C Spencer Ltd v M W High Tech Projects UK Limited

Under a hybrid construction contract, a payment notice need not state separately the sum attributable to construction operations where the parties have agreed one payment regime for all operations and that regime complies with the statutory requirements. The Housing Grants, Construction and Regeneration Act 1996 requires a notice to identify the sum considered due and the basis of its calculation. It imposes no additional allocation requirement.

Parties cannot contract out of the statutory protections for construction operations. They may, however, extend a compliant payment regime to non-construction operations. A distinction between the two types of operation becomes necessary when a dispute is referred to adjudication, unless the adjudicator’s jurisdiction has also been extended by agreement.

The respondent engaged the appellant under a milestone-payment subcontract for works at a power plant. Most works were construction operations, but some plant assembly and supporting steelwork were excluded by section 105(2)(c) of the Housing Grants, Construction and Regeneration Act 1996. The subcontract was therefore a hybrid contract.

The appellant’s payment application distinguished between construction and non-construction operations. The respondent’s payment notice gave a single negative valuation and did not make that allocation. The appellant brought a Part 8 claim for the sum attributed to construction operations, contending that the notice was invalid.

O’Farrell J dismissed the claim in [2019] EWHC 2547 (TCC). The central question on appeal was whether a valid payment notice under a hybrid contract must separately identify the sum due for construction operations and explain its calculation.

1. Appeal dismissed. The payment notice was valid. The subcontract imposed one payment regime for both construction and non-construction operations, and that regime complied with the mandatory requirements of the Housing Grants, Construction and Regeneration Act 1996.

2. The analysis begins with the contractual terms. The Act prescribes minimum payment and adjudication requirements. Where the agreed terms comply with those requirements, they govern the parties’ rights and obligations. If contractual terms fail to comply, the relevant provisions of the Scheme for Construction Contracts apply to the extent required.

3. Neither section 104(5) nor sections 109–111 require a hybrid contract or payment notice to separate the sums due for construction operations from those due for non-construction operations. Section 110A requires the notice to identify the sum considered due and the basis of calculation. Reading an additional allocation requirement into those provisions was neither necessary nor appropriate.

4. Although parties cannot contract out of the Act for construction operations, they may contract into an equivalent regime for excluded operations. Extending one compliant payment mechanism to all the works augments rather than removes statutory rights. It promotes cash flow, certainty and transparency, while avoiding the complexity and expense of separate valuations and payment processes.

5. The distinction between construction and non-construction operations becomes material when a dispute is referred to adjudication. Unless jurisdiction has been extended by agreement, an adjudicator may determine only the part concerning construction operations. The referring party must establish that jurisdiction. That requirement does not create an earlier obligation to allocate every payment application or notice.

6. The Court distinguished Severfield, where non-compliant contractual terms caused the statutory Scheme and the contractual regime to operate separately. Here there was a single compliant regime. The Court left open whether section 111 itself is the principal source of the obligation to pay the notified sum. Earlier observations suggesting that it was were obiter, unnecessary to the decision and of doubtful correctness.

Baker LJ and the Senior President of Tribunals agreed with Coulson LJ.

1. Court of Appeal (Civil Division): The appeal was dismissed unanimously. The court upheld the validity of the respondent’s payment notice: [2020] EWCA Civ 331.
2. Technology and Construction Court: O’Farrell J dismissed the appellant’s Part 8 claim, holding that the payment notice could be valid without separately identifying the sum attributable to construction operations: [2019] EWHC 2547 (TCC).