Can a pay less notice apply to two payment applications?

Can a pay less notice apply to two payment applications?

How the construction industry can survive the "pingdemic"

TCC confirms pay less notice requirements in Advance JV and others v Enisca Ltd [2022] EWHC 1152 (TCC).

A recent case reminds us that a pay less notice must be referable to the payment notice in which the notified sum is identified.

Background

In this case, the Claimant (Advance) sought a declaration concerning the validity of a pay less notice against the Defendant (Enisca).

Advance had engaged Enisca as sub-contractor under a contract based on the NEC3 Engineering and Construction Subcontract, including Option A, but subject to bespoke amendments. The contract included NEC3 Option Y(UK)2, which provides payment terms intended to comply with the requirements of the Housing Grants, Construction and Regeneration Act 1996 (the Act).

By way of summary, the facts were as follows:

  • Enisca had submitted its interim application 24 for payment in the sum of £2,717.992.88.  
  • Advance failed to issue any payment certificate in respect of Enisca’s application.
  • Enisca proceeded to submit its interim application 25.
  • Advance responded with a pay less notice which disagreed with Enisca’s assessment and submitted that no sums were due to Enisca.
  • Enisca argued that the pay less notice could only relate to interim application 25 and not interim application 24.
  • Enisca proceeded to refer the dispute to adjudication, claiming for payment in respect of interim application 24 (£2,717.992.88) due to no payment notice or pay less notice being issued. 
  • Advance argued that the pay less notice issued was valid and that Enisca’s application did not comply with the requirements to be a valid payment notice.
  • The adjudicator decided in Enisca’s favour, declaring that the pay less notice issued was in respect of interim application 25, not interim application 24. He awarded the full amount claimed, to Enisca, together with interest.   

Subsequently, Advance issued a Part 8 claim, seeking a declaration that the pay less notice was valid against both interim application 24 and interim application 25.

Decision

The court referred to the statutory payment regime introduced by the Act and previous case law, noting that the effect of the statutory provisions is “…to require an employer at periodic intervals to pay "the notified sum" by the final date for payment, irrespective of whether or not that sum in fact represents a correct valuation of the work to date. If an employer fails to give relevant notice, irrespective of whether this is by mistake, administrative oversight or any other reason, then a sum for which the contractor has applied becomes immediately contractually payable, even if it is wrong in valuation terms."

Advance argued that there is nothing in the Act, or the Contract, to preclude a pay less notice from responding to two applications. The key requirement, Advance submitted, is that the Pay Less Notice is served within the contractually stipulated time envelope. In respect of this, the judge, Mrs Justice Joanna Smith DBE stated:

“This is a novel proposition for which no support can be found in the Act or the Contract. It is difficult to see how one notice referable to only one assessment date could possibly be said to be responsive to two applications for payment.”

The key question for the court was therefore whether the pay less notice was in substance, form and intent, a pay less notice in respect of, or referable to, interim application 24. The court noted that the construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices.

Looked at objectively, the court commented that the use of the words "Application No 25" and the acronym "AFP25" pointed clearly to an intention that the pay less notice was to relate to interim application 25, as did the fact that it was provided under cover of the Payment Certificate for interim application 25 which identified the assessment date of 19 November 2021 and described the pay less notice as "Application 25 – Payless Notice". Amongst other factors, it was noted that there was nothing expressly on the face of the pay less notice (or anywhere else) which pointed to it being a response to interim application 24. In the circumstances, the pay less notice was not in substance or form a pay less notice relating to interim application 24 and a reasonable recipient would not have understood it to be such a response.

Accordingly, Advance’s claim was dismissed and as such, the sum applied for had become the notified sum.

The case confirms that a pay less notice cannot apply to two payment cycles. If a party wishes to pay less than the amount claimed, the pay less notice must comply with the requirements in substance, form and intent and be referable to the individual payment cycle to which it relates.

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