Limitation Period on Notified Sum Claims
Introduction
Limitation in the context of payments due under construction contracts is a hot topic at the moment, following the decision of HHJ Russen KC in the TCC case of LJR Interiors Ltd v Cooper Construction Ltd [2023] EWHC 3339 (TCC).
Whilst the most significant finding in LJR Interiors was that that an adjudicator does in fact have jurisdiction to address a limitation defence raised in adjudication proceedings (see the excellent article by James Frampton and Thomas Saunders of Keating Chambers on this), the Court also addressed the separate and well-trodden issue of when the limitation clock starts running on payments due under a construction contract, i.e., when the relevant cause of action accrues.
In addressing that latter point the Court referred to a number of authorities and had little difficulty in applying the well-established principle that, save in exceptional circumstances, the clock starts running from the date the relevant works for which payment is demanded are completed.
This decision however, along with some work I recently did on a case involving similar issues, had me thinking about a further point; does the same apply with respect to payment notices in default and notified sums?
The Cause of Action in Payment Claims
The starting point is the principle which was recently affirmed by the Court of Appeal in Consulting Concepts International Inc v Consumer Protection Association (Saudi Arabia) [2022] EWCA Civ 1699; namely that, in relation to the supply of services generally, the relevant cause of action arises when the relevant work is done and is not delayed until an invoice or demand is submitted.
Straightforward enough, however this seems at odds with the payment regime under most standard form construction contracts (and the Scheme for Construction Contracts) whereby there are procedural steps which must be followed between the completion of works, and the relevant payment relating to those works becoming due for payment.
The Court of Appeal addressed this incongruity to some extent in the case of Henry Boot Construction Ltd v Alstom Combined Cycles Ltd (No 2) [2005] EWCA Civ 814; [2005] 1 WLR 3850.
In that case, the relevant works were on a power station project under the Institution of Civil Engineers Standard Form (6th edition) contract, within which there is provision which makes the issue of an engineer’s certificate under the contract a condition precedent to payment. The Court of Appeal determined that the issue of such a certificate under the ICE contract was a true condition precedent
to payment becoming ‘due’, and that as such the relevant cause of action did not accrue until such time as that certificate was issued, or ought to have been issued.
At a glance this case may appear to provide for an exception within construction contracts, allowing a cause of action to accrue on the date payment is identified as due under the relevant contract, rather than when works are completed.
However, the application of the principle in Henry Boot is in fact very narrow in scope, and the establishment of a ‘true condition precedent’ is not possible through the mere existence of some form of prescribed payment mechanism.
Indeed, in the TCC case of Hirst & Another v Dunbar & Others [2022] EWHC 41 (TCC), the decision in Henry Boot was offered as authority for the proposition that the relevant limitation period for a payment due under a contract subject to the Scheme applied from the date of a payment notice being issued thereunder (likening it to the engineer’s payment certificate in Henry Boot), rather than the date of the completion of the relevant works.
The TCC had little time for this contention, finding (obiter) that:
“The situation under the Contract is wholly different from that under the ICE standard conditions which were being considered in Henry Boot Construction. In that case there was no way in which the parties could know what, if anything, was due in the absence of the engineer’s certificate. It was that certificate which was to identify the sum due by applying the contractually agreed rates of payment to the work which he found to have been done in the circumstances which had occurred during the course of the works. It was the certificate which gave the right to payment. Here the Claimants’ case is that they had a right to a reasonable sum in respect of the Works. In providing a certificate under the ICE conditions an engineer is performing an independent and avowedly determinative role. Conversely the payment notice under para 9 was to be provided by the Defendants and was to state the sum they considered due. The two exercises are different in nature.” (Emphasis added)
There is good reason for this judicial reluctance to depart from the established principle of a cause of action accruing upon completion of works, rather than upon the completion of some procedural step within a contract. See the comments of Lord Neuberger MR in the case of Legal Services Commission v Henthorn [2011] EWCA Civ 1415,
“Save where it is the essence of the arrangement between the parties that a sum is not payable until demanded (e.g. a loan expressly or impliedly repayable on demand) it appears to me that clear words would normally be required before a contract should be held to give a potential or actual creditor complete control over when time starts running against him, as it is such an unlikely arrangement for an actual or potential debtor to have agreed.”
In summary, the procedural steps imposed by contractual payment mechanism are irrelevant in the context of a cause of action accruing for limitation purposes, unless the relevant parties make extraordinary provision to the contrary.
Notified Sums
What Are They?
In the construction contract world, a ‘notified sum’ may be loosely defined as the sum which is identified from time to time during the operation of a given interim payment cycle as being undeniably due for payment on the relevant final date for payment relating to that cycle.
Typically, the starting point is that the ‘notified sum’ is that stated in the payor’s payment notice, unless a pay less notice is issued subsequently, in which case the notified sum becomes the amount stated in that pay less notice.
Where a payment notice is not issued in time however, the notified sum may instead become that stated in a demand for payment issued by the payee, either before (typically in the form of an ‘application’) or after the payor’s notice was due. This is known as a payment notice in default, i.e., a notice which becomes applicable only upon the payor’s default in failing to issue its own notice.
Many in the industry will be familiar with this mechanism, least not because it is the mechanism by which ‘smash and grab’ adjudications are made possible.
Why are they Special?
Usually if a provider of services renders an invoice the recipient of that invoice may refuse to pay it on the basis that they dispute the sum claimed. The party which rendered the invoice may then take the other party to Court and obtain a judgment based upon the amount which should in fact have been charged on the invoice for the relevant works.
Ignoring complex points around interest for the moment, the invoice itself has no legal significance, nor does it confer any entitlement to payment; it merely purports to record and communicate the details of an existing entitlement. This is wholly consistent with the notion that a cause of action with regard to services runs from the date those services were carried out, and not the date of invoice.
With a ‘notified sum’ however, the position is very different. Where a payment application or detailed invoice is issued and that application/invoice becomes a payment notice in default (i.e., determinative as to the ‘notified sum’), then if no pay less notice is issued by the paying party in order to alter that ‘notified sum’ it becomes indefensibly due for payment by the paying party on the relevant final date for payment, as a matter of enforceable law.
The basis for entitlement to payment of a notified sum is the contractual notice mechanism, and not services rendered. A link between the two is (hopefully) common, but such link is strictly coincidental.
Proposition: Limitation on Notified Sum Claims
Having regard to the above, there appears to be scope for the argument thus:
‘If the entitlement to payment of a notified sum is a free-standing cause of action distinct from that of entitlement to payment of sums for services rendered, that free-standing cause of action carries its own limitation period, equally distinct.’
This does not offend the decisions in Henry Boot or Hirst because neither of those decisions deal with the issue of ‘notices in default’ and the consequence arising therefrom.
So far as the underlying principle that a creditor ought not to have control over when the relevant limitation period starts to run on its claim, that principle is also observed; a ‘notice in default’ issued in advance of a payment notice due date (e.g., an application for payment) will always be in relation to a contractually defined payment date, and must necessarily follow a breach by the paying party in relation to another contractually defined date (i.e. the payment notice date).
Summary
The proposition above is not without its difficulties, and the following further questions, amongst others, come to mind in considering its validity:
1. If a failure to issue a payment notice is the ‘breach’ and the consequence of that breach is a requirement to pay a sum which is not necessarily linked to any real loss/entitlement, is that not a penalty?
2. If, conversely, a payment notice in default merely operates as a deeming instrument (replacing the payment notice as if it were issued in that form), then Henry Boot and Hirst remain applicable (although the further question of ’acknowledgment’ then arises).
3. Does the ability to issue a payment notice in default after a missed payment notice date (with the consequence that the final date for payment is deferred accordingly) fall foul of the principle precluding scenarios where a creditor has control over the limitation period?
4. Practically, the proposition would potentially lead to absurd scenarios, such as those where a ‘true value’ claim is out of time, but a notified sum claim is not (although that is arguably no more absurd than many of the existing scenarios under the Construction Act).
Despite these points however, I remain of the view that the proposition is at least a respectable one to contend, having particular regard to the fact that the sum due on a notified sum claim is not necessarily the same sum due for works properly carried out.
James Rooney
15 August 2023