Multi-tasking - a final certificate that is also a Pay Less Notice (in disguise?)

19 January 2017

The notice provisions under the statutory requirements relating to payments under construction contracts are stringent. You need to be in a position to prepare valid notices and to recognise notices when they land.

The latest decision on these requirements reminds us that in terms of "Pay Less Notices", the intention of the sender together with the substantive content of the document will be determinative. The judgment presents an enlightening comparison of the different standards applied by the courts to the construction of payment and pay less notices and is worth considering in some detail.

The dispute was between Surrey and Sussex Healthcare NHS Trust (the Trust) and Logan Construction (South East) Limited (Logan). The Trust appointed Logan to carry out refurbishment and associated works at the East Surrey Hospital near Redhill in Surrey for approximately £4.4m under a JCT Intermediate Building Contract form with Contractor's Design 2011.

In purely financial terms, Logan considered it has an entitlement to a payment of approximately £1m whereas the Trust's position was that the balance due to Logan was approximately £14k.

Factual background

  • Practical completion of the works was certified on 25 August 2015 and the Final Certificate was due to be issued by 21 September 2016. The parties had numerous meetings to discuss the final account and scheduled one such meeting for 21 September 2016.
  • On 20 September 2016, Logan's QS, Mr Crook, sent an email to the Trust's QS (Mr Stone) headed "....Account Meeting 21st September 2016" attaching various documents, including a document headed "Interim Payment Notice" seeking payment of approx £1.1m (Logan's September IPN).
  • At the meeting on 21 September 2016, the final account valuation was discussed. The fact that Logan had issued a document entitled Interim Payment Notice was not discussed. No agreement was reached on the final account.
  • Later that day, Mr Stone sent an email to the Trust copied to Mr Crook entitled "...Final Certificate" appending various documents (which together, we will go on to refer to as the Trust's notification of 21 September for ease of reference below) which set out the Trust's position and resulted in a balance payable of approximately £14k (with a full breakdown).

    In his covering email, Mr Stone stated that he was attaching the Final Certificate, and the Adjustment of Contract Sum issued on 22 May 2016. Notably, he also stated "...on 20 September 2016 I received an Interim Payment Notice dated 24 August 2016 from Logan Construction. The last due date for an Interim Payment Notice under...the Building Contract was 24 August 2016 and as such the out of date and void. In any event, the details stated in the Final Certificate are the same as would have been stated in any final Interim Certificate which may have been issued...".
  • In November 2016, Logan was successful in an adjudication seeking payment of the sum set out in Logan's September IPN. By this time (anticipating the decision by the adjudicator), the Trust had commenced TCC proceedings seeking the declarations set out below.

The Declarations sought by the Trust:

  1. that Logan's September IPN was not a valid Interim Payment Notice; and
  2. that the Trust's notification on 21 September constituted a valid Pay Less Notice.

Was Logan's September IPN a valid Interim Payment Notice?

The Trust argued that Logan's September IPN was not valid as the parties were already engaged in final account discussions and at the meeting on 21 September, Logan's September IPN was not mentioned - thus (it was argued) the notice was not unambiguous and so, not valid.

Logan accepted that the covering email with Logan's September IPN was not as clear as it might have been but argued that the Notice document itself was clear in substance, form and intent. Also, the Trust's notification of 21 September had confirmed that Logan's September IPN had been received (which it was argued Mr Stone wrongly assumed was out of date and void).

TCC's Decision: Logan's September IPN was a valid Interim Payment Notice

The Judge considered it was notable that the Contract Administrator was in breach of the Contract by failing to issue an Interim Certificate on 24 August 2016 - this had led to the current dispute. It was no answer to say that the final account process overtook the need for the interim payment regime.

Logan's September IPN was an interim payment notice in substance, form and intent - it was clear and free from ambiguity.

Was the Trust's notification of 21 September a valid Pay Less Notice?

The Trust argued that the law relating to pay less notices is less prescriptive than for a contractor's notice. Although the primary function of the Trust's notification of 21 September was to issue the Final Certificate, in substantive terms, the notification contained all the relevant information required.

Logan argued that in order to be valid, the sender must objectively intend that the document should stand as a Pay Less Notice and there was no such intention (evidenced by the fact that Mr Stone had clearly stated in the Trust's notification of 21 September that he did not consider Logan's September IPN to be a valid payment notice).

TCC's Decision: the Trust's notification of 21 September was a valid Pay Less Notice

The Judge considered that nothing turned on the fact that the Trust's notification of 21 September was not addressed directly to Logan - it was cc'd to Logan and a box in a relevant pro forma had been crossed to confirm it had been issued to the contractor.

To constitute a valid Pay Less Notice, the notification had to specify the sum which the employer considered to be due at the date of the notice, and the basis of calculation. It was conceded by Logan that the Trust's notification of 21 September fulfilled both requirements.

The key issue in the Judge's view was not the substantive content of the document (which was agreed to be "compliant" in any event) but whether or not Trust's notification of 21 September was intended to constitute a Pay Less Notice. The Judge agreed that such intention was "an essential requirement" but said that "that intention must be derived from the manner in which it would have informed the reasonable recipient". His conclusion was that "..... on a broader level, one intention of [the Trust's notification of 21 September] was that it should be responsive to the Interim Payment Notice".

Drawing from previous caselaw, the Judge stated that the Trust's notification of 21 September provided "an adequate agenda for an adjudication as to the true value of the Works on an interim basis for the purposes of [that Valuation]".

Further notable points on validity were as follows:

  • The valuation date referred to in the Trust's notification of 21 September was different to that stated in Logan's September IPN - it was accepted that this was not enough to invalidate it. The amount to be paid pursuant to a Pay Less Notice under the Contract was to be determined at the date the notice was given - ie the valuation did not have to be made at the due date for payment.
  • The Judge saw no difficulty with the idea of serving a contingent Pay Less Notice ie the Judge took the approach that effectively, in his email of 21 September, Mr Stone was saying: I consider Logan's September IPN to be invalid but if it is not, here is a Pay Less Notice. The Judge said that Mr Stone's secondary intention in issuing the Trust's notification of 21 September was to rely on the Pay Less Notice if he was wrong about the invalidity of the Interim Payment Notice.
  • There was no reference to "Pay Less Notice" or the pay less notice clause in the Contract anywhere in the Trust's notification of 21 September - nevertheless, the question was whether, viewed objectively, it had the requisite intention to fulfil that function; it did.

Content or Intention?

As was emphasised in this case, "draconian consequences.. .flow from a failure to serve a compliant Pay Less Notice in response to an Interim Payment Notice". If you are in a position where you may receive a pay less notice, always be aware that (subject to the terms of the relevant contract) any documents you receive from the paying party setting out their view and breakdown of the sum due may constitute a valid pay less notice, even if there is no overt suggestion on the face of the documents that they are so intended.

In light of this judgment, we suspect that many parties currently in the throes of a payment notice dispute will be hurriedly revisiting relevant communications with fresh eyes, to ascertain whether or not they can (arguably) be relied upon as constituting a valid pay less notice.

If the substantive content of those documents can be demonstrated to be "compliant", one might argue that a paying party is almost home and dry, as based on this decision, even demonstrating a secondary and contingent intention to issue a pay less notice may be sufficient.

If the content is compliant ("containing all the material information which should be conveyed by a Pay Less Notice"), a party expecting payment may find that the task of seeking to demonstrate the absence of any such secondary intention to issue a pay less notice surprisingly arduous.

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