The parties entered into a subcontract for works which were ‘construction operations’ within the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the "1996 Act"). The subcontract was a hybrid contract in that it also provided for works which were not ‘construction operations’.
The subcontractor’s application for payment 32 stated the total amount due as £3,353,219.22 (plus VAT). A breakdown to the application showed £2,683,617.09 as being due in respect of construction operations and the balance was for other works outside of the 1996 Act. The contractor responded with its payment notice showing a negative value due to the subcontractor.
The subcontractor claimed that the contractor’s payment notice was not valid as it did not distinguish between construction operations and non-construction operations. The issue in the case was, therefore, whether a payment notice had to separately identify the sum due in respect of construction operation works in order to constitute a valid notice.
The court held that, where a hybrid contract contains a payment scheme that complies with the 1996 Act for both construction and non-construction operations, a payment notice which did not separately identify the sum due in respect of construction operation works could be valid under sections 110A and 111 of the 1996 Act. That was because:
1.Those sections do not stipulate separate identification of the sums due in respect of construction operations.
2. While the statutory payment provisions apply only to construction operations under a contract, parties could agree that such provisions applied to non-construction operations. A payment notice could then comply with the statutory and contractual provisions.
3. Section 111 could be implemented where the same provisions applied to both construction and non-construction operations. In that regard, the validity of the payment notice in respect of both construction operations and non-construction operations would be decided against the same parameters. However, where separate payment provisions applied to construction operations and non-construction operations, it would be necessary to distinguish those operations from each other in applications for payment and payment notices.
4. An agreement that the same payment provisions apply to both construction and non-construction operations did not undermine the purpose of the statutory payment provisions. It was a pragmatic solution which extended the cash flow benefits afforded by the 1996 Act.
As the subcontractor had limited its claim to the notified sum payable under section 111 of the 1996 Act, it was necessary for the subcontractor to distinguish between the sums claimed for construction operations works and the sums claimed for other non-construction operations works. The contractor could defend the subcontractor’s claim by relying on its payment notice setting out the basis on which no sum was due in respect of any construction or non-construction operations.
Each payment notice had to be construed against the relevant contractual and statutory background to determine its validity. On a proper construction of the subcontract and the 1996 Act, the contractor had issued a valid payment notice in response to the subcontractor’s application.
With the benefit of the judgment in C Spencer v MW High Tech Projects UK, if parties want to avoid disputes as to the payment of construction and non-construction operations under a hybrid contract then it is advisable to ensure that the contract includes one payment mechanism for all operations which complies with the 1996 Act. Should you wish to discuss the payment provisions of your hybrid contract or any other payment related issues, please contact us and we will be happy to assist.