Payment Application Disputes in Construction
Payment applications are integral to cash flow management in construction projects. The importance of payment applications has increased over the past few years given the current economic climate, rising costs, inflation and staffing issues experienced by companies in the construction industry. They ensure that contractors and subcontractors are paid promptly and fairly for their work, contributing to the smooth running of the project.
In this article, our experienced construction lawyers explore the intricacies of payment applications, pay-less notices, and the adjudication process within the UK’s construction industry.
What is a Payment Application?
A payment application in the construction industry is a request for payment issued by a contractor or subcontractor for work completed during a specified period. This application is a fundamental part of the contractual payment process.
In the UK, the Housing Grants, Construction and Regeneration Act 1996 (as amended), also known as the ‘Construction Act’ provides the legislative framework for construction contracts, including payment applications. Compliance with this Act, including providing the necessary notices and following the outlined procedures, is crucial.
The format, content, and timing of the payment application must comply with the terms outlined in the construction contract. This includes adhering to deadlines for submission, as stipulated in the contract, to avoid delays or disputes.
The key requirements of a payment application include:
- Detailed Description: The application must detail the work completed in the period covered, including a breakdown of labour, materials, and any other costs incurred. It should align with the schedule of values in the contract, providing a clear correlation between the work done and the payment requested.
- Compliance with Contract Terms: The application should comply with the terms outlined in the construction contract, including timelines and format.
- Supporting Documentation: Including timesheets, invoices, photographs, and progress reports can be useful for substantiating the claim for payment (and can prove crucial in resolving any dispute).
What is a Pay Less Notice?
A pay-less notice is issued by a party (usually the employer or main contractor) to dispute or reduce the amount claimed in a payment application. This notice is critical in preventing overpayment for disputed work.
The key requirements of payless notices include:
- Timely Issuance: The pay-less notice must be issued within the time frame specified in the contract. The Housing Grants, Construction and Regeneration Act 1996 (as amended) sets a default deadline of 17 days from the due date for payment, but this can vary based on contract terms. Late issuance of a Pay Less Notice can invalidate the notice, obligating the payer to meet the full amount claimed in the payment application. If payment is not made on time, then the creditor could proceed with a ‘smash and grab’ adjudication for the full amount of the payment application (plus interest and costs).
- Clear Grounds for Withholding: The notice must clearly articulate the grounds for withholding payment. This includes any discrepancies, quality issues, or other disputes over the work completed. It should also specify the basis on which the reduced payment amount has been calculated, offering a clear comparison between the claimed amount and the amount being offered.
- Legal Compliance: The notice must adhere to the statutory requirements outlined in the Housing Grants, Construction and Regeneration Act 1996 (as amended). It should also comply with any specific contractual requirements regarding the format, content, and method of service.
Common Disputes on Payment Applications
In our experience, disputes can often arise over:
- Quality of Work: Disagreements about the standard or compliance of the work completed
- Work Scope: Conflicts regarding whether the work falls within the scope of the contract
- Calculation Errors: Discrepancies in the amount due, often due to miscalculations or misinterpretations
- Timing and Delays: Delays in work completion not communicated effectively can result in disputes when payment applications are submitted as per the original timeline.
- Incomplete Documentation and Lack of Supporting Evidence: Payment applications lacking sufficient supporting documentation or evidence of work completed can be challenged.
Adjudication in Construction Disputes
Adjudication is a fast-track dispute resolution process in the construction industry, allowing parties to resolve disputes without lengthy court proceedings.
Adjudication is a statutory procedure, primarily introduced by the Housing Grants, Construction and Regeneration Act 1996 (as amended). It allows any party to a construction contract to bring a dispute to an impartial third-party adjudicator.
The process is renowned for its speed, with most adjudications completed within 28 days of the adjudicator’s appointment.
The Royal Institution of Chartered Surveyors (RICS) and the Chartered Institute of Arbitrators (CIArb) are two key bodies in the UK that provide support, guidance, and panels of adjudicators. These institutions ensure the availability of qualified professionals to oversee the adjudication process, maintaining high standards and fairness.
Several of our lawyers are trained mediators and expert negotiators who are registered members of the Chartered Institute of Arbitrators (CIArb) and the International Mediation Institute. Our expertise in mediation gives our lawyers a significant and unique advantage when navigating settlement discussions on your behalf.
Reported Adjudication Court Judgments
Grovedeck Ltd v Capital Demolition Ltd [2000] EWHC Technology 224 (requirements of payment applications in construction)
The dispute was between Grovedeck Ltd, a construction company, and Capital Demolition Ltd, a contractor specialising in demolition work.
The case concerned a disagreement over payment for demolition work carried out by Capital Demolition on a project managed by Grovedeck. It was complicated by the fact that the construction contracts where not in writing but made orally. The dispute was initially referred to adjudication. Following the adjudicator’s award, the case was brought to the TCC for legal judgment, which is not unusual in situations where parties are dissatisfied with an adjudicator’s decision.
The case highlighted issues surrounding payment applications, particularly the importance of written contracts, and the clarity and accuracy required in such applications. The court scrutinized the payment application made by Capital Demolition, examining whether it was detailed and clear enough to warrant the payment claimed. The case set a precedent for the level of detail and clarity needed in payment applications in construction contracts namely:
- Precision in Documentation: The case emphasized that payment applications must be meticulously detailed and clear. This includes providing a comprehensive breakdown of the work done, costs incurred, and any other relevant financial information.
- Alignment with Contractual Terms: The applications must align closely with the terms of the contract. This means they should clearly reflect the scope of work, rates, and any other contractual agreements relevant to the payment.
- Substantiation of Claims: Every claim made in a payment application needs to be substantiated with adequate evidence. This could include timesheets, invoices, progress reports, and other relevant documentation.
- Transparency and Avoidance of Ambiguity: The case underscored the importance of transparency in payment applications. Ambiguities or lack of clarity in the application can lead to disputes and complications in the adjudication process.
- Requirement for Auditable Claims: The payment claims should be auditable; that is, they must be verifiable and easily traceable to the contractual obligations and work completed.
The court ruled that the adjudicator did not have jurisdiction over the dispute, primarily because it involved oral contracts. The court held that disputes related to the terms of oral contracts were not suitable for resolution by adjudication under the Housing Grants, Construction and Regeneration Act 1996.
Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 3352 (TCC) (binding nature of adjudicator decisions)
Severfield (UK) Ltd, a steelwork contractor, and Duro Felguera UK Ltd, an engineering and construction company. The dispute concerned payment issues under a construction contract. Severfield claimed outstanding payments for steelwork they had provided on a project where Duro Felguera was the main contractor.
Severfield brought the case to the TCC to enforce the adjudicator’s decision, seeking to recover the sums awarded. The TCC was asked to enforce the decision made by the adjudicator. A key aspect was whether the adjudicator’s decision was binding and should be upheld.
The TCC reinforced the principle that adjudicators’ decisions are generally binding and should be enforced unless there are clear grounds such as jurisdictional issues or breaches of natural justice.
Expert Construction Solicitors in London
Our lawyers’ extensive industry-specific knowledge and our commitment to justice make us the preferred choice for many businesses in the construction industry. Our lawyers are passionate about this industry and are members of the Society of Construction Law.
Our lawyers are recognised among the best lawyers in England & Wales, and have regularly been asked and featured to write authoritative articles in the Financial Times, the Law Society and LexisNexis and have been quoted in City AM, the New Law Journal, Law Society Gazette and Litigation Futures.
Our lawyers offer regulated, independent & confidential legal advice and are dedicated members of the Professional Negligence Lawyers Association, the London Solicitors’ Litigation Association, the Association of Cost Lawyers, the Insolvency Lawyers Association and the Commercial Litigation Association.
Case Example – £1.2m recovered for sub-contractor plus costs within 1 month
Client A approached our expert construction lawyers after receiving a contentious Pay Less Notice which the client assessed at zero. Our dedicated lawyers swiftly analysed the situation, and evidence (including an expert valuation report), identified key areas of contention, and helped Client A successfully challenge and mitigate the financial implications of the notice. Our lawyers were able to recover a significant multi-million-pound sum of over £1.2m for the subcontractor.
If you are facing a construction payment dispute, seeking professional legal advice is crucial. At Go Legal, our experienced construction lawyers specialise in construction law, providing clear guidance and robust representation. Whether it’s navigating payment applications, issuing pay-less notices, or pursuing adjudication, we are here to ensure you achieve the best outcome for you.
Contact us today on 0207 459 4037 for a Free Consultation or complete our booking form.
