Pay Less Notices must be specific

When I am not dealing with disputes, I spend much of my time training companies and individuals on NEC contracts. The delegates are enthusiastic, professional and, to many of them, disputes are an anathema. Most delegates are not aware of the potential significance of what they do or do not do in a simple payment process and the commercial implications of failing to get it right.

For those who deal with disputes we know that the processes are critical to the financial health of the parties to these contracts.

The case law on payment notices is now quite extensive both in terms of the form they must take and the consequences of not giving a valid notice at the right time. There is a new case study for the delegates. It is the recent case of Advance JV (A Joint Venture Between Balfour Beatty Group Limited, MWH Treatment Limited) v Enisca Limited (“Advance”)1 .

The Advance case has provided both a summary of the existing cases and the answer to a novel question: whether the payless notice must refer to a specific application.  

Advance concerns a dispute under an NEC3 Engineering and Construction Subcontract April 2013 edition, including Option A, subject to bespoke amendments. It includes NEC3 Option Y (UK) 2, which provides payment terms intended to comply with the requirements of the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 (” the Act “).

The payment terms were conventional. 

i)  Enisca may make an application for payment on or before the assessment date;

ii)  Advance is required to assess the amount due for payment at each assessment date (the payment due date) and certify a payment by issuing a Contractor payment certificate within three weeks of the assessment date;

iii)  Payment becomes due twenty-one days after the assessment date;

iv)  Either party intending to pay less than the notified sum (in this case Advance) must notify the other party within the contractual window, i.e. not later than seven days before the final date for payment.

The dispute concerned Applications for payment 24 and 25 and the validity of a pay less notice (“The Payless Notice”). 

As set out in the judgment the sequence of events was as follows;

  • In its Application 23 (the application immediately prior to the application on which the adjudication referred to below was based), the gross value applied for by Enisca in respect of its work over the previous two years was £3,686,499.80 exclusive of VAT. Payment was certified by Advance against this application in the sum of £2,270,597.38. The difference between the parties was £1,415,902.42. It was common ground that the assessment date of this application was 24 September 2021.
  • On 22 October 2021 (the next assessment date under the Contract), Enisca submitted Application 24 by email. The gross value applied for was £5,131,642.49, an increase of over £1.4 million or almost 40% of the entire gross valuation since the previous month. Taking account of the sum paid to date of £2,157,068.49, the net payment applied for was £2,717,992.88 against the previously certified figure of £2,270,597.38.
  • No payment certificate was provided by Advance to Enisca in respect of Application 24 (any such certificate being due on or before 12 November 2021) and no document was provided which expressly sought to respond to Application 24.
  • On 19 November 2021 (again, the next assessment date under the Contract), Enisca submitted Application 25, in the gross sum of £5,217,303.71, an increase of £85,661 compared to Application 24. Again, the previously certified figure of £2,270,597.38 was identified and the net payment applied for was £2,799,371.04.
  • Each of the applications for payment numbered 23, 24 and 25 was in the same form; each identified the date of the application, the application number and included the relevant figures in tabular form in three columns. 
  • The relevant dates pursuant to the payment provisions in the Contract for Application 24 (payment cycle) were:
    i)  12 November 2021 – Contractor certifies and due date for payment. No certificate was provided;
    ii)  26 November 2021 – the latest date for provision of a Pay Less Notice;
    iii)  3 December 2021 – final date for payment.
  • On 25 November 2021 (one day before the expiry of the time window for provision of a pay less notice in respect of Application 24 and within the 21 day period for certification following the assessment date in respect of Application 25) Advance uploaded to CEMAR a package of documents which included a “Certification of payment assessment” expressly said to be for the assessment date of 19 November 2021 (”the Payment Certificate“), i.e. the assessment date referable to Application 25, payment cycle 29.

Attached to the Payment Certificate were three documents as follows (i) a spreadsheet detailing the assessment carried out by Advance and responding to Application 25 including adding additional columns setting out Advance’s alternative assessment; (ii) a document identified as “SCADV35615-049 Enisca Ltd – Application 25 – Payless Notice 24.11.21.pdf” and (iii) Enisca’s own application No. 25.

The second document (which the judge refers to as “the Payless Notice“ 2 ) was marked in bold on its top right-hand corner with the words “Withholding/Payless Notice”.

The Payless Notice provided.

”Dear Sirs,
 Project No SCADV35615
 We refer to your application number 17, relating to period ending 26th March 2021. 
 Please be advised that, in accordance with the subcontract terms and conditions between us, we give notice of our assessment of your application number 17 as follows:
 i)  Application paid in full
 ii)  Your application has been amended in accordance with the attached detail;
• Advance Assessment of PWDD: £2,097,662.60
• Less 5% Retention: -£104,883.13
• Payment due: £1,992,779.47
• Less Paid to date: £2,157,068.49
• Payment amount due in period: -£164,288.02 …”
 iii)  Cumulative Payment value excluding VAT and before retention is: £2,157,067.49.”

The difference in valuation is considerable. The project which concerns the design and construction of a hydroelectric generation facility is some years behind the original completion date. In Application 24 the gross value applied for was £5,131,642.49, an increase of over £1.4 million or almost 40% of the entire gross valuation since the previous month. Taking account of the sum paid to date of £2,157,068.49, the net payment applied for was £2,717,992.88 against the previously certified figure of £2,270,597.38.

There is no discussion in the judgment of the basis for the 40 % increase but in the context of an NEC subcontract with its early warning procedures and the usual compensation event time bars, such a change in value is puzzling to say the least.

Advance had two defences that are mentioned in the case, one to deny the validity of the application and secondly to rely on their valuation for certificate 25 and the documents attached.3

When faced with non-payment of the sum claimed in Application 24 Enisca issued a notice of adjudication.4 The adjudicator issued his decision on 8 February 2022 – Enisca was successful. As a result, the adjudicator decided and declared that Advance did not issue a payment certificate by 12 November 2021, that Advance’s Pay Less Notice issued on 25 November 2021 was against Enisca’s Application 25, and that Advance did not issue an effective Pay Less Notice against Enisca’s Application 24. He ordered Advance to pay £2,717,992.88 to Enisca within 7 days, together with interest and any applicable VAT.

Advance then sought a declaration from the court.5 The issue to be decided was whether the Adjudicator’s analysis was wrong. Could the Pay Less Notice cover two applications? This had not been decided by previous cases. The judge reviewed the authorities and provided a summary of the law on the form of and interpretation of notices.

As the Pay Less Notice had been served within the timescale for a payless notice for both applications 24 and 25 the first matter the judge had to consider was how the Payless Notice was to be interpreted.

The position taken by Advance was that given the amount of the valuation Advance had notified in the Payless Notice and the consequent overpayment position “a reasonable recipient would therefore understand that Advance did not intend to make any further payment, either in respect of Interim Application 24 or Interim Application 25". The Payless Notice applied to both.

This raised the novel question of whether a pay less notice must refer to a specific application.

Enisca’s position was that a pay less notice is specific to an application and that the notice was not specific to application 24 and so could not be relied upon.

The judge reviewed the respective arguments stating;

“48.  I agree with Mr Nissen that it is plain from a review of the payment regime under the Act that payment notices are required to be referable to individual payment cycles.

49.  Mr Stansfield admits as much in relation to payment notices under section 110(B)(4) of the Act , which specifically provides that a payment notice is to notify the payer of “the sum that the payee considers will become due on the payment due date in respect of the payment”, thereby expressly requiring the payment notice to be referable to the due date in the relevant payment cycle. Hence the decision in Henia , where both the relevant contract and the Act required identification of a sum that was due “at the relevant due date”. However, he contends that the Act deals with pay less notices in a different way. In particular, that section 111(4)(a) merely requires a pay less notice to identify the sum that the payer considers to be due “on the date the notice is served”. In other words, when it comes to pay less notices, the Act is concerned only with time limits.

50.  I was initially attracted to this submission, but on reflection it appears to me to be important to bear in mind the wording of section 111(3) of the Act to the effect that “[t]he payer…may in accordance with this section give to the payee a notice of the payer’s intention to pay less than the notified sum”. Whilst I accept that a pay less notice need only identify the sum that the payer considers to be due for payment “on the date the notice is served” (and to this extent serves a different function from a payment notice under section 110(B)(4) ), the reference to “the notified sum” in 111(3) appears to me to root the giving of a pay less notice firmly in the payment cycle represented by the payment notice which (in the absence of a payment certificate) will identify “the notified sum”. Put another way, the pay less notice (which is expressing an intention to pay less than the notified sum) must be referable to the payment notice in which the notified sum is identified.

51.  Whilst Mr Stansfield is right to say that Bexheat was not directly concerned with the interpretation of pay less notices, nevertheless it does appear to me to reinforce the submissions made by Mr Nissen, primarily because it emphasises the difference between payment cycles, including the differing valuation periods applicable to those cycles.”

Although not referred to in the Advance case further support for this might be found in the approach taken to the previous Section 111 in the Scottish Courts.6

Reviewing the Pay Less Notice the judge noted it referred to Application 25, was provided together with the Payment Certificate which expressly related to Application 25 and it carried out a comparison between Application 25 and the sum that was said to be due by Advance. The erroneous references to application 17 or to sections 109 and 110 of the Act were not likely to affect this position. The judge considered that the Payless Notice was a pay less notice in relation to application 25. 

The judge identified the key issue was whether the Pay Less Notice was also in substance, form and intent, a pay less notice in respect of, or referable to, Application 24.

The judge concluded that the notice did not relate to both Application 24 and 25 and that correctly interpreted it applied only to Application 25 for the following reasons (applying the relevant considerations the judge had identified from the cases):

i)  Looked at objectively, the use of the words “Application No 25” and the acronym “AFP25” point clearly to an intention that the Pay Less Notice was to relate to Application 25, as does the fact that it was provided under cover of the Payment Certificate for Application 25 which identified the assessment date of 19 November 2021 and described the Payless Notice as “Application 25 – Payless Notice”.

ii)  There was nothing expressly on the face of the Pay Less Notice (or anywhere else) which pointed to it being a response to Application 24 or AFP24, still less anything which indicated that it was intended to respond to a valuation provided as at the assessment date for Application 24 of 22 October 2021. On the contrary, it was clear from the Pay Less Notice that it was comparing Advance’s own assessment of the sum due with Enisca’s valuation as at the assessment date of 19 November 2021, i.e. the assessment date for Application 25.

iii)  Whilst it might be argued that the provision of the Pay Less Notice one day before the end of the period for service of a pay less notice in respect of Application 24 pursuant to the Contract supports an intention that it might be referable to Application 24, the judge considered this factor to be no more than neutral in circumstances where the Pay Less Notice was also within the (overlapping) period for service of a pay less notice under Application 25.

iv) If the Pay Less Notice was intended to remedy the failure to serve a payment certificate in relation to Application 24; it did not make that clear.

v)  In the circumstances, the Pay Less Notice was not in substance or form a Pay Less Notice relating to Application 24. On its face it was in substance and form a response to Application 25. It did not give notice of an intention to pay less than the notified sum in Application 24.

vi) In the recent past, pay less notices served by Advance had always been served alongside payment certificates, and were referable to those certificates. The Pay Less Notice was no different in also being attached to the Payment Certificate and there was no indication that it was intended to be regarded as something else. The reasonable recipient would be aware of the history and there would have been nothing to alert them to the fact that a different approach was being taken in this instance or that it was intended that the Pay Less Notice should be responsive to Application 24. 

vii)  Viewed objectively, the reasonable recipient in Enisca’s shoes would not have understood that the Pay Less Notice was intended to be responsive to Application 24. There was nothing on the face of the Pay Less Notice or the Payment Certificate to which it was attached to indicate that that was intended to be the case.

viii) As to the argument that in view of the contents of the Pay Less Notice, Advance’s gross valuation of £2.1 million, and the sum already paid to Enisca, a reasonable recipient would not consider that Advance intended to accept Enisca’s gross valuation of about £5.13 million in Application 24 and pay over £2.7 million to Enisca in respect of that Interim Application; on the contrary, a reasonable recipient would consider that Advance did not intend to make any payment. The judge did not accept the argument. The judge commented;

“However, whilst I accept that these figures might have given a reasonable recipient pause for thought as to the purpose of the Pay Less Notice, in my judgment, in light of the clear form and substance of that Notice and the absence of any suggestion that it was designed to plug the gap left by the failure to issue a payment certificate in relation to Application 24, the reasonable recipient would have taken it at face value. As it happens, and although not strictly relevant to the exercise with which I am concerned, it would appear from Mr Hampsey’s evidence that this is exactly how Enisca did in fact take it.”

ix)  Even if the Pay Less Notice had been intended to respond to Application 24, the judge considered that it was not clear or unambiguous in that intention for all the reasons already identified. Furthermore, the Pay Less Notice could not have provided an agenda for an adjudication in respect of the sum due on 12 November 2021 because there was a mismatch: the Pay Less Notice was responsive to a different application, assessed upon a different date and due for payment on a later date.

x) The judge found the arguments raised by Enisca were not artificial or contrived; nor unduly technical stating “The court must take a practical and pragmatic approach” but concluding in circumstances where the judge had found that the Pay Less Notice was not in substance, form or intent a response to Application 24, and further that a reasonable recipient would not have understood it to be such a response, the right course must be to dismiss Advance’s claim and to refuse to make the declaration sought.

The judge therefore dismissed the declaration. Advance were required to make payment of a sum of £2,717,992.88. The agreement that enforcement would not be necessary if the declaration was unsuccessful came against the background of the case of Bexheat referred to in the judgment7 and other cases referred to in that case which show that the “pay now argue later” regime of the legislation cannot be avoided. 

The effect of this is that clients and their commercial staff must be aware that missing a payment certificate or a pay less notice may leave them with absolutely no option but to pay up even where a later certificate may have corrected the “overvaluation”. 

Advance could have dealt with both Applications 24 and 25 within the timescales required if the Payless Notice had responded to Application 24. On any view this was a costly mistake.

Tim WillisWillis Consultancy

  • 1Advance JV v ENISCA Ltd, 2022 WL 01667890 (2022)
  • 2There is some variation in reference. Reference is made to The Pay Less Notice and the Payless Notice. I have referred to the Payless Notice.
  • 3The argument that the application was invalid was abandoned at the hearing.
  • 4The NEC contracts prevent a party from taking a dispute to court before it has been decided by the adjudicator and if there is an arbitration clause any court proceedings (apart from enforcement of an adjudicator’s decision) will be stayed. To enforce payment adjudication is therefore a necessary step.
  • 5No separate enforcement proceedings were necessary as Advance had agreed to pay the amounts decided by the Adjudicator within 7 days if the court at the hearing concluded that its application for declaratory relief failed.
  • 6Strathmore Building Services Ltd v Greig [2000] ScotCS 133 (25 May 2000) per Lord Hamilton at[14] “ The second matter raised was whether a notice effective for the purposes of section 111 could be a communication in writing sent earlier than the making of the relevant Application. Mr d'Inverno pointed out that, while section 111(2) provided that any notice must be given not later than a particular time, it did not provide that it required to be given after any particular time, i.e. there was no terminus a quo. The letter of 17 August, albeit sent prior to the invoice of 27 November, was (or was arguably) a notice of intention to withhold payment within the meaning of section 111. I am unable to accept that argument. The purpose of section 111 is to provide a statutory mechanism on compliance with which, but only on compliance with which, a party otherwise due to make a payment may withhold such payment. It clearly, in my view, envisages a notice given under it being a considered response to the application for payment, in which response it is specified how much of the sum applied for it is proposed to withhold and the ground or grounds for withholding any amount. Such a response cannot, in my view, effectually be made prior to the application itself being made.”
  • 7Bexheat Limited v Essex Services Group Limited [2022] EWHC 936 (TCC) (”Bexheat”)