Construction contract – Milestone payment – Payless notice – Appellant submitting interim payment application for works under hybrid contract – Respondent serving payment notice with negative valuation – High Court upholding validity of payment notice – Appellant appealing – Whether valid payment notice needing to identify separately sum due in respect of construction operations only – Appeal dismissed
By a contract in 2015, the respondents were engaged as the main contractor to design and construct a power plant capable of processing refuse-derived fuel produced by commercial and industrial waste and municipal solid waste. By a sub-contract on the same day, the appellant was engaged by the respondent to design and construct the civil, structural and architectural works for the facility.
The principal elements of the sub-contract works were construction operations, within section 105 of the Housing Grants, Construction and Regeneration Act 1996. But the works also included the assembly of plant, and erection of steelwork to provide support or access to plant and machinery which were excluded from the 1996 Act pursuant to section 105(2)(c) as non-construction operations. Thus, the sub-contract was a hybrid contract.
The sub-contract provided for periodic interim payments in the form of milestone payments. Until almost the end of the work on site, the parties operated the payment provisions of the sub-contract without any regard to the definition of construction operations in section 105, or any perceived need to identify separate sums for construction and non-construction operations.
In 2019, the appellant applied for an interim payment in the sum of £3,353,219.22 plus VAT. The application specified the sum of almost £2.7m, allocated by the appellant to construction operations. The respondent served its payment notice, stating that the appellant owed it £6.8m. The attached spreadsheet set out the basis for that negative valuation. The breakdown of the respondent’s payment notice did not allocate any sums by reference to construction operations only.
The court was asked to determine the validity of the respondent’s payment notice and held that, where a hybrid contract contained a payment scheme that complied with the relevant provisions of the 1996 Act for both construction and non-construction operations, a payment notice that did not separately state the sums due in respect of the construction operations was capable of constituting a valid notice for purposes of sections 110A and 111 of the 1996 Act: [2019] EWHC 2547 (TCC). The appellant appealed.
Held: The appeal was dismissed.
(1) There was nothing in the terms of the sub-contract which required either side to differentiate in their payment notices or payless notices between the sums notified for construction and non-construction operations. The 1996 Act identified certain minimum provisions, as to payment and as to dispute resolution by way of adjudication, which every construction contract had to contain. Thus, any analysis had to start with the contract terms, in order to see if they complied with the Act. The Act itself envisaged that the parties would contract on terms which they agreed between themselves. If the agreed terms complied with the Act, the conventional view was that the Act was no longer of any direct relevance to the rights and obligations of the parties.
(2) Section 104(5) of the 1996 Act expressly recognised that, because of the distinction that the Act made between construction and non-construction operations, there would be hybrid contracts. Without its distinction between construction and non-construction operations, there would be no such thing as a hybrid contract at all. But although the Act created such contracts, it did not provide that a hybrid contract had to contain a term requiring the separate or distinct notification and breakdown of sums due in respect of construction operations only.
(3) If it had been important for hybrid contracts to contain terms which provided for the notification and breakdown of sums due in respect of construction operations only, then the Act could easily have said so. Nowhere in sections 110, 110A, 110B or 111 did the Act provide that the expression “the notified sum” should be modified in that way. Moreover, that would be a significant modification. The parties’ critical obligations began and usually ended with the payment of the notified sum. If the appellant was right then, in every hybrid contract created by section 104(5), the notified sum would not be the full sum due to the payee, but just that part which related to construction operations. Alternatively, the appellant’s case would lead to there being two different notified sums, one in respect of construction operations, and one in respect of non-construction operations. Such significant qualifications to the parties’ statutory or contractual rights would need to be clearly expressed in the Act. But they were not. Accordingly, the payment provisions in the sub-contract complied with the mandatory requirements of sections 109-111 of the 1996 Act. There was no requirement on either side to notify and break down sums due in respect of construction operations only.
(4) To the extent that there was an issue between the parties about the extension of the statutory provisions to non-construction operations, it was clear that the parties were at liberty to extend the payment provisions deriving from sections 109-111 to cover both construction operations and non-construction operations. That approach was not only permissible, but was to be welcomed. The fact that the parties had agreed that the same payment provisions as set out in the 1996 Act would apply to both construction and non-construction operations did not require the parties to differentiate between different parts of the sub-contract works in the manner suggested by the appellant. The terms of the sub-contract evidenced their intention to do the opposite and, provided that by so doing they were not in breach of the 1996 Act, they were entitled to rely on the sub-contract terms which they have agreed.
(5) The judge’s decision had been in accordance with previous authority and the purpose of the 1996 Act. It confirmed that purpose, by upholding the validity of stage payments for the totality of the works under the hybrid contract, regardless of whether they were for construction or non-construction operations; and providing greater certainty and greater transparency in relation to such stage payments: Cleveland Bridge UK Ltd v Whessoe Volker Joint Venture [2010] EWHC 1076 (TCC) and Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 2975 (TCC) applied.
Alexander Nissen QC and Matthew Finn (instructed by Gosschalks Solicitors, of Hull) appeared for the appellant; Simon Hargreaves QC and Tom Owen (instructed by Clyde & Co LLP) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of C Spencer Ltd v MW High Tech Projects UK Ltd
