C Spencer Ltd v MW High Tech Projects UK Ltd

[2019 EWHC 2547 (TCC) 

This was a Part 8 claim for £2.7 million based on the alleged failure by MW to serve a valid payment notice or pay less notice in response to CSL’s interim payment application. MW was engaged as the main contractor to design and construct a power plant, capable of processing refuse-derived fuel produced by commercial and industrial waste. CSL was engaged by MW to design and construct the civil, structural and architectural works for completion of the facility. The subcontract works included construction operations for the purposes of Part II of the HGCRA but also the assembly of plant and erection of steelwork which fell outside the HGCRA.  It was therefore a “hybrid” contract.

Initially, the parties operated the payment machinery provisions without any regard to the division between works that fell within or outside the definition of construction operations.  However, following an adjudication where MW had said that the dispute as framed failed to distinguish between the works that fell within and those that fell outside the ambit of the HGCRA, on 4 February 2019 CSL issued its application for interim payment 32. This application was split between the construction operations and the other works.

By letter dated 19 February 2019, MW served payment notice number 35. The attached spreadsheet contained a breakdown of the measured work and variations, indicating a negative sum due to CSL. The sums were not allocated to or divided between construction operations and non-construction operations. CSL said that on a proper construction of the HGCRA and the subcontract, any certificate of payment must identify the sum assessed as due at the payment due date in respect of those works that comprised construction operations and the basis on which that sum is calculated. Here, the certificate of payment was invalid because it failed to identify that part of the amount assessed as due in respect of construction operations and the basis of that calculation. It simply assessed the overall sum due in respect of both construction and non-construction works.

MW said that the payment provisions were compliant with the HGCRA. The parties decided that all operations would be subject to the same payment regime. They were entitled to do so and it did not make an otherwise compliant scheme thereby non-compliant. MW also said that the subcontract was a milestones contract and it was not possible to distinguish between included and excluded operations. 

The contractual regime for interim payments was that CSL was entitled to make an application for an interim or instalment payment on a monthly basis upon completion of each milestone. Each application submitted by CSL must set out CSL’s assessment of the amount due in respect of completed milestones and any other amounts to which CSL considered itself to be entitled. There was then a process for issuing payment and payless notices. 

The dispute resolution provisions under the contract included an entitlement for either party to refer any dispute to adjudication, such right being limited to disputes in respect of those parts of the subcontract works that constituted construction operations within the meaning of the HGCRA.

Mrs Justice O’Farrell noted that where, as here, the contract was a hybrid, it was necessary to consider the impact of section 104(5) of the HGCRA. Section 104(5) limited the application of the statutory payment requirements to the construction operations forming part of the subcontract. The parties were not permitted to contract out of the statutory payment requirements in so far as they relate to construction operations. However, the parties were also free to agree that non-construction operations should be subject to the same requirements as those contained in the HGCRA. Here, the subcontract contained one payment regime that applied to both construction operations and non-construction operations. For each interim payment there was one application made by CSL, one payment certificate issued on behalf of MW, one pay less notice (if any), and one sum payable by the final payment date.

In the Judge’s opinion, where, as here, a hybrid contract contained a payment scheme that complied with, or mirrored, the relevant provisions of the HGCRA for both construction and non-construction operations, a payment notice that did not separately state the sums due in respect of the construction operations was capable of constituting a valid payment or payless notice.  The express words of the HGCRA did not stipulate separate identification of the sums due in respect of construction operations. It was also open to the parties to agree a payment scheme that sat alongside the statutory provisions, such that it complied with the statutory provisions in respect of construction operations and mirrored those provisions in respect of other operations. In those circumstances, a payment notice could satisfy both the statutory requirements (in respect of construction operations) and the contractual requirements (in respect of non-construction operations). Such a payment notice could be valid under the contract and under the HGCRA.

As a matter of principle, it was possible to implement section 111 where the same provisions applied to both construction and non-construction operations. If parties agreed a payment scheme that complied with, or mirrored, the statutory scheme in respect of construction and non-construction operations, the cash flow benefits conferred by the HGCRA were simply extended to cover those additional works. 

This meant that whilst in order to bring an adjudication, CSL had to distinguish between the sums claimed for construction operations and sums claimed for other works because it sought to limit its claim to the notified sum payable, it was open to MW to defend that claim by relying on a payment notice setting out the basis on which no sum was due in respect of any construction or non-construction operations. The MW payment notice here set out the sum which was considered due at the relevant date and the basis on which it was calculated. Therefore, MW had issued a valid payment notice in response to CSL’s application no. 32. 

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