The facts and the dispute
The dispute arose from a subcontract incorporating the JCT DBSub/C 2016 standard form and additional payment schedules (the “Subcontract”) whereby Gypcraft was engaged to carry out certain subcontract works. The Subcontract incorporated “Numbered Document 6” which set out interim payment dates; however, those dates only covered an 11-month period up to 2 February 2021. The first issue with this limited schedule was that Gypcraft’s works on site were not to start any earlier than 1 December 2020 and no later than 31 January 2021 which meant that Numbered Document 6 was redundant almost immediately.To remedy the redundant payment schedule, VCL issued updated payment schedules. Each of these contained columns for:
(a) A payment application submission date (the “Interim Valuation Date”);
(b) A due date for payment;
(c) A date for a payment notice to be issued;
(d) A date for a pay less notice to be issued by; and
(e) A final date for payment.
These are the payment terms that one would expect to see in a works contract in line with the Housing Grants, Construction and Regeneration Act 1996, as amended the Local Democracy, Economic Development and Construction Act 2009 (“the Act”) which makes it a requirement for construction contracts to include an adequate mechanism for determining what payments become due and when failing which the relevant provisions of The Scheme for Construction Contracts (England and Wales) Regulations 1998 (“the Scheme”) apply.
Despite the Subcontract and the updated payment schedules providing for the relevant dates, the primary issue in dispute was whether VCL issued a valid payment notice in response to Gypcraft’s interim payment application no.23 (“PA23”). The relevant facts in relation to PA23 are as follows:
PA23 was issued on 16 January 2023 for a sum of £342,385.52;
On 07 February 2023 VCL issued a purported payment notice, stating the sum that it considered due to be £125,437.77 (the “Purported Payment Notice”). VCL paid that sum.
The Purported Payment Notice was issued by VCL five days after the payment notice date.
In October 2024 Gypcraft commenced a payment notice adjudication (often referred to as a “smash and grab” adjudication) seeking a decision that the full amount of £342,385.52 in PA23 was the notified sum absent a valid payment notice from VCL (as the Purported Payment Notice was issued late). Gypcraft therefore sought an order that VCL was to pay the remaining balance of £216,947.74 plus interest up to the date of the decision. Gypcraft was successful in the adjudication.
As a result of the adjudication, VCL commenced Part 8 proceedings seeking declarations that:
The Subcontract failed to adequately identify an Interim Valuation date for PA23 and therefore the Scheme should be implied into the Subcontract, the result being that Gypcraft was not entitled to submit PA23 when it did and therefore did not contain a notified sum;
That there was a course of conduct between the parties that created a convention that Gypcraft would accept VCL’s payment notices out of time and therefore Gypcraft was estopped from denying the validity of the Purported Payment Notice; and
Even if the Purported Payment Notice was late, VCL was within the timeframe to issue a pay less notice and there was no reason it could not be read as a valid pay less notice.
The TCC’s decision on each of these arguments is dealt with in turn below.
Issue 01: Interim valuation date
The TCC rejected this argument, stating that the payment schedule set out the required dates for each payment cycle and gave effect to the payment regime contemplated by the Subcontract. PA23 was a valid interim payment application.
Issue 02: Estoppel by convention
This argument was also rejected as on the facts there was no basis to find for estoppel by convention. There was no evidence that VCL placed any reliance on a shared assumption that it could issue late payment notices, nor any documentary evidence indicating that such a convention existed between the parties. The TCC also noted that such factual disputes are generally unsuitable for Part 8 proceedings.
Issue 03: Pay less notice argument
The TCC also rejected this argument, stating that it was an “ambitious submission” not least because the Purported Payment Notice was labelled as a payment notice and not as a pay less notice. The TCC held that to find that this was a valid pay less notice would entirely undermine the Act, the Subcontract, and earlier legal precedent, as it has been made clear that payment notices and pay less notices must make plain that it is, respectively, either a payment notice or a pay less notice. A payment notice cannot retrospectively be converted into a pay less notice.
Concluding comments
This judgment reaffirms, in no uncertain terms, of the importance of clarity and compliance in payment mechanisms under construction contracts. It remains that there is severely limited scope for technical or retrospective arguments to undermine statutory protections for payees under the Act.
