In 1st Formations Limited v Lapp Industries Ltd, the Technology and Construction Courtheld that an interim payment application was valid despite the opposing arguments that the notice did not comply with Paragraph 2 of the Scheme for Construction Contracts 1998 as amended, it was ambiguous, and it also concerned incorrect dates and provisional sums.
Background
In 2022 1st Formations Limited (Formations) engaged Lapp Industries Ltd (Lapp) to carry out refurbishment works at an office in London. The contract did not detail any payment terms as required by the Housing Grants, Construction and Regeneration Act 1996 (the Act), so Paragraph 2 of the Scheme for Construction Contracts 1998 as amended (the Scheme) provided the implied terms that would govern payment under the contract.
In April 2023, Lapp sent Formations what Lapp deemed to be an application for interim payment. This took the form of an email with an invoice for the interim payment of £100,000, a breakdown of the final account, totalling £588,590.60, and the application itself showing £341,854.32 as the "total payment now due". Lapp requested "prompt payment" of the amount applied for, being "a payment on account of £100,000 to cover my costs pending such agreement". The email explained that the amount was based on the provisional valuation of works carried out and sought payment within 14 days.
Formations did not issue any valid payment notice or pay less notice. As a result, Lapp claimed that its application became a default payment notice under section 110B of the Act and that it was entitled to payment of the claimed sum of £100,000. Formations did not pay, and Lapp served a notice of adjudication. In December 2024, the adjudicator determined that Lapp was entitled to the notified sum of £100,000 and that Formations had 14 days to pay.
Court action
Formations raised Part 8 proceedings to reverse the adjudicator's decision on the grounds that Lapp's interim payment was invalid. Formations did not dispute that the Scheme applied, but it disputed the validity of the interim payment application for the following reasons.
1. Requirements of paragraph 2 of the Scheme
Formations argued that the application was for an amount that did not reflect the requirements of an interim payment as specified by paragraph 2 of the Scheme. This was because the requested sum was less than Lapp was entitled to apply for in accordance with the Scheme. However, the Technology and Construction Court (TCC) held that Lapp complied with paragraph 2. Even though Lapp applied for a lesser "on account" payment, the "total payment now due" of £341,854.32 was also included on the application. The fact that Lapp had applied for less than it may have been entitled to did not invalidate the application. The Court described Formations' interpretation of paragraph 2 as "absurd".
Formations also argued that the use of "on account" and "provisional" made the application ambiguous. The Court disagreed, finding instead that the valuation of £341,854.32 was for the works as a whole and was reasonably detailed. The fact that the application then confirmed itself to a lesser sum of £100,000 did not undermine its validity. There was no doubt that the application was for an interim payment of £100,000 and that as shown in the application itself, at least £100,000 was due.
2. Incorrect dates
Formations contended that the application was invalid because it requested payment within 14 days and was not based on the 7-day period described in the Scheme. The TCC found that both parties seemingly misunderstood the payment dates. In any event, this was not relevant as the Court held that incorrect payment dates in an application did not invalidate the application itself as it was the provisions of the Scheme that determined the payment dates.
3. Provisional sums
Formations' final argument was that the sum applied for was provisional based on the fact that in Lapp's covering email containing the application, it stated that the "amount is based on [Lapp's] provisional valuation of the works carried out, and may be subject to any agreed adjustment following assessment". However, the Court found that the sum applied for was based on a detailed valuation of the "total payment now due" of £341,854.32 and Lapp had clearly shown that at least £100,000 was due at the date of the application.
4. Part 8 proceedings dismissed
The Court concluded that by interpreting Lapp's application "in a common sense, commercial way" it was obvious that Lapp intended it to be an application for an interim payment of £100,000. None of Formations' arguments regarding the validity of the application had persuaded the Court otherwise. Accordingly, Formations' Part 8 claim was dismissed and the adjudicator's decision upheld.
Key takeaways
- It is not a requirement under the Scheme that applications are for the full amount that may be due. It is valid to apply for less than the amount determined by the Scheme, provided that the full sum due and its basis are clearly set out.
- Where the application is based on a provisional valuation, the amount applied for can still be valid. It is important not to ignore applications for this reason.
- Similarly, an application should not be considered invalid where the payment terms are not in line with the application itself. Ultimately, it is the Scheme that determines the payment deadlines and not the application itself.
- This TCC decision is a reminder that courts favour a commercial "common sense" approach to questions regarding interim application payments and will take little account of excessively analytical interpretations of the Scheme.
- Even where there are questions regarding validity, parties should be advised to always respond to applications for interim payment with the appropriate payment notice or pay less notice. As this decision demonstrates, if this is not done and the application is held to be valid, the full sum applied for will be due.
This article was co-authored by Trainee Carrie Robertson.
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