Payment notice must state the amount genuinely considered to be due

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A developer’s Payment Notice stating only £0.97p was owed to a contractor was invalid because the developer did not genuinely believe that to be the correct amount the Technology and Construction Court (TCC) has recently decided. This is the first case to consider the subjective requirement that a Payment Notice must state “the sum that the payer considers to be or have been due at the payment date.”

Experts believe the ruling could expose developers to more ‘smash and grab’ adjudications where a contractor can demand immediate payment of the ‘notified sum’ set out in their original payment applications.

Downs Road Development appointed Laxmanbhai Construction to build four blocks of flats in East London under an amended 2011 JCT Design and Build Contract.

In February 2021 Laxmanbhai issued an interim payment application to Downs for around £1.9m. The next week Downs’ Employers Agent responded with a Payment Notice stating that only £0.97p was due. In a covering email Downs explained that it had not been given sufficient time to consider the payment application and would issue a second payment notice “in due course.” On 9 March it issued a second Payment Notice for around £650k.

Laxmanbhai started an adjudication to recover the full amount set out in its payment application. Enforcement proceedings were subsequently commenced in the TCC, which had to consider whether Downs’ original Payment Notice was valid. The TCC ruled it was invalid as it did not meet the requirement set out in the Construction Act that a Payment Notice should state the amount the payer considers to be due.

James Burgoyne, Divisional Director – Claims & Technical, Brunel Professions says: “This is an unwelcome development as the expectation is that we will now see more adjudications and enforcement proceedings which try to challenge Payment Notices and Payless Notices on the highly subjective ground that the employer did not genuinely believe that sum to be due. Employers and the professionals acting for them should take great care not to use wording in emails and other communications with contractors which suggests that they may consider making a different payment in the future. It is worth noting that including detail regarding how the sum stated has been calculated may deter a challenge that the sum was not genuinely believed to be correct.”

“One rather more welcome aspect of the decision is that the same point can apply to the payment application itself, and whether the contractor genuinely believed the sum to be due. This may be an added defence to Smash and Grab adjudications” he explained.

Reports about the decision have been published by CMS Law-Now and Fieldfisher.

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