In the recent case of Laing O'Rourke Delivery Ltd v Shepperton Studios Ltd [2026] EWHC 612 (TCC) the court confirmed that even where the Employer’s Payment Notice was invalid, that did not automatically invalidate the related Pay Less Notice which followed. The court also clarified the requirements for a party to be able to set-off sums between different adjudications and where a Parent Company Guarantee can be used to override concerns over claimant insolvency.
Background
- Shepperton Studios (SSL) engaged Laing O’Rourke (LOR) to provide certain works under a building contract dated 16 November 2021.
- Various disputes arose which were the subject of multiple adjudications, including an adjudication of a dispute regarding the validity of a Payment Notice and Pay Less Notice issued by SSL in respect of LOR’s application for payment (AFP) number 45.
- In summary, LOR submitted AFP 45 in the sum of £5,627,275.11 (all figures plus VAT). SSL’s Payment Notice 45 stated a sum due of £2,420,516.84. However, the gross valuation included in the Payment Notice was neither broken down, nor was there reference to any other document showing how the gross valuation sum was calculated. SSL further issued a Pay Less Notice which stated entitlement to certain deductions (totalling £2,428,614.47) giving a balance of £0 due to LOR in respect of AFP 45.
- LOR disputed the validity of the Payment Notice and referred the dispute to adjudication. The adjudicator decided in favour of LOR and concluded that SSL’s Payment Notice and the related Pay Less Notice were invalid, as they did not set out the basis on which the sum stated as due to LOR in the Payment Notice had been calculated. Therefore, the adjudicator decided that SSL must pay LOR the sum of £5,627,275.11 as applied for in AFP 45 (plus interest).
- SSL did not pay and commenced Part 8 proceedings in relation to the validity and effectiveness of the Payment and Pay Less Notices for AFP 45. LOR commenced enforcement proceedings to enforce the adjudicator’s decision.
Key arguments against enforcement
SSL raised 4 main arguments as follows:
- SSL said that the adjudicator’s decision was obviously wrong on a straightforward reading of the relevant notices and had commenced Part 8 proceedings for final declarations to that effect.
- Even if SSL were wrong about the validity of the Payment Notice, that did not invalidate the effect of the Pay Less Notice.
- There had already been 5 separate adjudication’s which determined the true value of LOR’s underlying claims which meant that LOR must accept that the sum set out in AFP 45 was not due, or LOR will have to repay c.90% of the notified sum, which should be set-off against the sum awarded by the adjudicator.
- There should be a stay on any sum payable to LOR as LOR was insolvent and continued to trade only by the support of its parent company. SSL argued that LOR would not be able to repay any sums in the future.
What did the court decide?
As the courts have made clear, in normal circumstances the courts will usually summarily enforce an adjudicator’s decision, if made within his jurisdiction, and will not look at whether the adjudicator was ‘correct’ in his conclusion or correct potential errors in the decision. However, in this case, the court found that it was able to consider the substance of the adjudicator’s decision, taking into account evidence submitted in relation to SSL’s Part 8 claim, even though there was no argument that he had acted outside his jurisdiction. The court took each of SSL’s arguments in turn and found as follows:
Was the Payment Notice invalid?
It was accepted that no breakdown was included with or referred to in the Payment Notice. SSL argued that a breakdown calculation of the sum stated to be due, while not included or referred to in the Payment Notice itself, had been separately provided by SSL to LOR on numerous prior occasions as a constant figure throughout AFP 41-44 which preceded AFP 45. So, while it was not expressly included as part of the Payment Notice LOR were aware of and had full knowledge of the breakdown and SSL’s calculation of the sum it stated was due in the Payment Notice.
However, the court stated that for a Payment Notice to be valid “there should generally be no need to look beyond the document itself or…documents incorporated by reference” and agreed with the adjudicator that the Payment Notice issued by SSL was invalid as it failed to include or expressly refer to the basis on which the sum due had been calculated. Therefore, the sum claimed by LOR in its AFP 45 became the sum due for payment.
But what about the Pay Less Notice?
Here the court disagreed with the adjudicator. LOR accepted that the sums for deduction in the Pay Less Notice were sufficiently detailed, but LOR argued that, because the Pay Less Notice started with the wrong figure (i.e. the figure stated to be due in SSL’s Payment Notice, rather than the figure stated to be due in LORs AFP 45), the balance figure of £0 stated in the Pay Less Notice was incorrect and therefore the notice was invalid and the ability to make those deductions was lost.
But the court disagreed with this argument and held that the Pay Less Notice was not contaminated by the invalid Payment Notice. In particular, the contract provided that if a Payment Notice was invalid, the sum applied for by LOR would become the sum payable ‘subject to any pay less notice…’. Here a valid Pay Less Notice had been issued by SSL. Therefore, the court held that the deductions noted in the Pay Less Notice (£2,428,614.47) should be applied to the sum applied for by LOR in AFP 45 (£5,627,275.11), giving a sum due to LOR of £3,198,660.64.
Set-off against other adjudications.
The court then went on to consider the argument in relation to the decisions made in 5 other adjudications, which together contained decisions which would reduce the value of sums due to LOR. SSL contended that if it was bound to pay a sum to LOR for AFP 45, SSL should be able to set-off any payment against the sums decided in its favour in those other adjudications.
However, the court was not persuaded by this argument, following a review of the authorities for setting off one adjudication decision against other, as set out in the case of HS Works Limited v Enterprise Managed Services Limited [2009] EWHC 729 (TCC). In particular it was noted that separate proceedings would need to be brought to enforce each of the other adjudication decisions, which had not happened here.
Stay of execution.
Finally, SSL argued that there should be a stay of execution, given that LOR was insolvent. The court considered that, given this situation, the starting point was that there should be a stay of execution of the sums payable in accordance with the principles set out in Wimbledon v Vago [2005] EWHC 1086 (TCC). LOR raised 4 main points in order to resist the stay as follows:
- LOR contended during the proceedings that it was not actually insolvent, but the court found that the evidence put forward by LOR in relation to its financial strength was not sufficient to rebut SSL’s entitlement to a stay.
- LOR’s parent company had given a letter of comfort to SSL, but SSL contended that this was of no value as it was of no fixed intent or duration and could not be relied upon. SSL also referred to the recent case of One Hyde Park Ltd v Laing O'Rourke Construction South Ltd [2026] EWHC 155 (TCC) where the LOR parent company pulled out of supporting another insolvent Laing O’Rourke subsidiary merely days before trial, an act which the judge in that case agreed was ‘commercially amoral’. The court agreed that this letter of comfort was not enough to rebut SSL’s entitlement to a stay.
- During submissions, LOR also offered an undertaking that it would pay any sums awarded to SSL in the Part 8 proceedings. But SSL did not consider this to be acceptable, and the judge agreed that if this was the only security available to SSL the judge would not consider the undertaking to rebut SSL’s entitlement to a stay.
- However, it transpired that LOR’s ultimate holding company had issued a parent company guarantee to SSL, governed by English law. The guarantee irrevocably and unconditionally guaranteed, as primary obligor, LORs performance of all its obligations, warranties, duties and undertakings under the building contract until such time as all of LOR’s obligations etc had been satisfied, with no obligation for SSL to pursue LOR before being entitled to enforce the guarantee against the parent company. The court found that the existence of the parent company guarantee, on these terms, did displace SSL’s entitlement to a stay of execution. Therefore, the court did not grant a stay and SSL was ordered to pay the sum of £3,198,660.64 (plus VAT and interest).
Key takeaways
- A Payment Notice should (subject to any specific contract requirements) include evidence of the basis of how the sum due has been calculated, or where appropriate, refer to relevant other documents in which this information is provided. A failure to do so is likely to make the Payment Notice invalid, and the contractor’s application for payment will become the default sum due for payment.
- But an invalid Payment Notice does not automatically invalidate a related Pay Less Notice. The deductions in a valid Pay Less Notice will still stand, but where the Payment Notice is invalid, these deductions will be made from the sum held to be validly due, rather than any invalid sum set out in the Pay Less Notice. This is a key point and provides a second line of defence for Employers, who may have made an error with the Payment Notice. Although it will not entirely save an Employer, where the sum due, as applied for by the contractor, is substantially higher than the Employer’s own valuation.
- Proper procedures must be followed in order to be able to set off one adjudication decision against another, including the issue of separate proceedings in relation to each relevant adjudication.
- Where a claimant is insolvent, a parent company guarantee can displace a defendant’s entitlement to a stay of execution.
In short, as ever, getting payment notices right is key to avoiding disputes over interim payments. But even where there is doubt over the validity of one notice, a valid subsequent notice may help to minimise any damage.
