Hybrid contracts and valid payment notices explored

18 December 2019

The statutory payment provisions for construction operations are designed to encourage cash flow within the construction industry. In the case of C Spencer Limited V MW High Tech Projects UK Limited[1] the Court had to consider the implications of a contractual payment regime that dealt with both construction operations and other works together.

The Claimant (CSL) brought a part 8 claim for payment of over £2.6 million and argued that the Defendant (MW) had not issued a valid payment notice under the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 (the Act).

MW was engaged as a main contractor to design and construct a power plant capable of processing refuse derived fuel. CSL was appointed under a sub-contract to design and construct the civil structural and architectural works for the facility.  The sub-contract works included construction operations for the purposes of the Act and works which fall outside the Act.

Under the sub-contract interim payments were made on a monthly basis on completion of the relevant milestone. The payment provisions did not distinguish between works which fell within or outside of the Act, and the payment regime applied to all to construction and non-construction operations. For all works which fell within each interim payment cycle one payment certificate is issued, only one pay less notice is issued, and only one sum is payable on the final date for payment.

The Dispute

In 2018 CSL brought an adjudication in regards to interim payment application 31. MW raised a jurisdictional challenge on the basis the adjudicator did not have jurisdiction to determine the dispute as framed. MW argued the dispute failed to distinguish between which works and sums fell within and which fell outside the Act. CSL withdrew its adjudication claim.

CSL subsequently issued interim payment application 32, which clearly differentiated construction and non-construction operations. MW then served payment notice 35, in which the break down did not distinguish between the sums due for construction and non-construction operations.

CSL claimed the sum of £2,683,617.09 was the notified sum due as a valid payment notice or pay less notice had not been issued.

The Judgment

The court held that:

  • s104(5) – mandatory statutory payment requirements in relation to construction operations does not prevent parties from agreeing the statutory requirements can apply to construction and non-construction operations;
  • the payment provisions in the sub-contract complied with the sections 110 and 110A of the Act and mirrored the obligations imposed by the Act in relation to non-construction operations; and
  • where a hybrid contract contains a payment scheme that complies or mirrors the Act for construction and non-construction operations, a payment notice that does not distinguish between sums due for construction operations is a valid notice for the purpose of the Act.

Mrs Justice O’Farrell reached this decision on the basis of:

  • s111 & s110A do not require separate identification of sums due for construction operations; s110A could be satisfied by stating the overall sum due for a valid payment notice;
  • the parties can agree to a payment scheme that complies which the Act and applies to both construction and non-construction operations; and
  • s111 can be implemented where the same provisions apply to construction and non-construction operations. If separate payment provisions applied it would be necessary to distinguish construction from non-construction operations.

The Court confirmed as CSL wishes to rely on section 111 it could distinguish between sums claimed for construction and non-construction operation, however MW could defend the claim by relying on its valid payment notice.

[1] [2019] EWHC 2547 (TCC)

Michaela Patterson Author
Michaela Patterson
Associate
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Isha Wurie Author
Isha Wurie
Trainee Solicitor
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