When is a payment notice valid under a hybrid contract? The confusion around “construction operations” continues

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The decision in C Spencer Ltd v MW High Tech Projects UK Ltd has provided some useful clarity on whether the distinction between construction and non-construction operations is necessary for serving a valid payment notice under the Construction Act 1996 (the “Act”). The issue was whether a payment notice given under a hybrid contract would be Act compliant and therefore validly served if it did not clearly identify separate sums for the different operations involved.

Facts

CSL entered into a subcontract with MW for the design and construction of a waste to energy power plant in Hull. The works included a combination of “construction operations” under the Act and non-construction operations. It was therefore a ‘hybrid’ contract.

Initially, the parties operated the payment provisions under the subcontract without distinguishing between the two types of operations or allocating specific sums to such operations.

Subsequently, a dispute arose when CSL issued a payment application which separated the amounts due in respect of the “construction operations” and the non-construction operations. MW’s payment notice failed to distinguish the claims and instead provided an overall figure for all works undertaken by CSL.

The validity of the notice was challenged by CSL on the grounds that MW did not clearly identify the different sums due for each type of operation and therefore CSL could not determine how MW had calculated the overall sum it said was due.

Judgement

The Court confirmed that the Act applied only to the “construction operations” under the sub-contract. However, the Court stated that if the parties agreed that the payment terms would apply equally to all works under the sub-contract, including non-construction operations, then such a payment regime would be valid.

The Court considered the wording of s.111 and s.110A of the Act which refers to notices setting out the “notified sum” and the “sum considered due at the payment due date and the basis on which that sum is calculated”. The wording does not specifically require the amounts due for different operations to be distinguished for a payment notice to be valid.

Therefore, if the relevant contract contained a single Act-compliant payment regime, the Court said that it was unnecessary to distinguish the sums due for “construction operations” from those due for non-construction operations.

In contrast, a hybrid contract which does not include Act compliant payment provisions would not be satisfactory because payment for the “construction operations” would be subject to the terms implied by the Scheme. Consequently, there would be two distinct payment regimes which would need to distinguish between the two types of operations.

In the circumstances, there was a valid payment notice.

Comment:

The judgment provides a salutary warning to parties entering into hybrid contracts and the care which needs to be taken in drafting payment provisions.

It seems that the best practicable approach, in order to avoid having to operate dual payment regimes, is to provide a single Act-complaint payment procedure to cover all works under the contract. This removes the need to calculate separate sums and distinguish between the different type of operations.

Whilst issues may still arise regarding the validity of payment notices in hybrid contracts, one thing is certain: the Court has narrowed the possibility that parties can claim they have not been served with a valid payment notice simply on the basis that sums stated to be due have not been separated.