Following a distinct trend in judgments from TCC in the last few years regarding the operation of the payment provisions of the Construction Act 1996 (the Act), it seems that 2017 is destined for more of the same.

Recent authorities have considered payment notices and payless notices and the consequences of failing to comply with the Act’s payment provisions. In Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd [2017 EWHC 17] the court gave further consideration to the content and form of both a payment application notice and a payless notice and reached what some may see as a rather surprising conclusion.

The facts

  • Logan Construction (Defendant) was engaged by Surrey and Sussex Healthcare NHS Trust (Claimant) to refurbish parts of East Surrey Hospital. The contract was a JCT Intermediate Building Contract with Contractor’s Design (2011 Ed)
  • The works were certified as practically complete on 25 August 2015
  • In May 2016, the appointed QS issued his calculation of the final contract sum, leading to the parties discussing the final account
  • 24 August 2016 – the Certificate of Making Good Defects was issued, triggering an interim payment cycle as the rectification period had expired. This also triggered the 28 day period for issuing the Final Certificate (which was due 21 September 2016)
  • 20 September 2016 – the Defendant sent the Claimant, shortly before midnight, an email with a number of attachments. The email included a document entitled “Interim Payment Notice”, stating the sum due to the Defendant as £1.015 million. (the 20 September email)
  • 21 September 2016 – the parties met to discuss the final account, though they were unable to “bridge the gap” as to the final sum due. The Interim Payment Notice was not discussed
  • 21 September 2016 – following the meeting that day, the QS issued the final certificate certifying £14,325 due to the Defendant. The QS noted in his email that the Defendant had sent an Interim Payment Notice but suggested it was ‘void’ (the 21 September email)
  • It was agreed that if the Defendant’s Interim Payment Notice had been validly issued on 20 September, any payless notice had to be served by 24 September 2016. However, no payless notice was served and, as the Defendant was not paid the £1.015 million stated in the payment notice, it referred the dispute to adjudication
  • 25 November 2016 – the adjudicator decided that the 20 September email was a valid interim payment application and in the absence of a payless notice or payment, the Defendant was entitled to the £1.015m claimed.

The claim

The Claimant brought Part 8 proceedings seeking two declarations:

That the Defendant’s 20 September email did not constitute a valid interim payment notice

The Claimant relied on the recent cases of Caledonian Modular Ltd v Mar City Developments Ltd[1], Henia Investments v Beck Interiors[2] and Jawaby Property v The Interiors Group[3] to argue that the Defendant had not been honest about its intentions and the documents relied upon by the Defendant were ambiguous.

The Claimant stated that the 20 September email was not clear, that the payment application had been “buried away” in other attachments and that the cover email was intended to divert attention to the final account meeting.

The Defendant counter argued that the application was clear on its face and identified the correct dates. It pointed out that the Claimant must have known it to be an application for payment as the QS acknowledged as much in an email but claimed the notice was void.

That the Claimant’s 21 September email constituted a payless notice and was served on time

If the 20 September email was found to be a valid interim application, the Claimant sought a declaration that the 21 September email containing the final account amounted to a valid payless notice and therefore the sum due to the Defendant was reduced.

The Claimant relied on previous authorities (Thomas Vale Construction plc v Brookside Syston Ltd[1] and Coulson on Construction Adjudication (Third Ed, 2015)) for the proposition that the law is less prescriptive when it comes to payless notices, and on that interpretation the 21 September email when read with the Final Certificate is sufficient to amount to a payless notice - the documents put the Defendant on notice of how much the Claimant proposed to pay and the basis on which that sum had been calculated.

The Defendant relied on the case of Jawaby Property Investment Ltd v The Interiors Group Ltd and another [2016] to argue that in order for the payless notice to be classed as valid, the “sender must objectively intend that the document should stand as a payless notice”. The Defendant submitted that the Claimant did not have any intention that the email was to be a payless notice. The QS had expressly asserted that the interim payment notice was void and therefore the Final Certificate issued was issued for a different function under a subsequent payment cycle and a separate clause of the contract.

The decision

The 20 September email was a valid interim payment notice

Alexander Nissen QC (sitting as Deputy High Court Judge) quoted the judgement in Caledonian at length and noted that the document in question must be construed against the relevant factual background.

Mr Nissen QC went on to conclude that the interim payment application was valid because the contractual purposes of the notice had been fulfilled, stating that the interim payment notice was “clear and free from ambiguity” (paragraph 42). This is because:

  • The document was labelled ‘Interim Payment Notice’
  • It made specific reference to the relevant clause in the contract, though this was not a requirement
  • The supporting information contained a detailed assessment of the sum said to be due
  • The valuation date of 24 August 2016 was consistent with the due date for payment.

The court also addressed the Claimant’s arguments as to the form of the notice itself and noted that the key words were in capitals and underlined. Further, the QS himself referred to the notice as an Interim Payment Notice in his 21 September 2016 email so there could be no question that that the text was not capable of being understood.

Consequently, it was held that the 20 September email was a valid payment notice.

The 21 September email was a valid payless notice

In relation to the payless notice, Mr Nissen QC found again that the contractual purposes of the notice had been fulfilled, i.e. it stated the sum due and the basis on which that sum had been calculated. The Defendant was clearly aware how much the Claimant thought was due. The court dismissed the argument that the certificate was not specifically addressed to the Defendant as irrelevant.

The intention of the Claimant was discussed, given that at the time it sent the 21 September Email the Claimant was of the opinion that the interim application was ‘void’ and therefore didn’t purport to reply to it. Mr Nissen QC stated: “Whilst I agree that it is an essential requirement that the sender should have the requisite intention, that intention must be derived from the manner in which it would have informed the reasonable recipient.” (Paragraph 58).

The court held that when read together, the email and attachments on a broader level constituted an intention to respond to the Interim Payment Notice.

The obiter judgment in Jawaby was distinguished. Jawaby held that a document was not a payless notice on the basis that in that case there was an established format for notices and it was “highly significant” in that case that the document that was relied on was in a completely different form. In the present case there was no established form.

…”it is not necessary for a Pay Less Notice to have that title or to make specific reference to the contractual clause in order to be valid. The question is whether, viewed objectively, it had the requisite intention to fulfil that function. As I have held, it did” (Paragraph 65).

Therefore as to the second declaration, the judge confirmed that the 21 September Email did serve a valid payless notice and the sum due to the Defendant was reduced.

Comment

The case provides further guidance as to what is relevant in considering the content and form of valid payment applications and payless notices. Mr Nissen QC has also provided further clarification that the court will be “less prescriptive” when looking at the validity of a payless notices and a reminder that the documents should be considered in light of the context as a whole.

The findings of the court may surprise some, particularly the finding that the Claimant had the “requisite intention” to serve a payless notice despite not accepting the validity of the interim application. The fact that the payment notice itself was sent late at night, with other documents and not discussed at a meeting the following day should warn practitioners to be extra thorough in reviewing and understanding the contents and intention of all correspondence.

It is also a further reminder to practitioners to serve payless notices even if the validity of the payment application is doubted. If the content or date of a payment application is not clear, best practice would be to issue a payless notice “just in case” and without prejudice to the contention that the application is invalid, as Mr Nissen QC confirmed:

“I also see no difficulty with the notion of serving a contingent Pay Less Notice. There are often cases in which a party wants to serve a notice without prejudice to his position that no such notice is required”.

If in doubt, protect your position.