Payment Notices – Again
Ken Salmon, a construction specialist and consultant solicitor at Slater Heelis Limited and Kuits LLP, draws our attention to a case that makes clear the importance of timely payment notices in construction contracts.
When is a payment notice not a payment notice? This was the question posed in the case of 1st Formations Ltd v Lapp Industries Ltd. [1] More precisely, the court was asked to rule whether a request for a ‘payment on account’ of the sum considered to be due, was a valid application for payment.
The claimant, Formations, employed the defendant, Lapp, to carry out the refurbishment of commercial premises in London. The contract did not contain any payment terms as required by the Housing Grants, Construction and Regeneration Act 1996 as amended (the Act) and so the payment provisions of Part II of the Scheme for Construction Contracts 1998 as amended (‘the Scheme’) applied as implied terms of the contract (by Section 114(4) of the Act).
The original scope of the works was added to by a series of quotations and acceptances and further instructions for variations. Lapp applied for payment of £100,000 plus VAT, stated to be a payment on account of the larger sum it considered to be due for work to date pending the anticipated agreement of the final account. There was no payment or pay less notice from Formations. An adjudicator awarded Lapp the sum claimed.
At an earlier hearing [2] to enforce the adjudicator’s decision, the judge, Adrian Williamson KC, held that the series of quotations and instructions amounted to a single contract and gave summary judgment for Lapp. Formations now sought to overturn that decision.
Formations said that Lapp’s application for payment was not a valid payment notice for a variety of reasons:
- The amount applied for was not the difference between (i) the total payment now due for work performed in the period covered by the application, as required by para 2(2) of the Scheme and (ii) the aggregate of all payment made to the end of the period, as required by para 2(3) of the Scheme.
- It was ambiguous and was not in substance, form and intent an interim payment application under the Scheme, because:
- The ‘total payment now due’ was stated to be £341,854.32 but the payment requested was £100,000 plus VAT. This was an arbitrary sum, based on what was stated to be a ‘provisional valuation’ pending a further valuation.
- Payment was stated to be due ‘within 14 days’, whereas under the Scheme payment would have been due on expiry of 7 days of the completion of the work or the making of the claim for payment.
- The sums described were stated to be provisional and subject to later adjustment.
The judge said that the law was now summarised in two recent decisions of the Technology and Construction Court (TCC) [3], which he quoted and adopted. Applying the principles set out in these cases, he decided that the payment notice was valid. In dismissing Formations’ objections, he found as follows.
As to point (1), the application did set out ‘the difference between the amount determined in accordance with sub-paragraph (2) and the amount determined in accordance with sub-paragraph (3)’, as required by para 2 (1) of the Scheme.
The application stated the ‘total payment now due’ was £341,854.32, then ‘requested on account’ the sum of £120,000 inc. VAT. It would be absurd if para 2 of the Scheme rendered an application invalid if it required payment of £1 or £100 less than the amount identified under the Scheme. Lapp had accurately complied with para 2 of the Scheme.
Given anticipated negotiations over the final account, they had realistically and commercially confined the claim to a smaller sum than para 2 would have entitled them to claim. That could not invalidate the application.
Likewise, on point (2), making the request for an ‘on account’ payment did not render the application ambiguous or not in substance, form and intent an interim payment application under the Scheme. There was no ambiguity: Lapp sought to be paid £100,000.00 plus VAT.
The application was in substance, form and intent an interim payment application under the Scheme. It set out a valuation of the works as a whole and then confined the application for payment to a lesser sum. It was sufficiently detailed and provided an adequate ‘agenda for an adjudication’ as to the true value of the works. On this point, the court noted that the valuation of the work contained in the application for payment the accompanying VAT invoice and the covering email, and each clearly set out the sum to be paid.
As to point 2(b), the dates for payment seemed misconceived. In the language of the Scheme, it may be that one or other of the date for payment and final date for payment set out in the application was erroneous, but the court was not shown any authority to suggest that would invalidate the application. It may have been a point that Formations could have raised as to the proper date of payment.
The final argument – that the ‘amount is based on my provisional valuation of the works carried out and may be subject to any agreed adjustment following assessment by Jonathan Grubb of Northcote Building Consultancy’ – did not invalidate the application. The sum of £100,000 was based on a detailed valuation, subject to information still awaited and a reasonable expectation of final account negotiations with Formations' quantity surveyor, Lapp were saying that at least £100,000.00 plus VAT was due as at the date of the application. The court denied Formations’ application.
Summary
The court was at pains to stress that in line with previous case law, and adopting what was said by Sir Peter Coulson in his text book [4], it would apply a common sense and practical approach to the construction of the payment notice and the requirements of the Act and Scheme.
It is, however, clear that an application for a payment on account must still comply with the statutory (and, if more restrictive, the contractual) requirements in substance and form, and must clearly set out the sum which is due and the basis on which that sum is calculated. It helped Lapp that it had consistently emphasised the amount of payment sought throughout the various documents submitted with its payment application.
[1] [2025] EWHC 1526.
[2] 16th April 2025 ([2025] EWHC 943 (TCC)).
[3] Kersfield Developments v Bray and Slaughter [2017] EWHC 15 (TCC); Advance JV v Enisca Ltd [2022] EWHC 1152 (TCC).
[4] Coulson on Construction Adjudication (now in its 4th Edition), Oxford University Press.
Kenneth Salmon MCIArb is a qualified solicitor in England, Wales and Eire. He is a Ciarb qualified and practising Mediator and Chair of Education at Ciarb North West Branch. Kenneth is a construction specialist currently working as a consultant to Slater Heelis Limited and Kuits LLP. He has extensive experience of all forms of dispute resolution including arbitration, adjudication, expert determination and mediation.
He is the author of Cases on the Enforcement of Construction Adjudication Awards (2012) and the series Cases (on adjudication enforcement) published in Ciarb’s academic journal Arbitration: The International Journal of Arbitration, Mediation and Dispute Management 1999-2017 and as now published in Ciarb’s newsletter from 2018 to present.
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Other articles by Ken:
Adjudication Case Law Update 2025: Part 1
Adjudication Case Law Update 2025: Part 2
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