Payment notices and construction operations under hybrid contracts

In the case of C Spencer Limited v MW High Tech Projects UK Limited, the TCC once again considered the issue of payment notices and construction operations under hybrid contracts.

Background

MW High Tech Projects UK Limited (MW) was engaged as the main contractor by Energy Works (Hull) Ltd on 20 November 2015 to design and construct a power plant, capable of processing industrial waste.

By a subcontract dated 20 November 2015, C Spencer Limited (CSL) was appointed by MW to design and construct the civil, structural and architectural works of the facility. The subcontract was a hybrid contract. The works included both "construction operations" (as defined within the Housing Grants, Construction and Regeneration Act 1996) and works which were excluded by virtue of the Act, referred to as "non-construction operations".

The Dispute

In February 2019, CSL issued an application for payment setting out separate sums in respect of the construction operations and non-construction operations. In response, MW issued its payment notice but failed to distinguish between the two amounts. In absence of such a distinction, CSL challenged the validity of the notice and commenced part 8 proceedings seeking payment of the sums due in its payment application. Despite being hybrid in nature, the contract contained a single mechanism for both the construction and non-construction operations of the works. The key issue for the court therefore concerned whether MW were required to separate the figures of the notified sum stated in its payment notice between the two distinct operations.

The Court's Decision

The Court held that where a single contractual payment mechanism is compliant with the Act, the parties are not obliged to distinguish between construction operations and non-construction operations in their payment notice(s)/application(s). In this instance, MW's payment notice was therefore valid and CSL's claim was dismissed.

In passing its judgement, the Court reiterated that, as found during the case of Severfield (UK) Ltd v Duro Felguera UK Ltd 2015, should a contract stipulate a payment mechanism that is not Act-compliant, the parties will be required in any payment application to distinguish between notified sums for those parts of the works which are deemed construction operations and those that are non-construction operations. Only in circumstances whereby the parties have agreed an Act-compliant payment mechanism that caters for both construction and non-construction operations are the parties permitted to lump such sums together.

When concluding that MW were under no obligation to separate the figures within their notified sum, the Court considered it relevant that the provisions of s111 and S110A of the Act did not stipulate a requirement to separate construction operations from other matters and it was open to the parties to agree a single payment mechanism for construction operations and non-construction operations without contravening the Act. This approach did not undermine the purpose of the statutory provisions, being to preserve cash flow for smaller contractors and sub-contractors during the execution of works and to prevent the paying party from abusing its position by wrongly withholding payments that are due. The Court went on to say that if parties agree a payment scheme that complies with the Act in respect of both construction and non-construction operations, the cash flow benefits conferred by the Act are simply extended to cover those works, a position which the Court regarded as a pragmatic solution to the illogical and uncommercial impact of section 104(5) of the Act.

Comment

The case of CSL v MW highlights the importance of having Act-compliant terms of payment where construction operations will be undertaken, whether within hybrid contracts or otherwise. The same rationale also applies to the right to adjudicate and the right to suspend works; both are statutory rights afforded only to construction operations. Without due consideration, a poorly drafted contract may prevent such rights from applying to the whole works and may apply only in respect of construction operations.

Liam Callaghan
Trainee solicitor

Return to contents page