The timing and labelling of payment/pay less notices

Written by Katie Quick and Sarah Wilson

In the case of Placefirst Construction Ltd v Car Construction (North East) Ltd, a smash and grab adjudication was successful in favour of Car (sub-contractor). However, this was then overturned by the Court, and deals with the order of serving the payment notice and payless notice and the labelling of notices.

Background

CAR Construction was contracted under an amended JCT D&B 2016 form of sub-contract by Placefirst. 

In accordance with the sub-contract, on 24 July 2024, CAR emailed its interim payment application (IPA) for over £3 million to Placefirst.

Placefirst sent an email to CAR with the subject line ‘CAR Construction Payless Notice and Valuation 30’ on 31 July 2024 (showing CAR was actually due a negative figure of £22,812), which attached the following:

1. ‘Valuation 30 – Payless Notice.pdf’; and
2. ‘Valuation 30.xlsm’.

CAR commenced a ‘smash and grab’ adjudication, as CAR disputed both the payment notice and payless notice that Placefirst issued, or in CAR’s view, failed to issue. CAR’s position was that (a) the 31 July correspondence was a payless notice, not a payment notice, and (b) the payless notice was invalid, as it had been issued before the deadline for issuing the payment notice.

Adjudication

The adjudicator found in favour of CAR in respect of both issues, awarding it the sums claimed via a smash and grab adjudication.

In respect of the payment notice, the adjudicator found in favour of CAR, concluding that the 31 July 2024 documents were clearly a payless notice. As such, Placefirst had failed to serve a payment notice.
 
In addition, further agreeing with CAR, the adjudicator found that the payless notice issued via email by Placefirst was invalid because it was served before any valid payment notice was provided by either party. 

High Court Decision

Placefirst commenced Court proceedings against CAR. 

1. Did Placefirst issue a valid payless notice?

Part II of the Scheme for Construction Contracts (England and Wales) Regulations 1998 states an IPA “will only become a payment notice after the time for the payer to give a payment notice has elapsed” (ie. 5 days after due date). It is clear there is no mention of a payless notice here, leading the judge to conclude “there is no logical reason why a payless notice should not be given before the time for giving a payment notice has elapsed” [para 63]. 

Accordingly, the payless notice issued by Placefirst was deemed valid, despite the fact it was issued before the 5-day period had elapsed.

Judge Stephen Davies presented alternative reasoning as to why the Payless Notice would still have effect:
Section 110A(3) of the HGCRA 1996 provides that a payment notice is valid given it specifies the following-
(a) the sum that the payee considers to be or to have been due at the payment due date; and
(b) the basis on which that sum was calculated. 

The parties previously amended the wording of clause 4.6 of the JCT sub-contract bringing IPAs issued by CAR in line with the same two requirements of a payment notice outlined under Section 110A(3) above. Therefore, the IPA issued by CAR constituted as a valid payment notice under the HGCRA 1996 and sub-contract. Hence, Placefirst served the payless notice after a payment notice (the IPA) was issued, deeming it valid.

2. Did Placefirst issue a valid payment notice? 

Judge Stephen Davies found that: 

1. worksheet ‘valuation 30.xlcm’ was separate to the payless notice (Valuation 30 – Payless Notice.pdf); 
2. worksheet ‘valuation 30.xlcm’, in particular the tab titled “subcontract payment certificate”, held all the qualities and functions of a payment notice, and therefore ‘does amount in substance to a payment notice’ [para 85]; 
3. while the workbook wasn’t explicitly labelled as a payment notice, this was not a requirement under the HGCRA 1996 (this emphasises that documents do not necessarily have to be named directly to be a sufficient payment notice).

Key takeaways

• “There is no difference of substance between the content of a payment notice and a payless notice” [para 63], therefore it is up to the payer to decide whether to serve both, however one notice cannot operate as both.
• The court found there was no reason payment notices and payless notices could not be served simultaneously in the same communication.
• A payment notice or payless notice can be validly served before the amount of time under the contract for the payment application to become the default payment notice elapses. 

It is essential, however, to check the contract in all of these scenarios, as it may state otherwise.

The decision in this case reflects the practical approach of the courts towards construction payment notices, where focus is maintained on substance over form. For example, the fact that Placefirst's excel workbook wasn't explicitly labelled as a payment notice did not invalidate it, as the court found its contents clearly served the function of a payment notice. In his judgement, Judge Stephen Davies referred to Lord Steyn's guidance in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd where it was stated "the construction of notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices". CAR v Placefirst reinforces these principles, serving as a recent example of how courts will consider the way a reasonable contractor would interpret communications in their entirety, rather than fixating on specific labels or rigid requirements.