A recent judgment in the Technology and Construction Court has provided guidance on what constitutes a Pay Less Notice when it doesn't describe itself as one.

Background

The decision in Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd [2017] EWHC 17 (TCC) followed an application for declaratory relief by Surrey and Sussex Healthcare NHS Trust (the Trust) in respect of the validity of an Interim Payment Notice served by Logan Construction (Logan) and the subsequent Pay Less Notice served by the Trust.

The dispute arose out of a building contract based on the JCT Intermediate (with Contractors Design) for extensive refurbishment works with a value of just over £4m. Towards the end of the works, Logan prepared an Interim Payment Notice and sent this as an attachment to an email to the Trust. The attached notice described itself as an 'Interim Payment Notice (Clause 4.10)'.

The dispute as to the validity of the Interim Payment Notice centred on the fact that the covering email did not make mention of the Interim Payment Notice attached and instead focused on a final account meeting to be held the next day (21 September). The Trust claimed that it had considered the Interim Payment Notice as a document in support of Logan's position on the final account and therefore could not be considered a valid Interim Payment Notice.

The validity of the Pay Less Notice involved a more convoluted argument (indeed an adjudicator decided that the notice was not a Pay Less Notice.) The Trust relied on an email sent following the Final Account meeting held on 21 September. Attached to this email were two documents; a Payment Certificate and Contract Sum Adjustment. There was no mention of a Pay Less Notice and indeed there was wording to the effect that the Interim Payment Notice was not valid. Logan argued on this basis that the two documents could not constitute a Pay Less Notice if the Trust did not consider there to be an Interim Payment Notice to pay less against.

It was common ground between the parties that the respective documents, provided they were valid, were served within the contractual time frames. The dispute was therefore whether the Interim Payment Notice and the subsequent Pay Less Notice were valid.

Findings

The Court (overturning the adjudicator's decision) held that both the Interim Payment Notice and the Pay Less Notice were valid.

Reasoning

In respect of the Interim Payment Notice, the judge reaffirmed the approach of recent case law (Caledonian Modular Ltd v Mar City Developments Ltd [2015] BLR 694; Henia Investments Inc. v Beck Interiors Ltd [2015] BLR 704 and Jawaby Property v The Interiors Group Limited [2016] BLR 328).

Under this recent run of cases, it has been consistently held that, given the draconian consequences of a failure on the part of an Employer to serve a Pay Less Notice (i.e. the entire sum under an Interim Certificate/Payment Notice becoming payable) that a Contractor must serve a notice that is 'clear and free from ambiguity'. This is a high threshold, but is to be viewed in both the contractual and factual circumstances at the time.

In this case, the Judge found that, given the express description of the declaration being 'Interim Payment Notice (Clause 4.10)', a reasonable person receiving this document would understand it to be an Interim Payment Notice, irrespective of it not being discussed in the covering email.

The decision in respect of the Interim Payment Notice was not particularly ground breaking. However the guidance in respect of the Pay Less Notice was more interesting.

The Trust did not serve any document expressly entitled 'Pay Less Notice'. It sent, by email, a Payment Certificate and Contract Sum Adjustment. The question before the Court was whether these documents constituted a Pay Less Notice. In its judgment, the Court set out the contractual requirements of a Pay Less Notice; namely that it must:

  • specify the sum which the Employer considers to be due to the Contractor; and
  • the basis on which that sum had been arrived at

Given that the Payment Certificate satisfied the former and the Contract Sum Adjustment satisfied the latter, the judge found that this constituted the requirements for Pay Less Notice. It was clear to the Court that the Employer intended the effect of the email and documents to be that of a Pay Less Notice.

The important lesson to take from this is that, even though there was no express wording, either in the documents or the email, a Pay Less Notice will be taken as having been served, provided the contractual requirements explained above are met.

There are, therefore, two different evidential standards for the two types of notice. If you want payment you need to make it clear and free from ambiguity, in other words you need to state 'I want payment'.

If you want to pay less, you need just to state how much you want to pay and why. You don’t need to expressly state that 'I want to pay less'. However the interpretation of this will be fact sensitive.

It may seem simplistic, but if you want to avoid arguments over whether a notice is a Pay Less Notice, a good starting point may be to head it 'PAY LESS NOTICE'.