A recent TCC case shows how the back and forth between contractor and employer around payment notices can descend into a parlour game

Tony Bingham

This is another “pipe-up or pay-up” case. Main contractor Logan Construction (South East) Ltd had its beady eye on £1m extra income because its customer Surrey & Sussex HealthCare NHS Trust’s payless notice was not up to snuff. It hadn’t “piped-up” properly said Logan. Be that as it may, said Surrey & Sussex HealthCare, your application for payment doesn’t pass muster; it isn’t a proper application, so it doesn’t matter if our payless notice is not good. And so it is that up and down our building sites this parlour game – “Payoply” – is making quantity surveyors very excited.

Be fair; for generations this business of paying up, or rather, not paying up, has been a plague on all our construction industry houses. This payment notice scheme is a well-meant effort by parliament to penalise the bad payer. Sounds easy. It is easy. But bad payers don’t always do what they are told. So parliament introduced a penalty for not telling. This is easy too:

  • The builder tells his customer what is owed
  • The customer says: “Oh no, it’s not!” That becomes the sum due. But, what if the payer says nothing in reply. Easy …
  • The builder gets what he said was due.

You might hear a faint whistling in the wind. What’s up? Well now, some say builders exaggerate their claims for payment, and some say that if the customer simply forgets to raise a push-back, he will be landed with forking out squillions of pounds not owed. Folk are terrified of an admin cock-up (failing to send a payment notice or payless notice), terrified they will be robbed.  Robbed, all for the want of a push-back. The snag is, that the builder’s interim account might be straight as a die. It might be that the employer is a naughty undervaluer. Damn it, it might be that the push-back is a deliberate under value.

For generations this business of paying up, or rather, not paying up, has been a plague on all our construction industry houses

Logan’s account for its works at East Surrey Hospital, near Redhill, was said to be gross £5.9m. The hospital’s QS said it was only worth £4.9m. Got the idea? Logan received a payless notice (the push-back). Logan said it was not valid. Surrey & Sussex HealthCare said Logan’s application for payment was not valid. The adjudicator said that the application for payment was valid and said the payless notice was invalid. So, Surrey & Sussex HealthCare was in the frame for the million, all for the want of a better push-back. And when you put it like that, there is a twinge of the parlour game about this malarkey; a twinge of “that’s all a bit daft”. East Surrey decided to bring the problem to court. It argued (again) that Logan’s application for payment was wrongful and the payless notice rightful.

The first attack is on the application for payment. Did it comply with the payment rules in the JCT Intermediate Form? Signs are good. It was on time and explained the values via chapter and verse. The snag was that it became tangled up with the timetable and negotiations for the final account. Put shortly, the employer’s QS and builder’s QS were on their eighth meeting about the final account figure, when a package of material rolled in under an email banner of another interim account. Logan was entitled to another interim according to the rules. But the circumstances created ambiguity, it was argued. Both QSs were up to their necks in final account to-ing and fro-ing. Indeed, at one stage the judge was inclined to decide that there was indeed ambiguity and declare no proper interim had been issued. But his objective test gave the benefit of the doubt to Logan; the “substance, form and intent” was that it was a good interim account. But it is not payable if the payless notice push-back was valid. Was it?

It started badly. You will remember that the two sides were hard at it on the final account. Time was running out on that so the employer’s QS formally rejected Logan’s £5.9m and issued a payless notice for £4.9m. Snag was, he badged it a payless notice for the final account. Worse, the QS expressly said that the idea of this latest interim account having any standing was wrong. So, said counsel for Logan, the intention to issue a payless notice for the interim was non-existent, so the £5.9m gross was payable. But things brightened up. The JCT Intermediate Form requires that notice to simply publish the basis on which that sum is calculated. Take a common sense view; the court isn’t to strive to find reasons for rejecting the notices. On that basis, said the judge, it was reasonable to conclude that the employer’s QS was simply mistaken about Logan’s application being for the final account. The payless notice was intended to apply to the interim application. That letter and its attachments showing how the £4.9m was reached provided an adequate agenda for adjudication on merits of the true sum due. So, the employer didn’t have to stump up the £1m Logan had obtained from the adjudicator.

Now what? Logan and Surrey & Sussex HealthCare can argue about the true value of the final account and put the “Payoply” board back in the cupboard for now.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple