What makes a valid payment and pay less notice? This was one of the questions considered by Alexander Nissen QC, sitting as a deputy High Court judge in the Technology and Construction Court (TCC) in Surrey and Sussex Healthcare NHS Trust v. Logan Construction (South East) Ltd [2017] EWHC 17 (TCC). Applying recent judgments, Nissen QC held that the contractor's interim payment notice was valid but, perhaps unexpectedly, also held the employer's pay less notice to be valid. His decision both provides guidance for contract administrators and highlights the scope for the issue of pay less notices contingent on two (or more) contractual payment scenarios.

The facts

The claimant, Surrey and Sussex Healthcare NHS Trust (the Trust), employed Logan Construction (South East) Ltd (Logan) under a JCT Intermediate 2011 Contract form to refurbish various operating theatres and carry out associated works. On 20 September 2016, after practical completion had been achieved and the Certificate of Making Good issued, another interim payment was due but Logan did not apply for payment and nor did the Trust issue an interim payment certificate.

Discussions on the final account began and Logan submitted papers to the Trust in preparation for a final account meeting. That submission, which included a document entitled "interim payment notice number 24", arrived late at night on the day before the meeting and the Trust's contract administrator assumed the notice was intended to assist with the final account discussions. The issuing of an interim certificate was not referred to at the subsequent meeting. Agreement was not reached on the final account and the parties agreed to mediate.

The next day, 21 September, the Trust's contract administrator sent out an email containing the final certificate, which was copied to Logan's representative. This email referenced the interim payment notice, concluded it was out of date and void and added, as a contingency, that "the details stated in the Final Certificate are the same as would have been stated in any final Interim Certificate which may have been issued".

Over a week after the interim payment notice was served, Logan pointed out that the Trust had not served a pay less notice and requested payment of the balance due on interim payment notice 24. The Trust refused and Logan took the dispute to adjudication. The adjudicator found in favour of Logan: the interim payment notice of 20 September 2017 was valid and, in the absence of a pay less notice, the Trust became responsible for the full amount specified in the payment notice.

The Trust issued court proceedings to obtain declarations that the interim payment notice was invalid and that the Trust's email of 21 September was a valid pay less notice.

The payment notice

In finding that the payment notice was valid, Nissen QC worked through the precedents put to him (including Caledonian Modular Ltd v. Mar City Developments Ltd [2015] BLR 694, Henia Investments Inc. v. Beck Interiors Ltd [2015] BLR 704 and Jawaby Property Investment Ltd v. The Interiors Group Ltd [2016] BLR 328), and confirmed:

"there is a high threshold to be met by any contractor who seeks to take advantage of [the Housing Grants, Construction and Regeneration Act] provisions whereby a sum automatically becomes payable if a timely employer's [pay less] notice is not served". (See paragraph 37 of the judgment.)

Nissen QC thought it relevant to construe the nature of the notice against both the contractual and factual setting of the case. The fact that the Trust's contract administrator had been in breach of contract for not issuing the interim certificate earlier was a relevant fact. In the absence of a certificate, Logan was contractually entitled to issue an interim payment notice. The notice served was legible, clear, free from ambiguity and an interim payment notice in substance, form and intent. Further, there were "sufficient indications both on the face of the document itself and in the description of the attachment to the email to make clear that Logan intended to issue an interim payment notice": it was titled an "interim payment notice" and the Trust had referred to it as such in its email of 21 September.

On the basis that the notice was valid, Logan would have been entitled to be paid the balance of the sum set out in the notice unless the Trust had issued a valid pay less notice.

The pay less notice

The Trust argued: "… in contrast to the position which applies to contractors' [payment] notices, the law adopts a different, less prescriptive, standard when it comes to considering whether a document constitutes a valid pay less notice". Because of the "draconian consequences" which flow from a failure to have issued a pay less notice, "any complaints about the form of a notice which are artificial or contrived should be rejected". (See Thomas Vale Construction plc v. Brookside Syston Ltd [2006] EWHC 3637.)

The Trust also relied on Sir Peter Coulson's book on Construction Adjudication, 3rd edition at paragraph 3.30 as support for the Trust's practical views that: the 21 September email, when read alongside the final certificate, was sufficient to amount to a pay less notice; one document can serve two different purposes at the same time; and the email contained all the information necessary to put Logan on notice of how much the Trust proposed to pay and the basis upon which that sum had been calculated.

In turn, Logan argued that the email could not constitute a valid pay less notice because the writer had plainly not intended it to be such a notice.

Nissen QC dismissed as irrelevant the fact that the email was only copied to Logan: the fact was that Logan had received it. The Trust had complied with the contractual requirements for a pay less notice: it had specified the sum considered to be due to Logan at the date of the notice and the basis upon which that sum had been calculated.

It boiled down to the key issue: were the email and its final certificate attachment, when read together, intended to constitute a pay less notice?

Nissen QC agreed with Logan that it is an essential requirement that the sender should have the requisite intention, but found that that intention must be derived from the manner in which it would have informed the reasonable recipient. Arguing that the email did not evidence the intention because it was not described as a pay less notice focuses too much on the specific detail of the language used by the sender and not on the overall message and purpose which the email and attachments would have conveyed to the reasonable recipient.

Putting this into context, the contract administrator's email effectively communicated to Logan the amount the Trust considered was due – whether by way of final account or interim payment – and gave a breakdown: no more information was needed. Viewed broadly, one intention of the email and its attachments was to respond to the interim payment notice.

Interestingly, Nissen saw "no difficulty with the notion of serving a contingent pay less notice" – that is, one that dealt with both the final account and alternative, interim payment, position. The contract administrator was saying that, if he was wrong about the invalidity of the interim payment notice, the final certificate reflected everything he wanted to say in response to it.

Nissen QC concluded that the Trust's email and its attachment did indeed have the necessary intention (as required by Jawaby).

Guidance on dealing with pay less notices

The recent splurge of payment notice cases shows clearly the dangers that lie in not administering contractual paperwork correctly and on time. Contract administrators in any doubt about the nature of documents dealing with payment should ensure their response is provided in timely fashion, is described specifically (as a pay less notice) and sets out clearly what is due and how that sum breaks down.

No contract administrator could possibly relish the experience of waiting for a court's decision on the validity of its paperwork. The Surrey case offers a little support: if in doubt about the nature of payment documents or the validity of a payment notice, contract administrators can hedge their position by giving a response that sets out the position they believe to be true – and a contingent response just in case they are wrong.