Background

The parties had entered into an amended JCT Design and Build (2016) form of subcontract. As amended, clause 4.6 of the subcontract provided that an interim application for payment should include "a statement of the sum that CAR considers to be due at the date when the relevant interim payment shall be calculated and the basis on which that sum is calculated.

On 24 July 2024, CAR issued its interim application number 30 claiming c.£867,000. In response, Placefirst sent an email on 31 July 2024 attaching a pay less notice and an excel workbook entitled "…Valuation 30". The pay less notice referred to Valuation 30 “which has been enclosed for your information". These documents concluded that a minus figure was due to CAR.

CAR referred the issue to adjudication for determination. CAR’s position, was that the material sent by Placefirst was clearly a pay less notice rather than a payment notice and the pay less notice was invalid on the basis that an effective pay less notice cannot be issued in response to an application for payment until that application has become the effective default payment notice.

The adjudicator agreed with CAR and concluded that Placefirst had failed to serve a payment notice or an effective pay less notice. Therefore, the amount claimed in CAR’s interim application for payment (i.e. the notified sum) was due and payable on the final date for payment.

Unsurprisingly, court proceedings followed, Placefirst issued part 8 proceedings seeking declarations to determine the validity of its payment and pay less notices. CAR thereafter issued its own proceedings and made an application for summary judgment to enforce the adjudicator’s decision. Both sets of proceedings were heard together given the overlapping issues.

Key Issues

Was the pay less notice a valid payless notice?

• The Court was required to determine at what point an application for payment would be regarded as the payee’s notice in default (s.110B(4) of the Construction Act 1996 (the "Act")), and therefore when a pay less notice could be issued under s111(5)(b).

• Placefirst argued that the effect of s.111(5)(b) and s.110B(4) of the Act (when read together) was that the interim payment application would be regarded as the default payment notice on the date when it was sent.

• CAR argued that s.110B(2) only permitted a payee notice to be given at any time after the date on which the payment notice was required to be given. Thus, it followed that the application for payment could not become the default payment notice until after this date, so no effective pay less notice can be issued before this point in time.

Did Placefirst give a valid payment notice on 31 July 2024?

• The Court was required to determine whether, as contended by Placefirst, the Valuation 30 excel workbook attached to its 31 July 2024 email was intended as a separate standalone document from the pay less notice. Placefirst submitted that the worksheet was in form and in substance, a valuation such as one would expect to see in a payment notice.

• If it was decided that Valuation 30 was a payment notice, whether it could be served alongside the pay less notice within the same communication.

• CAR's position was that Valuation 30 did not constitute a valid payment notice as it was intended to be a supporting document only to the pay less notice.

Decision

The Judge found in favour of Placefirst and decided that it had served both a valid payment notice, and a valid pay less notice for the following key reasons:

• Interim application 30 complied with the requirements of clause 4.6.2 of the sub-contract and the amended wording brought the notice into compliance with s.110(A)(3). The same is not true for the unamended version because it refers to a sum the sub-contractor considers "will become due to him".

• It followed that the interim payment application given by CAR met the requirements of a payment notice although that could only take effect as a payment notice under s.110(B) as a default payment notice if Placefirst failed to serve its payment notice.

• In the absence of a payment notice, Interim application 30 was effective as a default notice on the date that it was sent and not at a later date. This meant that Placefirst's pay less notice was not served early, i.e. before the notified sum was identified, but rather it was a valid pay less notice.

• Although the decision on the pay less notice was sufficient to determine the dispute in Placefirst’s favour, the Judge considered whether, in any event, it had, at the same time, issued a valid payment notice. When looked at objectively, the Judge said it was sufficiently clear that the documents Placefirst had sent with its 31 July 2024 email were intended to be a payment notice which was separate and distinct from the pay less notice it was sent with. In principle, there was nothing in the Act to prevent both notices being served at the same time.

In the circumstances, the Court declined to enforce the adjudicator’s decision.

Commentary

So called "smash and grab" adjudications are often perceived as an abuse of the adjudication process and at times result in draconian consequences for "technical" non-compliances with the Act. This decision might be viewed as the Court saying enough is enough. However, perhaps it serves more of a warning against the “unduly legalistic interpretation of [the] requirements [of the Act]". In reaching its decision, the Court was not persuaded by the overly technical, albeit "ingenious", legal arguments advanced by CAR. Ultimately, the Court considered substance over form and, in doing so, adopted a common sense approach,

Some practical takeaways to consider:-

1. The notified sum. The notified sum may be identified in a payment notice (s.110A), pay less notice (s.111(3)) or default payment notice (based on the application for payment (s.110B)).

2. Timing of a pay less notice. There is nothing in the Act to prevent a payor from serving the payless notice early i.e. before the time for service of the payment notice has elapsed. In the absence of a payment notice, the only requirement, is that the pay less notice must not be served before the date of the application for payment.

3. The wording of the contractual provisions are key. Clause 4.6.2 of the JCT Design and Build Sub contract 2016 does not comply with s.110A(3)(a) of the Act because it refers to a sum the subcontractor considers "will become due ". In this case, the clause was amended and did not refer to a future date, This was a subtle but key difference because it meant that the payment application would be, in the absence of a payment notice, the notice determining the notified sum.

4. No requirement to serve notices separately. The Act does not require the payer to serve payment and pay less notice separately, They can be served together at the same time. Also, if the notices contain the same information, it may not always be necessary to serve them both