REUTERS | Eddie Keogh

TCC dismisses Part 8 claim concerning validity of pay less notice

While I may sound like a turkey voting for Christmas, I acknowledge that sometimes (and only sometimes), it makes sense for parties to go straight to the TCC rather than adjudicating. In particular, where a dispute turns on the validity of a notice and there is little disputed witness evidence, then the parties may well be best off seeking a Part 8 declaration, particularly where there are significant sums at stake.

Although the case that I want to discuss this week, Advance JV and others v Enisca Ltd, involved an adjudication followed by a Part 8 application, it is difficult to see the utility of the adjudication. However, I digress because the case really concerns the thorny issue of pay less notices, and the judgment contains some important lessons, particularly for paying parties.

Advance JV and others v Enisca Ltd

Advance is a joint venture between Balfour Beatty Group Ltd and MWH Treatment Ltd. It is engaged by United Utilities Water plc to design and construct a new water treatment works, hydro-electric power generation facility and other works in Cumbria. By a sub-contract dated 21 October 2019, Advance engaged Enisca as a sub-contractor to design, supply and install the LV electrical installation for the project.

The parties’ sub-contract is based on the NEC3 Engineering and Construction Subcontract dated April 2013, including Option A, but is subject to bespoke amendments. It includes NEC3 Option Y(UK)2, which provides payment terms intended to comply with the requirements of the Construction Act 1996.

Work began in October 2019 and Enisca submitted monthly applications for payment (AFP). The parties communicated through a project document system called CEMAR although the AFPs were usually sent by email.

Relevant payment details are as follows:

  • AFP 23 was issued in September 2021. The gross value was £3.686 million, of which Advance certified £2.270 million, leaving a difference of some £1.415 million.
  • AFP 24 was issued on 22 October 2021. The gross value was £5.131 million, which left a net payment of some £2.718 million being applied for.
  • AFP 25 was issued on 19 November 2021. The gross value was £5.217, which left a net payment of £2.799 million being applied for.

No payment certificate or document expressly responding to AFP 24 was served but, on 24 November (the penultimate day a pay less notice could be served), several documents were uploaded to the parties’ shared document system. These included a payment certificate and a pay less notice, both of which referred to being served in response to the November payment cycle and AFP 25. These showed a zero payment due to Enisca as Advance calculated there had been an overpayment of some £164,000. Consequently, no money was paid to Enisca.

In January 2022, Enisca referred the non-payment of AFP 24 to adjudication. It said the documents uploaded on 25 November related to AFP 25 and it argued that, in the absence of a valid payment or pay less notice, the sum set out in AFP 24 had become the notified sum. In the adjudicator’s decision dated 8 February 2022, he agreed with Enisca and awarded it some £2.717 million.

Advance started its Part 8 claim just before the adjudicator’s decision had been made, seeking a declaration regarding the validity of the pay less notice. When the matter came before the court, Joanna Smith J agreed with the adjudicator, and she dismissed the Part 8 claim.

Key takeaways regarding notices

The judge’s finding that the documents uploaded on 25 November did not constitute a pay less notice under AFP 24 in “substance, form or intent” turn on the facts. However, there are nevertheless some points in this judgment that those involved in adjudication should note, particularly those responsible for issuing pay less notices.

Firstly, the judgment refers to the relevant cases concerning the interpretation of notices, and then sets out the courts’ approach in nine points (at paragraph 47 of the judgment). This is a very useful summary of the current principles, particularly for parties facing uncertainty as to how a court or adjudicator will interpret a payment notice or pay less notice.

Secondly, although Advance acknowledged that payment notices need to be referable to individual payment cycles, it submitted that the Construction Act 1996 deals with pay less notices in a different way, with section 111(4) merely requiring the notice to identify the sum that the payer considers due “on the date the notice is to be served”, in other words, the Act is only concerned with time limits.

Although the judge said that she was initially attracted to this submission, she considered that the reference to “the notified sum” in section 111(3) rooted the giving of a pay less notice in the payment cycle represented by the payment notice identifying the notified sum. The judge therefore concluded that a pay less notice:

“…must be referable to the payment notice in which the notified sum is identified.”

Therefore, it is important for paying parties to note that it is not good enough to simply issue a pay less notice in the hope that it can be applicable to any “live” payment notice, which is something I have seen occurring when multiple payment notices (default or otherwise) are flying around like betting slips on Derby day. Rather, a pay less notice must be referable to the relevant payment cycle and the payment notice in which the notified sum is identified.

Finally, the judge made short shrift of Advance’s argument that there is nothing in the Construction Act 1996 or the Scheme for Construction Contracts 1998 that would prevent a pay less notice responding to two payment notices. The judge stated that:

“This is a novel proposition for which no support can be found in the Act or the Contract. It is difficult to see how one notice referable to only one assessment date could possibly be said to be responsive to two applications for payment.”

Once again, paying parties should note that this is important limit on the scope of pay less notices.

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