The Technology and Construction Court in England and Wales has recently considered the novel concept of what payment an employer genuinely considers is due to a contractor, when testing the validity of a payment notice.
Prior to this decision, it was understood that if various procedural requirements were met a payment notice would be valid and the notified sum paid accordingly, subject to any pay less notice. The court in this decision looked behind the procedural requirements and found that a payment notice was invalid because the employer did not genuinely think that the sum stated as due in the payment notice was correct.
Let's look at the details of this case and why the employer unwittingly got its notice wrong.
The parties in this case were Downs Road Development LLP (employer) and Laxmanbhai Construction (UK) Limited (contractor). The contract in place was an amended JCT Design and Build Contract (2011 Edition). The contractor issued an interim application for payment no. 34 in the sum of £1,888,660.70.
The employer issued a payment notice in response by the contractual deadline (five days after the due date), stating that the sum due was £0.97 (being an additional £1 less retention). The covering email advised "…that a further Payment Notice will be issued to you in due course and will not affect your payment date.”
As promised, six days later the employer issued a further payment notice stating that £657,218.50 was due and this sum was paid on the final date for payment. The employer had followed this pattern in the three preceding payment cycles, claiming that the applications were not easy to follow, included substantial information and were issued on the due date. For these reasons, the employer could not properly assess the sum due by the deadline for the payment notice and so would issue a form of holding response until it had time to properly consider the application.
The validity of the payment notice
The contractor raised adjudication proceedings, and this resulted in sums being awarded. However, the employer challenged the enforceability of the adjudicator's decision and as part of those proceedings, the court considered the validity of the employer's first payment notice.
The court found that the payment notice could not "realistically" be said to accurately state the sum due. This was clear from the employer admitting that a further notice would be issued. The further notice then stating significantly more than £0.97 was due, added weight to the court's view that the employer had no belief in its first notice.
The court also relied on the well-known test for whether a payment notice satisfies the requirements of the Housing Grants, Construction and Regeneration Act 1996 – does the notice provide an adequate agenda for adjudication? The court considered that the employer's notice failed to meet this test as it did not set out a basis of calculation. The employer had failed to provide any accompanying material to evidence how it had reached the gross valuation. There was no evidence given to explain why the gross valuation only increased by £1 and so no basis to test the employer's argument. The payment notice did not therefore provide an adequate agenda for an adjudication. The court was reinforced in its view by the adjudicator using the second payment notice to decide the dispute between the parties.
Payment notices must give fair notice of sum due
This decision could be said to introduce a new concept of testing the validity of a payment notice, by considering an employer's subjective belief in the sum due for payment. Such a concept could create more scope for disputes as it provides an additional means of attacking the validity of a payment notice and encouraging 'smash and grab' adjudications.
That said, parties should be careful not to stretch the reasoning in this decision too far. The court was influenced by the employer admitting that the notice was in effect a holding response and subsequently paying a much higher amount than stated in the payment notice. The court was also persuaded by the employer's failure to set out a basis of calculation, which alone would have been enough to invalidate the notice. A subsequent court may therefore expect these factors to be present if a party seeks to challenge a payment notice on similar grounds.
In summary, the clear message from the decision is that any form of payment notice must give fair notice of the sum considered due and provide an adequate agenda for adjudication. A notice issued as a holding response only and failing to meet these requirements, risks being invalid and creating a gateway for a smash and grab adjudication.