Legal Q&A: Payment under construction contracts

What’s the latest you need to know?

A NEW decision from the Technology and Construction Court (TCC) has considered the subjective requirements for payment notices in the construction act and said that the amount the payer ‘considers’ to be due should be interpreted as ‘genuinely considers’ to be due. This outcome is essential reading to anyone involved in payment under construction contracts.

The facts

The case is Downs Road Development LLP v Laxmanbhai Construction (UK) Limited (2021) EWHC 2441 (TCC). Downs was the employer and Laxmanbhai was the contractor, appointed under a 2011 Joint Contracts Tribunal (JCT) Design and Build Contract with amendments.

The project involved construction works to develop a site in London; demolishing existing buildings and constructing four new buildings of residential flats.

Matters went awry when it came to payment cycle 34. Laxmanbhai submitted an interim application for payment on 26 February 2021, which was the due date under the contract. It claimed the sum due was £1,888,660.

On 3 March a payment notice was issued by the employer’s agent, stating the sum due was 97p. However, in the accompanying email the employer’s agent said that it had been taking longer than anticipated to assess recent interim applications given the way they were set out, the volume of information included and the fact that they were being issued late afternoon on the due date. As a result, it claimed, it was difficult to make a fair assessment in a timely manner.

The employer’s agent also confirmed that a further payment notice would be issued in due course and this would not affect the payment date (a practice it had adopted in recent payment cycles). True to its word, a further payment notice was issued on 9 March stating that the sum due was £657,218. This was paid on 26 March. 

Payers need to be cautious in attempting to use payment or pay-less notices as a holding tacticLaxmanbhai raised an adjudication, seeking the correct sum due to it for interim payment number 34. The adjudicator found a significant sum was due to Laxmanbhai. When Downs didn’t pay up, Laxmanbhai went to the TCC for enforcement.

This meant the question of whether the first payment notice of 3 March 2021 was valid under the Housing Grants, Construction and Regeneration Act 1996 as amended came before the court.

Downs admitted the second payment notice was invalid because it was out of time. However, it maintained the first payment notice stating the sum due was 97p and which was issued within time, was valid. This was because it ‘provided an agenda for adjudication’ (a term used in previous cases), in that it set out the amount which Downs contended was due and said why that sum was due. Therefore the first payment notice met the requirements of the construction act.

Laxmanbhai disagreed and said the first payment notice was not valid. This was because it did not set out the sum which Downs genuinely considered to be due, nor did it set out a proper basis of the calculation. Instead it was a place-holding exercise to gain Downs time to make a fuller assessment and to present a fuller case in response to Laxmanbhai’s interim application for payment and to avoid the consequences of having failed to serve a payment notice while it was taking those steps.

The decision

The court agreed with Laxmanbhai in finding the first payment notice was not valid. The construction act (section 110A(2) (a)) requires that payment notices have to specify the sum the payer ‘considers to be due’ and the basis on which that sum is calculated. This leads to the notified sum which must be paid under section 111 of the construction act, unless a pay-less notice is issued. Here the court found that ‘considers to be due’ requires to be what the paying party genuinely considers to be due.

The court found this was lacking in the first payment notice. This was evident because the employer’s agent’s email said a second payment notice would follow; Downs clearly envisaged that the second notice would set out a different figure (which would be the figure Downs in fact considered to be due); and whilst it may not have formed a view on the precise amount it believed was due at the time of giving the first payment notice, it was not credible to suggest Downs did not realise a substantially greater sum was due. However, the court said it was not necessary to find that Downs was acting in bad faith.

The impact

This case is important. It goes to the heart of the sums due under the construction act’s payment regime and it is something payers and payees alike need to be aware of. It seems to be the first time the courts have expressly addressed the subjective requirements for payment notices in the construction act and said that the amount the payer ‘considers’ to be due should be interpreted as ‘genuinely considers’ to be due.

This is likely to apply in the same way to applications for payment and pay-less notices, given the same wording appearing in sections 110A(3) and 111(4) of the construction act. Accordingly payers need to be cautious in attempting to use payment or pay-less notices as a holding tactic and payees need to be careful in how they prepare applications for payment.

This could also open the door for a different breed of smash and grab adjudications, where payees could make claims based not only on failures of notices to meet procedural requirements (such as their timing/format/sufficiency of information), but also around the subjective requirement of whether the sum stated is one genuinely considered to be due. In this case Laxmanbhai was able to rely on the accompanying email from the employer’s agent and the second payment notice to demonstrate Downs’ subjective intention, but this may be harder to demonstrate in other cases and adjudications may have to grapple with evidential issues in proving the subjective requirement of ‘genuine belief’.

As ever, a thorough approach to notices is recommended, because the more detail given about the sum considered due and how that has been calculated, the less likely it will be challenged on the grounds that the giver did not have a genuine belief in the amount stated as due.

Jane Fender-Allison, Of Counsel, CMS Cameron McKenna Nabarro Olswang
Jane.Fender-Allison @cms-cmno.com www.cms.law @cms_law