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Pay less notices under the Construction Act 1996

As I predicted in my blog post two weeks ago, the TCC has now been addressed on the argument that an out of time payment notice can stand as a valid pay less notice under the provisions of the Construction Act 1996.

In Grove Developments Ltd v Balfour Beatty Regional Construction LtdGrove sought (in the alternative), a declaration that:

“…if the last date for service of a Pay Less Notice was earlier than 15 September 2015, GDL’s Payment Certificate constituted a valid Pay Less Notice.”

As I discussed previously, this submission was endorsed by Akenhead J’s finding in Henia v Beck. There the court found that a pay less notice was capable of asserting a different valuation of the works, instead of being confined to raising cross claims and deductions against the valuation put forward in either the payment certificate or the contractor’s interim application. As a consequence, there is absolutely no difference between the content of a pay less notice and the content of a payment certificate, and there is also no statutory requirement to identify on the face of a notice that it is a pay less notice. Therefore, we are left in the position that an out of time payment certificate can presumably now stand as a timeous pay less notice without the employer taking any further action.

Grove Developments Ltd v Balfour Beatty

Grove Developments engaged Balfour Beatty Regional Construction Ltd to design and construct a hotel and serviced apartments adjoining the O2 complex at Greenwich Peninsular for £121 million. The parties’ contract was an amended JCT Design and Build Contract, 2011 edition (DB 2011), incorporating bespoke interim payment arrangements under an agreed Schedule.

The Schedule was intended to override the contract’s payment provisions and set out 23 valuation and payment dates covering the period from September 2013 to July 2015. The Schedule did not provide any interim payment dates after 22 July 2015, and was conspicuously silent about what would happen if practical completion was delayed beyond that date.

As is so often the case in construction projects, when that exact scenario occurred, there was a dispute over whether Balfour Beatty was entitled to any further interim payments. If it was, then there was a further dispute about whether the:

  • Schedule’s provisions should be used to determine the subsequent interim payment dates.
  • Underlying contract’s provisions should be used for dates not covered by the Schedule.
  • Provisions of the Scheme for Construction Contracts 1998 should be implied into the parties’ contract as their agreement no longer provided for any interim payments.

Balfour Beatty sent interim application 24 (IA 24) on 21 August 2015 seeking some £23 million. Grove Developments served two documents in response:

  • A payment certificate on 28 August 2015
  • A pay less notice on 15 September 2015.

After Grove Developments paid only £439,500 odd of the amount claimed, Balfour Beatty referred the dispute to adjudication. It was during the course of this adjudication that Grove Developments issued a Part 8 claim seeking declarations that Balfour Beatty had no contractual right to issue IA 24 and that it (Grove) had served a timeous pay less notice.

Stuart-Smith J’s decision

The first issue to be determined was whether, under the contract, Balfour Beatty had any contractual right to further interim payments.

Stuart-Smith J considered that Balfour Beatty’s various arguments did not wash. There was no agreement between the parties that there would be any further interim payment dates, either on the basis of an implied term of commercial common sense or as an agreement in principle with later clarification about the exact dates to follow. There was similarly no incorporation of a payment mechanism into the contract through operation of the Scheme for Construction Contracts 1998 or estoppel by convention.

Therefore, it was strictly unnecessary for Stuart-Smith J to provide any analysis of whether the payment certificate and pay less notice were valid, but he took the opportunity to give some guidance. The point was a straightforward one, as the Scheme did not apply and so the date for final payment was easy to determine:

“Clause 4.9.4 of the contract provided for Pay Less Notices to be given not later than 3 days before the final date for payment. Nothing occurred to justify supplanting that agreed provision with a provision based upon the Scheme. If the final date for payment was 25 September 2015, the Pay Less Notice had to be given on or before 22 September 2015. If the final date for payment was 18 September 2015 the Pay Less Notice had to be given on or before 15 September 2015. It was in fact given on 15 September and was therefore in time.”

Unfortunately, this meant that there was no scope for arguing that the pay less notice was served out of time, and hence there was strictly no need to determine whether the payment certificate could stand instead as a pay less notice. Stuart-Smith J opted not to resolve this uncertainty, perhaps aware that such a determination would involve a number of policy arguments that were beyond the scope of the current dispute:

“It is therefore not necessary to decide if GDL’s Payment Certificate could have been pressed into service to act as an operative Pay Less Notice, and I do not do so.”

So where does it leave us?

This decision leaves the argument up for grabs as to whether a late payment certificate can automatically serve as a timeous pay less notice without any further action by the employer, or anything on the face of the document to suggest it was intended as a pay less notice. It is unfortunate that Stuart-Smith J did not take the opportunity to address the apparent sting in the tail of Henia v Beck, though such a ruling would have been beyond the requirements of the dispute in front of him, particularly given his determination of the previous issues.

However, Stuart-Smith J’s reluctance to decide either way does appear to recognise that the issue is not so straightforward as to accept this as the obvious consequence of Henia v Beck without any further thought. There are a number of policy arguments militating against such a finding, not least the unfairness to the contractor of allowing the almost miraculous resurrection of an out of time notice without the employer having to take any further steps. Although a quick answer might be to impose the same formality requirements on the pay less notice as the TCC has imposed upon interim applications, this would not address the underlying concern that a contractor would still be left uncertain of the amount it was getting paid up to a day before payment which, as this case showed, can be the difference between getting paid £23 million and getting paid £439,500.

Hardwicke Brenna Conroy

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