Payment notices and strict forms

The Court of Appeal in London has issued a decision about payment, which will come as a relief to the supply chain in the construction industry in the wake of the Carillion collapse – at least south of the border. This article looks at the context of the decision in S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448 from a Scottish perspective.

In Trilogy Services Scotland Ltd v Windsor Residential [2017] SAC (Civ) 2, solicitors acting for Trilogy had issued letters to the respective partners of Windsor, in which they demanded payment of sums claimed due to their client under a contract, threatening that if payment was not made within 14 days, court action would be raised. That is normal practice for court practitioners. Trilogy’s solicitor argued that there was no entitlement to the payment claimed. The contract was a construction contract to which the payment provisions of the Housing Grants, Construction and Regeneration Act 1996 (as amended) applied. Trilogy had not served a valid and effective default notice, as required by the Act. Indeed, neither party had had any regard to the Act, either within their contract or subsequently. Therefore, a “notified sum” had not been created, so no entitlement to payment had been established.

The letters by Trilogy’s solicitors could not constitute the required default notice, Windsor said. It was obvious from the terms of the letters and the conduct of both Trilogy and its solicitors, that Trilogy had not intended the letters to constitute the required default notice.

Windsor relied on the following dicta:

(A) by Mr Justice Akenhead in the Technology & Construction Court in England, in Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC):
“Although it is not apt to talk in terms of conditions precedent, I consider that the document relied upon as an interim application under clause 4.11.1 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. If there are to be potentially serious consequences flowing from it being an interim application, it must be clear that it is what it purports to be so that the parties know what to do about it and when”;
and

(B) by Mr Justice Coulson, again in the Technology & Construction Court, in Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC):
“in all three documents where the claimant had the opportunity to say clearly that these documents were what they now say they were, namely a new application for an interim payment and/or a payee's notice, the claimant failed to do so. I consider that this omission is significant. It suggests that the claimant's case now, that the documents were in fact a fresh claim, is something of an afterthought. The only other alternative is that the claimant believed that it was in its best interests to be studiedly vague about the nature of the documents, so as to set up precisely the argument they advanced successfully in the adjudication. On any view, if they intended to serve a valid payee's notice on 13 February, they could and should have said that that was what they were doing”.

As a lack of intention was apparent, the document(s) relied upon could not in law constitute the valid and effective notice required to open the gate to payment. That was the end to the matter, argued Windsor. The Sheriff Appeal Court disagreed. In its decision of 17 January 2017 it remarked: “We do not read the decision of Akenhead J in Henia Investments Inc at para 17 as importing a requirement of 'intention' in each and every case”.

The court allowed the claim to proceed, notwithstanding that no one had intended to comply with the mandatory payment provisions of the Act.

Separate ways

That left unanswered questions. If intent is not required in every case, when is it required? More generally, when do the payer and payee require to comply with the Act as a precondition to payment?

Meanwhile, four days before the decision in Trilogy, the Technology & Construction Court confirmed that intention was required. In Surrey & Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd [2017] EWHC 17 (TCC), Mr Alexander Nissen QC upheld that a document had to be free from ambiguity and had to be a notice in form, substance and intent, in order to constitute an interim payment notice. While the essential requirement was that: “the sender should have the requisite intention, that intention must be derived from the manner in which [the purported notice] would have informed the reasonable recipient”.

Intended or not, this marked a fundamental split between the Scottish and English courts on the application of the payment provisions of the Act, so important to the construction sector.

Further decisions

The courts have continued to determine discrete issues about the payment provisions of the Act.

In October 2017, the Court of Session made a ruling in Muir Construction Ltd v Kapital Residential Ltd [2017] CSOH 132 on what a notice required to include. It determined that a purported notice (required by the contract to pay less than the sum otherwise due) was not valid because it did not: “at least... set out the grounds for withholding and the sum applied to each of these grounds with at least an indication of how each of these sums were arrived at”.

On 22 November 2017, in DC Community Partnership Ltd v Renfrewshire Council [2017] CSOH 143 the Court of Session held that it was not a prerequisite to arguing against a payment that a pay less notice had been issued detailing that argument.

In Adams Architecture Ltd v Halsbury Homes Ltd [2017] EWCA Civ 1735, the Court of Appeal in England confirmed in November 2017 that the payment provisions apply to all payments under a construction contract. They apply to interim payments, final payments and termination payments. The court also said that the payer must pay the notified sum, or the lesser sum of a valid and effective pay less notice, and then argue about the true value later.

In his decision of 16 March 2017, in Hutton Construction Ltd v Wilson Properties (London) Ltd [2017] EWHC 517 (TCC), Mr Justice Coulson recognised that since the decision in Caledonian Modular the “significant increase in these sorts of claims seems to me to arise principally from the ill-considered amendments to the 1996 Act, and the over-prescription of the payment terms included in the standard forms of contract, which have led to provisions of unnecessary complexity”.

The Jackson review

Finally, perhaps, we may have a complete judgment on the operation of the Act. Sir Rupert Jackson, giving the judgment of the Court of Appeal in S&T (UK) Ltd, has undertaken a comprehensive review of the salient cases which have passed judgment on the Act pre- and post-amendment, observing that he found it: “impossible to reconcile all of the first instance decisions with one another or to say that all of them are right in every particular… This is not a criticism of the judges concerned. We are all trying to hack out a pathway through a dense thicket of amended legislation, burgeoning case law and ever-changing standard form contracts”.

Before embarking upon his review, Sir Rupert observed that the payment and adjudication regimes of the Act play a critical role in the functioning of the construction industry.

He clarified that whilst the Act spoke of the “sum due” and the amended Act speaks of the “notified sum”, both were the same – the sum due with reference to the notices given under the contract. Neither mean the true value of the work. The change in wording was made to elucidate the point. Payment by application of the statutory payment regime is not about ascertainment of true value. It is about cash flow. He thereby placed emphasis on the service of notices as the gateway to payment.

The following points of clarity are taken from the judgment:

1. Intent is required. Determination of whether a document constitutes a valid and effective notice, in form, substance and intent, depends on how the reasonable recipient would understand it.

2. The notice requires to set out the sum considered to be due and the basis on which that sum has been calculated.
(a) It may do so with reference to another document or other documents.
(b) Whether or not the purported notice gives the requisite degree of specificity, on its own or by reference to other documents, is a question of fact and degree in each case.
(c) Accordingly, the other documents need not accompany the purported notice as an essential to validity.

3. A building contract is an entire agreement. This means that the builder has no entitlement to interim payments, save as provided by the contractual terms or by the Act.

4. The payment provisions of the Act are the operative provisions, not those of the contract. The contract is therefore referred to in application of the statutory provisions, only to the extent that those provisions allow agreement between the parties (for example on the period before the final date for payment by which a pay less notice must be given).

5. The obligation to pay by the final date for payment is immediate. That is to say that it cannot be delayed beyond the final date for payment, whilst the true value of the work may be disputed. Payment cannot be frustrated by argument.

6. However, any question of the true value of the work remains justiciable, notwithstanding the immediate obligation to pay. Therefore, either party may challenge the correctness of the notified sum, or sum of the pay less notice, in adjudication, arbitration (if agreed) or litigation. The adjudicator, arbitrator or judge has the power to open up and review the operative notices and can order repayment of any excessive payment as against the true value of the work.

7. The adjudication provisions are subordinate to the payment provisions of the amended Act. The obligation to pay the notified sum (or lesser sum of any pay less notice) by the final date for payment, has direct effect.

8. Therefore – and all of the foregoing points support the essential point – the payer is prohibited from embarking on adjudication or other proceedings to obtain a true valuation of the work, unless and until it has complied with the immediate obligation to pay, by application of the notice provisions under the Act.

Parallel thinking?

This decision may be seen as a breakthrough, or as the culmination of judicial and stakeholder thoughts for over two decades.

Whilst it deals with a UK wide statute, it is not binding in Scotland. No similar review to that by Sir Rupert Jackson has been undertaken by the Scottish courts.

Perhaps judicial thinking in Scotland and England is not so far apart. In Hoe International Ltd v Anderson [2017] CSIH 9 the dispute was about whether a notice under a share purchase agreement was valid and effective. Giving the opinion of the Inner House on 3 February 2017, Lord Drummond Young relied on the words of Lord Hoffmann at para 14 of his decision in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101): “the exercise of construction is essentially one unitary exercise of which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant”.

In doing so, Lord Drummond Young aligned with the opinion of Mr Alexander Nissen QC in Surrey & Sussex Healthcare NHS Trust. Though not yet expressed, perhaps the UK courts do agree on the position of intention to the validity and enforceability of notices under the amended Act. But the case was not about the Act, so doubt remains.

It is commended to stakeholders in the Scottish construction industry, including adjudicators, arbitrators and the judiciary, that Sir Rupert Jackson’s conclusions are adopted in the management of payment disputes in the construction sector in Scotland too. In that way, the UK jurisdictions will be aligned for uniform application of the Act, placing payment as the primary obligation, at an interim and final stage, at its heart.

Unresolved issue

Unfortunately, that is not the end. The real issue in Trilogy was the extent to which the payee was entitled to payment of the true value of the work, when it had not itself first applied the statutory payment provisions. That issue has not been resolved, even by Sir Rupert Jackson. There is merit in confirming such a requirement. Not least, application of the payment provisions assists in narrowing the scope of any dispute between the parties.

Wishful thinking it may be, but perhaps it is time for further amendment to the Act, so that there is no contractual discretion within the statutory payment regime, allowing scope for delay or disruption to payment. Perhaps requiring all parties to abide by a uniform and mandatory payment mechanism as the gateway to payment is the only way to achieve the immediate payment instructed by Sir Rupert, and to achieve the intent of the Act – as Sheriff Taylor put it in the sheriff court in 2002 (in Clark Contracts Ltd v The Burrell Co (Construction Management) Ltd 2002 SLT (Sh Ct) 103), “to pay now and litigate later”.