HGCR Act 1996 - Failure to Issue Section 110 Notice

© Daniel Atkinson 2001 29 September 2001

SUMMARY

In the absence of express provisions in the Contract to the contrary, the failure to issue a Section 110 Notice does not entitle payment of the amount applied for. Simply making an application for payment does not create a right to be paid without more. There must be a pre-existing legal right to be paid which is crystallised into payment by a specified date by the mechanism of the Contract, or an express term creating a right to be paid the amount applied for in the absence of a notice of the Sum Due.

Cashflow is important in any business, but particularly in the construction industry with its low profit margins. It has been common in the construction industry for disputes to develop because payment has been withheld and no reasons were given. This lack of information itself created disputes. Frequently the settlement of the dispute was to the advantage of the firm holding the money.

The Act was intended to deal with this situation. It does so by requiring the payer to state at each interim payment stage how much it intends to pay and the basis for the calculation - Section 110. If the payer intends to withhold any amount from its calculated amount then it is required to state the amount it proposes to withhold and the grounds for doing so - Section 111. In this way the basis of the payer’s assessment of the amount due is clearly established. Any dispute can be easily identified and decided by adjudication. If the payer does not then pay the full amount of its own assessment, then the payee has a right to suspend performance of its obligations, subject to notice - Section 112.

The Section 110 Notice is intended to establish the Sum Due. The Sum Due is required to be paid in full unless the payer decides to issue and does issue an effective notice of withholding under Section 111. If an effective Section 111 Notice is not issued then the amount which is to be paid is the Sum Due stated in the Section 110 Notice as provided in the Contract.

The Act is silent on what happens if a Section 110 Notice as provided in the Contract is not issued. If the Contract provides that in the absence of a Section 110 Notice the amount due to be paid is the amount stated in an application for payment, then effect will be given to that provision. That was the case in VHE Construction plc v RBSTB Trust Company (2000).

In the absence of express provisions in the Contract to the contrary, the failure to issue a Section 110 Notice does not entitle payment of the amount applied for SL Timber Systems Limited v Carillion Construction Limited (27 June 2001) Court of Session. Simply making an application for payment does not create a right to be paid without more. There must be a pre-existing legal right to be paid which is crystallised into payment by a specified date by the mechanism of the Contract, or an express term creating a right to be paid the amount applied for in the absence of a notice of the Sum Due.

The absence of a Section 110 Notice is likely to create a dispute as to the amount due which may have to be decided by an Adjudicator. It is suggested that in making his decision the Adjudicator is required to carry out a proper valuation of the Sum Due in accordance with the Contract. He will be faced with difficulties, since work will have continued and he will be reliant upon the evidence presented by the parties. In that case the application for payment is likely to be persuasive evidence of the value of the work carried out.

In Maxi Construction Management Limited v Mortons Rolls Limited (7^th August 2001) the main issue was whether Morton was required to pay Maxi the amount stated in it Interim Valuation No 10 on a project for the construction of Great Western Retail park in Glasgow. The form of contract was the JCT Scottish Building Contract with Contractor’s Design 1998. Morton had not issued a notice of the amount due nor a notice of withholding. If Interim valuation No 10 was a proper application for payment, then Clause 30.5 applied and Maxi was entitled to payment of the amount applied for in Valuation No 10.

Lord Macfadyen held that the contract made a clear distinction between two procedural stages, namely (i) the agreement of the valuation and (ii) the subsequent application for payment of the sum agreed to be due. Paragraph 2.5.20 of the Employer's Requirements required the amount of each valuation be agreed between the Maxi and the Employer’s Agent before submission of Maxi’s applications for payment. It was necessary to read the Interim Valuation No 10 and the covering letter with it.

It was held that it was clear from the terms of the covering letter that Valuation No. 10 was not intended by Maxi, when it was submitted, to operate as a claim for payment. The terms of the covering letter were somewhat inappropriate, in that they made reference to valuation and certification, although the contract made no provision for certification. What was clear was that in submitting Valuation No 10 Maxi was not asking Morton there and then to make payment of the sum brought out in the valuation, but were on the contrary were inviting the Employer’s Agent to agree the valuation as contemplated in paragraph 2.5.20 of the Employers' Requirements. Maxi made no attempt, at the time when Interim Valuation No. 10 was presented, to argue that paragraph 2.5.20 was invalid and that they were entitled to claim payment on the basis of their own valuation without the agreement of the Employer’s Agent. Instead Maxi submitted Interim Valuation No. 10 under cover of a request for agreement of their valuation in terms of paragraph 2.5.20.

It was held that in these circumstances, the Employer’s Agent was entitled to take Interim Valuation No. 10 and its covering letter at face value, and treat them as constituting no more than a request for agreement of the valuation, as a preliminary to the subsequent making of a claim for payment. It was held that it would be quite unfair to Morton, on the basis of an argument as to the invalidity of paragraph 2.5.20 presented ex postfacto, to treat Interim Valuation No. 10 as a "claim for payment" when it was not presented at the time as such. That was sufficient to dispose of the matter and allow the action to be dismissed.