A further complexity in assessing the validity of payment notices has been introduced in the recent TCC case of Downs Road Development LLP v Laxmanbhai Construction (UK) Ltd. It concludes that, in addition to meeting the procedural contractual requirements, employers should have a genuine belief that the sum stated in a payment notice is actually due.
We consider below the potential impact this could have on payment processes.
The parties’ dispute arose out of an engagement to perform construction works under a JCT Design and Build Contract (2011 edition).
In February 2021, pursuant to the terms of the contract, the Contractor issued Interim Application 34 for £1,888,660.70. Five days later, and in accordance with clause 4.10.1 of the contract, the Employer sent Payment Notice 34 stating that it considered £0.97 was due. The payment notice was accompanied by an email confirming that a further payment notice would be issued in due course and that the payment date would not be affected. Six days later the Employer duly issued Payment Notice 34a for £657,218.50, together with a valuation assessment.
This followed the Employer’s history of issuing a “holding notice” in order to comply with the contractual deadlines, before concluding a full assessment and re-issuing the payment notice. The reason the Employer gave for this conduct was that the Interim Application given by the Contactor was issued “late in the afternoon on the due date” and contained a lot of information which was difficult to follow. This meant that it took longer than anticipated for the Employer’s Agent to assess.
The court concluded that Payment Notice 34 was not valid for the following reasons:
- The Employer admitted it intended to send a further payment notice detailing the amount which it genuinely and accurately considered due. Therefore, the Employer clearly did not actually consider that the sum of £0.97 was due. It was not necessary to conclude that the Employer was acting in bad faith; and
- Payment Notice 34 did not set out the basis of calculation, and therefore did not satisfy the requirements of s.110A(2)(a) of the Housing Grants, Construction and Regeneration Act 1996 or clause 4.10.2 of the contract, and could not be said to provide an adequate agenda for an adjudication.
Important Considerations when Issuing Payment Notices
Employers will already be aware that there are strict contractual deadlines which payment notices must comply with. The effect of this decision is to affirm that payment notices must not only be correct in procedure, but in content too. This requirement for the employer to have an actual belief in the accuracy of the sum stated to be due could create a new basis for contractors to challenge the validity of payment notices.
It is worth noting however that the circumstances in this case were exceptional and clear cut.
The court concluded, in this instance, that it was not credible to suggest that the Employer did not believe that a substantially greater sum was due. It was clear from the accompanying email and the figures in the payment notice that the Employer had not, at the time, concluded what sum it genuinely considered correct, but it was also clear that it could not have realistically believed that £0.97 was due.
The requirement is not for the payment notice to be objectively correct, but for the Employer to genuinely believe it is accurate.
Two practical points to consider when issuing payment notices following this decision are:
- Parties are advised not to issue “holding notices” with the intention of issuing further, genuine, payment notices after additional review; and
- Payment notices should be accompanied by a clear breakdown of the calculation, which is capable of providing an adequate agenda for adjudication.