5 Min Read

Payment Notices – a “genuine belief” in the valuation - Downs Road Development LLP v Laxmanbhai Construction (UK) Ltd [2021] EWHC 2441 (TCC)

Read More

By Rebecca Austin

|

Published 21 December 2021

Executive Summary

This decision highlights the danger of issuing a Payment Notice without a genuine belief in the sum stated to be due. A proper valuation must be undertaken and those issuing them would be well advised not to state that the figure is interim, still under consideration or that there have been circumstances which meant that it has been difficult to make a genuine assessment.

It also issued a warning to Adjudicators that any legitimate defence must be considered failing which the decision will be unenforceable and paints a more cautious approach to the circumstances in which an Adjudicator’s decision can be severed.

Background

Downs Road Development LLP (“the Employer”) appointed Laxmanbhai Construction (UK) Ltd (“the Contractor”) to act as contractor in the construction of 4 blocks of flats in East London. The contract was an amended JCT Design & Build 2011.

A dispute arose between the parties in relation to the proper sum due on Interim Application No. 34. In that payment cycle (as in the previous payment cycles), the Employer purported to issue two Payment Notices. The first Payment Notice (34) was issued with a £1 increase to the gross valuation notified in the previous payment cycle, resulting in a net payment of £0.97. The covering email to Payment Notice 34 stated that “we confirm that a further Payment Notice will be issued to you in due course and will not affect your payment date”. Further, that the Employer’s Agent was finding “it a lot more difficult to get the valuations assessed in a timely manner to ensure the valuations are fairly assessed”.

The second Payment Notice (34a) was issued six days later and assessed a net payment in the sum of £657,218.50. The Employer duly paid £657,218.50 by the Final Date for payment.

The Contractor referred the dispute to Adjudication. In its Response, the Employer relied on a cross claim in relation to a capping beam. This was addressed by the Contractor in its Reply.

The Adjudicator decided the proper sum due on Interim Application No. 34. However, he held that he did not have jurisdiction to consider the cross claim because this was not part of the dispute when considered at the “snap shot” point in time of Interim Application No. 34.

The Issues

There were three material issues before the TCC on the enforcement proceedings:

  1. The validity or otherwise of Payment Notice 34.
  2. The enforceability of the Adjudicator's Decision that the sum payable was £103,836.98 with no account being taken of the capping beam cross-claim.
  3. Whether, if the Decision as to the amount to be paid is unenforceable by reason of the adjudicator's failure to address the cross-claim, there can be severance to treat it as nonetheless binding as to the proper amount of Interim Application 34

As to each of these the TCC held that:

1.              Neither Payment Notice 34 or Payment Notice 34a was valid. It was accepted by the Employer that Payment Notice 34a was served out of time and therefore invalid. As to Payment Notice 34, the Judge found that it did not comply with s110A(2)(a) of the Housing Grants, Construction and Regeneration Act 1996 in that it did not specify:

1.1.          The sum that the Employer genuinely considered to be due. That much was evident from the covering email and the fact that it issued a further Payment Notice shortly thereafter which did contain a full assessment of the sum due.

1.2.          The basis on which that sum is calculated. It was insufficient to refer to simple arithmetic of how the net valuation was calculated (i.e. gross valuation less retention): the Employer had failed to provide any explanation or breakdown of how it had arrived at the crucial figure of the gross valuation.

2.              The Adjudicator had taken an unduly restrictive view of his jurisdiction. The failure to do so was material. Thus, the Decision was unenforceable.

3.              It was not possible to sever the Decision. The Judge was not satisfied that the Decision on valuation could be divorced from the issue of the cross claim. The decision on the latter directly impacted upon the sum due under Interim Application No. 34, which was the single dispute referred to the Adjudicator. To sever the Decision would have turned a single decision with an accompanying explanation of reasoning into a series of separate decisions and that would not be the appropriate course.

The Contractor invited the Court to decide that, due to its findings that no valid Payment Notice was served in response to Interim Application No. 34 the Contractor’s Interim Application No. 34 became the notified sum and due for payment in accordance with authorities in S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448. However, the Court declined to consider that on the basis that no application for specific relief in that regard had been made.

Comment

This case has the potential to open the door to a wider class of “smash and grab” adjudications where it can be alleged that the payer does not have a “genuine belief” in the sum stated to be due in a Payment Notice. It is important that full and proper valuations are undertaken in a timely fashion and that those issuing them do not give any indication or evidence to the contrary. 

Author