REUTERS | Srdjan Zivulovic

Suggestion that email and financial documents are application for payment “defies common sense”

I don’t know about you, but I have rather missed Coulson J’s adjudication judgments over the last few years as he has been hearing cases out and about, but not so often in the TCC. I don’t really think I noticed that he’d gone, until he came back following Ramsey J’s retirement. A coincidence perhaps, but surely construction disputes will be better for it!

His way of plain speaking and his ability to cut to the chase have never been more apparent than in Caledonian Modular Ltd v Mar City Developments Ltd, a case all about interim applications for payment. I think it is a must-read for anyone involved in administering a construction contract and offers a cautionary tale for all.

Caledonian Modular Ltd v Mar City Developments Ltd

Caledonian was engaged under a letter of intent to carry out construction work at a site at Greenpoint, Colindale, North London. From the judgment, it appears that everything seemed to be going fine until interim application for payment 12, which went unpaid in November 2014.

Cue the first adjudication and, in a decision dated March 2015, Caledonian was awarded some £642,394 of which £200,000 was paid.

In the meantime, it seems that interim applications for payment 13 and 14 came and went and then, on 30 January 2015, Caledonian issued interim application for payment 15. This was in the same form as the previous 14 applications, that is, it was accompanied by a letter attaching the detail of the interim application and setting out the total amount due, the amount previously certified and the net payment due. The letter also identified the date on which a payment notice was to be received by Caledonian and the date for final payment. As with all the other applications, it was issued “towards the end of [the] calendar month”.

As application 15 was for some £1.5 million it is perhaps unsurprising that Mar City served a pay less notice on 5 February 2015. This identified a sum of just over £6,000 due to Caledonian.

So far, so “usual” you may think. What happened next is what has given rise to the court application and Coulson J’s robust judgment.

In early February, it appears the parties’ commercial managers were discussing what was, in effect, Caledonian’s final account. One issue related to scaffolding costs and, it seems, led to an agreement that Caledonian was entitled to more money. Caledonian sent an email on 13 February with a number of attachments setting out financial information, including the revised sums for scaffolding. One document was called “final account application summary”. This revised the sum due upwards by £6,643.

On 19 March, Caledonian issued a number of invoices. One of the invoices was for £1.5 million odd. A week later Mar City issued a pay less notice that showed no further sum was due to Calendonian. Cue the second adjudication.

Email-gate

The question for the second adjudicator (who had also been the first adjudicator) was whether the email and other documents of 13 February were interim application for payment 16. If so, there was no pay less notice and Caledonian was entitled to the £1.5 million it was claiming. If not, and the application was actually the invoice of 19 March, then there was a valid pay less notice and nothing further was due to Caledonian.

I am going to call this email-gate!

The adjudicator agreed with Caledonian. In doing so, he noted the application was early, made only 13 days after the previous application. He also made an interesting point:

“I cannot see how Mar City can argue here that the Application was not valid because it was issued too early when they treated it as a valid application and issued a Payless Notice against it.”

Cue non-payment and enforcement proceedings.

Not a valid interim application for payment

Coulson J disagreed with the adjudicator’s findings. In part it seems he was persuaded by the fact that:

  • None of the documents or the email of 13 February stated it was a new interim application for payment (it referred to number 15).
  • The invoice of 19 March did not say that it was a default payment notice or that the contractor’s notice had originally been provided on 13 February.

Another persuasive factor seemed to be the fact that when Mar City asked what the documents were, Caledonian didn’t say it was interim application for payment 16. Coulson J suggested this failure was a significant omission, that Caledonian’s case was “something of an afterthought”. Alternatively, it “believed that it was in its best interests to be studiedly vague about the nature of the documents”.

Further, Caledonian’s own correspondence indicated that the documents of 13 February were simply updating the overall value of its final account to include the scaffolding. The parties were negotiating and it is common for a final account to be regularly updated as part of those discussions. That did not mean that each update was a new claim for an interim payment.

Perhaps more importantly, Coulson J held that Caledonian could not apply for payment early, as that was inconsistent with the 28-day payment cycle the parties had agreed and followed. It “defies common sense” and was contrary to the Construction Act 1996’s notice provisions:

“It is simply not permissible for a contractor to make a claim for £1.5 million (interim application 15 on 30 January); to have it knocked back through the payless notice mechanism; to update that same claim 8 days later by adding one small variation worth £6,000; and then, by reason of that update alone, miraculously to become entitled to the £1.5 million, despite the fact that the claim for the vast bulk of that sum had already been the subject of the valid payless notice.

Coulson J continued:

“Such a sequence would make a mockery of the notice provisions under the Act and the Scheme. It would encourage a contractor to make fresh claims every few days in the hope that, at some stage, the employer or his agent will take his eye off the ball and fail to serve a valid payless notice, thus entitling the contractor to a wholly undeserved windfall.”

So, there you have it. How the interim applications for payment process should and, more importantly, should not operate. I said the judgment was one that everyone should take note of.

Court finally determining issue

There is a discussion in the judgment about whether the court could grant the declarations sought, which would have the effect of finally determining an issue that had been before the adjudicator.

Coulson J concluded that it could, particularly given the narrow point that was under discussion (was the email and documents of 13 February interim application for payment 16?). He suggested the procedure would be rarely used, but it shows a pragmatic approach to addressing the issue and dealing with it proportionately.

Not an appeal of the adjudicator’s decision, but the effect is the same.

Adjudication is suitable for payment disputes

Although most people are likely to focus on the second adjudicator’s decision about application for payment 16, I still think the judgment demonstrates that adjudication is a suitable forum for the payment disputes that it was introduced to deal with.

As a rule, I find myself being able to reach a decision within 28 days as its unlikely that a meeting will be needed, particularly if it is a technical payment notice/pay less type dispute (in contrast to the kitchen sink adjudications perhaps?).

“defies common sense”

The judgment also shows that sometimes it is good to sit back and look at things from a common sense perspective (something that isn’t always possible in adjudication). As my father in law says, common sense isn’t always that common.

MCMS Ltd Matt Molloy

Leave a Reply

Your email address will not be published. Required fields are marked *