A Contractor attempted to recover a £2.68m sum from a Sub-Contractor on the basis of an invalid payment notice in a hybrid contract.
C Spencer Limited (“CSL”) raised Court proceedings as a response to their interim payment application by MW High Tech Projects UK Limited (“MW”) did not distinguish the costs between ‘construction operations’ and ‘other operations’. CSL believed that the costs should be identified in separate parts and a breakdown of each provided, or else the response was invalid and the initial sum outlined in the application due for payment.  EWHC 2547 (TCC)
CSL and MW entered into a hybrid contract to design and construct the civil, structural and architectural works for a power plant in November 2015. The subcontract price was £35m, and included ‘construction operations’, which fall under the Housing Grants, Construction and Regeneration Act 1996 (the “Act”), and ‘other operations’, which fall outwith the Act.
In July 2018, an interim payment application nearly resulted in an adjudication due to a dispute. Neither the application for payment by CSL nor the payment notice by MW separated the two sets of operation costs.
The next interim payment application by CSL, issued in February 2019, was for the sum of £3.35m plus VAT, of which £2.68m plus VAT were construction operations. This application, in light of the previous dispute, provided separate costs for each of construction and other operations, including a breakdown of both. MW responded to this in a payment notice that did not separate the operations.
CSL claimed that the construction operations figure was due in the absence of a valid payment or pay less notice. MW disputed this, arguing that failing to distinguish the operations did not invalidate the payment notice. CSL commenced Part 8 proceedings for the payment of the construction operations and/or damages in the same sum along with interest.
One of the key issues before the Court was whether the payment notice issued by MW in response to CSL’s application was valid, specifically with regard to its failure to distinguish between construction and non-construction operations.
It was determined that the parties were entitled to agree to a payment scheme that sits alongside the statutory provisions, and that it is acceptable to include both construction and non-construction operations in the same sum.
CSL in this case required to distinguish between each type of operation as they sought to limit the claim to the notified sum, however MW were not required to do the same to defend this by way of a payment notice, as they could set out the basis on which no sum was due in respect of any of the operations.
The Court noted that MW set out the basis on which their sum was calculated and that it was satisfied the notice was valid. CSL was therefore unable to claim monetary relief and the Part 8 claim was dismissed.
Had the payment notice been invalid, the Court held that CSL would have been entitled to rely upon its payment application as the notified sum for the purposes of the Act, as MW had not raised a positive alternate case to resist enforcement of the statutory payment provisions. Further, MW would not have been able to rely upon a negative valuation as a pay less notice, cross-claim or set off.
‘A pragmatic solution to the illogical and uncommercial impact of section 104(5) of the Act’
The Court determined that extending the cash flow benefits conferred by the Act to non-construction operations did not undermine the purpose of the Act, and decided that applying the agreed payment scheme to both the construction operations and the non-construction operations was an acceptable outcome, even though the latter exist outwith the statutory requirements.
Contractors should be aware that unless more than one payment mechanism is used in a hybrid contract, a payment notice that does not separate construction and non-construction costs will be valid for the purposes of the Act.