What are the requirements for a valid pay less notice?

Acting successfully for the respondent on a recent adjudication concerning disputed payments for compensation events has provided us with a useful insight into the approach adjudicators will take when determining whether a document is a valid notice of an intention to pay less (“Pay Less Notices”) under section 111 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (“Construction Act 1996”).

Summary  

The dispute in question concerned a payment application under the contract which incorporated the standard NEC3 Engineering and Construction Contract Option A terms. The referring party issued a payment application for disputed compensation events under the contract. Our client’s project manager responded in turn issuing a document by e-mail titled “Payment Certificate NEC” with the e-mail subject titled “payment application”. The certificate set out the value of the works, and the sum our client felt was due to the referring party, which the project manager considered was £0. The payment certificate was issued after the deadline for the project manager to issue his payment certificate.  

The contractor subsequently launched a smash and grab adjudication claiming the full amount in its payment application. On discussing the referral with our client we advised that whilst the payment certificate was not titled a pay less notice, the document constituted a valid Pay Less Notice for the purposes of the Construction Act.

Decision 

The Adjudicator found that our client’s Pay Less Notice complied with the contract and with the Construction Act 1996. Citing Coulson J in Grove, the Adjudicator believed that it was clear the reasonable recipient would understand how the sums on the Pay Less Notice were calculated and that the form of Pay Less Notice was consistent with the forms served the previous times over the duration of the contract. Out of the prior 26 payment applications, our client issued what it held to be Pay Less Notices in the same form as the payment certificate in question on 15 occasions. Some of these were served before, and some were served after, the deadline for the project manager to serve his payment certificate. The referring party accepted the consequence of these certificates each time.

The Law on Pay Less Notices

In supporting this the adjudicator was directed to recent case law where payment certificates or other documents could validly constitute a Pay Less Certificate.

1. Jawaby Property Investments Limited v Interiors Group Limited [2016] EWHC 557 (TCC)On this occasion the employer relied on a mark-up of the contractor’s initial valuation to an application as a valid Pay Less Notice. However the court held that this was not a valid Pay Less Notice. Carr J held that “an essential requirement for the service of a contractual notice [is] that the sender has the requisite intention to serve it. The senders’ intention is a matter to be assessed objectively taking into account the context”. One reason the court gave for doubting the intention was the completely different form the alleged Pay Less Notice was to that which had been provided previously. 
2. Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) [2017] 17 EWHC (TCC) In Surrey the court were asked to consider whether an e-mail and a final certificate constituted a Pay Less Notice. They held that a Pay Less Notice did not have to be titled a “pay less notice” or make specific references to a contractual provision relating to that Pay Less Notice in order for it to be valid. Nissen QC held that the key criteria was whether (i) viewed objectively, the notice had the required intention to be a Pay Less notice; and (ii) that the document, with its supporting material, was capable of substantively fulfilling the requirements of a Pay Less Notice. He stated the adjudicator was wrong to hold that it was not a valid Pay Less Notice because he focussed too much on the formalities of what the certificate was called and language used in the e-mail, and “not on the overall message and purpose which the e-mail and attachments would have conveyed to the reasonable recipient.” (para 64) 
3. Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) This case dealt with a pay less notice that did not specify the sums due in it, but referred to a previously invalid payment application which did. It was clear from the referenced document how certain deductions were calculated. This reference was deemed to satisfy the requirement for showing the basis of the calculations in that Pay Less Notice. Coulson J summarised the authorities as showing that a “a pay less notice will be construed by reference to its background, in order to see how a reasonable recipient would have understood it” and that the courts would be unimpressed by contrived or artificial arguments focussing on clerical errors that tried to invalidate a Pay Less Notice.

Commentary

The adjudicator followed the guidance set out by the courts in considering the following 3 questions:

1.  Can the document substantively fulfil the contractual and statutory requirements of a Pay Less Notice?
2. Can the intention of parties be objectively assessed?
3. Would a reasonable recipient understand that a document is a Pay Less Notice and the basis of on which the sum is calculated? 

Whilst it was possible to convince the adjudicator that a Pay Less Notice had been issued, given the serious consequences of not issuing the correct notices we suggest that parties do what they can to avoid disputes over the technicalities of notices. In order to avoid such disputes we suggest two practical steps.

1. Use an agreed form of notice throughout the project which will ensure
   • that the intention behind the notice is clear; and
   • it is clear that the recipient would have understood the purpose of the notice.
2. Ensure that notices are served before their contractual deadlines.

Content written by David Arnold, Associate, and Rory Budworth, Trainee Solicitor