Summary

The recent TCC decision of Surrey and Sussex NHS Trust v Logan Construction (South East) Limited [2017] EWHC 17 has shed significant light on the judicial interpretation of what constitutes a valid Interim Payment Notice and Pay Less Notice. The decision has also served as a timely reminder of the importance of contractual awareness around the completion of construction projects.

The Facts

The Claimant employer, Surrey and Sussex Healthcare NHS Trust, entered into a construction contract with the Defendant contractor, Logan Construction, for the refurbishment of various operating theatres, recovery wards and associated works. The contract took the form of the JCT Intermediate Building Contract with Contractor's Design 2011.

Practical Completion of the Works was certified on 25 August 2015. On the following day, 26 August 2015, the Certificate of Making Good was issued. Upon certification of Practical Completion the Defendant became entitled to an interim payment. The issue of the Certificate of Making Good started the period for the issue of the Final Certificate. It was agreed that the Final Certificate had to be issued by 21 September 2015.

The parties entered into final account discussions. The Defendant did not submit an application for an interim payment at this stage. The Claimant also failed to issue an Interim Certificate. As a consequence, the Defendant became entitled to submit its own Interim Payment Notice (which, unless a valid Pay Less Notice was served, had to be paid).

A meeting was arranged to take place on 21 September 2015 to agree the final account. Prior to the meeting, late on the evening of 20 September 2016, the Defendant emailed a number of attachments to the Claimant, including a spreadsheet containing a worksheet entitled 'Interim Payment Notice (Clause 4.10)'. The gross sum listed was for £5,960,000, leaving a balance of £1,015,000 which the Defendant considered to be due.

Following the final account meeting (which was unsuccessful); the Claimant issued (on 21 September 2015) a Final Certificate, which stated that a balance of £14,235 was due to the Defendant contractor. The Claimant included the calculation for the due figure and also noted that they had received the Interim Payment Notice, but considered it to be late and therefore void. The Claimant argued that this action constituted a Pay Less Notice.

If the Defendant's Interim Payment Notice was validly issued on 20 September 2016, a valid pay less notice would have needed to be served by 24 September 2016. The Defendant did not consider a valid Pay Less Notice to have been served and was not paid the £1,015,000 claimed. The matter was referred to adjudication.

The adjudicator found in favour of the Defendant, noting that the Interim Payment Notice of 20 September 2016 was valid, and that no Pay Less Notice was issued. He ordered that the Defendant was entitled to the £1,015,000 claimed.

The Claimant issued Part 8 proceedings, seeking two declarations, namely:

  1. That the Defendant had not issued a valid Interim Payment Notice on 20 September 2016.

  2. The email and attachments that the Claimant sent on 21 September 2016 constituted a valid Pay less Notice, which was served in time.

Party Positions

Validity of the Interim Payment Notice

The Claimant argued that, as draconian consequences flowed from a failure to serve a Pay Less Notice, it was important that the Defendant was 'open and transparent about its intentions' and serve a notice that was unambiguous. The Claimant contended that this was not the case in this instance. The Defendant had 'buried away' what it claimed was an Interim Payment Notice in the attachments of the email of 20 September 2015, and had diverted the Claimant's attention to the planned final account discussions.

The Defendant argued that the Interim Payment Notice was valid as it was clearly labelled as such on its face. Whilst the Defendant could have been clearer in their covering email as to what documents were being served, what was actually important was the 'substance, form and intent' of the Interim Payment Notice. There was sufficient clarity on the fact of the Interim Payment Notice. The factual background was irrelevant as to question of the validity of the Notice. The fact that the Defendant had not drawn the existence of the Notice to the attention of the Claimant, and the fact that the Claimant had not considered the Notice to be valid was irrelevant.

Validity of the Pay Less Notice (21 September 2016)

The Claimant,relying upon the case of Thomas Vale Construction v Brookside Syston [2006] EWHC 3637, contended that a practical and common sense approach should be applied to the email and Final Certificate and that consequently, the email and attachments should be regarded as a valid Pay Less Notice as it contained all information required to put the Defendant on notice of how much the employer would have to pay and the basis of the calculation.

The Defendant focused on the case of Jawaby Property Investment v The Interiors Group Ltd [2016] BLR 328, and that to be valid, the intention by the sender should be that the document stands as a Pay Less Notice, an intention that was not held in this instance. It was argued that the Claimant, 'plainly had no intention for it to stand as such' by expressly stating that the Interim Payment Notice was void. The fact that the Notice contained all information required by the contract to be set in the Pay Less Notice pursuant was not sufficient.

Decision

The decision by the TCC was that both the Interim Payment Notice and the Pay Less Notice were valid.

With regards to the Interim Payment Notice, it was held that the spreadsheet constituted an Interim Payment Notice in 'substance, form and intent' and that it was 'clear and free from ambiguity'. It was no defence to the failure of the Contract Administrator to issue an Interim Certificate that the parties were discussing the final account and that this should be taken to circumvent the need to apply the interim payment regime. With regards to the covering email, whilst it did not specifically refer to the attached Notice, and whilst the court had initially considered that the manner in which the Notice had been served might have prevented there from being a sufficient indication that an Interim Payment Notice was being served and could have meant that the Notice was not clear and free from ambiguity, the Defendant was (viewed objectively) sufficiently open and transparent about its intentions. This situation would not have arisen if the Claimant had issued an Interim Certificate after the Certificate of Making Good as contractually required. The objective reader would have been aware that the Defendant was entitled to issue a Notice by reason of the Contract Administrator's failure to issue an Interim certificate.

The email and attachments sent by the Claimant on 21 September were also held to constitute a valid Pay Less Notice. In reaching this decision, the court focused on whether, when read together, the email and attachments were intended to constitute a Pay Less Notice. Of note, the court indicated that it would be wrong to focus on the 'specific detail of the language used', but rather look at the intention that would be conveyed to a reasonable recipient. They considered the email to state that, if the Claimant was wrong about the contractual position, that they were valuing the work as specified in the breakdown. This was the amount that the Claimant considered the contractor to be entitled to.

It is worth noting the following in particular:

  • The court found that the contractual requirements for a Pay Less Notice had been met, specifically that that the sum due was clear and the basis of the calculation had been set out.

  • The mistaken position of the Claimant did not impact on the intention of the email and attachments to amount to a Pay Less Notice. Rather, the reasonable reader would have seen the email as a response to the Defendant's Interim Payment Notice.

  • The Claimant did not need to expressly state that the material was a Pay Less Notice, or make a reference to the specific contractual clause dealing with Pay Less Notices.

Conclusion

The court has confirmed that to be valid, a Notice purporting to be an Interim Payment Notice must be sufficiently clear (viewed objectively) as to its purpose. A Pay Less Notice can be valid without containing the words 'pay less notice' and without making reference to the relevant contractual clause. The key issue was whether it intended to fulfil that function. A key ingredient is whether the Pay Less Notice responds to an Interim Payment Notice. Nevertheless, employers and contract administrators would be well advised to ensure that documents purporting to be pay less notices are clearly described as such.