Google the decision in Henia Investments Inc v Beck Interiors Ltd1 and you will find a raft of articles championing the decision as adding yet further weight to the argument that payment applications submitted by the “payee” must be clear and unambiguous.

However, what is noticeably absent from the commentary is any discussion regarding the degree of confusion that the decision has created in respect of the role of the payment notice and pay less notice regime.

Prior to the decision in Henia, there had been some confusion as to whether the new wording of the Construction Act allowed a payer to revalue the works in a pay less notice or whether the payer was only entitled to reduce the sums owed in a pay less notice on the basis of cross claims (as under the old withholding notice regime). In Henia, the court determined that the wording of the Construction Act was in fact wide enough such that “the 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” (paragraph 32, judgment). The decision was, in fact, largely in line with what the industry had previously thought the new wording meant.

Ramifications

In a nutshell, the TCC has therefore confirmed that there is no difference between the contents of a payment notice and pay less notice, save that the Construction Act requires that the payment notice must be served within five days of the payment due date, with no similar restriction on the pay less notice (a point which I will come back to).

What this means in practice is that an employer effectively gets a second bite of the cherry in respect of re-valuing the works. Put another way, if the employer fails to serve a payment notice, they can simply rectify the problem by serving a timeous pay less notice.

But the effect of the decision in Henia may also mean that if an employer issues a payment notice late (let’s say a day after the mandatory five days following the payment due date), and fails to correct the problem by issuing a pay less notice, it may still be able to rely on the invalid payment notice as a valid pay less notice, given that there is no difference in content between the two. There is of course no statutory requirement to identify in the notice that it is in fact a pay less notice.

The confusion created by the decision is that a contractor may believe it is entitled to the sums set out in its own payment application or default notice, but in fact the employer may be able to rely on an invalid payment notice as a valid notice under the pay less notice regime.

In order to avoid this confusion arising, we have to look to the TCC for clarity that, as with a valid payment application, a pay less notice must comply with the provisions of the Construction Act but also be clear and be free from ambiguity. Given the significance to a contractor of the employer serving a pay less notice, one would hope the TCC would follow the same logic as it has done in respect of payment applications.

What’s the point?

The obvious question that springs to my mind in respect of the decision in Henia is what is the point of having two notices that do the same thing?

The reasoning deployed by Akenhead J as to why a pay less notice should be capable of re-valuing the works was in effect that the contractor has an opportunity to value the works in a payment application, the independent certifier then has its say as to valuation in the payment notice such that the employer should also be entitled to its opportunity to value the works in a pay less notice (paragraphs 25 and 26, judgment). While Akenhead J was discussing the payment clauses found in a standard form JCT contract, he expressly stated that this was in keeping with the provisions of the Construction Act (paragraphs 31 to 32, judgment).

However, this reasoning appears to miss the point that absent the default of the employer, the contractor’s valuation carries no weight at all under the Construction Act or the payment provisions of the standard form JCT contract. It is only if there is a failure to issue a payment notice and pay less notice that the sums in the payment application become due. If the correct notices are served, the payment application is in effect discarded and the contractor doesn’t get a say at all.

The argument that a pay less notice is intended to be the employer’s challenge to a valuation in a payment notice also doesn’t wash. The judge’s reasoning overlooks the fact that under the provisions of the Construction Act, the employer is entitled to issue both the payment notice and pay less notice. In effect, if there is no independent certifier, the employer is left with two bites of the cherry when it comes to valuing the works. This cannot have been what Parliament intended.

So what was intended?

One starts from the proposition that if the Construction Act maintained a dual notice regime, with both notices capable of being served by one party (the employer), the notices were intended to do different things.

The fact that the notices must have been intended to do different things is also supported by the timetable set out in the Construction Act for serving such notices. The only notice required to be given within a restricted timeframe is the payment notice, which has to be given within five days of the payment due date. Contrastingly, a pay less notice can be served up to a day before the final date for payment. Again, there has to be a reason for this.

So what is the reason? Interestingly, the consultation on the changes to the Construction Act that took place as early as 2005 gives us the answer.

When the changes to the Construction Act were initially put out to consultation, it was in fact proposed that there should only be one payer notice to simplify the notification regime, and that the notice that should be retained was in fact the mechanism in section 111 (that is, withholding).

This suggestion went down like a lead balloon in the construction industry, precisely because the industry wanted to retain a notice responsible for valuing the works as close as possible to the payment due date. This was because it gave the payee time to consider whether it agreed with the valuation and to raise any issues with the payer in plenty of time prior to the final date for payment. The consultation report concluded that if the employer was allowed to value the works in a withholding notice, which could be issued days before the final date for payment, this would be:

“terrible news for the payee as he may be working to budgets and cash-flow forecasts which depend on him receiving money at certain times. If a payee only has two days notice of what is being paid, this may not give him enough time to ascertain if he agrees with the payment offered and raise any queries with the payer. It also means that he can only refer the matter to adjudication if the amount is disputed towards the end of the payment process – which will delay the opportunity to receive money even further.”

Thereafter the idea of a one notice regime was swiftly dropped and the Construction Act implemented the dual notice regime.

Where to now?

We are currently left with a TCC decision in keeping with the wording of the Construction Act, but which appears to undermine the dual notice payment regime intended by the Act: if the reason for keeping two notices was to avoid a payee having late notice of the employer’s valuation of the works, it cannot be correct that an employer is allowed to re-value the works in a pay less notice, which of course has the effect of overriding the valuations in payment notices and payment applications up to a day before the final date for payment.

However, if the TCC is correct in Henia as to the content of a pay less notice, it seems to me that we still require a decision explaining the difference (if any) between the payment and pay less notices, particularly given the confusion that will arise if an employer seeks to rely on a payment notice served out of time as a pay less notice under the Act. This point clearly has important ramifications for the construction industry as a whole.

This article was first published in the Practical Law Construction Blog.