In the recent case of 1st Formations Ltd v Lapp Industries Ltd [2025] EWHC 1526 (TCC) (19 June 2025) the Court explored the validity of an application for payment.
The Court held that when considering whether a payment application is valid or not it will look at the application in a common sense, commercial way. It found that the application for an amount on account of a larger sum stated to be due was valid and it would not have been 'an impossible or Herculean task' for a Payment or Pay Less Notice to have been issued in response.
The background
As a reminder, pursuant to the Housing Grants, Construction and Regeneration Act 1996 (the Act), payees under 'construction contracts' are entitled to payment of a 'notified sum'. If a payee serves the requisite notice and the payer fails to respond with a Payment or Pay Less notice, the amount in the payee's notice becomes the notified sum which it is entitled to be paid, whether the amount claimed is the true value due or not.
Briefly the background of the case is that:
- LAPP (the "Contractor") was engaged by 1st Formations (the "Developer") to carry out works relating to the refurbishment of an office block in central London;
- the contract was based on separate quotations, acceptances and instructions for variations. The contract did not provide for the amounts of interim payments and intervals in accordance with the Act and therefore Part II of the Scheme for Construction Contracts 1998 as amended (the Scheme) implied the relevant terms into the contract;
- the Contractor sent to the Developer an application for an interim payment under the contract (the "Application"). The Application stated that the total due to the Contractor was £341,854.32 plus VAT but requested a payment on account of £100,000 plus VAT;
- no Payment or Pay Less Notice was issued by the Developer and therefore the Application became the Default Payment Notice and contained the 'notified sum';
- the Contractor claimed the amount of £100,000 plus VAT was therefore due to be paid and commenced an adjudication for that sum;
- the adjudicator awarded the Contractor the amount claimed in its Application; and
- the Developer challenged the enforcement of the adjudicator's decision on jurisdiction and breach of natural justice grounds and lost. It then applied to the court for declarations under Part 8 that the Application was not valid.
When is a Payment Notice valid?
The Developer highlighted several issues with the Application. Their arguments were summarised as:
- the amount claimed in the Application was not the difference in the sums owed and the sums already paid, as required by paragraph 2 of the Scheme; and
- the Application was ambiguous and was not by substance, form and intent an interim payment application under the Scheme by:
- stating that the "total payment now due" was £341,854.32 but requested a lesser sum of £100,000 (plus VAT) on account;
- stating that payment was due in 14 days rather than 7 days or "the making of a claim by the payee", as required by paragraph 4 of the Scheme; and
- the sums described in the application were stated to be provisional and "subject to any agreed adjustment following assessment by Jonathan Grubb of Northcote Building Consultancy".
The Court considered previous caselaw (Kersfield Developments v Bray and Slaughter [2017] EWHC 15 (TCC) and Advance JV v Enisca Ltd [2022] EWHC 1152 (TCC)) and held that:
- the natural reaction of a reasonable recipient would be that this was an application for interim payment. The covering email said so, the Application was headed 'Application for interim payment', it sought an interim payment within 14 days and the Contractor had also provided a VAT invoice;
- the Contractor had calculated the sum owed in line with paragraph 2 of the Scheme and this was stated in the Application before stating that the lesser sum was due;
- the sum claimed was unambiguous - the Contractor sought to be paid £100,000 plus VAT as part of a realistic and sensible commercial decision;
- the Application was in substance, form and intent an interim application and the valuation was reasonably detailed. It provided an adequate agenda for adjudication;
- referring to erroneous due dates or final dates for payment would not invalidate the Application; and
- the Contractor's statement that the sums were based on its provisional valuation and would be "subject to any agreed adjustment" did not invalidate the Application but reflected the relevant next steps in the final account negotiations with the Developer's QS.
Conclusion
The failure to follow the contractual/ statutory payment processes remains a big risk on projects. This case highlights:
- the importance of responding to applications for payment with either a Payment or Pay Less notice, as this is not usually "an impossible or herculean task" and the consequences are well known. "Smash-and-grab" adjudications will continue to be used to enforce cash flow, whether or not the amount claimed is correct in valuation terms;
- the Court will take a common sense and commercial view when assessing whether a payment application is valid and won't adopt an unnecessarily restrictive interpretation; and
- to avoid any arguments of invalidity, an interim application should be clear and unambiguous in form, stating: (i) the sum due; and (ii) the basis of on which that sum has been calculated.
