Clarification from the courts

The Construction Act gives contractors the right to be paid at certain points in the contract, such as interim or stage payments. It does, however, stipulate that certain procedures must be followed. A recent case has given some clarification on whether an application for payment will be treated as default payment notice.

Serving payment notices in the correct form and at the correct time is crucial in construction contracts. There are strict rules which must be complied with; if they are not, an employer may find it is paying monies that it does not think are due, or a contractor will not receive a payment to which it thinks it is entitled.

For example, Bloggs Builders must serve a payers’ notice to its sub-contractor, Williams Electricals, in which it must state the sum it believes to be due. If Bloggs Builders fail to serve the payer‘s notice, Williams Electricals can serve its own payee’s notice in default.  It would need to do this, because if it does not, no payment becomes due in law. 

In some contracts, the payee - Williams Electricals in our example - is allowed, or even required, to serve an application for payment. This is sufficient to be considered Williams Electricals’ default notice, provided of course that it has served such an application in the correct form and at the correct time.

In a recent case, a question arose with regard to the Scheme for Construction Contracts and whether it permitted or required the receiving party to make such an application.  

Some clarification on this point has been obtained from the Technology and Construction Court.  In the case of Jonjohnstone Construction Limited v Eagle Building Services Limited, an adjudicator said that the Scheme did permit or require the receiving party to make an application for payment. This meant that the receiving party could rely on its application and that the paying party did not serve any payment notice. The sum in the application therefore became the notified sum and had to be paid, regardless of whether the contractor considered it to be correct.  The decision of the adjudicator was upheld when the case went to the Technology and Construction Court.  

This means that in contracts where the Scheme applies, receiving parties do not have to serve a further notice after their application if a payer’s notice is not served.

This will be a great advantage to contractors and subcontractors as they will not have to, in effect, remind the paying party that they should be serving a ‘pay less’ notice if they do not wish to pay the sum that has been claimed. If you would like to speak to one of our specialists please call 01245 453813 or alternatively email peter.allen@birkettlong.co.uk.