PAYMENT AND CONSTRUCTION CONTRACTS – PAYMENT NOTICE AND PAYLESS NOTICE REQUIREMENTS AND TRUE VALUE ADJUDICATION: GUIDANCE FROM THE HIGH COURT (TCC)
Charles Edwin Edwards MSt(Cantab) MSc(Lond) FCInstCES Barrister
Charles Edwards, construction barrister and head of chambers at Gray’s Inn Construction Chambers, reviews the case of Grove Developments Ltd v S&T (UK) Ltd[2018] EWHC 123 (TCC) which provided much needed and useful guidance in relation to payments arising from construction contracts, in particular, Payment Notices and Pay Less Notices.
By way of background, on 26 March 2015, the parties entered into a contract incorporating the JCT Design and Build Contract 2011 (“the Contract”). The Claimant, Grove, engaged the Defendant, S&T to design and build a new hotel at Heathrow Terminal 4. The contract sum was agreed at £26,393,730.04. The completion date was 10 October 2016, however, Practical Completion in relation to the project was not achieved until 24 March 2017. There were three adjudications between the parties. The first adjudication decision concluded that the Schedule of Amendments was a part of the contract. The second adjudication decision concluded that S&T were entitled to an Extension of Time. The third Adjudication decision concluded that Grove’s Pay Less Notice of 18 April 2017 was invalid and therefore, S&T were entitled to be paid in excess of £14 million in accordance with interim application no. 22.
The Claimant contended that its Pay Less Notice complied with the requirements of Clause 4.10.2.1 of the Contract as it specified the basis of calculation albeit with reference to a detailed calculation of £1,407.748 in the purported Payment Notice dated 13 April 2017. The Defendant disagreed, that the document referred to in the Payment Notice dated 13 April 2017 should have been attached to the Pay Less Notice and therefore a reference to it was not sufficient to comply with the contract.
The Claimant commenced CPR Part 8 proceedings for the Court to determine four separate issues:
“…
(a) Issue A: whether or not Grove’s Pay Less Notice complied with the requirements of the contract;
(b) Issue B: whether, even if the Pay Less Notice did comply with the contract, the result in the third adjudication in S&T’s favour should still be enforced;
(c) Issue C: whether in principle, at this stage, Grove is entitled to commence a separate adjudication seeking a decision as to the ‘true’ value of interim application 22;
(d) Issue D: whether Grove’s notices in respect of liquidated damages were properly issued. This is a separate and discrete issue from the previous three…”
The relevant clauses in contract between the parties included:
“Article 10
This Contract shall incorporate all the provisions of the Joint Contracts Tribunal Design & Build Contract 2011 (DB 2011), as amended by the Schedule of Amendments attached to the Conditions.
Clause 2.28
2.28 If the Contractor fails to complete the Works or a Section by the relevant Completion Date, the Employer shall issue a notice to that effect (a ‘Non-Completion Notice’). If a new Completion Date is fixed after the issue of such a notice, such fixing shall cancel that notice and the Employer shall where necessary issue a further notice.
Clause 2.29
2.29.1 Provided
2.29.1.1 The Employer has issued a Non-Completion Notice for the Works or a Section; and 2.29.1.2 the Employer has notified the Contractor before the due date for the final payment under clause 4.12.5 that he may require payment of, or may withhold or deduct, liquidated damages, the Employer may, not later than the day before the final date for payment of the amount payable under clause 4.12, give notice to the Contractor in the terms set out in clause 2.29.2.
2.29.2 A notice from the Employer under clause 2.29.1 shall state that for the period between the Completion Date and the date of practical completion of the Works or that Section:
2.29.2.1 he requires the Contractor to pay liquidated damages at the rate stated in the Contract Particulars, or lesser rate stated in the notice, in which event the Employer may recover the same as a debt; and/or
2.29.2.2 that he will withhold or deduct liquidated damages at the rate stated in the Contract Particulars, or at such lesser stated rate, from sums due to the Contractor.
2.29.2.3 If the Employer fixes a later Completion Date for the Works or a Section, the Employer shall pay or repay to the Contractor any amounts recovered, allowed or paid under clause 2.29 for the period up to that later Completion Date.
2.29.2.4 If the Employer in relation to the Works or a Section has notified the Contractor in accordance with clause 2.29.1.2 that he may require payment of, or may withhold or deduct, liquidated damages, then, unless the Employer states otherwise in writing, clause 2.29.1.2 shall remain satisfied in relation to the Works or Section, notwithstanding the cancellation of the relevant Non-Completion Notice and issue of any further Non-Completion Notice.
Clause 4.7.1
4.7.1 Interim Payments shall be made by the Employer to the Contractor in accordance with section 4 and whichever of Alternative A (Stage Payments) or Alternative B (Periodic Payments) is stated in the Contract Particulars to apply.
Clause 4.7.2
4.7.2 The sum due as an Interim Payment shall be an amount equal to the Gross Valuation under clause 4.13 where Alternative A applies, or clause 4.14 where Alternative B applies, in either case less the aggregate of:
4.7.2.1 any amount which may be deducted and retained by the Employer as provided in clauses 4.16 and 4.18 (‘the Retention’);
4.7.2.2 the cumulative total of the amounts of any advance payment that have then become due for reimbursement to the Employer in accordance with the terms stated in the Contract Particulars for clause 4.6; and
4.7.2.3 the amounts paid in previous Interim Payments.
Clause 4.8.3
4.8.3 Where Alternative B applies, for the period up to practical completion of the Works, Interim Applications shall be made as at the monthly dates specified in the Contract Particulars for Alternative B up to the date of practical completion or the specified date within one month thereafter. Subsequent Interim Applications shall be made at intervals of 2 months (unless otherwise agreed), the last such application being made upon the expiry of the Rectification Period or, if later, the issue of the Notice of Completion of Making Good (or, where there are Sections, the last such period or notice). The due date in each case shall be the later of the specified date and the date of receipt by the Employer of the Interim Application.
Clauses 4.9.1, 4.9.2, 4.9.3, 4.9.4
4.9.1 The final date for payment of an Interim Payment shall be 21 days from its due date.
4.9.2 Not later than 5 days after the due date the Employer shall give a notice (a ‘Payment Notice’) to the Contractor in accordance with clause 4.10.1 and, subject to any Pay Less Notice given by the Employer under clause 4.9.4, the amount of the Interim Payment to be made by the Employer on or before the final date for payment shall be the sum stated as due in the Payment Notice.
4.9.3 If the Payment Notice is not given in accordance with clause 4.9.2, the amount of the Interim Payment to be made by the Employer shall, subject to any Pay Less Notice under clause 4.9.4, be the sum stated as due in the Interim Application.
4.9.4 If the Employer intends to pay less than the sum stated as due from him in the Payment Notice or Interim Application, as the case may be, he shall not later than 3 days before the final date for payment give the Contractor notice of that intention in accordance with clause 4.10.2 (a ‘Pay Less Notice’). Where a Pay Less Notice is given, the payment to be made on or before the final date for payment shall not be less than the amount stated as due in the Pay Less Notice.
Clause 4.10.2
4.10.2 A Pay Less Notice:
4.10.2.1 (where it is to be given by the Employer) shall specify both the sum that he considers to be due to the Contractor at the date the notice is given and the basis on which that sum has been calculated;
4.10.2.2 (where it is to be given by the Contractor) shall specify both the sum that he considers to be due to the Employer at the date the notice is given and the basis on which that sum has been calculated.
Clause 4.14
4.14 The Gross Valuation shall be the total of the amounts referred to in clauses 4.14.1 and 4.14.2 less the total of the amounts referred to in clause 4.14.3, calculated as at the date for making an Interim Application under clause 4.8.3.
Clause 9.2.1
9.2 If a dispute or difference arises under this Contract which either Party wishes to refer to adjudication, the Scheme shall apply, subject to the following:
9.2.1 for the purposes of the Scheme the Adjudicator shall be the person (if any) and the nominating body shall be that stated in the Contract Particulars;”
In relation to Issue A, the Court decided in Grove’s favour that the Pay Less Notice of 18 April 2017 complied with Clause 4.10.2.1 of the Contract.
The Court concluded following a review of the authorities that all the authorities pointed the same way:
“…A pay less notice will be construed by reference to its background, in order to see how a reasonable recipient would have understood it. The court will be unimpressed by nice points of textual analysis, or arguments which seek to condemn the notice on an artificial or contrived basis. One way of testing to see whether the contents of the notice are adequate is to see if the notice provides an adequate agenda for a dispute about valuation and/or any cross-claims available to the employer…”
There were submissions on behalf of the Claimant that an Employer’s pay less notice might be construed “more generously” than the Contractor’s interim application/payment notice because, whilst the former might be regarded as merely defensive, the latter can give rise to draconian consequences if they are not responded to in time (as this case demonstrates). The Court did not consider that Courts should generally adopt a different approach to the construction of the two different kinds of notices as this would be potentially contrary to Mannai. Further, the Court was of the view that the particularly adverse consequences for an Employer that follow from a Contractor’s unanswered application/payment notice are relevant to the test of the reasonable recipient and would that recipient have realised that the document in question was an application or payment notice, with contractual force, and with all the consequences that that may entail?
The Court’s view was that previous authorities did not show a difference in approach in cases dealing with Payment Notices and Pay Less Notices. The guidance from the authorities applied equally to a Payment Notice and a Pay Less Notice, therefore:
“Each has to make plain that it is, respectively, a payment notice or a pay less notice. Each has to clearly set out the sum which is said to be due and/or to be deducted, and the basis on which that sum is calculated. Beyond that, the question of whether or not it is a valid notice in accordance with the contract is a matter of fact and degree…” [paragraph 29].
The Court’s view was that based on the principles identified in the authorities, the Pay Less Notice sent by Grove on 18 April 2017 did properly set out the basis of calculation so that, contrary to the adjudicator’s decision, it was a valid Pay Less Notice and there could be no doubt that the detailed calculation sent five days earlier with the purported Payment Notice of 13 April would have permitted the reasonable recipient to understand precisely how Grove’s valuation and the amount of £1.4 million odd, was calculated. In accordance with the test in Henia, there was a detailed agenda for any subsequent adjudication as to valuation: how could it be otherwise, when the same spreadsheet had been used by each party to identify their differences? Secondly, there can be no possible objection in principle to a notice referring to a detailed calculation set out in another, clearly-identified document. That is how these things are commonly done.
In relation to Issue B, the Court decided in Grove’s favour on the basis it was the only permissible consequence as a result of the finding in relation to Issue A and therefore the adjudicator’s decision should not be enforced.
In relation to Issue C, the Court decided in favour of Grove: “An employer who has failed to serve its own payment notice or pay less notice has to pay the amount claimed by the contractor because that is “the sum stated as due”. However, the employer is then free to commence its own adjudication proceedings in which the dispute as to the ‘true’ value of the application can be determined.”
The Court further stated:
“…At all times I keep in mind the simplicity of the underlying issue: can an employer, whose payment notice or pay less notice is deficient or non-existent, pay the contractor the sum stated as due in the contractor’s interim application and then seek, in a second adjudication, to dispute that the sum paid was the ‘true’ value of the works for which the contractor has claimed? In my view, on the application of first principles, there are six separate reasons why the answer to that question is Yes…”.
The six reasons stated by Court included:
1) The fact that a dispute about the true value of the works in an interim application for payment can be adjudicated upon as the true value was not decided in the earlier adjudication about notices.
2) Section 108(1) of the 1996 Construction Act provided:
“A party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with this section.”
Therefore, there was no limitation on the nature, scope and extent of the dispute which either party could refer to adjudication.
3) The dispute which the Employer wished to raise in the second adjudication would be different to that which was determined in the first adjudication. The issue to be determined in the first adjudication was whether or not there was a valid Payment Notice or Pay Less Notice or out of time and not the true value of the valuation.
4) The contract expressly differentiates between “the sum due” (Clause 4.7.2) on the one hand, and “the sum stated as due” in the payment notice or the pay less notice (Clause 4.9), on the other. The contract deliberately uses different terms and in the Court’s view, the answer is obvious. “The sum due” is identified in Clause 4.7 because that is the result of the contractual mechanism designed to calculate the contractor’s precise entitlement (the ‘true’ valuation). It is the process by which the correct amount, calculated to the penny, is arrived at. That is a very different thing to “the sum stated as due”, which is the phrase used twice in Clause 4.9. Clause 4.9 recognises that the contractor’s application/payment notice will identify the sum which the contractor has “stated to be due” and it provides that, in the absence of a payment notice and/or a Pay Less Notice from the employer, it is “the sum stated as due” which will be payable. Similarly, if there was a valid pay less notice, then it would be “the sum stated as due” in that notice that would be payable. In neither case would it be the sum due and payable (“i.e. the true value”).
5) The employer could refer the dispute about the true valuation to adjudication, once he had paid the sum stated to be due with regard to considerations of equality and fairness.
6) The only real justification which had been advanced in the cases for prohibiting an employer from commencing a second adjudication, to deal with the dispute about the ‘true’ value, has been the mantra that it does not really matter, because the prohibition only applies to interim applications, and does not apply to the final application. As a matter of first principles, there seems to me to be nothing whatsoever to justify this different treatment. There is nothing in the Act or the Scheme which draws any such distinction: on the contrary, s.110A, s.110B and s.111 of the 1996 Act apply to both interim and final payments.
In relation to Issue D, the Court decided in Grove’s favour. The Court’s was of the view that the two sets of notices were served in the correct sequence and were received in the correct sequence and therefore could not be said to be defective.
Conclusion
The case of Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) provides very useful guidance for the Construction Industry with regard to the requirements of Payment Notices and Pay Less Notices.
A number of important and practical points to note from the above, include:
a) The requirements of Payment Notice and Pay Less Notice are the same:-
· Each has to make plain that it is, respectively, a payment notice or a pay less notice.
· Each has to clearly set out the sum which is said to be due and/or to be deducted; and
· The basis on which that sum is calculated.
b) Whether or not a notice is valid in accordance with the construction contract is a matter of fact and degree.
c) It was permissible in a Pay Less Notice to refer to a calculation in another document (in this case a Payment Notice that had been sent a few days earlier).
d) A party was free to commence its own adjudication proceedings (i.e. a second adjudication) in which the dispute of the ‘true value’ of the works claimed in an application for payment could be determined.
The above is for general information only and to encourage discussion and does not constitute legal advice. The author does not assume any responsibility for the accuracy of any statements made and appropriate legal advice should be taken and relied upon before taking or omitting to take any action in respect of any specific matter. If the facts and matters referred to above are relevant to you or your organisation, then please do not hesitate to contact me in chambers to see how I can assist you or your organisation.
Charles Edwin Edwards MSt(Cantab) MSc(Lond) FCInstCES Barrister
(Head of Chambers)
Gray’s Inn Construction Chambers
344-354 Gray’s Inn Road
London
WC1X 8BP
E: [email protected]
