Under a sub-contract MW High Tech Projects UK Limited (“MW”) engaged C Spencer Limited (“CSL”) to design and construct the civil, structural and architectural works of a power plant. The main of the works included construction operations, which fall within the definition of s105(1) of the Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009 (together referred to as “The Act”). However, there were also non-construction operations, which are defined under s105 of the Act as including, the “assembly of…plant or machinery, or erection…of steelwork for the purposes of supporting or providing access to plant or machinery”.

The sub-contract provided for periodic interim payments and the parties operated the payment provisions of the sub-contract without regard to the definition of construction operations in the Act. In 2018, a dispute arose between the parties in respect of payment application 31. Neither the application for payment nor the payment notice separated out the sums due in respect of construction and non-construction operations. Both sides identified an overall figure in their application/notice; however, on this occasion there was a significant difference between the figures. CSL gave notice of their intention to refer to adjudication. MW raised a jurisdictional challenge on the basis that under Clause 44.1 of the sub-contract (which referred to the Act) which set out that the adjudicator could only deal with disputes in respect of construction operations and that the circumstances had failed to distinguish. 

On 4 February 2019, CSL issued its application for interim payment 32 in the sum of £3,353,219.22 plus VAT. This application distinguished between construction and non-construction operations, allocating £2,683,617.09 to construction operations. MW then served its payment notice 35 as well as giving notice that CSL owed MW £6,818,521.70 excluding VAT, the basis for which included delay claims. MW’s notice did not distinguish between operations. CSL then claimed £2,683,617.09 plus VAT, arguing that there had been no valid payment notice or PLN from MW because it made no distinction of construction operations. CSL commenced Part 8 proceedings. The Judge at first instance found in MW’s favour, stating that the express wording of ss111 and 110A does not stipulate separate identification and a payment notice failing to make such a distinction is still capable of valid.

The Court of Appeal upheld O’Farrell J’s decision and dismissed the appeal. Coulson LJ found nothing within the Act that sets out a requirement for “separate or distinct notification and breakdown of sums due in respect of construction operations only.” With regards to CSL’s argument that the words of s104(5) (“only so far as it relates to construction operations”) should be read into ss109-11. Coulson LJ disagreed, stating the Act “can be construed perfectly well without reading in any words”. CSL also argued that s111 had been drafted on the assumption that it related to construction contracts only. Coulson LJ rejected this on the basis that s104 and 105 created hybrid contracts and therefore such contracts would have been “in mind in its subsequent provisions.”

Contrasting Clause 44.1 of the sub-contract, which provides explicitly for referrals in respect of construction operations, Coulson LJ acknowledged that such a limitation could have been included in the payment provisions but was not. 

Comparing the facts with the case of Severfield, Lord Coulson concluded in the present case it would be “absurd if two separate payment regimes had been created here, when a single…regime has been agreed by the parties.” Ultimately, Coulson LJ held that the purpose of the Act is greater certainty and transparency in relation to stage payments and this case emphasises that a pragmatic approach should be taken to payment provisions, avoiding creating “additional layers of complexity and cost.” 

This decision provides useful guidance in respect of payment provisions. It clearly sets out that if parties which to have two separate payment provisions, then these provisions should form part of the contract.