B e f o r e :
MRS JUSTICE O'FARRELL DBE ____________________
____________________
Alexander Nissen QC & Matthew Finn (instructed by Gosschalks) for the Claimant Simon Hargreaves QC & Tom Owen (instructed by Clyde & Co LLP) for the Defendant Hearing date: 1st July 2019 ____________________
HTML VERSION OF JUDGMENT ____________________
Crown Copyright ©
Mrs Justice O'Farrell:
This is a Part 8 claim by the claimant ("CSL") against the defendant ("MW") for £2,683,617.09 plus VAT based on the alleged failure by MW to serve a valid payment notice or pay less notice for the purpose of the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 (together referred to as "the Act") in response to CSL's interim payment application dated 4 February 2019.
The question raised by the dispute is whether, in the case of a contract for the execution of both: (i) construction operations within the ambit of the Act and (ii) non-construction operations falling outside the Act, a valid payment notice for the purpose of section 111 of the Act must identify separately the sum due in respect of any construction operations and the basis on which that sum is calculated.
Background to the dispute
By a contract dated 20 November 2015 MW was engaged as the main contractor by Energy Works (Hull) Ltd to design and construct a power plant, capable of processing refuse derived fuel produced by commercial and industrial waste and municipal solid waste.
By a subcontract dated 20 November 2015 ("the Subcontract") CSL was engaged by MW to design and construct the civil, structural and architectural works for completion of the facility. The Subcontract price is £35,650,398.
On 2 February 2017 the parties entered into a Deed of Variation and Settlement, the terms of which do not affect the issues raised in these proceedings.
The Subcontract works include construction operations for the purposes of Part II of the Act but also include the assembly of plant and erection of steelwork to provide support or access to plant and machinery, works which fall outside the ambit of the Act.
The Subcontract makes provision for periodic interim payments to be made.
Initially, the parties operated the payment machinery provisions without any regard to the division between milestones or works that fell within or outside the definition of construction operations for the purpose of the Act.
In 2018 a dispute arose between the parties in respect of interim payment application number 31. Neither the application for payment submitted by CSL nor the payment notice issued by MW separated out the sums due in respect of construction operations from the sums due in respect of non-construction operations.
In July 2018 CSL gave notice of an intention to refer the dispute to adjudication. MW raised a jurisdictional challenge in respect of the proposed adjudication. The ground of challenge was that the contractual adjudication provision was limited to disputes in respect of construction operations within the Act; the adjudicator did not have jurisdiction to determine the dispute as framed because it failed to distinguish between the works and associated sums claimed falling within and outside the ambit of the Act.
In the face of such challenge, CSL withdrew its adjudication claim.
On 4 February 2019 CSL issued its application for interim payment number 32 in the sum of £3,353,219.22 plus VAT, of which sum £2,683,617.09 plus VAT was claimed in respect of construction operations and the balance was claimed in respect of other works. The covering letter stated:
The enclosed application for payment included a breakdown of the amount claimed as due under the Subcontract, each item allocated to or divided between construction operations and/or non-construction operations.
By letter dated 19 February 2019 MW served its payment notice number 35, stating:
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. MW did not respond to the substance of CSL's position regarding the appropriate allocation of the works between construction and non-construction operations.
By letter dated 14 March 2019 Gosschalks, solicitors acting for CSL, claimed the sum of £2,683,617.09 plus VAT as the notified sum due in the absence of any valid payment notice or pay less notice.
By letter dated 19 March 2019 Clyde & Co LLP, solicitors acting for MW, disputed the alleged debt, arguing that the failure of MW to specify the sums due in respect of construction and non-construction operations did not invalidate its payment notice.
The Claim
On 5 April 2019 CSL commenced these Part 8 proceedings, seeking payment of £2,683,617.09 plus VAT and/or damages in the same sum together with interest.
CSL's case is:
i) On a proper construction of the Act and clause 38.4 of the Subcontract, any certificate of payment issued by the Contract Manager must identify the sum assessed as due at the payment due date in respect of those works that comprise construction operations and the basis on which that sum is calculated.
ii) The certificate of payment was not a valid notice of payment for the purpose of section 110A(2) of the Act 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.
iii) In the absence of a valid payment notice or any pay less notice, pursuant to section 111 of the Act, the "notified sum" to which CSL became entitled was the amount assessed as due in its application for payment.
MW disputes the claim and submits that Part 8 is inappropriate for determination of this matter. MW's case is:
i) The payment provisions in the Subcontract are compliant with the requirements of the Act. Payment notice 35 complies with the requirements of section 110A of the Act. 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.
ii) If CSL's argument is correct, which is disputed, CSL must prove that all sums claimed in these proceedings are sums for construction operations.
iii) The Subcontract is a milestones contract and it is not possible to distinguish between included and excluded operations.
iv) CSL is estopped by convention from contending that the parties' agreement requires that applications for payment and payment notices distinguish between included and excluded operations.
v) MW is entitled to rely on the payment notice as notice of its cross-claims.
vi) MW is entitled to rely on the payment notice as a pay less notice.
vii) MW is entitled to raise a set-off in the sum of £6,818,521.70.
The issues for determination by the Court can be summarised as follows:
i) on a proper construction of the Subcontract and the Act, whether MW issued a valid payment notice in response to CSL's application no.32;
ii) whether CSL is estopped from relying on its construction argument;
iii) if MW failed to issue a valid payment notice, whether CSL is entitled to rely on its payment application as "the notified sum" for the purposes of the Act;
iv) whether MW is entitled to rely on its negative valuation as a pay less notice, cross-claim or set off;
v) whether this claim is suitable for determination by Part 8 proceedings.
The Subcontract
The Subcontract incorporates the general conditions of the IChemE Form of Contract for Civil Engineering Subcontracts ("the Brown Book"), 3 rd edition 2013, as amended and subject to special conditions agreed by the parties.
The Subcontract Agreement contains an entire agreement provision at clause 2:
The material payment provisions of the Subcontract are as follows:
Thus, the contractual regime for interim payments under the Subcontract is as follows. CSL is 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 considers itself to be entitled, together with the basis of calculation of the sum claimed and supporting documentation, less sums previously certified. Each instalment payment becomes due sixteen days after the date of CSL's application ("the Payment Due Date"). The contract manager issues a certificate sixteen days after the application, setting out his response to the application, including the basis on which the certified sum has been calculated. MW is obliged to pay the sum due nineteen days after the Payment Due Date ("the Final Date for Payment"). If MW intends to pay less than the sum due, it must issue a pay less notice no later than one day before the Final Date for Payment. Subject to any pay less notice, the sum due is (a) the amount certified for payment in the contract manager's certificate or, in the absence of such certificate, (b) the amount assessed by CSL as due in its application.
The dispute resolution provisions of the Subcontract include adjudication at Clause 44.2:
However, clause 44.1 states:
Therefore, although the dispute resolution provisions of the Subcontract include an entitlement for either party to refer any dispute to adjudication, such right is limited to disputes in respect of those parts of the Subcontract works that constitute construction operations within the meaning of the Act.
The Act
Section 104 of the Act defines the construction contracts to which it applies:
Section 105 defines construction operations for the purposes of the Act:
It is common ground that the Subcontract works have been carried out on a site where the primary activity is to be power generation. The Subcontract works comprise a combination of construction operations and works that are not construction operations for the purposes of the Act. Therefore, application of the relevant provisions of the Act is limited to those parts of the Subcontract works falling within the definition of construction operations.
Section 108 of the Act sets out the right to refer disputes to adjudication:
The Subcontract contains provision for the parties to refer disputes to adjudication under a compliant procedure, limited to disputes arising in respect of construction operations within the meaning of the Act.
Section 109 of the Act entitles the parties to construction contracts to stage payments:
Section 110 of the Act requires construction contracts to provide for an adequate payment mechanism, in the absence of which the statutory Scheme applies:
Section 110A sets out mandatory requirements for contractual payment notices:
Section 110B provides for a payee's notice to be given in default of a payer's notice (or, where the contract so provides, for the payee's application notice to be regarded as a payee's notice):
Section 111 imposes a statutory requirement on the payer to pay the notified sum:
Section 114(4) of the Act states:
The material requirements of the payment regime imposed by the Act, in respect of construction contracts, can be summarised as follows. The contractor is entitled to interim payments (save for certain short-term contracts). The contract must provide an adequate mechanism for determining what payments become due and when, including the final date for payment of those sums. The parties are free to agree such mechanism but in the absence of an adequate contractual mechanism, the statutory scheme applies. The contract must require one of the parties (or a specified person) to give a payment notice in respect of each interim payment, not later than five days after the payment due date, setting out the sum considered due and the basis on which such sum has been calculated. The paying party is obliged to pay the sum due (the notified sum) on or before the final date for payment. If the paying party intends to pay less than the sum due, it must issue a pay less notice no later than an agreed period before the final date for payment (or, in the absence of an agreed period, as prescribed by the scheme). Subject to any pay less notice, the notified sum due is (a) the amount specified in in the paying party's payment notice or, in the absence of a valid payment notice, (b) the amount specified as due in the contractor's application or payment notice.
Construction of the Subcontract
Mr Nissen QC, for CSL, submits that MW's certificate was not a valid payment notice for the purposes of the Act. The express language of the Subcontract contemplates the issue of only one payment certificate per payment cycle. It draws no distinction between those operations that are subject to the Act and those that are not. Section 111 of the Act is mandatory and of direct application, regardless of whether it is replicated in the contract: Grove Developments Ltd v S&T (UK) Ltd [2019] BLR 1 (CA) per Jackson LJ at [40]. However, Section 111 applies only to those operations that are subject to the Act. For the statutory provision to work, it is necessary to identify the notified sum in respect of construction operations. If a contract is capable of being read in two ways, one of which would involve a contravention of a statute and the other would not, that may be a powerful reason for reading the contract in the sense which its compliant with the statute, even if it is the less natural construction: Great Estates Group Ltd v Digby [2011] EWCA Civ 1120 (CA) per Toulson LJ at [98]. This Subcontract must be construed in a way that is compliant with the Act, that is, by reading clause 38.4 as requiring the payment notice to identify separately the sum considered due in respect of construction operations. CSL's application for payment distinguished between the sums claimed in respect of construction operations and the sums claimed in respect of other operations, allowing the parties to comply with the mandatory regime in section 111 of the Act. However, MW issued a single payment certificate that failed to make such distinction. For the purpose of the Act, it did not amount to a valid payment notice. No pay less notice was served. Therefore, CSL is entitled to the amount claimed for construction operations in its application.
Mr Hargreaves QC, for MW, submits that MW's certificate was a valid payment notice for the purposes of the Act. The payment provisions of the Subcontract in clause 38 comply with the requirements of section 110A of the Act. Payment notice 35 complies with the Subcontract. Therefore, payment notice 35 must be compliant for the purposes of sections 110(A)(2) and 111(2)(a) of the Act.
The starting point for the Court is to consider the purpose of the statutory payment scheme under the Act, namely, to preserve cash flow for smaller contractors and sub-contractors during the execution of the works and prevent the paying party from abusing its position by wrongly withholding payments that are due. This objective is achieved by the imposition of a contractual payment scheme. The scheme must include a timetable for notices and payments, and a minimum standard of notification of the payments to be made or withheld, including the basis on which sums have been calculated, so that they can be justified or challenged. The purpose of section 111 of the Act is to support compliance with the payment scheme, by requiring the paying party to pay the sum assessed as due by the receiving party, if no proper notice is given disputing entitlement to that sum.
Where, as in this case, the contract is a hybrid, it is necessary to consider the impact of section 104(5) of the Act on the contractual payment regime. Section 104(5) limits the application of the statutory payment requirements to the construction operations forming part of the Subcontract. The parties are not permitted to contract out of the statutory payment requirements in so far as they relate to construction operations. The parties have no power to extend the ambit of the Act. However, the parties are free to agree that non-construction operations should be subject to the same requirements as those contained in the Act. Section 104(5) does not preclude the parties from agreeing a contractual payment regime pursuant to which the statutory requirements are applied to both construction operations and non-construction operations.
The Subcontract contains one payment regime that applies to both construction operations and non-construction operations. For each interim payment there is 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.
On their face, the payment provisions in the Subcontract comply with, or are consistent with, the material provisions of the Act. Clause 38.1 contains an express entitlement to interim payments as required by section 109 of the Act. Clauses 38.2 to 38.3A set out the contractual machinery for determining what payments become due and when, and clause 38.5 fixes the final date for payment, as required by section 110 of the Act. Clause 38.4 sets out the requirements for the contract manager's certificate, namely, to identify the sum that is considered to be due and the basis on which that sum is calculated, in accordance with section 110A of the Act.
Clauses 38.5 to 38.7 mirror the obligations imposed by section 111 of the Act. Clause 38.5 obliges MW to pay the amount specified in clause 38.6 by the Final Date for Payment (the effect of section 111(1)). Clause 38.6 specifies the amount to be paid as the sum set out in the contract manager's certificate or, in default, CSL's application (the effect of section 111(2)). Clause 38.7 requires MW to issue a pay less notice if it intends to pay less than the sum due (the effect of sections 111(3)-(6) and specifies the prescribed period for service of such notice.
The question that arises is whether, as contended by CSL, it is necessary for the operation of sections 110A(2)(a) and 111 that the payment notice should state the sum considered due, and the basis of calculation of that sum, in respect of construction operations, so as to distinguish it from any sum due in respect of non-construction operations falling outside the Act.
The applicability of the Act to hybrid contracts was considered in Cleveland Bridge (UK) Ltd v Whessoe-Volker Stevin Joint Venture [2010] EWHC 1076 (TCC) . In that case, the court refused to enforce an adjudication decision in circumstances where the contract did not contain an adjudication agreement and the statutory scheme applied only to the construction operations; not to the other operations. Having referred to section 104(5) of the Act, Ramsey J stated:
The case of Severfield (UK) Ltd v Duo Felguera UK Ltd (2015) 163 Con LR 235 (TCC) concerned the application of the statutory scheme payment provisions in respect of a hybrid contract. In that case, the contract works comprised construction operations under the Act but also works that were excluded from the scope of the Act pursuant to section 105(2). The contractual payment regime did not comply with Part II of the Act. As a consequence, the statutory scheme applied to the construction operations under the contract but a different contractual scheme applied to the other operations. Having referred to the Cleveland Bridge case, Coulson J (as he then was) explained:
Having initially submitted a claim for an interim payment in respect of all works under the contract, the claimant in that case then sought to revise it by limiting it to sums claimed in respect of construction operations to which the Act applied. The court rejected the claimant's argument that the revised claim could stand as a payment notice for the purposes of the Act:
The above cases both concerned contracts to which two separate schemes applied. In Cleveland Bridge , the statutory adjudication scheme applied in respect of construction operations but there was no adjudication scheme in respect of non-construction operations. In Severfield , the statutory payment scheme applied in respect of construction operations but the contractual scheme continued to apply in respect of non-construction operations. In both cases it was necessary to distinguish the claims in respect of construction operations from the claims in respect of non-construction operations so that the material statutory or contractual scheme could be applied. In the absence of such clarity from the party seeking to rely on it, the Court would not undertake an investigation to establish the appropriate apportionment.
Cleveland Bridge and Severfield are authorities for the proposition that Part II of the Act applies only to that part of a hybrid contract that concerns construction operations as defined by section 105. The Act contemplates that separate payment or adjudication provisions may apply to construction operations and non-construction operations under a single, hybrid contract. If separate schemes apply in such a hybrid contract, it is essential for an interim payment applicant to identify the sum claimed in respect of the part of the works covered by the Act, so that he can take advantage of the scheme provisions, including the default provisions in section 111 of the Act.
However, those cases do not provide support for the proposition that parties to a hybrid contract are unable to agree a single adjudication or payment scheme that is applicable to construction and other operations and capable of achieving compliance with the Act.
I am grateful to the parties for drawing to my attention the recent decision of the Court of Appeal in Bennett (Construction) Limited v CIMC MBS Limited [2019] EWCA Civ 1515 and providing additional short submissions. The case provides a helpful exposition of the relevant principles that arise but deals with different issues to the one before this Court. The issues in Bennett were whether the contractual payment mechanism in that case complied with section 110 of the Act and, if not, whether the inadequacy should be resolved by wholesale or piecemeal imposition of the statutory payment scheme. In this case, it is common ground that section 38.4 of the Subcontract complies with section 110; the primary issue is whether it is necessary for it to be construed as contended for by CSL to render it compliant with sections 110A and 111. This issue did not arise and therefore was not considered by the Court of Appeal in Bennett.
In my judgment where, as here, a hybrid contract contains a payment scheme that complies with, or mirrors, the relevant provisions of the Act for both construction and non-construction operations, a payment notice that does not separately state the sums due in respect of the construction operations is capable of constituting a valid notice for the purposes of sections 110A and 111 of the Act for the following reasons.
Firstly, the express words of sections 111 and 110A do not stipulate separate identification of the sums due in respect of construction operations. Section 111 simply identifies the "notified sum" by reference to a valid payment notice in section 110A. Section 110A(2) contains two requirements for a valid payment notice, namely, the sum considered due at the payment due date and the basis on which that sum is calculated. To comply with section 110A(2), the sum considered due must include, but is not expressly limited to, such sum in respect of construction operations. That may be satisfied by stating the overall sum considered due in response to the relevant application.
Secondly, although the statutory provisions apply only to the construction operations under a contract, as explained above, it is open to the parties to agree a payment scheme that sits alongside the statutory provisions, such that it complies with the statutory provisions in respect of construction operations and mirrors those provisions in respect of other operations. In such circumstances, it is possible for a payment notice to 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 Act.
Thirdly, as a matter of principle, there is no difficulty in implementing section 111 where the same provisions apply to both construction and non-construction operations. I agree with CSL that, where separate payment machinery applied, as in the case of Severfield , it would be necessary to distinguish construction operations from non-construction operations in respect of each application notice and payment notice. Otherwise, it would not be possible to identify the notified sum which became payable pursuant to section 111. There might also be cases where one party sought to enforce section 111 in isolation from any contractual entitlement to a payment. In such cases, it would be necessary for the party seeking to rely on section 111 to identify the notified sum to which the section applied so that the default provision in section 111 could be implemented. However, such difficulty would not arise where the same provisions applied to both construction and non-construction operations, whether by way of statutory requirement or contractual obligation. As a matter of principle, validity of the payment notice in respect of both the construction and non-construction operations would be determined against the same parameters. In such cases, it would be possible to identify the sum payable by way of each interim payment, applying section 111 (in respect of the claims for construction operations) together with the provisions replicated in the Subcontract (in respect of the claims for non-construction operations).
Fourthly, the above approach does not undermine the purpose of the statutory payment provisions. It could be described as a pragmatic solution to the illogical and uncommercial impact of section 104(5) of the Act. If parties agree a payment scheme that complies with, or mirrors, the statutory scheme in respect of both construction and non-construction operations, the cash flow benefits conferred by the Act are simply extended to cover those additional works.
In this case it is necessary for CSL to distinguish between the sums claimed for construction operations and sums claimed for other works because it seeks to limit its claim to the notified sum payable pursuant to section 111 of the Act. However, it is open to MW to defend that claim by relying on a payment notice, setting out the basis on which no sum is due in respect of any construction or non-construction operations.
Of course, it is necessary to construe each payment notice against the relevant contractual and statutory background to determine its validity. A payment notice must be sufficiently clear and unambiguous in form, substance and intent so that the parties have proper notice of the sum assessed as due and the basis of calculation. It is possible that a paying party who declined to apportion or allocate the sums due or deducted as between construction and non-construction operations might struggle to rely on its notice for the purpose of the Act if a deficiency in the notice undermined the validity of its global assessment. No such issue has been identified in this case.
MW's payment notice 35 set out the sum which the contract manager considered due at the relevant date and the basis on which it was calculated. I am satisfied that on a proper construction of the Subcontract and the Act, MW issued a valid payment notice in response to CSL's application no.32.
The issue of a valid payment notice by MW is sufficient to defeat CSL's claim for monetary relief in these proceedings and dispose of the Part 8 claim. However, for completeness, I consider the alternative arguments deployed by the parties below.
Estoppel by convention
MW wishes to plead a case (for future determination) that CSL is estopped by convention from contending that the Subcontract requires that applications for payment notices distinguish between included and excluded operations. MW has not set out its argument and evidence on this issue in detail but in his skeleton Mr Hargreaves states that the convention arose from the parties' conduct in the first thirty-one interim payments. Neither party distinguished construction operations from non-construction operations or suggested that the Subcontract required such distinction to be drawn. MW relied on the convention when issuing payment certificate 35. It would be unjust or unconscionable to allow CSL to resile from the convention in all the circumstances.
CSL's position on the case indicated by MW is that estoppel by convention must fail because: (i) it is not possible to contract out of the mandatory effect of the Act; (ii) the entire agreement clause in the Subcontract precludes the doctrine of estoppel by convention from operating on the Subcontract; and (iii) any such estoppel would have been brought to an end by the time that MW issued its payment notice in response to CSL's interim application 32.
Where parties to a transaction proceed on the basis of a shared underlying assumption on which they have conducted their dealings between them, neither will be allowed to depart from that assumption, even if it is shown to be wrong, when it would be unfair or unjust to do so in all the circumstances: Amalgamated Property Company v Texas Bank [1982] 1 QB 84 (CA) per Lord Denning pp.121-122; Brandon LJ pp.131; The Indian Endurance [1998] AC 878 (HL) per Lord Steyn pp.913-914; ING Bank NV v Ros Roca SA [2012] 1 WLR 472 (CA) per Carnwath LJ at [55]-[65].
Mr Nissen's first point is that it is not possible to contract out of Part II of the Act, or to avoid its application by reliance on estoppel: Keen v Holland [1984] 1 WLR 251 (CA) per Oliver LJ pp.261-2. Mr Hargreaves does not dispute that proposition but has clarified in his submissions that he relies on an estoppel by convention in relation to the proper construction of the Subcontract, rather than the Act, as summarised above. I accept Mr Nissen's submission that, if established, such an estoppel would not assist MW. The estoppel argument arises only on the premise that CSL is correct that sections 110A and 111 of the Act require the parties to separate out claims for construction operations from other operations in application and payment notices. In such circumstances, if CSL were estopped from asserting its construction of the Subcontract, the Subcontract would not comply with the mandatory provisions of the Act and the statutory scheme would be implied as necessary: Bennett v CIMC (above) at [54]. On CSL's construction of the Act, the scheme (construed so as to comply with sections 110A and 111) would incorporate the same requirement to identify separately sums assessed as due in relation to construction operations. On that basis, MW's payment notice would be invalid even if its estoppel argument were successful.
Mr Nissen's second point is that the no oral modification ("NOM") provision forming part of the entire agreement clause in the Subcontract precludes the doctrine of estoppel by convention from operating upon the Subcontract. Reliance is placed on Sere Holdings Ltd v Volkswagen Group United Kingdom Ltd [2004] EWHC 1551 (Ch) [25]; Lloyd v MGL (Rugby) Ltd [2007] EWCA Civ 153 [28] and Jet2.com v Blackpool Airport Ltd [2010] EWHC 3166 (Comm) [40]. Those cases do not go so far as to exclude all estoppels as incompatible with an entire agreement clause. I reject the submission that an estoppel cannot operate in the circumstances of this case. In Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24 , the Supreme Court held that a NOM clause would be enforced by the courts to preclude reliance on an oral variation but subject to potential estoppel arguments: per Lord Sumption at [10]-[16] and Lord Briggs at [24]-[25]. Therefore, as a matter of principle, estoppel by convention could operate on the Subcontract despite the existence of the NOM clause.
Mr Nissen's third point is that any estoppel by convention would have been brought to an end by the time that MW came to issue its payment notice in response to CSL's interim application 32. The applicable principles are not in dispute. Once a common assumption is revealed to be erroneous, the estoppel will not apply to future dealings: Hiscox v Outhwaite [1992] 1 AC 562 per Lord Donaldson MR p.575. The reliant party is commonly afforded a limited time within which to protect itself from the consequences of discovering the true legal or factual position HM Revenue & Customs v Benchdollar Ltd [2009] EWHC 1310 per Briggs J at [44], [45], [52] and [59]-[61].
The documentary evidence before the Court is sufficient to demonstrate an arguable case for an initial common understanding that the Subcontract did not require any breakdown between construction and other operations for the purpose of operating the payment mechanism. However, it is common ground that, during the adjudication concerning disputed application 31, MW raised the issue of the hybrid nature of the Subcontract and the application of the Act. That challenge was in the context of adjudication but the limited application of the Act relied on by MW against CSL to challenge jurisdiction introduced the necessity for the parties to distinguish between payment claims for construction and other operations, contrary to any earlier assumption. Even if it could be said by MW that it was not clear at that stage that the point would affect payment notices, CSL raised the point fairly and squarely in its letter dated 4 February 2019. Thereafter, it must have been plain and obvious to MW that CSL required MW's payment notice to set out sums assessed as due in respect of construction and other operations to comply with the Act. Thus, any shared assumption was at an end. Having already raised the hybrid nature of the Subcontract in the adjudication and having received CSL's breakdown in its interim application notice, MW had sufficient time to comply with CSL's requirement prior to the date for service of its payment notice.
I do not accept Mr Hargreaves' submission that this issue would be unsuitable for Part 8 determination. In general, Part 8 proceedings are unsuitable for the trial of an issue of estoppel: ING Bank (above) per Stanley Burnton LJ at [77]. That is because such issues require careful and precise formulation, and identification of the matters in dispute. In most cases, that is best done through pleadings using the Part 7 procedure. Further, many cases of estoppel involve substantial disputes of fact. However, where the court is concerned with enforcement of the payment and adjudication provisions in the Act, designed to promote cashflow during construction projects through swift interim resolution procedures, it is not sufficient for a party to rely on a vague, unparticularised issue to derail such enforcement.
MW has not identified any relevant issue of fact that is in dispute. The history and basis of earlier interim payments is a matter of documentary record, as are the abortive adjudication reference in respect of interim application 31 and the reason for withdrawal. The exchanges between the parties in regard to interim application 32 are likewise a matter of documentary record. It is not suggested by MW that there were oral meetings or agreements that are pertinent to the issue and require oral evidence to be given. The Court has before it the relevant material to determine the question.
For the above reasons, had CSL's construction argument succeeded, Mr Nissen's first and third points would have been sufficient to defeat any reliance by MW on a plea of estoppel by convention.
Proof of sums claimed
MW's alternative case is that, if CSL's argument is correct, which is disputed, CSL must prove that all sums claimed in these proceedings are sums assessed as due in respect of construction operations.
CSL's case is that the division of work between construction and non-construction operations was set out in its application 32. MW did not raise any objection to the application on grounds of validity or respond with an alternative breakdown. There is no dispute between the parties as to any of the milestone payments; the dispute centres on variations and other claims. In any event, any impossibility to disentangle the construction and non-construction operations would not relieve MW of the obligation to serve a payment notice, setting out its assessment that no sum was due in respect of the construction operations.
MW's case is that the Subcontract is a milestones contract and it is not possible, or very difficult, to distinguish between included and excluded operations, as explained in the witness statement of Mr Greggan dated 10 May 2019. The Act, including section 111, does not apply to non-construction operations. The absence of a valid payment notice would not preclude MW from relying on a set-off or cross-claim to defeat CSL's claim if it included non-construction operations. Therefore, in order to succeed in its claim, CSL must establish that the claim does not include sums in respect of any non-construction operations.
CSL set out in its application for payment 32 its position as to the breakdown of the works between construction and non-construction operations. MW did not dispute the validity of the application. MW failed to set out in its payment notice any alternative breakdown for which it contended. The evidence served in these proceedings identified potential arguments but did not set out MW's case on allocation of the works. It is not sufficient for MW to raise this matter as a potential issue for future investigation. It is incumbent on MW to condescend to detail and identify a positive, alternative case if it seeks to resist enforcement of the statutory payment provisions. Otherwise, the purpose of the statutory payment provisions would be undermined.
I am not satisfied that MW has raised an arguable case that CSL's application included non-construction operations to which the Act did not apply. Therefore, had the Court found that MW failed to issue a valid payment notice, CSL would have been entitled to rely on its payment application as the notified sum for the purposes of the Act.
Reliance on negative valuation
MW's case is that if the Court finds that its payment notice does not comply with sections 110A and 111 of the Act, MW may still rely on the negative valuations in its payment notice as (i) a pay less notice for the purpose of section 111; or (ii) a set-off or counterclaim, reducing the notified sum to £NIL.
The essential requirement for the service of a contractual notice is that the sender has the requisite intention to serve it, objectively ascertained from the document relied on against the factual context: Jawaby Property Investment Limited v The Interiors Group Limited & another [2016] EWHC 557 (TCC) per Carr J at [63]-[65].
On an objective construction of payment notice 35, it was served as a payment notice pursuant to clause 38.4 of the Subcontract. It was stated to be notice of the sum considered to be due in response to CSL's application for payment. It was stated to be a certificate of the sum due (as required by clause 38.4). It was not identified as a pay less notice and it was not intended to be read as a pay less notice. Therefore, MW did not have the requisite contractual intention to serve it as a pay less notice. It follows that MW is not entitled to rely on the payment notice as a pay less notice.
Case law has established that a payer is entitled to raise any legitimate set off as part of its payment notice or pay less notice: Henia v Beck [2015] BLR 704 per Akenhead J at [32]. However, a payer cannot avoid the operation of section 111 by relying on a defence of set-off or a cross-claim if not raised in a valid payment notice: VHE Construction plc v RBSTB Trust Co Ltd [2000] BLR 187 (TCC) per His Honour Judge Hicks QC at [36]; Severfield (above) at [47]; Letchworth Roofing v Sterling Building Company [2009] EWHC 1119 (TCC) per Coulson J at [25]-[26] and [33].
Mr Hargreaves submits that MW is entitled to rely on its negative valuation in the payment notice as a set-off or counterclaim against CSL's claim. The restrictions on deployment of any set-off defence or counterclaim do not apply where there is a hybrid contract: Severfield (above) at [47]-[51]. The variation and delay claims forming the set-off and counterclaim cannot be broken down as between construction and non-construction operations. Therefore, it is arguable that MW does not have any obligation to pay the sum claimed until both claim and counterclaim have been assessed.
The difficulty raised by hybrid contracts identified in Severfield merits further consideration following full argument. However, it would not assist MW in this case because the Subcontract produces the same result as the Act. The premise of the argument is that MW failed to serve a valid payment notice. The Subcontract has replicated the effect of section 111 of the Act through clauses 38.5 and 38.7. If MW wished to pay less than the sum due in CSL's application "for any reason" , including a set-off or counterclaim, it was obliged to serve a pay less notice. In the absence of a pay less notice, and in the absence of a valid certificate under clause 38.4, the amount applied for under clause 38.3 would be payable.
Therefore, had the Court found that the payment notice was invalid, MW would not be entitled to rely on its negative valuation as a set-off or counterclaim against the notified sum determined by section 111 of the Act.
Suitability of Part 8 proceedings
The courts have urged parties to consider carefully whether their disputes should be pursued by Part 7 proceedings rather than Part 8 proceedings. Where the matter raises substantial issues of fact or expert evidence, Part 7 should be used. Where the case is complex and requires pleadings to identify the issues, Part 7 should be used. In this case I am satisfied that the claim raises a point of construction that is suitable for determination by Part 8 proceedings.
Conclusion
For the reasons set out above:
i) on a proper construction of the Subcontract and the Act, MW issued a valid payment notice in response to CSL's application no.32;
ii) CSL is not estopped from relying on its construction argument;
iii) if, contrary to the finding in (i), MW failed to issue a valid payment notice, CSL would be entitled to rely on its payment application as the notified sum for the purposes of the Act;
iv) MW would not be entitled to rely on its negative valuation as a pay less notice, cross-claim or set off;
v) this claim was suitable for determination by Part 8 proceedings.