A "pay less notice" can be valid even when it is not called this

The statutory regime governing payment applications and notices, under the Construction Act 1996, can be an unforgiving one. The timing of a “pay less” notice in particular is critical, and the consequences of getting it wrong can be severe. In the heat of a project, however, communications and notices do not always follow the ideal form and formalities.

The recent case of Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) will provide encouragement for employers that a failure to label a pay less notice as such will not prevent it from being a valid notice.  What matters is the “substance, form and intent” of the document.

What was the dispute about?

Logan Construction (South East) (the Contractor) was engaged by Surrey and Sussex Healthcare NHS Trust (the Employer) to refurbish parts of the East Surrey Hospital. The contract was for £4.388 million and comprised of the JCT Intermediate Building Contract with contractor’s design, 2011 Edition.

On 21 September 2016, representatives from the Employer and the Contractor met to discuss the Contractor’s final account. Prior to the meeting, the Contractor sent to the Employer an email with a number of attachments, including one entitled “Interim Payment Notice”. The gross sum totalled £5.96 million, leaving a balance of £1.015 million that the Contractor said was due to it.

The parties met and disputed the balance. Following the meeting, the Employer emailed the Contractor and issued the final certificate, including within that email spread sheet attachments with the adjusted contract sum of £4.9 million. Within the email, the Employer also disputed that the interim payment notice dated 20 September 2016 was valid. If the interim payment notice was valid, then any pay less notice had to be served by 24 September 2016.

The Contractor referred the matter to adjudication after it was not paid the £1.015 million it claimed was due, arguing that no pay less notice had been served.

On 25 November 2016, the adjudicator decided that the Contractor’s interim payment notice was valid and that no pay less notice had been issued. The result was the Contractor was entitled to the full sum it claimed pursuant to the Act.

The Employer applied to the TCC for a declaration that: the Contractor had not issued a valid interim payment notice; and the Employer had issued a valid pay less notice.

What did the court decide?

In the TCC, Alexander Nissan QC held that both the interim payment application and the pay less notice were valid. The judge considered the cases of Caledonian, Henia and Jawaby and the “substance, form and intent” of the documents. On this analysis, the judge found that the pay less notice was valid for the following reasons:

• The Employer had been mistaken as to the payment procedure under the contract by referring to what it would have certified in an Interim Certificate rather than a pay less notice. This did not mean, though, the Employer didn’t have the required intention to issue a pay less notice.

• It was clear from the Employer’s email that it intended the Final Certificate to be responsive to Logan’s Interim Payment Notice. The reasonable recipient would have understood that the Employer was mistaken.

• It was not essential to state expressly that a pay less notice was being given, nor did the Employer have to make specific reference to the relevant contractual clause dealing with pay less notices.

• A pay less notice could be validly given despite it being made subject to the validity of the Contractor’s Interim Payment Notice.

• Therefore, the contractual requirements for a pay less notice had been fulfilled (namely the sum had been specified and the calculation shown).

What are the lessons from this case?

This judgment is pragmatic, and has provided a little wiggle room for now within a tight statutory regime.  It still remains best practice, though, for Employers to clearly state that the document is a “pay less notice” and to refer to the relevant contractual provisions (due to the severe consequences under the Act for Employers not serving a valid pay less notice in time).

However, this judgment provides a potential life raft in cases where an Employer has acted quickly, but may have failed to explicitly state the document is a pay less notice. This decision will be welcomed by Employers and provides a warning for Contractors to be diligent when reviewing and considering Employer correspondence.