A recent Technology and Construction Court judgment has clarified the requirements for valid payment notices and pay less notices under the Construction Act.
Background
The judgment arose from a payment dispute between the contractor (LOR) and client (Shepperton) in connection with a design and build contract for the expansion of Shepperton Studios in Surrey.
In response to LOR’s interim payment application for £5.6m, Shepperton issued a payment notice valuing the sum due at £2.4m and a pay less notice deducting the £2.4m for liquidated damages and other contra charges. The Adjudicator awarded LOR £5.6m and Shepperton issued Part 8 proceedings to challenge the decision.
Judgment
The TCC held that the payment notice was invalid because it failed to provide "the basis on which that sum has been calculated" because it provided a headline gross valuation figure without any supporting breakdown.
The Court rejected the argument that spreadsheets and other background material provided separately could cure the defect, reiterating that such documents must be expressly incorporated by reference on the face of the notice itself.
The Court also considered Shepperton’s payless notice and concluded that it was valid as it set out the basis of the deduction of liquidated damages. As a consequence, the Court found that LOR was due £3.2m on that interim application.
Implications
In our experience, the “payers” in construction contracts do not always issue payless notices, thinking that they are sufficiently protected by a payment notice alone. This judgment highlights that doing so puts the payer at risk of liability for the sums applied for by the payee because the payment notice does not set out the basis on which the sum has been calculated.
The judgment could also lead to a surge in claims in connection with historical payment notices which, again, failed to contain details of the calculations.
