PAYMENT AND PAYLESS NOTICES
Payment and payless notices used within the construction and engineering industry can create significant problems regarding their contents and the timing of such notices and are frequently subject of disputes.
The judgement in Placefirst Construction Ltd v Car Construction (North East) Ltd [2025] EWHC 100 from the Technology and Construction Court provides useful guidance on issues which, as stated by the judgement, the court was advised there was no authority. The two key issues which the court had to determine were as follows:
- Whether the contractor’s payless notice was invalid because it was served in advance of the date when it could properly have been served in accordance with Housing Grants, Construction and Regeneration Act 1996 (as amended) and the subcontract.
- Whether the contractor had served what was on objective analysis, intended and understood to be a payment notice in accordance with the act and the subcontract.
Adjudicator’s decision
This dispute was originally decided by the adjudicator in favour of Car Construction (North East) Ltd (the subcontractor), requesting Placefirst Construction Ltd (the contractor) to pay the subcontractor £867,031.36 in what is known as smash and grab adjudication.
Part 8 proceedings/enforcement proceedings
The contractor issued part 8 proceedings in the High Court whilst the subcontractor issued enforcement proceedings three days later. In accordance with the principles summarised in the Court of Appeal by Coulson LJ in A&V Building Solutions v J&B Hopkins [2023] EWCA Civ 54, at paras 34 – 40 (referring to the TCC guide at sections 9.4.4 to 9.4.5), the court decided that both the part 8 claim and the part 7 enforcement proceedings should be dealt with at the same hearing.
Factual background
The subcontract agreement between the contractor and subcontractor comprised of a JCT Design and Build 2016 form of subcontract (as amended). The payment terms including the timing of interim applications, payment notices, and payless notices as set out in clauses 4.6 to 4.10 of the subcontract. The contractor was required to give a payment notice not later than five days after the due date. There were no requirements as to the format of the payment notice which was to be provided in accordance with the act.
The contractor was required to pay the amount specified in the payment notice or, if there was no payment notice, the interim payment application by the final date for payment. This was subject to the contractor given the payless notice no later than two days before the final date for payment in which case the contractors obligation was to pay the amount specified in the payless notice.
This was subject to the contractor given the payless notice no later than two days before the final date for payment in which case the contractors obligation was to pay the amount specified in the payless notice.The gross valuation for each interim payment was to be calculated in accordance with detailed provisions in clause 4.9 of the subcontract (as amended) which permitted the contractor to deduct any amounts which it was entitled to withhold, deduct or set off under the subcontract.
On 24 July 2024, the subcontractor emailed the contractor its interim application for month ending 31 July 2024. On 31 July 2024, the contractor emailed the subcontractor. This email included two attachments. The subject line of the contractor’s email stated: ‘CAR Construction Payless Notice and Valuation 30’. The attachments were identified as ‘Valuation 30 – Payless Notice.pdf’ and ‘Valuation 3.xlsm’. The contractor’s attached letter dated 31 July 2024, provided a summary as to how the gross amount had been calculated and how the amount due of -£22,812.15 was arrived at.
The contractor’s attached letter dated 31 July 2024, provided a summary as to how the gross amount had been calculated and how the amount due of -£22,812.15 was arrived at.
It was clear from the information that the contractor had deducted the amount of £141,501.43 for loss and expense in order to arrive at a negative amount. The first tab in the Excel spreadsheet contained the same information as provided in the letter, under the heading of ‘Summary’. The second tab was titled ‘Payment Certificate’ and the worksheet set out therein was headed ‘Subcontract Payment Certificate’ and identified the invoice number as ‘val30’ and the certificate number as ‘pf30’. Further, it stated the date to be 31 July 2024 and also stated payment due no later than 28 August 2024 which was the final date for payment in accordance with the subcontract.
Technology and Construction Court’s analysis
It is the subcontractor’s case that the contractor’s payless notice was invalid because it was served before the date when it could validly have been served.
The court considered the relevant payment provisions of the act, in particular, sections 110A (payment notices: Contractual requirements), 110B (payment notices: Payee’s notice in default of payer’s notice), 111 (requirement to pay notified sum), and a summary of the law on the interpretation of notices set out by Joanna Smith J at paragraphs 46 and 47 of the judgement of Advance JV & Ors v Enisca Limited [2022] EWHC 1152.
Issue 1: Was the payless notice a valid payless notice if served earlier than the act and/or the subcontract?
It is the subcontractor’s case that the contractor’s payless notice was invalid because it was served before the date when it could validly have been served in accordance with act and/or the subcontract. The payless notice, issued by the contractor, complied with the requirements in subsection 111(5) (a) of the act in terms of form and content, the only dispute remaining was the further requirements of subparagraph (b) and that ‘case referred to in subsection (2)( b) or (c), it may not be given before the notice by reference to which the notified sum is determined’.
The High Court stated subsection 110A(3) applied to notices required to be given by a payee and specified the requirements with which it must comply in order to be a valid payment notice. The court found section 110A(3) does apply for the following reasons:
- A: Under the amended form of subcontract CAR was required by clause 4.6 to submit an interim payment application which was to include a statement of the sum that [CAR] considers to be due to him at the date when the relevant interim payment shall be calculated and the basis on which that sum is calculated. This was subtly different to clause 4.6.2 of the standard form which, where the subcontract particulars state that it applies, the subcontractor is required to submit an application stating the sum the subcontractor considers will become due at the due date and the basis on which that sum is calculated.
- B: The wording as amended complies with s.110A(3)( a), whereas the unamended wording does not, because it refers to a sum the subcontractor considers will become due at a future date. In my judgement s.110A(3)( a) cannot properly be read as if it said, the sum that the payee considers to be or to have been due or that will become due at the payment due date.
- C: It follows that the interim payment application given by CAR in compliance with the contract (as amended) met the requirements of a payment notice under s.110A(3), even though it would not have the effect of a payment notice unless and until Placefirst had failed to give a valid payer’s payment notice.
- D: It also follows that on the hypothesis identified in paragraph 40 above, i.e. that Placefirst did not serve a valid payment notice, then s.111(2)( b) applied, because the interim payment application was the relevant notice, and it thus follows that Placefirst’s payless notice was not given before the notice by reference to which the notified sum is determined.
The court further stated that in any event, section 110A(3) would apply indirectly via section 111(2)( c). This is through section 110b which deals with payee payment notices in default of a payer’s payment notice. This section applies to this subcontract because it required the contractor to give a compliant payment notice, not later than five days after the payment due date and on the subcontractor’s analysis, it did not do so.
The subcontractor is required to submit an application stating the sum the subcontractor considers will become due at the due date and the basis on which that sum is calculated.
Therefore, the requirements of subsection 110b(1) are satisfied, and thus 110b applies (paragraph 53 of the judgement). Subsection 110b(2) of the act allows the payee in such a case to give section 110a(3) compliant notice at any time after the day on which the payment notice was required to be given. However, this is subject to subsection (4). Subsection (4) applies whereas in this case, the subcontract permits or requires the payee to give an advanced payment notification, and the payee does so. In such a case, that notification is to be regarded as a notice complying with section 110a(3) given pursuant to subsection (2).
The contractor’s argument included the submission that subsection 110b(4) and 111(5)( b) read together simply have the effect that the interim payment application is regarded as a payee notice which takes effect as such on the date when it was in fact sent. The subcontractor’s argument included (paragraph 58 of the judgement):
Whilst the High Court found the subcontractor’s arguments to be ingenious, the High Court found that there were two reasons why this submission was wrong.
“Is that because subsection 110B(2) only permits a payee notice to be given at any time after the date on which the payer’s payment notice must be given (i.e. five days after the payment due date), it follows that the deemed notice under subsection 110b(4) must be regarded as having been given no earlier than after five days after the payment due date. The submission is that, since unless and until that date arrives and the payer fails to serve a valid payment notice, it is unknown as to whether or not the interim payment application will or will not become a deemed payee notice, it must follow that it is only on that date that it can become an effective payless notice.”
Whilst the High Court found the subcontractor’s arguments to be ingenious, the High Court found that there were two reasons why this submission was wrong. The first reason is that there was nothing in the express wording of the clauses which dictates such a conclusion and further the subcontract simply states that the notice is to be regarded as being a section 110a(3) notice and that a payless notice must not be given before the date of such notice. The second reason is that there is no compelling reason in the court’s judgement which required this provision to be read in the way contended for because that reading is plainly consistent with its intended purpose whereas the literal reading is not.
Thus, the decision whether or not to serve a payment notice and a payless notice, or just to serve only one or the other, rests entirely with the payer. the parties’ (paragraph 63 of the judgement).
The rationale for a payless notice to be given before the interim payment application is clear-cut or else there would be no known sum from which a deduction could be made. Whereas there is no logical reason why a payless notice should not be given before the time for giving a payment notice has elapsed. As is apparent from the description in the act (and in the subcontract), there is no difference of substance between the content of a payment notice and a payless notice.
Thus, the decision whether or not to serve a payment notice and a payless notice, or just to serve only one or the other, rests entirely with the payer. Indeed, if the payer had to wait until the interim payment application was deemed to have become a payee notice, that would potentially prevent the payee from obtaining an earlier payment of the amount which the payer included in its payless notice. The court made clear that the object of the act, which is to improve cashflow, would not be satisfied had it adopted ‘an interpretation which has unhelpful consequences to one or other of the parties' (paragraph 63 of the judgement).
The court ruled in favour of the contractor on the first issue.
Issue 2: Did the contractor give a payment notice on 31 July 2024?
The court made it clear that in accordance with the act, what is required to be stated in a payment notice and that of in a payless notice is essentially the same since both notices are required to do the same thing, i.e. state the amount that the payer or payee considers to be due and the basis on which that sum is calculated. In regard to one notice operating simultaneously as a payment notice and a payless notice, the court cited Sir Peter Coulson writing extra-judicially in Construction Adjudication at paragraph 3.28, ‘the original provisions, which entitled a payer to serve a notice, operating as both a payment notice and a withholding notice, have been deleted in their entirety.
Thus the payer must serve both the payer’s notice and a payless notice in accordance with the new s111 in the periods identified’. Further, the court found no reason, in principle, why a payment notice and a payless notice could not be served at the same time under cover of the same email or letter (paragraph 69 of the judgement).
The court further stated at paragraph 88: If, it was unnecessary to do so, because it was necessary only to serve a valid payless notice, and the payless notice served in this case was, on a proper analysis of the requirements of the act, a valid payless notice, then that might well be a factor militating against it being construed objectively as a payment notice in a case where its interpretation is uncertain.
Conversely, if the payless notice was invalid because it was sent before the date when, on a proper analysis of the act, it could have been sent, that might fortify the conclusion that the subcontract payment certificate was intended to have separate contractual effect as a payment notice.
In conclusion, on the second issue, the court ruled in favour of the contractor and took the view that:
- There was no requirement that a payment notice had to expressly state that the sum stated was what the payer considered due at the ‘due date’.
- The subcontract in this case allowed for specific deductions to be made from the gross valuation, including loss and expense and these would not have been included unless the standard JCT subcontract form had been amended.
- There is no prohibition on a payment notice being in a negative sum.
Conclusion
The court, found in favour of the contractor on both key issues. Further, it was only necessary for the contractor to serve a valid payless notice and the payless notice served in this case was, on a proper analysis of the requirements of the act, a valid payless notice. Key points from the judgement include:
Further, it was only necessary for the contractor to serve a valid payless notice.
- The adjudicator’s decision requiring the contractor pay the subcontractor £867,031.36 was not enforced by the court as it was wrong. Adjudicators’ decisions are normally enforced, even if they are wrong, so this was one of those rare cases in which the court did not, on the basis of the adjudicator’s incorrect interpretation of the payment notices issued.
- The court clarified that a payment notice, and a payless notice can be served at the same time by email or letter, as long as they satisfy the act and the relevant requirements in the contract.
Charles Edwards is chair of the CICES Contracts and Dispute Resolution Panel.