For those of us who get excited at even the mere mention of a payment notice or a pay less notice arising under a JCT contract and the Construction Act, January was set to be the payment notice open. This was because the TCC was given an opportunity to clarify the arguable ambiguity left in the wake of Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC) (‘Henia’).

The judgment in Henia provided that a “Pay Less Notice can not only raise deductions specifically permitted by the Contract and legitimate set-offs but also deploy the Employer’s own valuation of the Works”. This, while helpful to employers, essentially blurred the distinction between a payment notice and a pay less notice to the point where each one could serve as the other. 

As per the diagram below, an out of time payment notice could be deemed a valid pay less notice for a period between the payment notice deadline and the deadline for a pay less notice. Each red arrow below would be 5 days under the standard JCT Design and Build Contract, 2011 edition (‘DB 2011’) terms, with a 14 day overall period between the payment due date and the final date for payment.

Click here to view table.

One could therefore envisage the following situation. A contractor, under the impression that no pay less notice had been served, believes with some certainty that they are to be paid their payment application in full. The employer then relies on a payment notice that the contractor had deemed ineffective due to being out of time, entitling it to refuse payment of the full application amount. As contractors are reliant on keeping tabs on cash flow throughout any given project this may be an invidious position to find themselves, and yet, following the judgment inHenia, it is one which there is every chance that they might. 

The circumstances in Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWHC 168 (TCC) lent themselves to shedding light on this conundrum. Balfour Beatty had been engaged for the design and construction of a hotel and serviced apartment development for £121 million. An amended form of JCTDB 2011 was used. Part of the amendments incorporated bespoke interim payment arrangements under an agreed payment schedule (‘Payment Schedule’). 

Crucially the Payment Schedule failed to provide any interim payment dates after 22 July 2015, which was the planned contractual completion date and made no provision about what would happen should there be a delay to the works. As is so often the case construction project large and small, the works were considerably delayed by over 6 months (and still incomplete at the time of the hearing). A dispute subsequently arose as to whether Balfour Beatty was entitled to further staged payments. Balfour Beatty sent interim application 24 (IA 24) on 21 August 2015 seeking payment in the region of £23 million. Grove Developments served a payment certificate on 28 August 2015 and a pay less notice on 15 September 2015. 

Grove Developments paid only £439,503 of the amount claimed and Balfour Beatty referred the dispute to adjudication. It was during the course of this adjudication that Grove Developments issued a Part 8 claim seeking declarations that the pay less notice was served on time and Balfour Beatty had no contractual right to issue IA 24. Crucially Grove Developments requested clarification that “…if the last date for service of a Pay Less Notice was earlier than 15 September 2015, GDL’s Payment Certificate constituted a valid Pay Less Notice.” In essence the ball had been teed for the TCC to drive home a decision on this point.  

While the case represents a good example of a well-judged application for declaratory relief effectively stymying the effect of an adjudication, unfortunately for everyone waiting for clarification on the finer points of the payment notice regime, the TCC decided it did not need to make a judgment on whether a payment notice issued after the payment notice deadline could stand as a pay less notice in the absence of a timeous pay less notice, as it was able to make a decision on the case on the basis that no payment schedule existed beyond the final date listed on the Payment Schedule. Mr Justice Edwards found that it was unnecessary to import any terms from the Scheme to the Construction at to determine the final date for payment and held, on the facts, in accordance with the terms of the Contract that the employer’s pay less notice had been served in time, had it been necessary to decide the case on this point (which it was not).  The TCC made no findings as to whether the employer’s payment notice could have served as a pay less notice. They left the ball on the tee. 

Following Henia, it would be safer for payees to assume that a payment notice issued late as a payment notice but in time to constitute a pay less notice will stand.  However, arguably the point is not clear and clarification from the Courts would be welcome. 

Parties wishing to consider bespoke amendments to the payment provisions to standard form contracts should consider carefully the effect of delay on the contract and the effect of the amendments.  In addition, in order to save the time and costs of such arguments arising at a later date, parties should always take care that all notices in construction contracts are served on time and in proper form.