This update from David Wilson and Rebecca Barrass considers the requirements for a valid payment notice in construction contracts with particular reference to the recent decision in Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd a decision of the English High Court.

Requirements for Payment Notices

The Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy Act 2009 (“the 1996 Act”) introduced statutory requirements regulating payment under construction contracts. The 1996 Act is supplemented by the Scheme for Construction Contracts (“the Scheme”). Where a construction contract fails to incorporate any or all of the payment provisions required by the 1996 Act, the relevant provisions of the Scheme are implied into the contract.

Sections 110A and 110B of the 1996 Act require payment notices to be issued under construction contracts even where no sums are due. In terms of the 1996 act a valid payment notice must:

1. detail the amount due and the payment due date; and

2. detail the basis on which this sum is calculated.

A third requirement: clarity and free from ambiguity

A third requirement that a payment notice ought to be clear and free from ambiguity has been developed in recent case law to supplement the statutory requirements. In Caledonian Modular Ltd v Mar City Developments Ltd the court reminded contractors that to benefit from the 1996 Act statutory provisions payment notices must be clear. In Henia Investments Inc v Beck Interiors Ltd the court went further by requiring that payment notices must be unambiguous. This was reconfirmed by the court in Jawaby Property Investment Limited v The Interiors Group Ltd and another .

Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd English High Court

In the more recent case of Surrey and Sussex the Technology and Construction Court (TCC) considered the validity of payment notices particularly in relation to the third requirement for clarity and unambiguity. The contractor, Logan Construction, was employed by Surrey and Sussex Healthcare NHS Trust to refurbish areas in East Surrey Hospital.

The works were certified as practically complete on 25 August 2015. A final account meeting was arranged to take place on 21 September 2016 to agree the final account figure. The contractor sent an email to the employer on 20 September 2016 which referred to the impending meeting and attached various documents. One of the attachments was titled “Interim Payment Notice” and noted the balance payable to the contractor as £1.105 million.

The contractor’s 20 September 2016 email and its attachments were not discussed at the 21 September 2016 meeting. The parties were unable to come to an agreement in relation to the final account figure. Following the meeting on 21 September 2016, the employer sent an email to the contractor attaching the final certificate which detailed the balance payable to the contractor as £14,235.43.

The lack of consensus between the parties resulted in the employer referring the matter to adjudication and it was decided that the contractor’s 20 September 2016 email was a validly issued interim payment notice and that the employer had not issued a pay less notice. Therefore, £1.105 million was due to the contractor.

Thereafter the employer made a declaratory relief application to the TCC that:

Comment

Until Surrey and Sussex the court took a rigid approach to the validity of payment notices particularly with regards to the requirement for clarity and unambiguity. If parties sought to benefit from the provisions in the 1996 Act then they ought to issue payment notices in accordance with the same. In Surrey and Sussex the court relaxed this approach and looked around the payment provisions in the contract to the parties’ intentions. The validity of the payment notices was then construed against the contractual and factual settings.

Take-away points

The prudent practitioner should not leave a decision on the parties’ intentions in relation to the validity of payment notices to the discretion of the courts:

Before issuing payment notices look at the contract to be sure that you are following the correct procedure;

Make sure a payment notice is clearly titled as such;

If a payment notice is attached to an email make reference to the same in the main body of the email; and

Even if you consider a payment notice has been issued invalidly make sure a pay less notice is issued.