Factual and Procedural Background
This is a Part 8 claim brought by the Plaintiff against the Defendant for £2,683,617.09 plus VAT, arising from the Defendant's alleged failure to serve a valid payment notice or pay less notice under the Housing Grants, Construction and Regeneration Act 1996 (as amended) ("the Act") in response to the Plaintiff's interim payment application dated 4 February 2019.
The dispute concerns a hybrid subcontract entered into on 20 November 2015, under which the Plaintiff was engaged by the Defendant as subcontractor to design and construct civil, structural, and architectural works for a power plant. The subcontract works included both construction operations within the ambit of the Act and non-construction operations outside the Act.
Periodic interim payments were provided under the subcontract. Initially, both parties did not distinguish between construction and non-construction operations in the payment process. A dispute arose in 2018 regarding interim payment application number 31, where neither the Plaintiff’s payment application nor the Defendant’s payment notice separated sums due for construction and non-construction operations. The Defendant challenged adjudication jurisdiction on the basis that the adjudicator lacked jurisdiction over non-construction operations, leading to withdrawal of the adjudication claim by the Plaintiff.
On 4 February 2019, the Plaintiff submitted interim payment application number 32, distinguishing sums claimed for construction operations from other works. The Defendant responded on 19 February 2019 with payment notice number 35, stating a negative sum due overall but not distinguishing between construction and non-construction operations. The Plaintiff claimed the sum due for construction operations in the absence of a valid payment notice. The Defendant disputed the claim, arguing the payment notice was valid.
The Plaintiff commenced Part 8 proceedings seeking payment of the sum claimed for construction operations plus interest. The central legal question is whether a valid payment notice under the Act must separately identify sums due for construction operations in a hybrid contract.
Legal Issues Presented
- Whether, on proper construction of the subcontract and the Act, the Defendant issued a valid payment notice in response to the Plaintiff’s application no.32.
- Whether the Plaintiff is estopped from relying on its construction argument requiring separation of sums due for construction operations.
- If the Defendant failed to issue a valid payment notice, whether the Plaintiff is entitled to rely on its payment application as the "notified sum" under the Act.
- Whether the Defendant is entitled to rely on its negative valuation as a pay less notice, cross-claim, or set-off.
- Whether this claim is suitable for determination by Part 8 proceedings.
Arguments of the Parties
Plaintiff's Arguments
- The subcontract and the Act require any payment certificate to identify separately the sum assessed as due in respect of construction operations and the basis of that calculation.
- The Defendant's certificate was not a valid payment notice under section 110A(2) of the Act because it failed to distinguish sums due for construction operations.
- In the absence of a valid payment or pay less notice, section 111 of the Act entitles the Plaintiff to the amount claimed in its payment application for construction operations.
- The Plaintiff’s application distinguished sums for construction and non-construction operations, enabling compliance with the Act’s mandatory regime.
- Estoppel by convention does not apply as it is not possible to contract out of the Act, and any such estoppel would have ended before the Defendant issued its payment notice.
- The Defendant must prove that all sums claimed relate to construction operations if it disputes the claim.
Defendant's Arguments
- The payment provisions in the subcontract comply with the Act, and payment notice 35 is valid under section 110A.
- The parties agreed a single payment regime applying to both construction and non-construction operations; this does not breach the Act.
- If the Plaintiff’s argument is correct, it must prove all sums claimed relate to construction operations.
- The subcontract is a milestones contract, making it difficult or impossible to distinguish between included and excluded operations.
- The Plaintiff is estopped by convention from contending that payment notices must distinguish between included and excluded operations, based on prior conduct.
- The Defendant is entitled to rely on the payment notice as notice of cross-claims and as a pay less notice.
- The Defendant is entitled to raise a set-off of £6,818,521.70.
- The claim is unsuitable for Part 8 proceedings.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Grove Developments Ltd v S&T (UK) Ltd [2019] BLR 1 (CA) |
Section 111 of the Act is mandatory and applies only to construction operations; contracts must be construed to comply with the Act. |
Supported the proposition that the subcontract must be construed to require identification of sums due for construction operations for compliance with the Act. |
| Great Estates Group Ltd v Digby [2011] EWCA Civ 1120 (CA) |
Where a contract is capable of two constructions, the one compliant with statute should be preferred. |
Applied to construe the subcontract in a way compliant with the Act. |
| Cleveland Bridge (UK) Ltd v Whessoe-Volker Stevin JV [2010] EWHC 1076 (TCC) |
Part II of the Act applies only to construction operations; hybrid contracts require distinction between construction and non-construction operations. |
Established that statutory adjudication and payment provisions apply only to construction operations in a hybrid contract. |
| Severfield (UK) Ltd v Duo Felguera UK Ltd (2015) 163 Con LR 235 (TCC) |
Hybrid contracts have two distinct payment regimes; statutory scheme applies only to construction operations. |
Confirmed the need to distinguish construction operations claims for the statutory scheme to apply. |
| Bennett (Construction) Limited v CIMC MBS Limited [2019] EWCA Civ 1515 |
Considered compliance of contractual payment mechanism with section 110 of the Act and the effect of inadequacies. |
Distinguished from current case; did not consider requirement to distinguish sums for construction operations under sections 110A and 111. |
| Amalgamated Property Company v Texas Bank [1982] 1 QB 84 (CA) |
Principles of estoppel by convention require parties to adhere to shared assumptions to avoid unfairness. |
Applied in assessing estoppel arguments. |
| Keen v Holland [1984] 1 WLR 251 (CA) |
Part II of the Act cannot be contracted out or avoided by estoppel. |
Supported the Plaintiff’s argument that estoppel cannot override mandatory statutory provisions. |
| Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24 |
No oral modification clauses can be subject to estoppel. |
Confirmed estoppel by convention could operate despite entire agreement and NOM clauses. |
| Henia v Beck [2015] BLR 704 |
Payer may raise set-off in payment or pay less notice. |
Referenced in relation to Defendant’s set-off argument. |
| VHE Construction plc v RBSTB Trust Co Ltd [2000] BLR 187 (TCC) |
Set-off or cross-claim must be raised in a valid payment or pay less notice to avoid operation of section 111. |
Supported the conclusion that Defendant could not rely on set-off absent a valid pay less notice. |
| Letchworth Roofing v Sterling Building Company [2009] EWHC 1119 (TCC) |
Same as VHE Construction regarding set-off and pay less notices. |
Reinforced requirement for valid payment or pay less notice to raise set-off. |
| Jawaby Property Investment Ltd v The Interiors Group Ltd [2016] EWHC 557 (TCC) |
Contractual notice requires objective intention to serve it. |
Applied to determine that payment notice 35 was not intended as a pay less notice. |
Court's Reasoning and Analysis
The Court began by examining the statutory framework under the Act, which applies only to construction operations within hybrid contracts. The Act requires an adequate payment mechanism, including payment notices that specify the sum due and the basis of calculation. The Court considered the subcontract’s payment provisions, which apply a single payment regime to both construction and non-construction operations.
The Court acknowledged established case law confirming that statutory payment and adjudication provisions apply only to construction operations in hybrid contracts, necessitating clear distinction between construction and non-construction claims when separate schemes apply.
However, the Court found that where the parties agree a single payment scheme covering both types of operations, a payment notice stating an overall sum due without separate identification of construction operations may still be valid under sections 110A and 111 of the Act. The statutory language does not expressly require separate identification of sums due for construction operations, and parties may contractually extend the statutory scheme to non-construction operations.
The Defendant’s payment notice 35 complied with the subcontract’s clause 38.4 by stating the sum due and the basis of calculation, even though it did not apportion sums between construction and non-construction operations. The Court was satisfied that the notice was valid under the subcontract and the Act.
Regarding estoppel by convention, the Court found that although the parties had a prior shared assumption not to distinguish between operations in payment notices, this assumption ended when the hybrid nature of the contract was raised during adjudication proceedings and in the Plaintiff’s subsequent payment application. Even if estoppel applied, it would not assist the Defendant because the statutory scheme cannot be contracted out.
The Court rejected the Defendant’s argument that the Plaintiff must prove all sums claimed relate to construction operations, noting that the Plaintiff’s application distinguished those sums and that the Defendant did not challenge the breakdown or provide an alternative.
On reliance on the negative valuation as a pay less notice or set-off, the Court found no objective intention by the Defendant to serve the payment notice as a pay less notice. The Defendant’s negative valuation could not operate as a pay less notice or set-off absent a valid notice served within the contractual timeframe.
Finally, the Court held that the dispute raised a point of construction suitable for determination by Part 8 proceedings, given the absence of disputed facts requiring oral evidence.
Holding and Implications
The Court held that the Defendant issued a valid payment notice in response to the Plaintiff’s interim payment application no.32.
The Court further held that the Plaintiff is not estopped from relying on its construction argument, and if the Defendant had failed to issue a valid payment notice, the Plaintiff would be entitled to rely on its payment application as the notified sum under the Act.
The Defendant is not entitled to rely on its negative valuation as a pay less notice, cross-claim, or set-off in the absence of a valid notice.
The claim was suitable for determination by Part 8 proceedings.
The direct effect of the decision is that the Plaintiff’s claim for payment under the Act is defeated by the validity of the Defendant’s payment notice. No new precedent was established beyond the Court’s application of existing principles to the facts of a hybrid contract with a single payment regime.