You can't change the past: Payment Notices cannot become Pay Less Notices

In the recent case of Vision vs Gypcraft, the parties argued over a subcontract's payment provisions, and various notices relating to payment that were issued under that subcontract - highlighting how crucial it is for those involved in payment administration to pay close attention to the payment mechanisms in their contracts.

What happened?

The contractor, Vision Construction Ltd (VCL), engaged a subcontractor, Gypcraft Drylining Contractors Ltd (Gypcraft), under a subcontract dated 12 November 2020. This subcontract contained a bespoke payment schedule.

On 16 January 2023, Gypcraft issued a payment application (Application 23), seeking payment in the sum of £342,385.52. VCL responded on 7 February 2023 with a Payment Notice issued five days after the contractual deadline for a Payment Notice, stating the sum due to Gypcraft was only £125,437.77, which VCL then paid. However, VCL did not serve a Pay Less Notice in respect of the difference between the figure set out in Gypcraft's Application 23 and the amount VCL actually paid.

Gypcraft issued a smash and grab adjudication and obtained a favourable decision with the Adjudicator determining that Gypcraft had served a valid Interim Payment Application 23, but that VCL’s Payment Notice was out of time. As such Gypcraft was entitled to the full amount claimed (the unpaid balance being £216,947.75 plus interest) as a “notified sum”.

In response, VCL sought a Part 8 declaration in relation to the proper construction of a subcontract payment mechanism. It advanced three main arguments:

1. The subcontract failed to specify a relevant "Interim Valuation Date" as required under clause 4 of the subcontract. Therefore, as the subcontract did not contain an adequate payment mechanism, the Scheme for Construction Contracts 1998 applied - under which Gypcraft's Application 23 was not valid.
2. There was a course of conduct between the parties under which Gypcraft had previously accepted VCL's out-of-time Payment Notices, giving rise to estoppel by convention (ie essentially they couldn't now argue that this was unacceptable).
3. VCL argued that its Payment Notice of 7 February 2023 could be treated as a valid Pay Less Notice.

The Court’s findings

Adrian Williamson KC, sitting as Deputy Judge of the High Court rejected all three arguments by VCL.

On the first point about the adequacy of the subcontract payment mechanism, the judge held that the Payment Schedule clearly set out the relevant dates. The Adjudicator had been able to give effect “clearly and methodically” to the dates and regime contemplated by the subcontract. The judge referred to the comments of Coulson LJ in Bennett Construction Ltd v CIMC MBS Ltd [2019] BLR 587, which said: "the courts expect the parties to adopt business common sense as to the arrangements for invoicing and payment."

Adrian Williamson KC concluded by saying it "would be perverse and uncommercial to hold that the regime could not work as intended because the words "Sub-Contractor Submission Valuation Date" were used rather than "Interim Valuation Date".

On the second point about the course of conduct between the parties, the judge also emphasised that claims involving estoppel were generally unsuitable for Part 8 claims where there is a substantive dispute of fact. For an estoppel to arise, there must be a clear and unequivocal communication from one party to the other as to a state of affairs, or a shared understanding between both parties (Mears Ltd v Shoreline Housing Partnership Ltd [2015] EWHC 1396 (TCC)).

Here, Adrian Williamson KC found that there was insufficient evidence of a shared assumption or convention that Payment Notices could be given out of time, no evidence of reliance, and no basis to conclude it would be unconscionable for Gypcraft to enforce the contractual payment regime.

Finally, on the third point that a Payment Notice could be treated as a valid Pay Less Notice, the judge described VCL's argument as an "ambitious submission" as the document was clearly labelled as a Payment Notice and it stated the basis on which the sum stated in the Payment Notice has been calculated. The judge concluded that:

“it would, in my view, entirely undermine the Act and the Sub-Contract if what the parties clearly intended at the time to be a Payment Notice could somehow retrospectively be converted into a Pay Less Notice.”

What are the takeaways?

The Construction Act, which introduced important payment provisions (including around payment and pay less notices) has been around for over 20 years but we are still seeing cases regarding contract payment provisions. In this case, the key points to take away were:

1. The Court will generally uphold a payment mechanism if it's commercially intelligible, is workable in practice, and doesn't conflict with the requirements of the Construction Act.
2. Where parties seek to rely on an estoppel they must still establish the required elements and provide the necessary evidence, and
3. Payment Notices and Pay Less Notices are entirely separate documents, and a party cannot turn back time to rely on an invalid Payment Notice as a valid Pay Less Notice.

Finally, remember to check that your contract terms align with the Construction Act, and ensure those contract provisions are then carefully followed throughout the contract duration.

This article was also authored by Lane Castro, Solicitor at Womble Bond Dickinson.