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Pay Less Notices stop “Smash and Grab”

I last wrote about this subject on 12th May 2015, lamenting the lack of detailed guidance on the content of pay less notices and their predecessors, withholding notices. In Jawaby Property Investment Limited v The Interiors Group Limited [2016] EWHC 557 TCC, both the validity of applications for payment and the content of pay less notices under s. 111(3) to (5) of the Housing Grants, Construction and Regeneration Act 1996 (as amended) were considered.

Jawaby Property Investment Limited (JPIL) was the employer, The Interiors Group Limited (TIG) were the contractor under a JCT Design & Build 2011 form. The agreed valuation date for interim valuations was the 8th of each month.  

Six monthly applications for payment passed uneventfully. TIG sent valuations by email, with a spreadsheet and back up sheets, and a statement of the sum applied for. Each application stated that the valuation was for “approval” or “consideration”. JPIL would then inspect and issue its payment notice, and TIG would raise an invoice. JPIL was well versed in the requirements for pay less notices, issuing two during December 2015, each of which was headed "Pay Less Notice", referred to contract conditions and the Act, and  set out  what JPIL considered to be due at the date of notice, together with a breakdown of how the sum was calculated; text book stuff.

Things went wrong with the seventh application, in the sum of £2,352,937.29. For whatever reason, rather than waiting on TIG, on 5 January 2016 JPIL requested TIG’s valuation, and on 7th TIG sent its “initial assessment for Valuation 007”. JPIL visited site on 11 January 2016 and issued its payment notice on 15 January 2016, showing a negative figure of £-124,604.00. Both parties accepted that this was served too late to be a valid payment notice. 

TIG sought an explanation of the low valuation. JPIL replied on the 18January 2016, providing a marked-up copy of TIG’s application and explaining their valuation.

Faced with the fact that TIG’s application would stand as the ‘notified sum’, JPIL attacked the validity of the application. To adjudicate on this, the court could draw on key TCC cases from the last 18 months for guidance, including Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855, Leeds City Council v Waco UK Ltd [2015] EWHC 1400 and in particular,  Akenhead J’s statement in Henia Investments v Beck Interiors [2015] BLR 704 that an “…application for interim payment [must] be in substance, form and intent an interim application stating the sum considered by the contractor as due at the relevant due date and it must be free from ambiguity”.

TIG had described its valuation as an “initial assessment”, and the court found that it “… cannot objectively be construed as a statement by TIG of what it considered was due to it …”. The incorrect labelling of the summary sheet, and a valuation date of 7 January 2016 (not the contractual valuation date), and the failure to include supporting documents, such as invoices from suppliers and the like, or applications or build-ups from sub-contractors were also unhelpful to TIG. Overall, it decided that it was insufficient to satisfy the contractual requirement to show the basis on which the valuation had been calculated, and that a “…reasonable recipient of the Valuation would not have regarded it as unambiguously informing it that this was an Interim Application for the purpose of Clause 4.8.1”.  So the valuation was not payable, and JPIL did not have to rely on its alternative contention concerning its email of 18 January 2016.

However, although its above findings meant it did not have to, unusually, the court did consider JPIL’s contention that its email of 18 January 2016 amounted to a pay less notice.  Earlier judgments referred to in my previous article concentrated on the content of notices, but here the court gave great weight to JPIL’s intent behind that email; it was simply to supply a mark-up of the valuation and provide an explanation of the JPIL’s valuation, in response to request from TIG. The requirement for positive intent to serve a notice was absent, and the email was also very different in style from JPIL’s previous ‘official’ pay less notices. It could not amount to a pay less notice.

JIPL had initially applied for an injunction to restrain TIG from presenting a winding up petition, and then switched to claim under Part 8 of the Civil Procedure Rules to obtain these declarations.  Tactically, TIG had pursued an unwise strategy, threatening insolvency proceedings rather than adjudication, which meant the stakes were higher than usual in this payment dispute; a more cunning approach could have bought more leverage.  Although this case was not one of the now typical summary judgment hearings concerning enforcement of adjudicator’s awards, it illustrates that, faced with the regime imposed by the amended Act becoming discredited by ‘smash and grab’ adjudications on the back of default payment notices, the courts are now wise to opportunistic attempts to get advantage by representing routine correspondence as applications for payment or pay less notices.

The moral of this case for contractors is that failure to follow the formalities when applying for payment may mean that your recovery strategy for a particular application for payment is built on foundations of sand. It also indicates the folly of resorting to insolvency proceedings when there are doubts that ‘all your ducks are in a row’ – here, the application 007 itself – or there is a genuine dispute over the sum due, as indicated by JPIL’s negative valuation.  Insolvency courts have greater discretion to consider cross claims than a court charged with enforcing an adjudicator’s decision does; ‘pay now litigate later’ does not apply where there is a real risk of contractor insolvency.

It is curious that JPIL got its pay less notices right twice, then got it wrong the third time.  That illustrates the importance of consistent processes, diarising the due date for serving pay less notices and proper management supervision.  

For employers, a failure to do this will be fatal where the tight 5 day deadline for the employer’s payment notice has been missed, since without a pay less notice you cannot then avoid having to pay the contractor’s ‘notified sum’ unless you can demonstrate they are insolvent for reasons unrelated to you withholding payment.

If you are a contractor, ensure your applications for payment are prepared in the format, delivered by the method and at the time that the contract says they should be, to ensure their validity cannot be subsequently challenged

Employers must ensure that their pay less notices say that’s what they are, set out your view of the sum due and how it is comprised in no uncertain terms, and are sent in the manner and by the date provided by the contract.  The contractor should be in no doubt what it is when it hits his desk.  Your management processes need to focus on ensuring that happens.

If you are unsure what an effective application for payment or pay less notice should look like, how or when they should be sent, then speak to us.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.