Payment notices under construction: cracks at the border

Since the introduction of the new regime for payment in construction contracts, by the Local Democracy, Economic Development and Construction Act 2009, the English courts have held one principle steadfast.

In Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC), Akenhead J, sitting in the Technology & Construction Court in August 2015, remarked at paras 14-17: “The statutory provisions, which are not excludable by the terms of contracts, need to be looked at in the context of the purposes of the [legislation], which include not only the need to encourage cash flow to contractor parties to construction contracts but also the need to establish an agenda for (speedy) adjudication arising out of disputes between the parties in relation to interim payment entitlements…

“Although fraud would probably unravel a fraudulently prepared interim application… there is often room for sometimes widely differing assessments of value and proportions of work completed. Although it is not apt to talk in terms of conditions precedent, I consider that the document relied upon as an interim application… 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.”

That principle has been repeatedly stated. A document must “in substance, form and intent” be a notice required by the Act, to be valid.

The English approach, in summary

In May 2022, also sitting in the Technology & Construction Court (in Advance JV (A Joint Venture Between Balfour Beatty Group Ltd and MWH Treatment Ltd) v Enisca Ltd [2022] EWHC 1152 (TCC)), Joanna Smith J reviewed previous decisions of the English courts, including Henia and the unequivocal decision of S & T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448. She summarised the English courts’ approach to interpretation of notices under the Act thus (at para 47):

(i) In considering the true construction of a contractual notice, the issue is how a reasonable recipient would have understood the notice, circumstanced as the actual parties were.

(ii) The notice must be construed with regard to the context. “This means that, amongst other things, the reasonable recipient will be credited with knowledge of the relevant contract”.

(iii) The purpose of the notice will be relevant to its construction and validity. The court will be unimpressed by nice points of analysis or arguments, which seek to condemn the notice on an artificial or contrived basis. The court will take a commonsense, practical view of the contents of the notice and will not adopt an unnecessarily restrictive interpretation. Provided that the notice is tolerably clear, the court will not strive to intervene or endeavour to find reasons that would render such a notice invalid or ineffective.

(iv) There is no principled reason for adopting a different approach to construction in respect of different kinds of notices (for example because some may give rise to more draconian consequences than others). However, the particularly adverse consequences for an employer that follow from, say, a contractor's unanswered application/payment notice are relevant to the test of the reasonable recipient.

(v) To qualify as a valid notice, the document must comply with the statutory (and, if more restrictive, the contractual) requirements in substance and form. Payment notices and pay less notices must clearly set out the sum which is due and/or to be deducted and the basis on which the sum is calculated. Beyond that, the question of whether a notice is or is not valid is a question of fact and degree. 

(vi) Over and above the question of whether a notice has achieved the required degree of specificity, will be the additional question of whether the document that is alleged to constitute a valid notice was in fact intended to be such and whether it is free from ambiguity. The sender's intention is a matter to be assessed objectively, taking account of the context.

(vii) There is no requirement for a particular type of notice, such as a pay less notice, to have that title or to make specific reference to the contractual clause in order to be valid. The question is whether, viewed objectively, it had the requisite intention to fulfil that function.

(viii) One way of testing the validity or otherwise of a pay less notice will be to see whether it provided an adequate agenda for an adjudication as to the true value of the works.

Smith J’s summary is comprehensive and instructive. Its recurring theme is intention to give the notice, assessed objectively. To have a right to payment, or to pay less, the party concerned must have intended to have given the notice establishing that right, in terms of the Act.

Scottish adoption…

The approach of the Scottish courts would appear to be the same. While determining that a payment notice which stated that the due date to which it related was one day earlier than the actual due date under the contract, would be invalid, Lord Clark remarked in D McLaughlin & Sons Ltd v East Ayrshire Council [2021] CSOH 122 (December 2021) at para 40:

“The employer must be given reasonable notice that the payment period has been triggered in the first place: Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC). The validity of the notice has been assessed by having regard to its substance, form and intent (see, e.g. Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC); Jawaby Property Investments Ltd v Interiors Group Ltd [2016] EWHC 557 (TCC)). Quite properly, the cases have regard to the important fact that service of an interim payment notice places the employer at risk that failure to serve a pay less notice at the appropriate time will render him liable in full for the amount claimed. For the employer to be placed in that position, the contractor must have complied with the contractual terms."

By referring to the decision in Henia and duplicating its language, Lord Clark may be taken to uphold the principle of the English courts, that the party giving the notice to establish the right to payment, or to pay less, must have intended that the document relied upon constituted such notice.

However, Lord Clark did not elucidate upon his remark about the role of intention in determination of the validity of a notice under the Act. The inference that he agreed with the strict principle of the English courts in this regard may not be justified.

… or divergence? 

Sheriff Principal Turnbull, sitting in the Sheriff Appeal Court, has on two occasions now expressed views about the role of intention which may be at odds with the principle of the English courts.

In Trilogy Services Scotland Ltd v Windsor Residential [2017] SAC (Civ) 2 the issue for resolution was whether the contractor required to demonstrate that it was their intention to give notice under the 1996 Act. Sitting in January 2017 with Sheriff Arthurson QC and Sheriff Principal Lockhart, Sheriff Principal Turnbull said in the decision of the court, that such specific intention was not required for validity. At para 16 the court found that: “There can be no doubt as to the [contractors'] intentions. They wished to be paid the amount they had first claimed some three months earlier. 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, as, in effect, the appellants argue for.” 

In Tierney v G F Bisset (Inverbervie) Ltd [2022] SAC (Civ) 3, Sheriff Principal Turnbull affirmed his opinion on 9 December 2021, two days after Lord Clark’s opinion was issued. Tierney argued that the document claimed to be a payment notice under the Act was not valid because it “was not in substance, form, and intent a payment notice. It did not provide reasonable notice that the payment period had been triggered”. That was akin to the employer’s position in Trilogy.

At para 14 his Lordship repeated the reasoning of Trilogy, namely that the Act requires the document founded on as the relevant notice to state the sum due and the basis upon which it was calculated. It need do no more. The degree of specification of how the sum was calculated is a question of fact and degree. That may be dependent on the terms of the particular contract. In these views, he accorded with Smith J’s summary. 

However, his Lordship diverged from the position of the English courts, in respect of the consequence of vagueness to a purported notice, at least in relation to creation of the notified sum. In Sheriff Principal Turnbull’s view (at para 14), that did not result in invalidity, but rather was reason for giving a pay less notice. 

In respect of “substance, form and intent”, Tierney argued that objectively assessed, the requisite intention to serve a payment notice was lacking. That was in line with the principle of the English courts. Sheriff Principal Turnbull disagreed, observing at paras 16-17: 

“In the decision of this court in Trilogy Services Scotland Ltd v Windsor Residential 2017 SCLR 640 , the requirements of a payment notice were discussed… This court found that there was no requirement for the issuing party to demonstrate that it was their intention to give notice under the Act… It is sufficient that there was intention to request payment (see Trilogy Services Scotland Ltd at paras 16-17). Such intention was clear from the valuation statement at issue in the present case, particularly standing the context of the contract and prior valuation statements.

“In the present case, we have no hesitation in concluding that the respondent's third valuation was a payment notice in substance, form and intent… Assessing the facts and circumstances of this case objectively, there is no doubt as to the respondent's intention. It was making application for payment. The reasonable recipient of the application would have been in no doubt that that was the case. The respondent's third valuation is, in substance, form and intent, a payment notice”.

For Sheriff Principal Turnbull, the requirement of intention noted by Akenhead J and Lord Clark is of being paid, rather than the narrower intention of giving a compliant notice. In practice, that is a material difference in approach, because the intention to be paid is unlikely to be in doubt and it is persistent in time. On the other hand, clarity of intention to serve a particular notice at the correct time in relation to a particular due date is instant and onerous.

In line with the Act?

If the words of Lord Clark in D McLaughlin & Sons Ltd suggest an adoption in Scotland of the rationale of the English courts, then the courts’ approach to the application of the Act is uniform across the United Kingdom. The regime for payment under the Act is strictly applied in order that unfair advantage is not taken of its potentially draconian consequences.

Conversely, the views of Sheriff Principal Turnbull are at odds with those of the courts in England. His view is that intention to give the requisite notice is an additional burden, which is not required by the Act. He takes a purposive approach to interpretation, emphasising the first of the two purposes of the Act identified by Akenhead J in Henia at para 14: “the need to encourage cash flow to contractor parties”.

If the words of Lord Clark do not mark consistency with the approach of the English courts, then there would appear to be a material difference in the requirements for compliance with the Act north and south of the border.

Sheriff Principal Turnbull’s decisions leave open questions. If intention is not required in every case, when is it required? If vagueness in the notice creating the notified sum is met not by declaration of invalidity but service of a pay less notice, how is vagueness in the pay less notice addressed?

The risk of the purposive approach is that it allows the party giving the notice to take unfair advantage, by retrospectively arguing that the requirements of the Act had or had not been complied with, which had not been intended. As Coulson J said in Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC) at para 34: “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 the other hand, rigid insistence on intention to give a compliant notice, in contrast to simply seeking payment, of itself may work against the underlying principle of the Act to encourage cash flow to contractor parties. For, fundamentally, it requires the contractor party to know of the payment regime under the Act, and to be astute and learned enough to know the degree of specification required for each notice. It also requires them to know the details of the contract around payment cycles, or of the default position under the scheme and, factually, when the works started – a date which may not be certain.

Too often, this level of insight is not an attribute of contractors. To this day, many contractors remain ignorant of the payment regime imposed by the Act in the first instance.

Bring in prescribed forms

It is perhaps not surprising then that the published decisions of the English courts, followed by that of the Court of Session, adopt the strict interpretation. Those decisions have involved larger sums, and perhaps more sophisticated parties – a factor observed by the sheriff at first instance in Trilogy. Perhaps it is right that a higher standard of conduct should be expected of them. At the “grass roots” level of contracting, such an approach would likely render the Act inept, as neither party had really any awareness of the payment regime to which they must comply, let alone the resources to manage it. A strict application would grind the industry to a halt. And perhaps that explains the difference: it is not one of jurisdiction and the battle with the “auld enemy” over application of a UK wide statute; rather it is a difference in approach, driven by value and pragmatism.

The approach of Sheriff Principal Turnbull is to be commended as serving the purposes of the Act (to encourage cash flow to contractor parties to construction contracts; and to establish an agenda for (speedy) adjudication arising out of disputes between the parties in relation to interim payment entitlements), in a way which benefits the whole of the construction industry. 

What is apparent is that differences in jurisprudence are emerging, perhaps across more than one border. That cannot be good for the industry. Ambiguity creates uncertainty and in turn argument, at the expenditure of time and cost to the parties involved. Is it not time for a mandatory regime, with prescribed forms of notice?