Inflated payment claims present risks for clients and advisers, says Peter Gracia FCIOB FCIArb.
There has never been a better time for a contractor to tack a couple of zeros on to a final account claim. A series of Technology and Construction Court (TCC) decisions and consultants’ ignorance of payment legislation have created an environment for inflated claims to slip through the net. But before we consider what all this means – for contractors, clients and the consultants who advise them – let us refresh our memories about the payment legislation at the heart of the problem.
Part 8 of the Local Democracy, Economic Development and Construction Act 2009 amended the Construction Act 1996 part 2. The act requires the contract to contain information to allow parties to know how much will be paid and when. The old system of saying a payment is due 14 days after a certificate is issued is not an adequate mechanism. The newer system is linked to dates and specific periods of time, so the due date is critical.
The act’s default position is that the payer – the employer or its agent – will issue a payment notice to explain how much is due within five days of the due date. But if the payer does not issue the payment notice at the correct time, this opens the door for the contractor to establish how much has to be paid.
Where the contract allows applications for payment and these have been submitted, that can become the deemed payment notice. Alternatively if applications were not permitted or made under the contract and the payer has not issued the payment notice within five days of the due date, the contractor can issue its own default payment notice. The time for payment then runs from this notice, which provides the payer with a final opportunity to challenge the sum.
Section 111 can provide the knockout blow to the employer or contractor. It says the payer must pay the notified sum – ie the sum on the payment notice. It is immaterial if this amount is wrong or inflated. The only way to avoid paying is to issue a “pay less” notice at the correct time. If that is late or fails to contain the required information, it will not protect the employer, who must pay the notified sum.
“Since moral considerations do not apply, many people routinely make inflated claims for payment, including vast sums for variations, loss and expenses. If the payer misses the boat with a payment or pay less notice, it can be faced with a big bill that has no bearing on the amount of work undertaken.”
At the TCC, Justice Edwards-Stuart has heard cases in the past year where payment notice arguments have been key. The requirement to pay the notified sum was reinforced in ISG Construction v Seevic College [2014], when he said: “Absent fraud, in the absence of a payment or pay less notice issued in time by the employer, the contractor becomes entitled to the amount stated in the interim application irrespective of the true value of the work actually carried out.”
Since moral considerations do not apply – this is the construction industry – many people routinely make inflated claims for payment, including vast sums for variations, loss and expenses. Whether this constitutes fraud may be addressed in future. If the payer or its consultant misses the boat with a payment or pay less notice, it can be faced with a big bill that has no bearing on the amount of work undertaken and will require significant effort to recover.
Until recently the payer would respond with a counter-adjudication to try to get a proper valuation of the works by the same adjudicator. They would try to set one decision off against another to restore balance to the account. That option has effectively disappeared following Seevic, which decided the second adjudication could not re-evaluate the amount due if the first had already decided that amount by default.
The courts believe that in most cases an apparent overpayment on an interim certificate could be corrected on later certificates when a gross value of the work is produced. However, this can be a problem if you can only produce negative valuations in the final certificate and the value of works remaining is less than the inflated value of the earlier payment notice decision.
The courts are naive in thinking this will not often occur at the end of the contract because that is exactly when you want to make your exaggerated claim. This leaves little or no time left for corrective valuations. Often, by the time a final account is sorted out, a couple of years have dribbled by and the contractor has either gone bust or bought another yacht.
Payment notice mistakes are making big holes in employers’ accounts. So it is little surprise that employers consider action against their consultants if they fail to issue the proper notices. In the TCC case Galliford Try Building v Estura the application in dispute was for almost £5m more than the contract sum and only £4,000 less than the contractor’s projected final account figure.
The February judgment also revealed – in paragraph 55 – that Estura was pursuing its own contract administrator in adjudication, claiming damages for breaches of contract and negligence in failing to issue the required payment notice. “Traditional” negligence claims are based on the duty of care between the parties.
A breach of the duty of care may occur when the contract administrator or “specified person” fails to issue a payment notice or a pay less notice when required. This is all a matter of timing, so sensible contract administrators will have a schedule of application and payment dates on his or her wall from the outset.
The lesson after four years of this legislation is to get payment notices right, or pay for the consequences.
Peter Gracia FCIOB FRICS FCIArb FQSi is a director of Gracia Consult and RICS adjudicator panel member
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