£1 notices aren’t worth the paper they’re printed on

The contractor’s interim application for payment no. 34 claimed £1.88m net payment. The employer said 97p! This was £1, minus retention. Was this taking the mick? Actually, the employer always issued a 97p sum due notice for all interim valuations. I suspect that at some point in the past, this employer had boobed by failing to send any sum due notices and lumbered itself with having to pay the contractor’s application by default. So, the 97p thing was a sham sum due notice. Then, when ready, the employer would send a proper one.

Interim application no. 34 eventually received a sum due notice from the employer for £903,884 instead of the 97p. Let me cut to the chase: all these manoeuvres came to court. The judge said the 97p sum due notice was not a notice at all, so it failed as a sum due. Then the second sum due notice was out of time and that too fell over. Hurrah, said the contractor, those failed sum due notices mean that the interim application for payment figure applies in default, being £1.88m.

Wait: the lesson here is twofold. First, if you have the bright idea of sending a sham sum due notice for £1, or whatever sham figure, then it is useless. The sum due notice has to perform a key role. It must be detailed enough to set the agenda for any challenge to it via adjudication. In other words, having given the elbow to the contractor’s interim payment application in favour of the payer’s figure, the sum due notice must explain how the employer has reached that lower figure. If it is vague or daft, it won’t set the agenda for an adjudication and fails. Then the contractor’s claimed sum becomes payable, if the adjudication is about payment notices.

There is more. The job in Hackney is worth £27.4m. It is 79 flats, offices, a restaurant and a gym. The employer is Downs Road Development LLP; the contractor is Laxmanbhai Construction (UK) Ltd. The contract document is JCT Design and Build 2011. Laxmanbhai brought an adjudication for interim payment account no. 34. It was brought under the heading of a true value dispute and was not a simple payment notices referral. Laxmanbhai wanted the adjudicator to award the true sum due as at no. 34. It said the proper gross sum was £22,476,252.

The payment notice for £1 was void. The second payment notice was also void. Then the adjudication award was void and unenforceable. Now what?

The employer challenged that as the true sum due. For a start it lobbed a counter-claim into the mix, saying a capping beam tying in the piles was in the wrong place and at the wrong height. The claim for the effect was a likely lower earning on future rent of those flats. It put a figure of about £150,000 on the loss.

The adjudicator got on with the true value of the works at interim payment notice no. 34, but decided the future losses as to the capping beam alleged error were outside his jurisdiction. He said he had no authority to bring that counter-claim into his task regarding interim payment application no. 34. He had read the notice of adjudication and said it constrained his authority, so he put the counter-claim aside.

He then did a thorough job on the true value of interim payment no. 34, and concluded that the correct gross valuation was £21,246,002. Contrast that with the contractor’s application for £22,476,252 and the employer’s evaluation of £21,128,654. This meant the contractor was to received £103,826.98; Laxmanbhai was probably disappointed. On the other hand the employer had to stump up that £103,000 or so.

The next move was canny. Remember, the employer had been deprived of bringing in its counter-claim for the capping beam dispute. It might well have extinguished the adjudicator’s award for £103,000 in favour of Laxmanbhai. So, the employer’s lawyers argued in court that the adjudicator had gone wrong by excluding that claim. It was, they said, a “breach of natural justice” … unfair, in other words. They said the adjudicator’s award was therefore unenforceable, and the judge said this argument succeeded. The award was set aside. Let me try to explain: when a true value adjudication is brought, the intention is to fathom the cash due after all claims for money are made and decided. The capping beam claim was an ordinary part of the account.

All the possible defences are to be brought in and decided by the adjudicator. So, the payment notice for £1 was void. The second payment notice was also void. Then the adjudication award was void and unenforceable. Now what?

The contractor had not brought a payment notice dispute; it had brought a true value dispute. It was the original notice of adjudication that circumscribed jurisdiction being the proper quantification of the contractor’s interim application no. 34. The only point of comfort is that since interim application no. 34 things had moved on. Most of us were trained to consider interims as a cumulative figure. In other words, the next interim, being no. 35, is a completely new and fresh calculation to a new gross sum.

I suspect the employer will ditch its £1 sham valuation in no. 35 and get its QS to give a chapter and verse gross figure, including that capping beam affair. The true value can be bottomed out in no. 35. Who knows – it may require a true value adjudication all over again, but this time including the counter-claim.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple