Invalid Payment Notices & Requirement for Genuine Belief

In this latest feature from Ryland Ash of WFW writes about how, for the first time, the TCC has provided guidance on the requirement in s.110A(2)(a) of the Construction Act that a payment notice must state the sum the payer “considers” to be due.

An important Technology and Construction Court (“TCC”) decision¹ has clarified for the first time that payment or pay less notices served without a genuine belief in the sum stated as due may be invalid and open to challenge.

The minimum requirements covering interim payments in construction contracts are set out in the Housing Grants (Construction and Regeneration) Act 1996 (the “Construction Act”). A payment notice must comply in substance, form and intent with the requirements of the contract to which the application relates (see our previous briefing on this issue here). There is a long history of case law dealing with the requirements for valid payment notices.

Now, for the first time, the TCC has provided guidance on the requirement in s.110A(2)(a) of the Construction Act that a payment notice must state the sum the payer “considers” to be due.

Facts

Downs Road Development (the “Employer”) engaged Laxmanbhai (the “Contractor”) to construct four blocks of flats in East London under an amended JCT Design and Build Contract.

The Employer operated an unusual approach to interim valuations on the project. Following the Contractor’s applications for payment, the Employer would generally send two payment notices within each payment cycle. The first payment notice, sent within the required timescale, would confirm a nominal sum (such as £nil or £1) as the amount due. A second payment notice, sent after the relevant deadline had expired, would state the true sum the Employer considered due.

A dispute arose between the parties regarding the Contractor’s February 2021 interim payment where the Employer had adopted its usual approach of issuing two payment notices. The Contractor disputed the Employer’s valuation and commenced adjudication proceedings for the true value of its application (as opposed to a ‘smash and grab’ adjudication on the basis the payment notice was invalid). The adjudicator awarded a payment to the Contractor. When the Employer did not pay the sum awarded, the Contractor commenced enforcement proceedings in the TCC. One of the key issues before the TCC was the validity of the Employer’s payment notice. That is the aspect of the judgment we will cover in this briefing.

Decision

A payment notice must specify “the sum that the payer considers to be or have been due at the payment due date”² (emphasis added). However, in this case the Employer’s covering email to the February 2021 valuation stated that a further notice would be issued in due course. This indicated that the Employer’s payment notice did not accurately state the sum which the Employer considered to be due at the payment due date. Indeed, the covering email indicated a further notice would follow which would contain an entirely different figure. As a result, the payment notice did not satisfy the requirements of the Construction Act and was invalid.

The judge distinguished this case from those such as Henia Investments v Beck Interiors³ on the facts. Henia Investments concerned a pay less notice which said that “£0” was due, but contained a valid explanation of how that figure came about, with reference to certificates issued by the contract administrator and noted “there was no suggestion that the Employer was acting in anything other than a bona fide way”. The judge emphasised that such cases were not purporting to create a test other than that in s.110A(2)(a) of the Construction Act, but rather were addressing the adequacy of particular documents for the purpose of that test.

Comment/ Key Takeaways

• Following this decision, it is more important than ever for employers to make a genuine attempt to value works at the time the relevant notices are served. Employers will have to show that any amount submitted in a payment or pay less notice was the sum they genuinelybelieved was due at the relevant date;
• Attempts to buy more time by serving unrealistic and unsubstantiated payment notices may invalidate the notice entirely and could lead to ‘smash and grab’ adjudications, with the contractor potentially claiming as due the sum submitted in its interim payment application;
• To avoid this, it is very important that employers maintain an accurate and updated valuation of the works to ensure they are ready to respond to interim payment applications within the required timescales;
• When negotiating construction contracts, parties must ensure they allow sufficient time for valuations to be prepared. How much time an employer needs will depend on the size and complexity of the project and the capacity of the employer’s valuation team; and
• Following on from the above, while there is scope to allow more time in the payment provisions for the submission and review of applications for payment before the due date, the Construction Act still imposes a strict timescale requiring payment notices to be served no more than five days after the due date.

This decision is important as it identifies another basis on which parties claiming payment may seek to challenge the validity of payment notices. To avoid such risks, parties making or certifying payments must make a genuine attempt to value the works. Payment and pay less notices served without a genuine belief in the sum stated as due, or outside the permitted timescales, risk being challenged leaving the payer exposed to ‘smash and grab’ claims for full payment. If in doubt, take expert legal advice.

Trainee Jude Boateng also contributed to this article.

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