Tag: Payment Notice

The Scheme for Construction Contracts

In recent posts we have seen two pieces of Primary Legislation being referred to, these being The Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009. Intrinsic to this legislation is The Scheme for Construction Contracts, a Statutory Instrument that has come into force following these acts to regulate key elements of the construction process. In this post we will examine The Scheme and its major points.

We must first remember that this legislation refers to “construction activities” as defined in the legislation. While it is not prescriptive and allows some legal interpretation, broadly a construction contract is defined as “all design and construction contracts, including professional appointments, are likely to be construction contracts as long as they relate to construction operations”.

Which leads to the further question of, “What are “construction operations?””

Again this has been left to some interpretation but includes a wide range of construction operations and most common forms of engineering operation, such as civil engineering projects.

Some engineering projects such as mining, nuclear and power generation as well as contracts with residential occupiers are expressly excluded.

Let’s now consider The Scheme for Construction Contracts. Firstly we must remember that there are a different set of regulations in place in England & Wales to those in place in Scotland. In this post we will consider the regulations as they apply in England & Wales.

The Scheme for Construction Contracts

The Scheme for Construction Contracts (England and Wales) Regulations to give them their full title apply when construction contracts do not comply with the primary legislation and either supplements the provisions of the contract where it has deficiencies relative to the requirements of the Act or replaces the contract where it is non-compliant. The purpose is to allow the contract capable of being performed (reducing the likelihood of frustration) whilst allowing regulatory control over its provisions.

The Housing Grants, Construction and Regeneration Act applies  to all contracts for “construction operations” and sets out the requirements relating to Adjudication and payment, including:

  • The right to commence Adjudication
  • To be paid in interim, periodic or stage payments.
  • To be informed of the amount due, or any amounts to be withheld.
  • To suspend performance for non-payment.
  • Disallowing pay when paid clauses.

Part 1 of the Scheme makes provision for Adjudication where the contract does not comply with the requirement and Part 2 replaces those provisions in relation to payment that do not comply.

The 2011 amendments to The Housing Grants, Construction and Regeneration Act

The Housing Grants, Construction and Regeneration Act 1996 was amended in October 2011 by the Local Democracy, Economic Development and Construction Act 2009 to close loop holes within the original legislation and as a result The Scheme for Construction Contracts was also amended to reflect the amendments. These amendments and their implication have been outlined in previous posts but can be broadly summarised as follows:

  • The act now applies to all construction contracts, even those not evidenced in writing
  • Adjudication clauses must still be in writing
  • Who will bear the cost of Adjudication can no longer be defined in the contract
  • The Adjudicator has the right to correct errors in contracts within 5 days of delivering a Determination
  • Payment dates must be set out in the contract.
  • A Payment Notice must be issued five days of the date for payment, even if no amount is due, although alternatively, if the contract allows, the Contractor may make an application for payment, which is treated as if it is the Payment Notice
  • A Pay Less Notice (previously a Withholding Notice) must be issued where it is intended to pay less than the amount set out in the Payment Notice, including the basis of calculation of the amount being paid less
  • The notified sum is payable by the final date for payment
  • Where a Payment Notice is not issued, the Contractor (or Sub-Contractor) may issue a Default Payment Notice
  • Pay when certified clauses are no longer allowed and retention release cannot be prevented by conditions within another contract.
  • The provisions around the right to suspend for non-payment have been expanded to allow costs to be claimed as well as the right to an Extension of time as consequences of any statutory suspension

These amendments apply to construction contracts entered into on or after 1 October 2011 in England and Wales, and 1 November 2011 in Scotland.

In the next post we will look at Part 1 (Adjudication) of The Scheme for Construction Contracts and the legal requirements and in the post after that Part 2 (Payment).

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The Construction Act (The amendments) Part II

In the previous post we reviewed the changes in the Construction Act as many companies still do not abide by them in their entirety. In this post we will consider these key changes in more detail.

 Contracts in writing

The most significant and far reaching effect of the 2009 Act is the removal of the requirement for construction contracts to be in writing and the Act applies to all contracts, be they wholly in writing, partly in writing and partly oral or wholly oral. This  will particularly affect Adjudication, although for Adjudicators Costs and the “slip rule” will need to be in writing to be relied on, if they are not then the Scheme will apply.

This makes it even more important that agreements (even where part standard conditions and part negotiated (oral) amendments are fully recorded in writing, even as a contract appendix. For the protection of both parties an “Entire Agreement Clause” where it is clear that the written document constitutes the whole agreement, should be included. This clause will not prevent disagreements,  but will significantly improve the position of a party arguing against an oral agreement.

Payment Issues

The amendment at Part 8 of the 2009 Act affect all Construction Contracts in England, Wales & Scotland when they came into force on 1 October 2011 in England & Wales and 1 November 2011 in Scotland. The primary aims of the amendments were to:

  • To make Adjudication more accessible to resolve disputes
  • To introduce clarity and certainty in relation to payment
  • To introduce a fair payment mechanism
  • To improve the right of Contractors to suspend their works for non-payment

The fundamental changes to the payment mechanism are:

  • Conditional Payment clauses are abolished
  • Changes to the Payment Notice regime, including a requirement for the Payee to pay the notified sum
  • Introducing new rules on Payless Notices
  • New rights for Contractors who suspend their services for non-payment
  • Allowing clauses to be included in Construction Contracts allowing the Employer to Withhold Payment without notice in the event of a contractors insolvency

We will now examine these fundamental changes and look at what the 1996 Act required and how this has been amended.

The Payment Notice

Previous position

In the 1996 Act an “adequate mechanism” for determining the sum due for payment and its payment date (known as the “Due Date”) was required. Further the payee had to give notice, not later than 5 days after the due date, detailing:

  • The amount of the payment made or proposed to be made
  • The basis on calculation of the amount

There was no effective sanction for failure to comply with the notice requirement and the Act was ambiguous if no payment notice was issued as there was no certainty to what sum was due under the contract.

2009 Act

 Construction contracts require a payment notice to be given for every payment provided for by the contract, not later than five days after the payment due date. The 2009 Act further defines the due date as “the date provided for by the contract as the date on which the payment is due”.

The contract must provide for the payment notice to be given by the payer, a “specified person” specified in or determined in accordance with the contract or by the payee itself. The notice must specify:

  • The sum considered to be due or to have been due at the payment due date in respect of the payment; and
  • The basis on which that sum is calculated.

Even if the sum considered due is zero, a payment notice must still be given in the required form.

Whilst not a sea change from the previous position they key changes that need to be considered are:

  • The payment notice no longer need to be issued by the Employer and  can be issued by specified persons such as the architect or engineer, or the payee may be required to issue the notice
  • The notice must simply state the sum which is “considered” due and the basis of calculation. This prevents duplication and takes into account any set off, abatement or any other deductions which may be withheld; and
  • A sanction has been introduced where there is a failure to issue a payment notice and a significant greater risk faced by parties that fail to issue payment notices. This risk is that the payee may now issue a notice in default stating the amount considered to be due and the basis for calculation.

If the deadline has passed and a payment notice has not been given, the payee may give the payer a payment notice – known as a ‘payee’s notice in default’ – at any time, stating the amount it considers due and the basis for calculation. If the contract provides for an application for payment and the application is made, that will automatically be regarded as a payee’s notice in default.

If a payee’s notice in default is issued, the final date for payment will be postponed by the length of time between when the payer or specified person should have given the payment notice and the date the payee gave its notice in default.

These changes are important because there is a positive obligation to pay the notified sum, which may be the value of an application under the contract

 Requirement to pay notified sum or less

 Previous position

A party to a construction contract could not withhold payment after the final date for payment of a sum due unless it has given an effective notice of intention to withhold payment (the “’withholding notice”).

To be effective the withholding notice needed to specify:

  • the amount to be withheld and the ground for withholding payment; or
  • Where there is more than one ground, each ground and the amount attributable to it.

The withholding notice had to given not later than the ‘prescribed period’ before the final date for payment, as agreed by the parties. Where a date had need been agreed then the default would be the requirement of The Scheme for Construction Contracts, making the period seven days.

Crucially a payment notice could act as a withholding notice, as long as it meets the requirements detailed above.

2009 Act

 The amendment in the 2009 Act creates a positive obligation on the payer to pay the ‘notified sum’, to the extent not already paid, on or before the final date for payment.

The previous regime of withholding notices has been abolished and the “notified sum” is now a key concept. This sum is the sum stated in the payment notice, which can be issued by the paying party, the specified third party or the payee. This notice can also be the notice in default and in almost all cases this will be the application for payment. If no payment notice is issued, there is a positive requirement to pay the sums set out in the application if the contract allows or requires the making of an application.

This change allows the paying party (or a specified person) to issue a notice of intention to pay less, known as the “Payless Notice” before the final date for payment or where specified in the contract the final date to issue a “Payless Notice. The “Payless Notice” must specify:

  • The sum that the person giving the notice considers to be due on the date the notice is served; and
  • The basis on how the sum is calculated.

However as with the “withholding notice” it must be given not later than the prescribed period before the final date for payment.

Another further change is in insolvency situations where the notified sum need not be made if:

  • The contract allows withholding of sums due in cases of insolvency: and
  • The insolvency occurs after the expiry of the time for giving the counter notice.

However this is not a statutory right and the contract must contain an appropriate clause to benefit from this provision.

 Suspension for non-payment

 Previous position

 Previously a party who is entitled to payment the right to suspend performance of its obligations under the contract if:

  • The sum due is not paid in full by the final date for payment; and
  • No effective notice to withhold payment has been given.

The party wishing to use this right has to give the other party at least seven days’ notice of its intention to suspend stating the ground or grounds for suspension. The right to suspend comes to an end when the other party pays the amount due in full. However there was no entitlement in the Act itself to recover your loss and expense where you suspended for non-payment. To have this right the contract needed to be amended to give effect to this entitlement.

Crucially any period of suspension under this right was disregarded when calculating the amount of time taken to complete the contract for the purposes of delay damages, so in effect could have the double whammy effect of putting you in breach of your obligation to complete by a particular dat or suffer Liquidated and Ascertained Damages.

2009 Act

 The right of suspension now arises where there is a requirement to pay the notified sum and that requirement has not been complied with.

The party wishing to suspend will now be able to suspend performance of any or all of its contractual obligations. This new entitlement to partial suspension of contractual obligations means that suspension is not limited to the actual construction obligations, but could go beyond and suspend the right to insure the works or suspension of works on only crucial areas or with certain sub-contractors, thereby negating programme delays if possible.

Where the right to suspend is exercised, the other party will be liable to pay a reasonable amount in respect of the costs and expenses reasonably incurred by the suspending party as a result of exercising this right and this is a Statutory Right enshrined in the Act.

Further, crucially the time period during which performance is suspended in pursuance of or in consequence of exercising the right of statutory suspension is disregarded when computing the time to complete work is any period.

 Conditional payment clauses

Previous position

 Under the 1996 Act provisions which make payment conditional upon receipt of payment from a third party (‘pay when paid’ clauses) are not prohibited and allowed payment to be conditional on other events, such as ‘pay when certified’ clauses, where payment is conditional on a certificate being issued under another contract.

This had the implication of effectively causing a Sub Contractor to become exposed where a dispute (that he was not party to) existed between the Employer and Contractor.

2009 Act

 Conditional Payment clauses are now invalid where they are conditional upon:

  • Performance of obligations under another contract; or
  • A decision by any person as to whether obligations under another contract have been performed.

This is to prevent a party up the line from relying on circumstances relating to its own contract to delay payment under a separate contract. By way of an example; if the Employer has not complied with its certification obligations to the Contractor, this cannot be used by the Contractor to deny payment to a Sub Contractor.

 There is however an exceptions in relation to management contracting or equivalent project relief arrangements, where the Contractor simply acts as a conduit. An example would be Public / Private Partnerships where a Special Purpose Vehicle (SPV) company is created with the sole purpose of procuring the project. This SPV has no assets and is not intended to have any liability unless it is first paid.

Due to concerns that the 2009 amendments would outlaw equivalent project relief provisions in subcontracts in Public / Private Partnerships, orders have been made which protect certain of these arrangements in respect of contracts entered into after the act came into force.

The Orders means that provisions in Tier 1 first tier PFI Public / Private Partnerships Sub Contracts which make payments in such contracts conditional upon obligations being performed in other contracts (such as providing certificates and ‘pay when paid’ clauses) will be effective.

Although in reality this is a loophole that will have to re-visited in the future. We will also examine Public / Private Partnerships in greater detail at a later stage.

 

At a practical level in day to day operation of contracts the fundamental changes are:

  • Notices are crucial, bearing in mind that if there is no payment notice the other party can serve a notice of default or rely on its own application for payment;
  • The paying party will then have to pay whatever has been notified unless a valid notice of the intention to pay less has been served; and
  • Payment clauses have had to be redrafted to reflect the changes

Sadly in far too many cases the changes that have been effected have not been communicated effectively in large organisations and while the necessary clauses have been changed to make compliant contracts, for fear of strike down clauses, on a day to day basis many do not provide the necessary documentation.

Yet even more concerning is despite this, many still do not enforce their rights.

The Construction Act (The amendments)

Previous postings of Heina v Beck & Enforcement of Adjudication Decisions as a result of Brown v Complete Building Solutions have primarily revolved around two pieces of Primary Legislation, these being The Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009. In effect the 2009 act has been primarily an updating of the previous legislation to clarify where over time the law has been seen to be deficient. We should therefore look at the material changes that took place.

 As these two pieces of legislation, where they apply to construction activities first define what would be a Construction Contract in accordance with the legislation. While it is not prescriptive and allows some legal interpretation, broadly a construction contract is defined as “all design and construction contracts, including professional appointments, are likely to be construction contracts as long as they relate to construction operations.

This leads to the further question of, “What are “construction operations?””

Again this has been left to some interpretation but includes a wide range of construction operations and most common forms of engineering operation, such as civil engineering projects.

Some engineering projects such as mining, nuclear and power generation as well as contracts with residential occupiers are expressly excluded.

Let’s now consider the major changes of the 2009 Act

The major changes took effect with after amendments were made to The Scheme for Construction Contracts in 2011 and apply to contracts entered into after this.

The table below explains the key changes that were made to the 1996 Act:

CHANGE POINTS TO NOTE

 

 

Contracts in writing no longer required

Section 107 of the 1996 Act will be repealed.

The payment and adjudication provisions of the 1996 Act will now apply to all construction contracts, whether written, oral or a mixture of both.

The parties will still have to have a written adjudication clause in their contract that complies with section 108 of the 1996 Act. If they do not, the Scheme will apply.

Adjudication may be used more widely but it is likely that more time will be taken up in future adjudications arguing about what the terms of the contract are.

Ability to award costs restricted

Parties will not be able to agree in advance who will pay the costs of Adjudication.

The adjudicator also cannot be given the power to award legal costs.

 

 

 

Under the new section 108A, only two types of costs agreement will be effective:

1) An agreement in writing in the construction contract which gives the adjudicator power to split liability for the adjudicator’s own fees and expenses between the parties; and

2) An agreement on costs made in writing between the parties after the notice of adjudication is served.

 

New slip rule

Under new section 108(3A), construction contracts will have to contain a provision in writing allowing the adjudicator to correct clerical or typographical errors in his decision, arising by accident or omission.

 

The Act is silent on how long an adjudicator will have to make corrections. Parties would be wise to agree a timescale in their contract.

Notably, the Adjudicator will be permitted but not compelled to make corrections and his ability to do so will be limited. He is unlikely to be able to correct factual or reasoning errors or errors of judgement.

Pay when certified clauses banned

‘Pay when certified’ clauses will be banned under new section 110(1A), except where the construction contract is an agreement for someone else to carry out construction operations and payment is conditional on that other person performing their obligations.

 

 

 

 

The exception to section 110(1A) will mean that management contracts will not be outlawed.

Equivalent project relief clauses in Public / Private Partnership contracts, which normally contain conditional payment arrangements, may have to be redrafted.

Payers may try to find other mechanisms to minimise the effect of this, such as by inserting a longer payment period into the subcontract than the period in the main contract.

‘Pay when paid’ provisions will still be ineffective under section 113, except where there is an upstream insolvency.

Due date can’t be determined by notice

Under new section 110(1D), making the due date dependent on the payer giving a payment notice will be banned.

This is not an adequate mechanism for determining when payments become due.

If there is such a clause in the contract, it will be ineffective and the Scheme will apply.

New payment notices

The payment notice provisions of the 1996 Act will be replaced.

Under new section 110A, a payment notice will have to be given not later than five days after the payment due date.

The construction contract may provide for the payer (person paying), the payee (person receiving payment) or another specified person to give this notice.

The payment notice must be issued, even where the amount due is thought to be zero.

To be valid, the notice must state the sum that the person giving the notice considers to be due (or to have been due at the payment date) and the basis on which that sum is calculated.

Where a specified person gives the notice, it may state the sum that either the specified person or the payer considers to be due.

If the payer fails to serve a valid payment notice but the payee has already submitted an application for payment, the amount set out in the application will become due. Payers should therefore be careful to serve their payment notices on time.

New payment default notices

Under section 110B, where the payer (or a specified person) is supposed to but has failed to issue a valid payment notice, the payee may serve a ‘payment default notice’.

Where a valid payment default notice is given, the final date for payment of the notified sum will be postponed by the number of days that it took the payee to issue the payment default notice after the payer failed to issue the payment notice.

The payment default notice must state the sum that the payee considers to be due and the basis on which it is calculated.

Payment default notices should be served promptly, to minimise any delay to the final date for payment and to ensure that suspension rights can be exercised if payment is not made.

A payment default notice cannot be served if the contract provides for the payee to serve the payment notice.

Withholding notices replaced by “pay less” notices

The withholding notice provisions of the 1996 Act are to be replaced.

Under new section 111, the notified sum (the amount specified in a valid payment notice or payment default notice) must be paid on or before the final date for payment, unless the payer (or a specified person) serves a valid ‘pay less notice’.

Money can still be withheld without a ‘pay less notice’, if the payee becomes insolvent after the period for issuing the notice has expired.

A “Pay Less otice” must state the payer’s intention to pay less than the notified sum. It must be served not later than the prescribed period before the final date for payment.

It must specify the sum that the payer considers to be due on the date the notice is served (even if that is zero) and the basis on which that is calculated.

A ‘pay less notice’ cannot be served before a payment notice or a payment default notice has been served.

 

Enhanced rights on suspension

Where the payee is entitled to suspend performance under section 112 of the 1996 Act, their rights will be enhanced.

The payee will:

1) be able to suspend their obligations in whole or in part;

2) be entitled to be paid the reasonable costs and expenses associated with the suspension; and

3) be entitled to an extension of time which includes time required to remobilise.

Enhanced compensation rights may encourage parties to use this remedy.

Suspension may now be seen as an even more effective way of securing payment.

 

 

 

 

 

 

In the next post we will have a look at these changes in more detail and what should be included to ensure compliance with and protection from changes from that seek to dilute the effectiveness of the changes.

 

Ansell Murray Limited Commercial Support

In the previous post we reviewed the outline of how the construction industry in the United Kingdom treats Sub Contractors and Sub-Sub Contractors. In this post we will examine how the little guy can strike back by just using the available rules, regulations and legislation together with their own Sub contracted commercial support.

Ansell Murray Limited as a boutique Consultancy is able to offer commercial advice and support at any time of the life cycle of the works as well as, as much or little support as is required. A new company may need robust systems to capture what they are doing and more mature business may be expanding on taking on works where not only the contract to be entered into is more complex and onerous but may require more compliance.

In the following sections we will set out typical functions that can be undertaken.

Pre Contract Advice / Support

As the title implies these are activities that take place prior to a contract being awarded and can even be in support of a tender and include:

  • Build up of “Actual Cost” rates for Labour, Plant and Materials
  • Preliminaries Build up and Requirements
  • Estimating
  • Review of proposed form and contract and schedule of amendments
  • Design implications (Professional Indemnity & Warranty requirements)
  • Condition Precedents and their potential Implications
  • Main Contract programme requirements and support
  • Notice Service requirements
  • Specific recurring requirements of the contract

Of course nothing is going to stop “subby bashing,” however the risk of payment problems can also be reduced by ensuring that a fair contract and contract procedures are in place.

Ideally, you should incorporate your own Terms & Conditions of business into any order which can be done by careful submission prior to commencing work, making the last document on file the contract.  If this is achieved it can only be trumped by the later signing of a formal contract, which does not have to be done before payment is to be made, such malpractice is outlawed by the Construction Acts.

Ansell Murray Limited are well placed to assist in this key pre contract activity to ensure many of the terms in the contract cannot be turned into disastrous “subby bashing” tools.

Contract period Advice / Support

During the period of construction works the works can either run smoothly with little or no real change in what has been contracted for and at the other extreme can be delayed and disrupted, subject to dispute. Ansell Murray Limited to provide commercial and project management support at both ends of the spectrum as well as the eventualities in between.

  • Application for Payment support, including dealing with all contractual reporting requirements
  • Management of Change Control, be these Variations or Compensation Events
  • Payless Notice support
  • Robust support of Variation / Compensation Event entitlements
  • Robust support against Contra Charges for additional contractor labour
  • Claim of Compensation and associated interest for Late Payment
  • Invoicing and Payroll (Employee’s and Sub Contractors)
  • Management of supply chain commercially, including ensuring back to back contract provisions and reporting to the supply chain
  • Notice service requirements
  • Insurance liability
  • Programme management, including period updates

In the event Ansell Murray Limited had been utilised during the Pre-Contract phase our primary objectives are to ensure the following are as favourable as possible to the Sub Contractor:

  • Onerous payment periods and lengthy due dates are removed and are at worst in line with legislation defaults
  • Retention, Liquidated and Ascertained Damages, Main Contractor Discount advice and support
  • Letters of intent where issued and being subject to Contract
  • Condition precedents (Extension of Time, Loss & Expense entitlements and Practical Completion)
  • Unrealistic programmes, time requirements & time essence clauses
  • Ensure “Pay when paid” or “Pay when certified” clauses are removed and are in line with current legislation
  • Termination and Suspension rights
  • Set off clauses are removed
  • Onerous adjudication clauses are removed and are in line with The Scheme for Construction Contracts.
  • Insolvency of the Employer and or Contractor advise and support

During the construction phase there is often a false belief that there is nothing that can be done about Contractors entering into contracts and then ignoring them, to the detriment of the Sub Contractor undertaking the work.

Because in large organisations people effectively learn how to mechanically undertake their day to day job, many do not understand their duties and obligations under the contract that they are effectively administrating. In effect the rules that protects a Sub Contractor from bad practices

Often the paying parties do not understand the Payment Notice requirements and that their timing and content are critical. As well as this they fail to recognise the power of payment applications becoming the sum due where the rules of assessment and certification are not followed. In effect your payment application becomes the sum due. If the paying party wants to contest this it must prove its case in later proceedings, which if made up and is not supported by contemporaneous evidence will be impossible.

Post Contract Advice / Support

Often a Sub Contractor may provide the works in accordance with the contract, yet the Contractor regularly and consistently under values your works. This is often a precursor to a robust Final Account negotiation where the Contractors seeks to maintain his margin on the project by using your monies. The larger the amount due as a Final Account settlement and the more chance the Contractor will use delay tactics to try and struck the best deal for the Contractor, often to the detriment of the Sub Contractor.

And what can you do? Your works are complete, often you will have made all the payments due to your supply chain, but you need the cash flow to fund the next project.

Contractors know this and will then use this to drive down the agreed final value.

But it does not need to be like this. Ansell Murray Limited can be engaged at Final Account stage purely to ensure that you are paid what you are owed together with any agreement on the amounts of effective free money you want to give the contractor.

This should only be necessary where the objectives are clear that the Contractor is seeking a significant reduction in the final cost he will pay. For the sake of the industry as a whole these companies should be challenged to stop their behaviour for the greater good of all Tier 2 / 3 contractors.

By engaging Ansell Murray Limited during the construction phase our clear objectives are to ensure the value that has been earned by your efforts on site are paid in that period and in effect to make the final account negotiation about the final 5% of the contract value.

Claims & Dispute Advice / Support

Sometimes contracts simply do not happen as planned and if you are the innocent party and have suffered loss the contract between the parties will allow you to be compensated for this. Ansell Murray Limited can provide assistance in setting out contractual claims generally around Loss & Expense and Extension of Time claims.

The United Kingdom construction industry offers its customers great flexibility. Many construction project are not fully designed when they commence and can progress with the design continuing in the background. This means changes in scope are inevitable and change means a revision in price being charged to the Employer and usually the programme. In this environment disputes are ordinary and common place, so too is a settlement that both parties can accept. However this is often dependent on robustness of the change and associated detail in the pricing and impact on the programme that is put forward. If this is not efficiently managed it reduces itself and the project to conflict which can affect overall quality, time and health & safety. Ansell Murray Limited can manage and handle these claim processes to ensure they do not result in a larger dispute. This is not limited to large scale industrial and commercial construction and civil engineering but can be something as small as a fit out of a local shop.

However sometimes the claim ends up as a dispute where both parties believe their stance is correct and the only method to resolve the claim will be through Alternative Dispute Resolution (ADR) as usually the legal option in the Technology and Construction Court (TCC) is prohibitively expensive.

On 1st May 1998 the construction industry took a great stride into the future with the introduction of a statutory right to have a dispute determined by Adjudication. In the subsequent 19 years this process has become entrenched as a relatively cost effective way of having a dispute determined in 28 days. It is a decision which is further binding and can only be overturned, revised or confirmed in Arbitration (if the contract contains an Arbitration clause) or in litigation. Please see previous posts in relation to the mechanism of Adjudication at this link: https://ansellmurray.wordpress.com/tag/adjudication/

Ansell Murray Limited offers support in Adjudication whether you are the party commencing Adjudication [The Referring Party) or to assist in defending where you have been referred to Adjudication (The Responding Party).

Can a party commence its own Adjudication without using a company such as Ansell Murray Limited? The short answer is “Yes” and the slightly longer answer is “It’s not advisable.”

An Adjudication is an argument giving each party a reasonable opportunity of putting his case forward and rebutting the case put by the other party to the contract, with the watchword being fairness.

Why is “It’s not advisable?”

The Adjudicator does not make a case for either party or find the evidence to undermine a party’s case. The role is purely to make a Determination based on facts, evidence, rights and duties in the contract and at law. If an adjudicator investigates at all, it will be to clarify points of fact or law in the party’s case. Therefore it is vital that in preparation of a Referral Notice as the party commencing an Adjudication or in the Response where contesting that the facts are laid out clearly and concisely for the Adjudicator, even where appropriate using legal precedent as a justification of an argument. In reality where there are no legal complexities to be considered the Adjudicator will have little time to do much more than simply make his Determination based on the written arguments of each side.

Of course this entire process is not one-sided and only requires a specialist consultancy such as Ansell Murray Limited. As the real strength (or weakness) of a case for a simple claim or even Adjudication is based on the golden rule or “Records, Records, Records.” These records are your evidence to prove your claim or to disprove a claim made against you. For a claim to be successful it demands good evidence.

Systematic keeping of all site correspondence, instructions, meeting minutes, record photographs (which with modern technology are date stamped), correspondence in writing and electronic mails, site diaries and site resource record sheets. This is also easily verified by the use of technology such as biometric scanners. These are the types of records that help back up a successful claim.

As stated at the start of this post, as a boutique consultancy, Ansell Murray Limited can be your Estimator, Surveyor, Programme Manager, Project Manager, Commercial Manager or Commercial Director. The name on the badge may be slightly different to your organisations name, but we are there to integrate as much or as little into your organisation as you want.

Go to www.ansellmurray.com to view our website and make contact.

Enforcement of Adjudication decisions

Adjudication, as a form of Alternative Dispute Resolution (ADR) is a faster form of resolving a dispute between parties to a contract. However there is a golden rule when Adjudicating on the same dispute.

The current position is quite straightforward.

If a dispute referred to Adjudicator is the same or substantially the same as a previous Adjudication, an Adjudicator cannot decide on this second dispute. He will not have jurisdiction.

In a recent Court of Appeal case this was put to the test.

In Brown v Complete Buildings Solutions Ltd [2016],  the judge was required to rule on whether an Adjudicator had jurisdiction to decide on a dispute referred to him. As the matter of the dispute had been argued in a previous Adjudication, it was argued that the Adjudicator did not have jurisdiction.

Timeline of events

A Joint Contract Tribunal (JCT) Minor Works Building Contract (2011) was entered into between the parties to demolish a residential house in Ashtead, Surrey and build a new house. The Contract Sum was £496,578.

The Architect certified Practical Completion on 9th April 2013 and then issued a Certificate of Making Good Defects on 25th October 2013. On 31st October the Architect issued a Final Certificate for the sum of £115,450.50. This sum remained unpaid and on 20th December 2013 the Contractor sent a letter to the Employer stating this Final Payment of £115,450.50 was due.

The sum remained unpaid and a Notice of Adjudication (the First Adjudication Notice) was issued on 7th February 2014 in accordance with Clause 7.2 of the Contract.

Mr. C Calcroft was named as the Adjudicator by the Adjudication Nominating Body (ANB). In this Adjudication is was accepted that the Architect’s Final Certificate was in breach of contract as it was not issued in accordance with Clause 4.8.1 of the Contract, but rather relied on clause 4.8.4 which provided:

If the final certificate is not issued in accordance with clause 4.8.1,

4.8.4.1  the Contractor may give a payment notice to the Employer with a copy to the Architect/Contract Administrator stating what the Contractor considers to be the amount of the final payment due to him under this Contract and the basis on which the sum has been calculated and, subject to any notice under clause 4.8.4.3, the final payment shall be the final amount.

 4.8.1.3 If the Employer intends to pay less than the sum specified in the Contractor’s payment notice, he shall not later than 5 days before the final date for payment give the Contractor notice of that intention in accordance with 4.8.3 and the payment to be made on or before the final date for payment shall not be less than the amount stated as due in the Employer’s notice.

Further Clause 4.8.5 of the Contract established that where the Employer did not give a counter notice under clause 4.8.4.3 it was obliged to pay the Contractor the sum stated as due in the Contractor’s notice.

The Adjudicator, Mr. Calcroft issued his Decision on 1st April 2014 where he concluded that the Final Certificate (CBSL) issued on 30th October was ineffective and further found that CBSL’s letter of 20th December 2013 was not a valid Payment Notice in accordance with Clause 4.8.4.1 of the Contract on the following two grounds:

  1. It was based on the ‘Final Certificate’ being issued late, whereas it was in fact invalid
  2. The terms of the 20 December 2013 letter did not comply with clause 4.8.4.1 in view of the way it was expressed as it did not make clear that it was:
  • a notice
  • Issued pursuant to clause 4.8.4.1

The Adjudicator ruled that since no Payment Notice had been served, no sum was payable.

On the same day as Mr. Calcroft issued his Decision, 1st April 2014, CBSL sent a letter which was detailed as a “‘notice pursuant to Clause 4.8.4.1 of the Contract.” This was followed on 24 April 2014 with a further Notice of Adjudication (the Second Adjudication Notice).

The ANB appointed Mr. C Hough as Adjudicator on 29th April 2014. Brown disputed Mr. Hough’s jurisdiction on the basis that he was being asked to decide the same, or substantially the same, dispute as had been decided by Mr. Calcroft in the First Adjudication. They therefore declined to participate in the Adjudication and further did not serve a notice under Clause 4.8.4.3 of the Contract. In layman terms the Employer did not issue a Payless Notice.

Mr. Hough issued his Decision on 27th May 2014.

He ruled that the dispute he was being required to determine was not the same or substantially the same as the Adjudication determined by Mr. Calcroft. He further found that Mr. Calcroft had determined that no certificate had been issued in accordance with Clause 4.8.1 (Final Certificate) and this decision was binding on both the parties and him. However, he determined that the 1st April 2014 notice was an effective notice under Clause 4.8.4.1 (Payment Notice from the Contractor to the Employer) and Brown’s refusal to pay had created this dispute, which was not the same or substantially the same as the one previously dispute.

As Brown had not issued CBSL with a Payless Notice, the sum fell due for payment. Brown was required to pay:

  • £115,440.46 to CBSL within 7 days
  • Interest of £817.70 up to the payment date, increasing at a rate of £17.90 per day until paid
  • The Adjudicator’s fees of £1,944.

Brown did not pay and on 11th June 2014 CBSL initiated proceedings in the Technology and Construction Court (TCC) Manchester District Registry. They were granted permission to issue an application for Summary Judgment. Brown applied for an adjournment and an application to transfer the proceedings from Manchester to London. They did not however pay the required fee for the request to transfer.

Judge Raynor QC refused the application to Adjourn and ruled in CBSL’s favour on 10th July 2014. He found that the sum of £118,500 was due, with costs summarily assessed at £6,000. However he stayed execution of the judgment until 8th August 2014. Brown had to make application to set aside by 8th August 2014.

Brown applied on 31st July 2014 for the order to be set aside and have the hearing transferred to London. Judge Raynor QC dismissed the application in a fully reasoned judgment and Brown was further ordered to pay costs, summarily assessed at £5,750.

It is from this judgment Brown made an appeal to the Court of Appeal.

The issue and the argument

A number of case law precedents were cited by both parties. The applicable principles are summarised as follows:

  1. The parties are bound by the decision of an Adjudicator on a dispute or difference until it is finally determined by court or arbitration proceedings or by an agreement made subsequently by the parties.
  2. The parties cannot seek a further decision by an adjudicator on a dispute or difference if that dispute or difference has already been the subject of a decision by an adjudicator.
  3. The extent to which a decision or a dispute is binding will depend on an analysis of the terms, scope and extent of the dispute or difference referred to adjudication and the terms, scope and extent of the decision made by the adjudicator. In order to do this the approach has to be to ask whether the dispute or difference is the same or substantially the same as the relevant dispute or difference and whether the adjudicator has decided a dispute or difference which is the same or fundamentally the same as the relevant dispute or difference.
  4. The approach must involve not only the same but also substantially the same dispute or difference. This is because disputes or differences encompass a wide range of factual and legal issues. If there had to be complete identity of factual and legal issues then the ability to re-adjudicate what was in substance the same dispute or difference would deprive clause 9.2 of The Scheme for Construction Contracts (England and Wales) Regulations 1998 (The Scheme) of its intended purpose.
  5. Whether one dispute is substantially the same as another dispute is a question of fact and degree.

The reference above to “fact and degree” are interpreted from further case law precedent from a 2006 Court of Appeal case, Quietfield Limited v. Vascroft Construction Limited [2006] EWCA Civ 1737 where the matter of an Extension of Time (EoT) was referred to Adjudication and Determined. The matter was subsequently referred to Adjudication again, however the Adjudicator determined he did not have jurisdiction as this was the same dispute. At the Court of Appeal it was found:

  1. Clause 9.2 of The Scheme provides that an Adjudicator must resign where the dispute is the same or substantially the same as one which has previously been referred to Adjudication with a decision reached. It must that the parties may not refer a dispute to Adjudication in these circumstances.
  2. This mechanism being adopted to protect respondents from having to face the expense and trouble of successive Adjudications on the same or substantially the same dispute. There is an imperfect analogy here with the rules developed by the common law to prevent successive litigation over the same matter
  3. If the first Adjudication is substantially the same as the second Adjudication is a question of fact and degree. If the contractor identifies the same Relevant Event in successive applications for EoT, but gives different particulars to its expected effects, the differences may or may not be sufficient to lead to the conclusion that the two disputes are not substantially the same. Particularly if the particulars of expected effects are the same, but the evidence by which the contractor seeks to prove them is different.
  4. Where the only difference between disputes arising from the rejection of two successive applications for an extension of time is that the later application makes good shortcomings of the earlier application, an Adjudicator will usually have little difficulty in deciding that the two disputes are substantially the same.

The central claim made by Brown was that Mr. Hough was being asked to determine the same or substantially the same dispute as Mr. Calcroft had been asked to determine. This was further reinforced as it was for the same sum of money, with the only material difference being no valid Final Certificate in the first Adjudication

Decision

  1. A further case was quoted, this being Matthew Harding (trading as M J Harding Contractors) v. Paice and Springhall [2015] EWCA Civ 1281 where it was stated in the text of the Judgment:

It is quite clear from the authorities that one does not look at the dispute or dispute referred to the first adjudicator in isolation. One must look at what the first adjudicator actually decided. Ultimately it is what the first adjudicator decided which determines how much or how little remains for consideration by the second adjudicator.

It was found in a unanimous decision that in the second Adjudication, the Adjudicator was both entitled and correct to conclude that he was not considering the same or substantially the same dispute as the first Adjudication. Mr. Hough had recognised that both parties were bound by the Decision in the First Adjudication that the Final Certificate was ineffective and that the letter of 20th December 2013 was not a valid notice under the Contract. Mr. Hough was being asked to determine if a different notice served 4 months later had different consequences.

While both Adjudications relied on the ineffectiveness of the ‘Final Certificate’ and claimed the same sum, the Relevant Event was CBSL’s notice of 1st April 2013. Neither this notice nor the consequence of it (CBSL’s entitlement to be paid if no Payless Notice was issued served) gave rise to dispute referred in the first Adjudication. Crucially CBSL were not making good a shortcoming in the earlier letter by bring a new claim via a new and different route as it relied on a letter issued after the Decision of the first Adjudication and therefore raised a different dispute. This had been dealt with by Judge Raynor QC in his judgment, “what was decided in the First Adjudication was the ineffectiveness of the notice given in December 2013. That was not raised at all as an issue in the Second Adjudication.”

The appeal was therefore dismissed.

 

What is the lesson here?

It the same lesson as in Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC), follow the contract and stick to its strict timetables particularly around the Payment Mechanism

In this case Brown could have protected themselves by issuing a Payless Notice, but did not. There would still have been a dispute, that is clear, but as the second Adjudication was found to be a different dispute, so too would a second Adjudication where a valid Payless Notice was in place.

Henia Investments Inc v Beck Interiors Ltd

In the last post we looked at three basic documents that are a consequence of the Payment Mechanism, these being:

• The Interim Application for Payment (AfP)

• The Payment Notice

• The Payless Notice

How important these relatively straight forward contract requirements are has been highlighted in a court case that has recently been concluded in the Technology and Construction Court (TCC) between Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC). In particular it has given some legal position in relation to the three documents, but in particular the AfP and Payless Notice.

Background to the case

Henia Investments Incorporated (Henia) entered into a Joint Contract Tribunal (JCT) Standard Building Contract without Quantities 2011 (as amended) with Beck Interiors Limited (Beck) to undertake an extensive Fit Out to a property in Kensington, London.

The Payment Mechanism was intended to reflect The Housing Grants, Construction and Regeneration Act [1996], as amended by The Local Democracy, Economic Development and Construction Act [2009] where the interim AfP due date was the 29th of each month with interim AfP’s to be made no later than 7 days before the due date. Therefore Beck could apply between the 22nd and 29th of each month. The Contract Administrator was required to issue an Interim Payment Notice no later than 5 days after the due date, this being usually the 3rd or 4th of the following month, save February where it would be due on the 5th March. The final date for payment was 28 days after the due date and any Payless Notice were to be issued no later than 3 days before the final date, therefore on or before the 26th of the next month following the AfP.

What led to the Dispute

The dispute centred round AfP’s and if legally delivered and the consequence thereof. Although it should be noted that the presiding judge, Mr Justice Akenhead noted that the parties “have not followed with any precision the contractual requirements”. This is perhaps a masterpiece of understatement as this case could be a case study in how not to administer a Contract.

The dispute centres on Interim AfP Number 18, due on 29th April 2015 and AfP Number 19, which was due to be submitted on 29th May 2015.

Beck lodged their Interim AfP Number 18 for the sum of £2,943,098.95 six (6) days late. Crucially this was for works completed to 30th April 2015. On 6th May 2015 the Contract Administrator issued a Payment Notice to Beck detailing the sum a payable as £226,248,98. This payment Notice where it related to AfP number 18 was issued one (1) day late, although effectively the Contract Administrator could not issue a Payment Notice in time as the AfP was delivered after he was compelled contractually to provide his Payment Notice. Although the Contract Administator could have issed a Payment Notice in time, in all probability showing £0 due in period.

Beck failed to produce and lodge their Interim AfP Number 19 (due on or before 29th May 2015). Despite this the Contract Administrator issued a Payment Notice to Beck on 4th June 2015 at 00:03, therefore 3 minutes later than when it was due, although in reality one (1) late, detailing the sum a payable as £18,893,953.

Henia issued a Payless Notice within the agreed contractual timescale on 17 June 2015. This was based on Payment Notice Number 19, of which part of the computation was the deduction for Liquidated & Ascertained Damages (LAD’s) of £373,751.05. This Payless Notice stated that Becks entitlement in relation to AfP number 19 was £0.

It was Beck position that the AfP lodged six (6) days late was a valid Interim AfP relating to the next Valuation Date of 29th May 2015 and that as the Contract Administrators Payment Notice was late (effectively by 3 minutes) the sum claimed in this AfP was now due. Beck argued further that the Payless Notice issued by Heina on 17th June 2015 was invalid. Their challenge to its validity was on the grounds that in a Payless Notice, Henia could only apply cross-claims, such as LAD’s but otherwise not challenge the Contract Administrator’s valuation.

In Part 8 proceedings commenced by Heina (Part 8 – Alternative Procedures for Claims is explained in greater detail at this link: http://www.justice.gov.uk/courts/procedure-rules/civil/rules/part08 ) Judge Akenhead had three very clear and distinct arguments to consider. These being:

• Was Beck’s Interim AfP Number 18 valid

• Was Henia’s Payless Notice valid

• Would the failure by the Contract Administrator to make a Determination in respect of an Extension of Time (EoT) claim by Beck prevent Henia from claiming LAD’s

While these were the three primary points to be considered, the essential element was the timing of these documents in relation to the Payment Mechanism within the Contract.

Judgment

Beck’s Interim AfP’s

The Contract enabled Beck to lodge an AfP on or before the 29th of each month stating the sum it considered would become due for payment. The works would be valued from the 30th of the previous month to the 29th of the current month, under normal circumstances. Beck’s Interim AfP Number 18 stated the sums applied for were “Valued to 30/04/2015”. The Contract was clear and unambiguous that an AfP on a valuation of the works could only happen on either 29 April or 29 May. 30 April was therefore not an option.

Judge Akenhead therefore rules that Beck’s Interim AfP was invalid. However he was silent with regards the timing of Becks AfP being six (6) days late.

In effect on this issue four points can be made to summarise the position that was decided by Judge Akenhead, these being:

1. The relevant AfP date of 29th April 2015, which would have been the 18th relevant due date under the Contract.

2. Nothing in the AfP dated to 30th April 2015 suggested the works were valued to 29th May 2015. The AfP stated the works were valued up to 30th April 2015 meaning that if was a valuation to the 29th May 2015 AfP date, Beck were not anticipating doing any work of value during May 2015. This was not plausible.

3. There was no indication in the AfP dated 30th April 2015 to suggest the 29th April 2015 AfP date had been missed and this AfP related to the 29th May 2015.

4. The AfP dated 30th April 2015 in substance, form and intent not an Interim AfP relating to the 29th May 2015 AfP date.

Henia’s Payless Notice

Due to the finding in relation to the validity of Beck’s Interim AfP, the dispute over Henia’s Payless Notice was rendered irrelevant. As the Contract Payment Mechanism had not been followed, it meant that there was no valid Interim AfP or indeed Payment Notices and both had been issued late. As a consequence no interim payment became due to Beck.

Judge Akenhead did however go on to consider the parties’ arguments in relation to the Payless Notice.

If Beck’s Interim AfP Number 18 was valid then Henia would have been compelled by the Act to pay the sum applied for, as there was no valid Payment Notice, which was effectively the subject of Henia’s Payless Notice.

Beck argued that a Payless Notice only allowed Henia to pay less than the sum in the Payment Notice (or Interim AfP) on the basis of counter or cross claims, in this case LAD’s.

Henia countered this argument and claimed that in addition to any cross claims, it was also entitled to state its own valuation of the works in its Payless Notice. This valuation was based on the late Payment Notice Number 19, which contained their claim for LAD’s and this claim outweighed this, hence Henia’s view that no sums were due to Beck.

Judge Akenhead sided with Henia and held the contract compelled Henia to serve a Payless Notice if it intended to “pay less than the sums stated as due.” Further no explicit wording in the Contract implied this was restricted to cross-claims.

Contract Administrators failure to Determine the EoT

Judge Akenhead found that any failure by the Contract Administrator to Determine the EoT provisions would not give rise to a Condition Precedent debarring Henia from claiming LAD’s and any potential short term unfairness to Beck could be resolved through the Contracts dispute resolution mechanism. He stressed this finding was obiter where prior to judgment being handed down, in an Adjudication commenced by Beck, the Adjudicator had found that no valid application for an extension of time had been submitted.

The Judgement in Summary

The judgment in Henia vs Beck found that a “Pay Less Notice can not only raise deductions specifically permitted by the Contract and legitimate set-offs but also deploy the Employer’s own valuation of the Works.”

Employers will welcome this outcome as it has blurred the lines between a Payment Notice and a Payless Notice and at what stage each one could arguably serve as the other.

What is the general implication of this ruling?

This judgment confirms the principle that The Housing Grants, Construction and Regeneration Act [1996] and it’s amendments in The Local Democracy, Economic Development and Construction Act [2009] where the Employer is not barred from challenging an amount previously certified by the Contract Administrator and undertaking its own valuation. However this will obviously need to be specific to the terms of the Contract.

Further where a Contract has a clear and unambiguous date for the lodging of an Interim AfP doubt will arise if the sequence is not followed.