Judgement clarifies law on construction payment notices

By RYLAND ASH, London Dispute Resolution Partner at Watson Farley & Williams LLP

[AN IMPORTANT DECISION in the Technology and Construction Court (TCC) (Downs Road Development LLP v Laxmanbhai Construction (UK) Limited [2021] EWHC 2441 (TCC)) 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, known as the Construction Act. A payment notice must comply in substance, form and intent with the requirements of the contract to which the application relates. 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 s110A(2)(a) of the Construction Act that a payment notice must state the sum the payer ‘considers’ to be due.

This decision is important as it identifies another basis on which parties claiming payment may seek to challenge the validity of payment notices.

Downs Road Development (the employer) engaged Laxmanbhai Construction (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. The contractor disputed the employer’s valuation and commenced adjudication proceedings for the true value of its application 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.

Part of the TCC’s decision was that a payment notice must specify ‘…the sum that the payer considers to be or have been due at the payment due date’. 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.

Following the 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 genuinely believed was due at the relevant date.

When negotiating construction contracts, parties must ensure they allow sufficient time for valuations to be prepared.

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. q