contractors cannot make interim applications early or outside of the process, or circumvent the process by submitting applications outside of a payment cycle. Additionally, contractors should take care to make clear that they are submitting applications for payment so that the employer is aware that the payment period has been triggered. Whilst the judge here stressed that the case turned on its own facts, it offers some comfort to employers, particularly where an adjudicator has decided against them.


1 Geoffrey Osborne Ltd v Atkins Rail Ltd [2009] EWHC 2425 (TCC).

2 Housing Grants, Construction and Regeneration Act 1996, as amended.

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