Posted by Andrew Ash, Partner
Payment Notices – the difference between assessments and sums due
We are all well aware by now of the draconian effect of failing to issue a timely payment notice and/or pay less notice, in accordance with the contract, in response to interim payment applications (see for example: Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Limited  EWHC 17 (TCC)). Failure to do so can lead to losing the right to dispute the amount claimed (at least until the next interim payment application or final account).
However, some standard forms extend these rigorous cross notification requirements to cover not only interim payments (which was the primary aim of the 1996 Act), but to the settlement of the final account.
Last month Mr. Justice Coulson handed down his judgment in Systems Pipework Limited v Rotary Building Services Limited  EWHC 3235 (TCC). This case in particular caught my eye because it applies the same common sense principles which apply to notices regarding interim payment applications to those governing final account claims, i.e. that they must be clear, free from ambiguity and be properly labelled so as to ensure that the recipient is aware that failure to respond may have a draconian effect.
Systems Pipework Limited (“SPL”) was engaged as a sub-contractor by Rotary Building Services Limited (“RBS”) to supply and install the steam, condensate, chilled water and cooling systems at the Davidstow Creamery in Cornwall (“the Sub-Contract”).
Clause 28.6 of the conditions of the Sub-Contract contained the following provision:
“The Contractor shall assess the proper amount due for payment in respect of the Sub-Contractor’s Final Account based on the information submitted in accordance with clause 28.5 and shall notify the Sub-Contractor accordingly within 13 weeks of receipt of the Sub-Contractor’s proposed Final Account or such longer time as would be reasonable in all the circumstances taking account of the Main Contract conditions.
In the absence of a proposed Final Account submission from the Sub-Contractor in accordance with clause 28.5, the Contractor may value the proper amount due for payment in respect of the Sub-Contractor’s Final Account on a fair and reasonable basis and notify the Sub-Contractor accordingly.
In either case, if such notification is not dissented from in writing by the Sub-Contractor within 14 Days, then the notified figure will be deemed to have been agreed and will be binding on the parties.”
On 22 May 2016, SPL made an interim application in respect of its works. This application was not paid by RBS.
On 2 September 2016, RBS provided SPL with a lengthy assessment of the gross value of SPL’s works with a covering letter which described this document as ‘our final account assessment for the works carried out on the above project by your company’.
On 16 September 2016, SPL commenced an adjudication in respect of its entitlement to interim payment for its works (“Adjudication 1”).On 14 November 2016, the adjudicator decided that RBS was liable to SPL for interim payments in the sum of £249,217.43.
However, on 20 September 2016, RBS commenced a second adjudication (“Adjudication 2”) seeking a declaration that, SPL was bound by the gross valuation of the whole of SPL’s works that it provided on 2 September 2016 because, so it argued, SPL had failed to disagree with this assessment within the 14 day period stipulated in clause 28.6.
On 15 November 2016, the same adjudicator concluded that SPL was not bound by the 2 September 2016 assessment, to the extent that he had already arrived at a different, higher value in Adjudication 1 for certain items of work, but was bound by the 2 September 2016 assessment in relation to the remainder of SPL’s works.
Although SPL had been successful in recovering payment of its interim payment applications in Adjudication 1, it now faced the prospect of a significant shortfall in the recovery of the overall final value of its works.
Consequently, SPL issued a Part 8 Claim in the TCC seeking declarations that the adjudicator had been wrong to reach the decision which he did in Adjudication 2.
The issues brought before the court were, (1) as a matter of construction of the sub-contract, what notification was RBS obliged to give SPL, in order for that notification to have the effect envisaged by clause 28.6? (2) Did RBS’s 2 September 2016 assessment comply in form and in substance with the required notification under clause 28.6? (3) If the 2 September 2016 assessment was the required notification, was it validly opposed?
The TCC held that the principles established from previous cases brought before the court regarding the interpretation of notices relating to interim payments also applied to notices regarding the final account assessment (i.e. that the notice must be construed objectively on a common sense basis, and in order to be effective must be free from ambiguity and comply in substance, form and intent with the requirements of the contract).
It was plain that the document of 2 September 2016 was not a proper notification of “the amount due” for payment in respect of SPL’s final account because:
- First, neither the accompanying letter, nor the bulky document which it had attached, said that it was the notification of the amount due to SPL. Rather, both the letter and the attachment described themselves as a Final Account assessment;
- Secondly, neither the letter, nor the attachment, contained any identification anywhere of a particular sum which was said to be due and payable from RBS to SPL (or vice versa). It was a gross assessment of the value of SPL’s works, no more and no less
- Thirdly, nowhere in the 2 September document was there any reference to clause 28.6 of the Sub-Contract. The notice should have made it clear that it had been issued under that clause; and
- Fourthly, and perhaps most important of all, it was clear from RBS’s own evidence that the documents of 2 September 2016 were not the notification of “an amount due”.
On the face of it, the 2 September 2016 assessment had been a gross final account assessment only, valuing the entirety of the sub-contract works, and not a notification of an amount due. There was no reference to sums paid to date or the amount or balance due, neither was there any reference to clause 28.6. As such the court held that proper notification was not provided and RBS was not entitled to rely upon clause 28.6.
This case serves as a reminder that a party relying on payment notices, whether those are issued in relation to an interim payment or a final account, must follow the procedures of the contract and make sure that the notice complies in substance, form and intent with the contractual requirements and is free from ambiguity.
Similarly, although RBS’s arguments were unsuccessful on this occasion, the court was nevertheless prepared to uphold the draconian effects of clause 28.6 if appropriate notice had been given. This decision therefore serves as a reminder of the importance of notices in the context of the final account where the contract provides for a final account procedure of the type envisaged in clause 28.6.
This latter point was illustrated in Costain Limited v Tarmac Holdings Limited  EWHC 319 (TCC) where Mr. Justice Coulson was obliged to find that one party’s right to pursue a final account claim through adjudication and subsequent arbitration ‘had been lost for all time’ because it had failed to challenge the other party’s assessment of that final account within 14 days, in accordance with the contract.
If you have an issue relating to payment notices in a construction contract context then please contact Andrew Ash, Terry Mcdermott or our Construction & Engineering team on:
0800 923 2063 Email us
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