New TCC guidance on the validity of payment and pay less notices

A decision of the TCC last week has provided additional guidance as to the validity requirements for payment applications, payment notices and pay less notices under construction contracts. The court’s decision addresses the extent to which such notices must be drawn to the attention of the receiving party when given in an unusual context and also addresses a number of commonly occurring issues in respect of pay less notices.

Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Limited

Logan entered into a construction contract with the Trust on the terms of the JCT Intermediate 2011 form for refurbishment works at East Surrey Hospital. After practical completion was achieved, Logan did not make any further interim payment applications, but the Trust continued to issue Interim Certificates every two months in accordance with the standard JCT payment provisions.

After the Certificate of Making Good was issued, the parties entered into final account discussions. The contract provided for a further interim payment at this stage, but Logan did not submit an application nor did the Trust issue an Interim Certificate. As a result, the contract entitled Logan to submit its own payment notice in the absence of an Interim Certificate from the Trust.

Final account discussions continued and a meeting was to be held on the due date for service of the Trust’s Final Certificate. Late in the evening the day before the meeting, Logan emailed a spreadsheet to the Trust containing a worksheet entitled “Interim Payment Notice (Clause 4.10)”, which Logan subsequently alleged to be a valid payment notice under the contract. Logan’s covering email made no reference to the spreadsheet being a payment notice and the Trust presumed that the spreadsheet was simply to inform discussions at the meeting the following day.

No agreement was reached at the meeting and the Trust proceeded to issue a Final Certificate in an amount £1.1 million less than Logan’s Interim Payment Notice. By this time the Trust had appreciated the significance of Logan’s Interim Payment Notice, but mistakenly believed it to be a late payment application. The covering email to the Trust’s Final Certificate alleged that the notice was “out of date and void”, but went on to say that “in any event, the details stated in the Final Certificate are the same as would have been stated in any final Interim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.”

At adjudication, Logan successfully argued that the Trust’s Final Certificate and covering email was not a valid pay less notice and was awarded the outstanding amount of its Interim Payment Notice. The Trust issued Part 8 proceedings, asking the TCC to declare that Logan’s Interim Payment Notice was invalid and that it had issued a valid pay less notice.

A valid payment notice?

The court noted a number of recent TCC decisions which had set a high standard for the submission of payment applications by contractors. Most recently, in Jawaby Property Investment v The Interiors Group, the court had noted that: “If a contractor wishes to have the benefit of the interim payment regime such as that contained in the Contract, then its application for interim payment must be in substance, form and intent an interim application stating the sum considered by the contractor as due at the relevant due date and it must be free from ambiguity.” In concluding that Logan had satisfied these requirements the court noted the following matters:

• It was important to consider the contractual and factual background to the payment notice objectively, assessing it against how it would have informed a reasonable recipient.
• While the covering email did not specifically refer to the notice, the notice itself was sufficiently clear and free from ambiguity on its face, in terms of legibility, substance, form and intent.
• Despite the lack of reference to the notice in the covering email, Logan had been open and transparent about its intentions.
• It was also relevant that the dispute would not have arisen had the Trust issued an Interim Certificate after the Certificate of Making Good as it was contractually required to do.

A valid pay less notice?

The decision in Jawaby was also relevant to the Trust’s claim to have submitted a valid pay less notice. In Jawaby, a potential pay less notice was found to be invalid on the basis that the Employer had not intended to give such a notice: “an essential requirement for the service of a contractual notice [is] that the sender has the requisite intention to serve it”.

In the present case, the court upheld the Trust’s Final Certificate and covering email as amounting to a pay less notice:

• The contractual requirements for a pay less notice, specifying the sum due and the basis of the calculation, had been fulfilled.
• The fact that the Trust had been mistaken as to the payment procedure under the contract and had referred to what it would have certified in an Interim Certificate rather than a pay less notice, did not prevent it from having the required intention to issue a pay less notice. The reasonable reader would have been aware that the Trust was mistaken and the overriding impression from the Trust’s email was that it intended its Final Certificate to be responsive to Logan’s Interim Payment Notice.
• It was not necessary for the Trust to state expressly that it was giving a pay less notice or to make specific reference to the relevant contractual clause dealing with pay less notices.
• A pay less notice could be validly given despite the contingent nature of the Trust’s email (i.e. it being made subject to the validity of Logan’s Interim Payment Notice which the Trust had denied).

Conclusions and implications

The court’s decision builds on previous TCC decisions in this area and provides helpful guidance as to the validity requirements applicable to payment applications, payment notices and pay less notices.

It is notable that the court was initially attracted to the Trust’s argument that the background of the final account negotiations between the parties and the fact that the Interim Payment Notice had not specifically been drawn to the Trust’s attention may have caused it to be invalid. Ultimately, however, the notice was given effect to because its intention was sufficiently clear from the terms of spreadsheet emailed to the Trust. Employers should therefore be alert to the prospect that payment applications or payment notices may be submitted as part of meeting documentation or in other unexpected ways.

The court’s comments in relation to pay less notices provide helpful confirmation that contingent notices can be given and that the words “pay less notice” need not be used or the relevant contractual clauses referred to. Rather, a key ingredient for showing the necessary intention to give such a notice is whether the notice is responsive to the payment application or payment notice in question.

References

Jawaby Property v The Interiors Group Ltd [2016] BLR 328

Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Limited [2017] EWHC 17 (TCC)