When it comes to the adequacy or otherwise of a pay less notice under the Construction Act 1996, I was reminded the other day of something that Alexander Nissen QC (sitting as a Deputy High Court judge) said in Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd, namely that it is a question of whether the documents supplied can provide “an adequate agenda for an adjudication“. If there is nothing more the contractor needs to know when it receives documents from the employer (or its agent), then it can. Alexander was borrowing his words from Akenhead J in Henia Investments Inc v Beck Interiors Ltd, and I’m going to borrow them for the purposes of this post.
I mention this because of Lord Bannatyne’s judgment in Muir Construction Ltd v Kapital Residential Ltd.
Adequacy of the notice
In Surrey and Sussex v Logan, Alexander explained why he felt the pay less notice was adequate. He was interested in what a “reasonable recipient would have appreciated”, namely that:
“… on a broader level, one intention of the email and its attachments was that it should be responsive to the Interim Payment Notice.”
In other words, the email and attachment in that case “had the requisite intention” to be a pay less notice. To be valid, it was unnecessary for the pay less notice to have the title “pay less notice” or to refer to a specific contract clause.
It is almost a year since this judgment came out, and I know it is often referred to when parties are arguing over whether a particular document or documents are sufficient to be a pay less notice. It was referred to by Lord Bannatyne in Muir.
Muir Construction Ltd v Kapital Residential Ltd
In August 2014, the parties entered into a design and build contract for the design and construction of a new-build housing scheme in Rosyth.
During the course of the project, there was a number of disputes on a range of matters, some of which were adjudicated. This all led to the parties entering into a settlement agreement in April 2016. The settlement agreement was intended to be a “global resolution” of the various disputes and catered for Muir dealing with any defects during the rectification (or defects liability) period. It provided a final date for payment of any retention due to Muir following that period expiring (31 December 2016) and allowed Kapita to issue a pay less notice to withhold retention if certain conditions were satisfied.
Unsurprisingly (this is a construction dispute, after all!) a pay less notice was issued on 21 December 2016. It said the sum due to Muir was zero or “£0.00” (something just over £102,000 was being retained). The pay less notice did not explain how the figure of £0.00 was calculated, not did it have any accompanying documents.
Consequently, as Muir wanted the retention, court proceedings followed and one of the questions for Lord Ballanatyne was whether Kapital’s pay less notice was valid.
Was the pay less notice valid?
Kapital clearly felt its pay less notice was valid, and argued that it was. It relied on Surrey and Sussex v Logan. It suggested that there should not be:
“…an unnecessarily restrictive interpretation of such a notice… Provided that the notice makes tolerably clear what is being held and why, the courts will generally not strive to intervene or endeavour to find reasons that would render such a notice invalid or ineffective…”
It said one should avoid an overly formal approach to its construction and the notice should be construed:
“… in the manner of a reasonable commercial person adopting a contextual, purposive and common sense construction.”
With regard to the extent of detail required for the notice to be valid, Kapital argued that each case would turn on its own facts. Here, the retention was for a small sum and a “very large amount of work” was required to remedy the defects. This was enough to say the cost of remedying the defects would be greater than the amount of the retention. Thus:
“… the basis upon which in this case there is a zero sum in the notice is sufficiently stated.”
Muir also relied on Surrey and Sussex v Logan, but argued that for a notice to be valid, it must set out the “basis” of the sum. It also relied on Lord Macfadyen’s judgment in Maxi Construction Management Ltd v Mortons Rolls Ltd to support this argument.
Computer says no
It is a phrase immortalised by David Walliams in Little Britain but, in a few, short paragraphs Lord Bannatyne said no, the pay less notice was not valid. He agreed with Muir that Kapital had put forward “no basis for the zero sum figure” in the notice or the supporting documents that it relied on.
Further, he said that a “reasonable recipient” (Muir in this case) could not work out how the zero sum was calculated. Without a calculation, how could the reasonable recipient make any sense of the figure arrived at? He concluded that for a pay less notice to be valid, it must set out the “basis”, it must:
“… at least set out the grounds for withholding and the sum applied to each of these grounds with at least an indication of how each of these sums were arrived at.”
What does this mean?
In my experience, the question of whether a party has complied with the requirements of a notice, whether it is a payment or pay less notice, occupies a fair amount of time in adjudication proceedings.
Since Akenhead J and Alexander’s judgments, adjudicators know to look out for the signs that the documents supplied could provide “an adequate agenda for an adjudication” (although they may not express it this way). While, at first sight, that phrase sounds amorphous and ambiguous, it is often surprisingly clear in practice.
As this is a Scottish judgment, it isn’t binding in England and Wales. That said, given the lack of judicial guidance on this point, I’m sure it will be referred to (just like Henia v Beck and Surrey and Sussex v Logan are). It is also worth mentioning that although this case was concerned with a pay less notice (which we know the court takes a slightly more relaxed view to than, say, a payment or a default payment notice), the same language appears in sections 110A and 110B of the Construction Act 1996. Therefore, it may well be used to interpret those provisions too, which may well add to the burden of a payee looking to succeed in a smash and grab adjudication.