A recent Technology and Construction Court (TCC) case[1] has helpfully provided guidance about the requirements for valid payment and pay less notices. It seems there are a number of ways to “get noticed”.

The back-story

Logan Construction was the building contractor engaged by an NHS Trust to carry out refurbishment works at a hospital under a JCT Intermediate Building Contract with Contractor’s Design 2011. In the twilight period following practical completion, Logan didn’t apply for interim payments but the NHS Trust nevertheless issued interim certificates every two months in line with the contract.

The Certificate of Making Good Defects was issued, which triggered a further interim payment cycle and a 28 day period for issuing the Final Certificate.  Logan didn’t submit an application and nor did the NHS Trust issue an interim payment certificate.  On this basis, it was open to Logan to issue its own payment notice.

The parties met to discuss the final account on the due date for the NHS Trust to issue the Final Certificate. The evening before that meeting, Logan sent an email to the Employer with a number of attachments, including one called “Interim Payment Notice”.

Understandably, the NHS Trust didn’t have much opportunity to review this email and the attachments before the meeting. In fact, it is clear that the NHS Trust didn’t appreciate the implication of the description to the one of the attachments (“interim payment notice”); naturally, it thought that the purpose of the document was to set out Logan’s final account position.  After all, Logan had been promising that it would provide such a document for some time and that was the purpose of the scheduled meeting.

Ultimately, it didn’t prove possible to agree the value of the final account at the meeting. As such, later that same day, the NHS Trust issued a Final Certificate. In that email, the NHS Trust noted that it had received the contractor’s interim payment notice, but that it was late and therefore invalid; in any event, the details in the Final Certificate were the same as would have been stated in any final interim certificate which may have been issued.

Logan didn’t agree with the Final Certificate but the dispute that Logan referred to adjudication was not a final account dispute but rather a ‘smash and grab’ dispute in respect of the interim payment notice it had submitted.

In that adjudication, Logan argued that it had submitted a valid interim payment notice and that, as the NHS Trust had failed to serve a valid pay less notice, the NHS Trust had to pay the notified sum (i.e. the sum identified as payable in Logan’s payment notice).

The NHS Trust challenged that for two reasons:

(1) on the basis that the interim payment notice wasn’t valid; and

(2) even if it was valid, it had issued a pay less notice (its Final Certificate dated 21 September 2016).

Was the interim payment notice valid?

In short, yes. The court said that the notice must be construed against the contractual and factual setting in which it was issued. The test was whether the payment notice was ‘in substance, form and intent’ an interim payment notice. Here, it was, as it was ‘clear and free from ambiguity’.

On this basis, Logan was entitled to be paid the sum notified in its payment notice, unless that is, the NHS Trust’s argument that it had issued a valid pay less notice succeeded.

Was the pay less notice valid?

Again, and in short, yes. The NHS Trust’s email and attachments (including the Final Certificate) were capable of fulfilling the pay less notice requirements; they were sent with the ‘requisite intention’. A reasonable person on reviewing the NHS Trust’s email would have understood that the NHS Trust was saying that, if it was wrong about the contractual position, then it was valuing the work on the same basis as set out in the Final Certificate.

It wasn’t necessary for a pay less notice to be specifically labelled a ‘pay less notice’ to be valid. Further, there was nothing wrong in issuing a contingent pay less notice.

Top tips

The court has said that to be valid a pay less notice doesn’t actually have to be labelled as such. However, to avoid any argument or confusion about the purpose of a document, it is always best practice to label payment notices (whether interim or pay less) clearly.

Parties to construction contracts have long been issuing contingent (just in case) payment and pay less notices. The decision in this case means that, going forward, there will be less argument about whether such notices are validly issued.  If in doubt as to the status of a document received, the safest approach is to issue the appropriate payment / pay less notice on a contingent (just in case) basis.

[1] Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd [2017] EWHC 17 (TCC)

For further information, please contact:

Kate Onions, senior associate, Construction

T: 0121 234 0185

E: Kate.Onions@gateleyplc.com 

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.