Payment notices form the basis of the prompt payment regime under the Housing Grants, Construction and Regeneration Act 1996 (as amended) (“HGCRA”). Issuing a valid payment notice triggers obligations on the paying party to respond to it, in default of which the payee can launch a “smash and grab” adjudication. Issuing a defective payment notice bars the payee from relying on the provisions of the HGCRA and can hamper its cash flow.
In RGB Plastering Limited v Tawe Drylining and Plastering Limited [2020] EWHC 3028 (TCC), the court was asked to determine whether the subcontractor’s application was invalid by reference to the parties’ contract.
Facts
RGB Plastering Limited (“RGB”) engaged Tawe Drylining and Plastering Limited (“Tawe”) as a drylining subcontractor at a project in Portsmouth.
As regards applications for payment, the contract between the parties stated that:
- All applications shall be submitted on or before the “issue” date and value works up to the “subcontractor valuation” date as shown on the payment schedule;
- Any applications made after the “issue” date will not be considered; and
- All applications should be submitted electronically to a specific email address.
The payment schedule incorporated into the contract set out the relevant dates for each payment cycle. For April 2019 the issue and valuation dates were 28 April and 3 May 2019 respectively. For May 2019 those dates were 29 May and 2 June 2019 respectively.
On 7 May 2019 Tawe emailed its “valuation number 6” to various RGB employees (but not the specified email address for payment applications) stating that it was for works valued up to 30 April 2019. RGB contended that this was not a valid application for payment in accordance with the contract and asked the court to make a determination on that basis.
Decision
In seeking to determine whether Tawe’s application was valid, HHJ Jarman QC referred to previous cases that had dealt with the payment regime under the HGCRA.
In Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855, Coulson J (as he then was) said that contractors and subcontractors looking to benefit from the HGCRA’s payment regime were obliged to set out their applications with “proper clarity” and subsequently
“If the employer is to be put at risk that a failure to serve a payless notice at the appropriate time during the payment period will render him liable in full for the amount claimed, he must be given reasonable notice that the payment period has been triggered in the first place.”
In Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC), Akenhead J said that an interim application
“…must be in substance, form and intent an Interim Application stating the sum considered by the Contractor as due at the relevant due date and it must be free from ambiguity…If there are to be potentially serious consequences flowing from it being an Interim Application, it must be clear that it is what it purports to be so that the parties know what to do about it and when.”
Tawe took the above passage from Henia broadly, arguing that the application in question was clear in what its purpose would be and that the parties knew what to do about it and when. Tawe’s alternative submission was that the application should have been considered in the May 2019 payment cycle.
RGB argued that the application was received after the April 2019 issue date and did not cover works up to the valuation date for that month. Further, it had not been sent to the email address stipulated in the contract. RGB submitted that a reasonable recipient would think the application was a late application for April 2019 rather than an early May 2019 application and therefore it was invalid.
In reaching his decision, HHJ Jarman QC rejected Tawe’s argument that RGB should have known the purpose of its application and what to do with it and when. The valuation was late and did not value the works up to the valuation date for April or May 2019. The application was also not sent to the correct email address. The judge concluded that
“…the application did not comply with the requirements of the subcontract. It was not clear or unambiguous so that the parties could know what to do about it or when. In my judgment it is invalid.”
Commentary
As noted above, the payment notice system is central to the prompt payment regime under the HGCRA. The HGCRA allows payees who have validly issued an interim application to commence a “smash and grab” adjudication in default of a response from the paying party. Given this potential on the paying party, the onus is on the payee to ensure its application is valid.
Whilst the minimum requirements for payment notices - in respect of timing, form and substance –are set out in sections 110A, 110B and 111 of the HGCRA, there is nothing preventing the parties from adding further stipulations. The “issue” date and requirement to send applications to a specific email address are examples of this in the present case.
It is therefore crucial for contractors and subcontractors to follow the provisions of their contract with regard to applications for payment. RGB Plastering v Tawe Drylining demonstrates that the court will reject broad arguments about an application’s purpose and will focus on whether the “substance, form and intent” of the application is in accordance with the contract. This protects the paying party from the serious consequences of not recognising an application for payment. The case may also encourage paying parties to reject applications on narrow grounds or add superficial hurdles into contracts to allow them to reject applications. Payees should be alive to this.
If you require assistance with interpreting the payment provisions of a contract or assessing the validity of a payment notice, please contact the Construction and Development team at Prettys.
