As many construction professionals and practitioners are aware, the Housing Grants, Construction and Regeneration Act 1996 (as amended) 1996 (the “HGCRA”) states at section 110A(2)(a) that a payment notice should set out:
- The sum the paying party considers to be due at the due date; and
- The basis on which that sum is calculated.
In Downs Road Development LLP v Laxmanbhai Construction (U.K.) Ltd [2021] EWHC 2441 (TCC), the court considered whether the first bullet point above should be read as the sum the paying party genuinely considers to be due. We set out a summary of the case and practical tips arising below.
Background
In September 2018, Downs Road Development LLP (“Downs Road”) engaged Laxmanbhai Construction (U.K.) Ltd (“LC”) to construct 79 residential units in London (the “Project”) under an amended JCT Design and Build (2011) form of contract (the “Contract”). The contract sum was some £27,000,000. The payment terms of the Contract reflected section 110A(2)(a) of the HGCRA (as quoted above).
On 26 February 2021, LC sent its interim application number 34 (“IA34”) to Downs Road. IA34 showed a net sum due of around £1,890,000.
On 3 March 2021, Downs Road sent its payment notice number 34 (“PN34”), showing a net sum due of 97p. This followed Downs Road’s novel approach on the Project of sending a “place holder” payment notice showing a sum due of £1 (before deducting retention) followed by a second payment notice showing a larger sum due. PN34 did not show how Downs Road had arrived at the gros valuation figure. The covering email to PN34 said that a further payment notice would be issued in due course.
On 9 March 2021, Downs Road sent the second payment notice (“PN34a”). PN34a showed a net sum due of around £657,000.
On 16 April 2021, LC referred a dispute to adjudication. Specifically, LC asked the adjudicator to decide the true value of the sum due at the time it submitted IA34. Further, LC sought payment of some £1,307,000. In his decision, the adjudicator awarded LC a sum of around £103,000.
In the proceedings, LC sought (among other things) a declaration that PN34 was invalid. The judge, HHJ Eyre QC, set this out as one of the key issues for the court to decide.
Decision
The judge firstly considered the arguments of both parties. LC said that PN34 was not valid as it did not set out the sum which Downs Road genuinely considered to be due or show a proper basis of calculation. LC said that Downs Road’s “place holder” strategy was simply a way to buy more time to make a proper assessment and avoid the consequences of not serving a payment and pay less notice.
Downs Road’s position was that PN34 complied with the payment provisions of the Contract and provided an agenda for the adjudication. Downs Road noted that there could be circumstances where a modest sum was due, for example to correct an earlier overpayment.
Having considered each party’s arguments, the judge decided that PN34 was not a valid payment notice, because it:
- Did not set out the sum which Downs Road considered due at the due date. In support of this, the referred to the covering email to PN34 which stated a second payment notice was to follow and the fact that PN34a showed a far greater sum due than PN43.
- Did not set out the basis of calculation as Downs Road did not show how it had arrived at the “crucial figure” of the gross valuation.
Comment
At first glance, Downs Road v Laxmanbhai seems to place an additional requirement on paying parties to ensure that there is a genuine belief in the sums shown on payment notices. Some commentators have ventured to suggest that this may herald a new wave of “smash and grab” adjudications where a payee can show that the paying party did not subjectively have a genuine belief.
However, a pragmatic reading of this case is that it simply reinforces the requirements of section 110A(2)(a) of the HGCRA and whether a notice is genuine or not should not be relevant if those provisions are properly complied with. Paying parties should therefore:
- Avoid issuing “place holder” payment notices for nominal sums and/or indicating that a further payment notice will be issued showing a different sum; and
- Set out the basis of calculation of the gross sum, by reference to measures, invoices, progress reports and so on. Written commentary against figures is also good practice.
Complying with the above should obviate any argument that a payment notice was not genuine. The principles apply equally to pay less notices.
