Value judgments

There are several problems cropping up in adjudications under the Construction Act, but one seems to crop up more regularly than most. If the party doing the work puts in an application for an interim payment and does not hear anything from the party that is supposed to be doing the paying, how much is actually payable? Is it the sum claimed in the application for payment, or is it the real value of the work, calculated objectively by the adjudicator?

The adjudicator is there only to sort out the contractual entitlement, so he must start with the contract. To make life easier for the time being, let us assume that the contract says nothing at all about the point. The adjudicator therefore turns to the Scheme for Construction Contracts.

The scheme imposes implied terms on the contract to fill in gaps left by the parties. It starts by explaining how to calculate the amount due as an installment – the value of the work and materials valued under the contract, less what has already been paid. So far, so good.

Then it provides that the paying party must give written notice of how much is to be paid. That notice has to be given within five days of the payment becoming due. That is where the problem starts: the paying party has not given this notice.

Parking that problem for a moment, the adjudicator reads on. He reads that if the paying party wants to withhold any part of a payment that is due it must give a different notice no fewer than seven days before the final date for payment. The adjudicator looks for such a notice and does not find one of those, either.

So, the paying party has not taken either opportunity to have a say about what it should be paying. All that has happened before the adjudication is that the party seeking to be paid has put in an application for payment. The adjudicator looks to see what the scheme says about such an application.

The scheme does refer to a “claim for payment”, but the only relevance such a claim seems to have for the process is to establish when a payment becomes due. This happens seven days after “the relevant period” (the payment period in the contract, if there is one, or 28 days) or when the claim is made, if it is made later. In other words, if a claim is made late, the payment becomes due late. That does not help work out how much money should be paid.

The adjudicator is in trouble. He feels sure that he read something somewhere about the claim for payment being used to establish how much is due if the payer fails to give the five-day notice. He pulls out his file of helpful commentaries published by Building and various erudite law firms since 1996, when the act became law.

The act was passed before the Scheme for Construction Contracts had been drafted. That came along much later, after a great deal of consultation and some speculation. In November 1996, the then DOE published a consultation document entitled Making the Scheme for Construction Contracts, in which it set out its proposals.

The scheme does refer to a “claim for payment”, but the only relevance such a claim seems to have for the process is to establish when a payment becomes due, not how much it is reasonable for the payee to ask for

It suggested that, at the end of each “payment interval”, the payee might serve a claim specifying the amount due in accordance with the contract. If there was no contractual

machinery as to valuation, the claim could be for a reasonable sum together with overheads and profit.

That sum would then become due on service of the claim and would remain due unless the paying party gave a notice within five days saying that it would pay something different – in which case that different sum would become the new sum due. Under those proposals, there would be no need to consider what the sum should be; the sum due would be the amount for which application was made.

That idea did not catch on. By the time the scheme appeared in its final form, it had been changed. Nothing more was heard on the idea.

Under the scheme as it now stands, there is no automatic link between the application for payment and the sum that becomes due. The payer is still obliged to say within five days how much it intends to pay, but if it does not do so, there is no obvious sanction. The adjudicator may wonder why he failed to kick up a fuss about an application he now says was excessive, but the payer is not prevented from arguing the point.

The contract may say something different, of course. The JCT With Contractor’s Design contract is very different. If the employer fails to give a notice saying what it is going to pay within five days of the contractor’s application for payment, it must pay the sum requested.

This is more or less what the old JCT used to provide, but it was often amended beyond recognition.