TCC liberalises payment notice rules in “smash and grab” disputes

A recent TCC decision has adopted a liberal approach to the rules for payment notices making it easier for a “notified sum” to arise. The application of such rules are commonly disputed in “smash and grab” claims. The meaning of this decision will inevitably require further elaboration and consideration by the court in the future, but in the meantime it is likely to alter the way in which “smash and grab” claims are argued.

Payment notices and pay less notices under the Construction Act

The Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”) establishes a mandatory payment regime for construction contracts falling within the Act. Among other things, the Act requires certain notices to be given in relation to each payment falling due under a construction contract. The failure to serve notices in time often gives rise to “smash and grab” claims where payment of the amount applied for by a contractor is said to be immediately payable under the terms of the Construction Act. For more information about “smash and grab” claims please see our earlier Law-Now here.

The notification requirements for payments under a construction contract can be summarised briefly as follows:

• Payment notices. Sections 110A of the Construction Act requires a construction contract to provide that either the payer or payee issue a payment notice to the other not later than five days after the payment due date. The notice must state the sum considered to be due "at the payment due date" and the basis on which that sum is calculated.
   
• Payee’s notice in default. Section 110B addresses situations where a payer fails to issue a payment notice and allows the payee to issue a payment notice in default. This notice can be given "at any time after" the date on which the payer's notice was required to be given.
   
• Payment applications. Where a payer fails to issue a payment notice within time, sub-section 110B(4) allows for payment applications to “be regarded as” a payee’s notice in default where the contract “permits or requires” the payee to notify the payer, prior to the date for the payment notice, the sum the payee considers “will become due on the payment due date” and the basis on which that sum is calculated.
   
• Pay less notices. Section 111 of the Construction Act requires that the amount stated in a payment notice or payment notice in default is to become the “notified sum” and paid without set-off or deduction by the final date for payment. However, the section also allows the payer to serve a pay less notice stating the amount the payer consider to be due “on the date the notice is served” and the basis on which that sum is calculated. The payer then need only pay the amount stated in the pay less notice. Sub-section 111(5) states that a pay less notice may not be served prior to the “notice by reference to which the notified sum is determined”.

The validity of notices served under these provisions is frequently disputed between parties to construction contracts. A recent TCC decision considers a number of unresolved questions arising from the above sections.

Placefirst Construction Ltd v CAR Construction (North East) Ltd

Placefirst and CAR entered into an amended JCT Design and Build 2016 sub-contract for a construction project in Durham. The sub-contract stipulated that interim payments were due 16 days after the interim valuation date (being the last calendar date of each month), with the final date for payment being 12 days after the due date. CAR was required to submit an interim payment application by the 25th of each month. Placefirst was then obligated to issue a payment notice within five days of the due date.

CAR submitted its interim payment application on 24 July 2024. Placefirst responded on 31 July 2024 with an email attaching a document described as a pay less notice and a workbook containing a sub-contract payment certificate. CAR commenced a “smash and grab” adjudication claiming the amount of its payment application. CAR was successful, with the adjudicator finding that Placefirst had failed to serve a valid payment notice or pay less notice. Placefirst sought to challenge the adjudicator’s decision at an enforcement hearing before the TCC.

Was the payment notice valid?

Contrary to the adjudicator, the TCC considered the payment certificate attached to the pay less notice did amount to a valid payment notice. The certificate met the substantive requirements of the Construction Act by specifying the sum considered due and providing the basis on which the sum had been calculated. Neither its simultaneous issuance with a pay less notice, nor its designation as a “certificate” affected the intended purpose or essential validity of the notice.

A significant point relied on by CAR in the adjudication was that the payment certificate stated the amount due on 31 July 2024 when it was served and not on the due date, 16 August 2024. In the court’s view, and despite the express words of section 110A to the contrary, “there was no requirement that a payment notice has to state expressly that the sum stated was that which the payer considered due at the due date”. In addition, the court found that even if there had been such a requirement, the failure to meet it would not have affected the certificate’s “intended purpose or its essential validity”.

If not, was the application a payee’s payment notice?

The court also considered whether, had no payment notice been served by Placefirst, CAR’s payment application could have amounted to a payment notice under section 110A.

The court drew attention to a change in wording from the standard JCT payment application clause. The standard clause follows the wording of section 110B(4) in requiring the application to state the sum which the sub-contractor “considers will become due to him at the due date”, whereas the amended clause required CAR’s application to state the sum it considered “to be due to him … at the date when the relevant interim payment shall be calculated”.

In the court’s view the amended wording complied with the payment notice requirements of section 110A, whereas the unamended wording did not “because it refers to a sum the sub-contractor considers will become due at a future date.” Accordingly, the payment application was able to stand as a payment notice, but would not have effect “unless and until Placefirst had failed to give a valid payer’s payment notice”.

The court’s judgment makes clear that the payment application would have qualified as a payment notice “directly” under section 110A and not indirectly via the payment notice in default provisions of section 110B. The court’s reasoning on this point is difficult to understand. In particular, given the court’s finding that the payment application was intended to stand as a payment notice, it is unclear why this was considered to be subject to the giving of a valid payment notice by Placefirst. Moreover, in light of the requirement in section 110B that a payment notice in default must be given after the date on which the payer’s notice was due, the basis for the court’s finding that, in effect, a payment notice in default could be given prior to the payer’s payment notice in this contract is unclear.  

If not, was the application a payee’s payment notice in default under section 110B(4)?

In the event that CAR’s payment application was not a payment notice directly under section 110A, the court considered that it would nevertheless amount to a payment notice in default under the payment application provisions of section 110B(4). However, as noted above, the court had earlier found that the wording of the standard JCT payment application had been changed away from a requirement to state the sum which “will become due”. It is unclear, therefore, on what basis the court considered section 110B(4) to apply, as that section applies only where a contract permits or requires a payment application stating the sum which “will become due” on the due date.

If so, was the pay less notice given too early?

The court next considered whether Placefirst’s pay less notice on 31 July 2024 fell foul of section 111(5) by virtue of being issued prior to the relevant payment notice. CAR relied on the requirement in section 110B that a payment notice in default may only be given after the date on which the contractual payment notice was due (which was five days after the due date in this case i.e. 21 August 2024). CAR argued that this requirement meant that its payment application would only have become a payment notice in default under section 110B(4) five days after the due date. The pay less notice was issued much earlier than this and was therefore said to be invalid.

The court disagreed with this interpretation. In its judgment, the fact that a payment application was, under section 110B(4), “to be regarded as a [payment] notice” did not mean that the date of the payment application had changed. The payment application remained the “notice by reference to which the notified sum is determined” under section 111(5) and a pay less notice could be effectively given at any time after the payment application.

Conclusions and implications

This is a very significant decision dealing with a number of issues which routinely arise in “smash and grab” adjudications. Of most significance is the very liberal approach taken to the Construction Act requirements for payment notices. The court’s finding that a payment notice need not state the sum considered to be due “at the due date” is a point on which many a previous payment notice has fallen. Similarly, whether or not a payment application clause complies with section 110B(4) is often of critical importance to the success of a “smash and grab” claim, yet the court was not troubled by the amendments in this case which moved the language of the clause away from that required by section 110B(4).

The court’s reasoning on these points is not always clear, but its liberal approach to the Act’s requirements may be at odds with previous cases which have emphasised the need for close compliance with the payment notice and payment application provisions of the Act to balance the “draconian” effects of the “notified sum” provisions of section 111 (which form the basis of any “smash and grab” claim). For example, in Henia Investments v Beck Interiors the court noted that:

“Although it is not apt to talk in terms of conditions precedent, I consider that the document relied upon as an Interim Application under Clause 4.11.1 must be in substance, form and intent an Interim Application stating the sum considered by the Contractor as due at the relevant due date and it must be free from ambiguity. In this context, the Interim Application should be considered in the same light as a certificate. If there are to be potentially serious consequences flowing from it being an Interim Application, it must be clear that it is what it purports to be so that the parties know what to do about it and when.”

The court’s conclusion in relation to the date at which a pay less notice can be given is also significant and removes one potential objection to such notices. However, the finding means that a pay less notice can in certain circumstances be given prior to a “notified sum” arising under section 111. The pay less notice might then be subsequently invalidated if a payment notice is served (by a third-party certifier, for example).

Overall this is a complex decision which will inevitably require further elaboration and consideration by the courts in subsequent cases. In the meantime, the decision is likely to significantly shape the way in which “smash and grab” claims are argued.

References:

Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC)

Placefirst Construction Ltd v Car Construction (North East) Ltd [2025] EWHC 100