Pay less notices: confusion at the Manor

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Summary: The agreed JCT variation created an impossibility because under section 111(5)(b) of the Construction Act 1996, a pay less notice cannot pre-date the payment notice to which it relates.

They say that hard cases make bad law, and Manor Asset Ltd v Demolition Services Ltd is certainly a hard case. It involved an agreed variation to a JCT contract for demolition works. In place of the usual JCT payment process, the parties agreed that the contractor would raise an invoice on achieving an agreed milestone, with payment to follow 72 hours thereafter. Unsurprisingly, it did not occur to the parties to amend the pay less notice regime, so the “prescribed period” for service of a pay less notice remained five days before the final date for payment.

Manor Asset: the issue

Manor Asset involved an agreed variation to a JCT contract for demolition works. In place of the usual JCT payment process, the parties agreed that the contractor would raise an invoice on achieving an agreed milestone, with payment to follow 72 hours thereafter. Unsurprisingly, it did not occur to the parties to amend the pay less notice regime, so the “prescribed period” for service of a pay less notice remained five days before the final date for payment. This of course created an impossibility, because undersection 111(5)(b) of the Construction Act 1996, a pay less notice cannot pre-date the payment notice to which it relates.

When the employer purported to make a deduction from the agreed milestone payment, not having served a pay less notice within the 72 hour period, the contractor took umbrage and referred the matter to adjudication. The adjudicator got his dates a bit muddled, but found in the contractor’s favour and awarded payment in full.

On enforcement, the employer obviously realised that there was no jurisdictional basis for challenging the adjudicator’s decision. He had answered the right question and, even if he had got the answer wrong, he was entitled to reach the conclusion that he did. So, instead, the employer sought two declarations:

  • The decision was unenforceable for breaches of natural justice.
  • The final date for payment of the contractor’s invoice.

The judge dealt shortly with the first point and I do not propose to comment further on it, except to note that that alone would have disposed of the matter. However, since the employer had asked for the second declaration as well he felt obliged to rule on it, in case he was wrong on the natural justice point.

The final date for payment

This is where things start to get tricky. The problem is that the Construction Act 1996 contemplates the payment process happening in a certain order:

  • Step 1: due date for payment (in this case, when the milestone was achieved).
  • Step 2: issue of a payment notice (in this case the contractor’s invoice).
  • Step 3: an opportunity for the employer to issue a pay less notice.
  • Step 4: final date for payment.

Here, however, the truncated payment period in the varied contract created a problem, as the Step 3 period expired before the payment notice (Step 2) was issued. The judge was clearly keen to avoid a finding that the payment provisions were entirely non-compliant, which would have meant importing the 17 day payment period in the Scheme, a result that would have defeated the agreed intention of the parties (payment within 72 hours). In order to get round this conclusion, he held that a term should be impliedallowing a pay less notice to be given at any time before the final date for payment. In other words, the prescribed period was reduced to nil. By doing so, he preserved both the running order (Steps 1 to 4) and the integrity of the payment process.

Pausing there for a moment, it is worth noting that the judge did not in fact have to go this far. Based on his other findings, the final date for payment was 26 October and a pay less notice was not issued until 28 October, so by any reckoning the notice was out of time. That being the case, he did not need to come to a conclusion that arguably undermines one of the objectives of the Construction Act 1996, namely that the payee should have advance notice of the payer’s intention to pay less than the notified sum. For example, he could have chosen any “prescribed period” that was more than nil but less than 72 hours.

More seriously, and topically, given the recent flurry of cases on implied terms, it is at best questionable whether the tests for implying a term, as most recently clarified by the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd, were met here. In particular, I think it is highly doubtful whether the term can be said to be so obvious that it “goes without saying”. Nor, arguably, is it necessary for business efficacy (a point to which I will return below) and moreover it appears to contradict an express term of the varied contract, that is the five day period prescribed by the JCT form. All rather difficult.

An alternative approach?

However, I suggest that the judge overlooked another solution, that, in my view, may well be the right one. It is simply this: Step 3 does not need to fall after Step 2.

Let me explain. The Construction Act 1996 does not require every construction contract to include provisions governing the issue of a pay less notice. It merely states that, if the employer wishes to pay less than the notified sum, it must give a notice not later than the prescribed period before the final date for payment. So a contract is not non-compliant simply because it does not provide for Step 3.

Translating this to the facts of Manor Asset, a plausible, indeed, perhaps the most likely analysis of the parties’ (objective) intentions is that the employer consciously chose to forgo his right to give a pay less notice. In other words, once the milestone has been achieved and an invoice issued, it is no longer entitled to dispute the amount payable. It will of course remain open to the employer to argue that the milestone has not been reached, in other words, that the invoice is premature, but otherwise it will be bound to pay the sum due. Of course we do not know the detailed commercial background behind the contract variation, but this explanation seems to me to be perfectly logical and to accord with business common sense.

On this analysis, the position becomes clear. There is no need to imply a term, nor to override the express agreement of the parties. The five day prescribed period can remain, but will be redundant in practice. I would venture to suggest that this is a more satisfactory solution than the contortions through which the judge forced himself to go in implying a new term into the contract.

Footnote on the Construction Act 1996

Finally, it is worth remembering that one of the declared objectives of the legislation was to protect contractors against extended payment periods. It is ironic that, at least on the facts of Manor Asset, the Construction Act 1996 had the unintended consequence of creating a barrier to prompt payment. I would run the risk of being branded a heretic if I were to describe the Construction Act 1996 as a sledgehammer to crack a nut. However, it cannot be denied that, like so many well-meaning initiatives, its approach is at times heavy handed and can lead to collateral damage.

This article was first published by Practical Law Construction as part of our regular construction blog series in which we share our practical experiences of working in construction and engineering and give our opinion on the current and future legal developments that shape and will shape the industry. To read more from the series, visit the Practical Law blog.

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