A late 2021 court case, which revolved around payment notices and pay less notices, has important repercussions for construction contracts.
The case of Downs Road Development LLP v Laxmanbhai Construction Ltd has made it clear that, to be valid, payment notices and pay less notices must set out the amount genuinely considered to be due.
Under The Housing Grants, Construction and Regeneration Act 1996 as amended, payment notices and pay less notices should state the sum the party (usually the paying party) considers to be due, along with details of how that sum has been calculated.
Previously, the validity of a payment notice has hinged on its content, form and method of delivery, but this recent Technology and Construction Court (TCC) case adds a subjective element into the mix, requiring that the sum stated is the amount the giver of the notice considers to be due.
In the case in question, Downs appointed Laxmanbhai Construction Ltd (LCL) as contractor in the construction of four blocks of flats.
On 26 February 2021 LCL submitted an interim payment application stating that £1,888,660.70 was due in accordance with the terms of the contract.
On 3 March 2021, Downs Road Development LLP’s (DRD) agent issued a payment notice stating that £0.97 was due, explaining in their covering email that it was taking longer than expected to assess LCL’s payment application because the application had been sent on the due date.
A further notice was issued on 9 March 2021, stating that the amount due for payment was £657,218.50. This was paid by DRD on 26 March 2021.
LCL began an adjudication at which one of the matters that the TCC considered was whether the DRD payment notice of £0.97 on 3 March 2021 was validly given.
DRD argued that the payment notice was valid as it set out an ‘agenda for adjudication’, explaining that valuation was still taking place and that a second payment notice would follow. However, the court rejected this argument and deemed the first payment notice invalid because it did not set out the amount that DRD genuinely considered to be due.
The court went on to explain that DRD clearly intended to issue a second payment notice, but that this would set out a radically different figure to the first and, while they had not been able to provide an accurate valuation, they knew the actual figure would be considerably more than £0.97.
The decision will make employers wary of stating that the amount quoted is subject to revision or of issuing a notice that is merely a holding measure, for fear that this invalidates their notice.
Equally, the case could lead to an increase in ‘smash and grab’ adjudications where the amount specified by the contractor becomes the ‘notified sum’, which is required to be paid, in the absence of a valid payment notice.
It’s an interesting case that has implications for contractors and employers and it’s worth noting that the principle of genuine belief as to the sum considered due extends to all JCT and NEC standard forms in relation to applications for payment.
If you have any questions on this case or need help with any construction contract issue, please don’t hesitate to get in touch with either our Stoke-on-Trent, Birmingham or Altrincham office by emailing email@example.com or calling our head office on 01782 205000.