Surrey & Sussex NHS v Logan Construction – the importance of clarity in payment notices

Payment provisions pursuant to most construction contracts (i.e. those governed by the Housing Grants, Construction and Regeneration Act 1996) are strict. Missing a deadline or failing to serve the correct kind of notice can create liabilities of millions of pounds in some cases, subject to final determination at the end of a project.

By way of brief reminder, a contractor pursuant to a JCT Design & Build 2016 contract, for example, should serve an interim payment application every month, and the later of either receipt by the employer of that application or the interim valuation date is the start of the monthly payment process. Seven days after the start of the process is the due date for payment. Not later than seven days after the due date, the employer is supposed to serve a payment notice, specifying the amount that is to be paid. If the employer intends to pay less than the sum specified in a payment notice or interim payment application, the employer must serve a pay less notice not later than five days prior to the final date for payment (which is 14 days after the due date). If the employer omits to serve a payment notice or pay less notice in time, it will be bound to pay the amount in the interim payment application even if the amount stated in the interim payment application is too high.

The court has confirmed the strict approach in cases like ISG Construction v Seevic College 2014. In that case, the contractor served an interim application requesting payment of £1,097,696 and the employer failed to serve a pay less notice. Despite the value of those works being subsequently valued at adjudication in the sum of £315,450, the court held that the full £1,097,696 had to be paid. The employer had unintentionally but implicitly agreed the value of the works at £1,097,696 on an interim basis and that had to be paid.

The consequences of payment applications and pay less notices can clearly be quite severe, and it is therefore extremely important that employers and contractors alike serve their documents in time, ensure they are accurate and also ensure that it is very clear what they are serving.

Clarity as to the nature of the payment notices was a feature of the judgment in Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Limited [2017] in the Technology and Construction Court (TCC). The case does not necessarily introduce new law, but it is a useful illustration.

The contract between the NHS Trust and Logan Construction was relatively straightforward, being a JCT Intermediate Building Contract with Contractor’s Design 2011 for a total contract sum of £4,388,000 for Logan Construction to refurbish operating theatres and a recovery ward.

Practical completion was certified on 25 August 2015, and the NHS Trust issued interim certificates every two months for ongoing works, as provided for in the contract. A certificate of making good defects was issued on 24 August 2016, which was the same date as the expiry of the rectification period. The 28 day period for a final certificate therefore commenced (if no interim payment application or certificate was issued), to expire on 21 September 2016. The parties then started discussing the final account.

Just before midnight on 20 September 2016, Logan Construction sent an email saying “Please see the attached ahead of our meeting tomorrow. I look forward to seeing you then”, enclosing a document which was headed “INTERIM PAYMENT NOTICE (Clause 4.10)”, asking for payment of £1,105,557.95. The NHS Trust appears to have thought that this document was Logan Construction’s position in relation to the final account, rather than an application for payment.

The NHS Trust therefore provided a Final Certificate by email on 21 September 2016 (being under the impression that they were discussing the final account) certifying that £14,235.43 was due.

The question for the court was whether the document sent on 20 September 2016 was a valid interim payment notice and whether the document sent on 21 September 2016 was a valid pay less notice.

The interim payment notice

The court reviewed the recent authorities on this point, including Caledonian Modular Ltd v Mar City Developments [2015], Henia Investments Inc v Beck Interiors Ltd [2015] and Jawaby Property Investment Ltd v The Interiors Group Ltd [2016] and made the following observation:

There is a high threshold to be met by any contractor who seeks to take advantage of these provisions whereby a sum automatically becomes payable if a timely employer’s notice is not served.

The court found that in fact the document contained within the email on 20 September 2016 was clear and free from ambiguity and could therefore be found to have been an interim payment notice.

The judge actually pointed out that he was close to finding that the document taken together with the surrounding correspondence actually took the form of final account discussions, and only on balance found that they were sufficient

The pay less notice

If you’re reading this without having read the judgment first, you may be thinking at this stage “what pay less notice?” however, the NHS Trust argued that the Final Certificate was, in effect, a pay less notice. If the same “clear and unambiguous” argument had been applied to the pay less notice that had been applied to the interim payment notice (bearing in mind that the judge was close to finding that the document marked “interim payment notice” was not in fact an Interim Payment Notice), their argument may have been doomed to fail.

However, in reliance on Thomas Vale Construction plc v Brookside Syston Limited [2016] the court found that the requirements for a pay less notice were less stringent. All that is required is whether, viewed objectively, the document has the intention to fulfil the function of the pay less contractual provisions. The Final Certificate appeared to fulfil that function, and therefore was held to be valid.

Comment

There is logic in this difference, even if it is a bit of an artificial difference of approach between the two types of notices. It is the contractor who wants to be paid, and if they follow these payment provisions successfully they may in fact be entitled to receive substantial sums of money that potentially they may not be entitled to (if the court subsequently rules on a final account that the proper sum should be much less). The consequences for the employer can be quite draconian. It stands to reason, therefore, that the courts should be strict with contractors; if they want to be paid, they have to comply with the strict letter of the contract and make it absolutely unequivocally clear to the employer that they are serving an interim payment notice.

By contrast, the employer is in a vulnerable position once a valid interim payment notice has been served. Substantial unfairness could be caused, for example, if an employer served a pay less notice which was technically defective, and the contractor then simply waited until the deadline passed and claimed that no notice had been served. The employer should, therefore, be given the benefit of the doubt and if a document looks like a pay less notice, it probably is.

One practical piece of advice the judge did give to employers was that there is no problem with serving a contingent pay less notice, and that parties are entitled to serve a notice without prejudice to their position that no such notice is required. Employers and contract administrators would be wise, therefore, to do exactly that if there is any doubt whatsoever as to whether they need to serve one.