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Are different minimum requirements for default payment and pay less notices a double standard or justified?

The TCC has started 2017 at quite a canter and has handed down a number of interesting judgments. One that particularly caught my eye was Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd, which is another case on everyone’s favourite topic: payment notices and pay less notices.

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

The Trust employed Logan under a JCT Intermediate Building Contract with Contractor’s Design, 2011 Edition, to undertake various refurbishment works at the East Surrey Hospital for the sum of circa £4.4 million. Practical completion was certified on 25 August 2015 and the Certificate of Making Good Defects was issued on 24 August 2016 (that is, on the same day that the Rectification Period ended). This triggered an interim payment cycle. The issue of this certificate was also the last of the three requirements necessary to trigger the issue of the Final Certificate within 28 days (that is, by 21 September 2016).

Following the issue of the Certificate of Making Good Defects, Logan did not issue an application for payment in respect of the interim payment cycle and the Trust did not issue a payment notice.

However, shortly before midnight on 20 September 2016, Logan issued a document by email with an attachment called “Logan Interim Payment Notice – Valuation No 24”. This was Logan’s interim payment notice in default of the Trust not issuing a payment notice. Logan claimed that it was entitled to payment of just over £1.1 million.

Logan and the Trust’s quantity surveyor arranged to meet on 21 September 2016 to discuss the final account, but no agreement was reached. Later that day, the Trust’s quantity surveyor issued the Final Certificate by email. This email included a detailed breakdown that indicated Logan was entitled to payment of just £14,235.

The parties’ dispute

Logan contended that the Trust had failed to serve a pay less notice against its default payment notice issued on 20 September 2016, and demanded payment of £1.1 million.

The Trust argued that:

  • Logan’s attachment to its email of 20 September 2016 did not constitute a default payment notice. Rather, it was Logan’s valuation of the final account.
  • Even if an effective default payment notice had been served, the email and attachments issued by the Trust’s quantity surveyor on 21 September 2016 constituted an effective pay less notice.

The Trust therefore refused to pay the £1.1 million, and the parties trotted off to adjudication.

The adjudication

The adjudicator found that the document Logan served on 20 September 2016 was a default payment notice and the Final Certificate was not a pay less notice. The adjudicator therefore ordered the Trust to pay Logan the sum claimed of £1.1 million.

Part 8 proceedings

The Trust issued Part 8 proceedings seeking declarations that:

  • Logan’s attachment to its email of 20 September 2016 was not a default payment notice.
  • The email of 21 September 2016 and attachments (issued by the Trust’s quantity surveyor) was an effective pay less notice.

Mr Alexander Nissen QC (sitting as a deputy High Court judge) heard the case in December 2016 and his very readable judgment was handed down in early January 2017. In a nutshell, he:

  • Agreed with the adjudicator and Logan that Logan’s attachment to its email of 20 September 2016 was a default payment notice.
  • Disagreed with them when it came to the email of 21 September 2016 and attachments: these were an effective pay less notice.

It was a default payment notice

I don’t want to dwell too long on the court’s findings concerning the default payment notice because I don’t think they necessarily add a great deal to what we’ve learnt from cases such as Caledonian Modular v Mar City, Henia v Beck and Jawby Property v The Interiors Group, all of which Matt and I have blogged about in the past couple of years.

We already know from these cases that if a contractor wants to rely on a default payment notice it must have dotted all of the i’s and crossed all of the t’s or, as Mr Nissen QC put it much more eloquently:

“There is a high threshold to be met by any contractor who seeks to take advantage of these provisions whereby a sum automatically becomes payable if a timely employer’s notice is not served…”

The court found that Logan’s attachment to its email of 20 September 2016 was a default payment notice in “substance, form and intent”. This result was unsurprising given that the attachment was called an interim payment notice, it referred to the relevant clause of the contract and the correct valuation date, and it also contained a detailed breakdown of the sum due.

One point I thought was interesting was that, when considering the background to take into account, the court said that it was relevant that the Trust had failed to issue a payment notice in respect of the interim payment cycle. The court stated that this breach of contract:

“..is not a promising backdrop for consideration of the Trust’s first ground of declaratory relief.”

However, surely a claim based on a default payment notice will almost always follow a failure by the employer or its agent to serve a payment notice? The exception to this would be a payee-led payment notice system, but I am yet to encounter one of these when acting as adjudicator. That said, the court acknowledged that a default payment notice still had to be clear and free from ambiguity.

It was a pay less notice

Logan conceded that the documents relied on by the Trust specified the sum that the Trust considered to be due at the date of the notice and the basis on which that sum had been calculated. However, Logan argued that they could not constitute an effective pay less notice because the sender did not intend it to be a pay less notice and did not describe it as such.

The court considered the facts of the case, and carefully analysed what a reasonable recipient of the email of 21 September 2016 would have been aware of and understand from the notice. That was, against Logan’s claim for an interim payment of £1.1 million, the Trust considered that £14,235 was due.

The court pointed out that it is not necessary for a pay less notice to have that title, or to refer to the relevant clause of the contract concerning pay less notices, and it was satisfied that, objectively viewed, the pay less notice:

“…had the requisite intention to fulfil that function.”

The differing requirements of payment notices and pay less notices

To support its case concerning the pay less notice the Trust argued that the law adopts a different, less prescriptive, standard when it comes to considering whether a document constitutes a pay less notice. The Trust relied on Thomas Vale Construction v Brookside Syston as authority for the proposition that complaints about the form of a pay less notice that are artificial or contrived should be rejected. The Trust also relied on paragraph 3.30 of Coulson on Construction Adjudication, which states:

“The courts will take a common sense, practical view of the contents of a payless notice and will not adopt an unnecessarily restrictive interpretation of such a notice…It is thought that, provided that the notice makes tolerably clear what is being held and why, the court will not strive to intervene or endeavour to find reasons that would render such a notice invalid or ineffective.”

The court acknowledged that there is some support for the proposition that:

“…as a matter of over-arching principle, Pay Less Notices should be construed more generously than notices emanating from a contractor.”

While I think that some involved in adjudication have previously assumed this to be the case, I think this confirmation will provide welcome clarification for parties, representatives and adjudicators.

However, is it just to apply different standards to payment notices and pay less notices, so that we end up with a two-tier system?

Some would undoubtedly argue that it is right that, if a contractor wants to rely on a default payment notice in order to recover the full sum claimed, then it must ensure that it strictly complies with all of the requirements for such default notices. Furthermore, as the Trust argued, the “draconian consequences which flow from a failure to have issued” a pay less justify a lesser standard being applied to such notices.

However, contractors and sub-contractors would argue that they too face harsh consequences if a generously construed pay less notice is found to be effective because they are being kept from money that is rightly owed to them. The counter argument to this is that they are not rightly owed the money until the dispute is determined on the merits (that is, the correct value of works, claim and so on, is determined).

The time period for adjudication is the same regardless of whether it is a technical claim based on a failure to issue a payment notice and/or pay less notice, or a claim based on the merits of a valuation, so why not just refer the merits to adjudication? Furthermore, even if the technical claim is successful, a merits based adjudication is likely to follow therefore resulting in extra costs. I appreciate that this is a rather simplistic approach because there are a great deal more factors to consider such as the time needed to fully prepare a case on the merits, but it is nevertheless worth bearing in mind.

On balance, I think that the “draconian consequences” referred to above justify having different minimum standards for payment notices and pay less notices, but I am sure that plenty will disagree with me and think that this is just double standards.

MCMS Ltd Jonathan Cope

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