A recent decision of the Technology and Construction Court has reiterated the need for careful drafting when issuing a Pay Less Notice (PLN) under a construction contract.
Pay Less Notices
Disputes surrounding the value of work done under a construction contract are common, and special importance has been placed on ensuring that such disputes are clearly identified before they make their way to adjudication.
The Housing Grants, Construction and Regeneration Act 1996 allows an employer under a construction contract to issue a notice giving its intention to pay less than the sum certified in a payment certificate or sought in a contractor's application for payment. This Pay Less Notice (PLN) is a requirement if the employer wishes to avoid paying the sum certified or claimed. If an employer fails to issue a payment certificate and a PLN in the required time, then it will be contractually bound to pay the full sum claimed by the contractor. This results in what has become known as a smash-and-grab adjudication, where a contractor can be awarded the payment they have applied for, which the employer will be required to pay before any dispute about the true value of the work can be finally resolved.
Getting such a PLN correct is therefore critical.
Paying Less for What Work?
In Advance JV v Enisca Limited, the court was asked to consider whether a PLN was validly issued against either one or two payment applications.
Advance was the main contractor in a contract to design and construct a large utilities project. It employed Enisca as a subcontractor to design and install electrical works.
The subject of the dispute was two payment applications made by Enisca to Advance: Application 24 and Application 25. Advance issued a PLN after the issuance of Application 25, which began by referring to "application number 17", and later contained reference to "application No 25". The parties agreed that the reference to application number 17 was in error. However, they diverged in that Advance contended that the PLN was in reference to Applications 24 and 25, whereas Enisca argued that it only related to Application 25.
In deciding which argument was to be preferred, the court considered the case Bexheat Limited v Essex Services Group Limited, in which it was held that disputes regarding multiple payment cycles were, in fact, separate disputes. Bexheat was held to be authority for the proposition that there was a meaningful distinction between different payment cycles. Also, the fact that the Construction Act states that payment notices refer to the "notified sum" was held to link the PLN directly to an individual Payment Application, further characterising each application as a discrete ground for dispute.
Based on the calculations within the PLN, the court held that Advance's intention was not to dispute Application 24 but only Application 25. Additionally, the court held that, even if Advance's intention had been to dispute Application 24, the PLN was by no means clear or unambiguous in giving the appearance of such intention, and the reasonable recipient of the PLN would not have believed it to relate to the previous application.
How Should Notices be Drafted?
When a difference of opinion surrounding payment is emerging, is important to quickly assess whether any particular payment application is disputed. A PLN should be issued promptly, and it should identify that it is in relation to a specific payment application or payment certificate. Identifying a similar dispute later in the project will be of no use to an employer intending to resist a smash-and-grab adjudication in relation to an earlier payment application.