Many aspects of the Construction Act’s payment notice regime have been tested by the courts since their amendment in 2011, but some uncertainties remain.
One of those is precisely what is required to satisfy the Act’s requirement to state “the basis on which [a] sum is calculated”. This requirement crops up in relation to payment notices, default payment notices (and thereby to an extent payee applications), and pay less notices - but the Act does not define what is necessary. The English courts have yet to set out a view, but a recent Scottish case has thrown some light on how the issue might be approach as and when they are required to.
In Muir Construction Ltd v. Kapital Residential Ltd , Muir (a design and build contractor for the construction of a new-build housing scheme) sought payment from Kapital (the employer) of just over £100,000 retention. Kapital resisted because it said substantial defects existed, and referred to a pay less notice it had served. It appears that the pay less notice simply stated "We consider that the sum that is due on the date this notice is given is: Zero (£0.00) (the ‘Amount Due’)" and that neither in the notice itself or the documentation accompanying it was any basis given for the zero sum figure.
The court agreed that this invalidated the pay less notice. It said that “From none of the information provided could the reasonable recipient work out the basis on which the zero sum figure was calculated”, specifically “There is no calculation put forward which would allow the reasonable recipient to understand how that figure is arrived at”, “There is no specification which would allow the reasonable recipient to make any sense of the figure arrived at”, and Kapital had stated “no figures and thus no basis substantiating the zero sum figure in the PLN or in any of the other documentation upon which it relies”. Although it seems that Kapital had substantial counterclaims against Muir, the court said that the basis set out in the pay less notice “amounted to no more than saying the sum retained is not a large one and given the number and nature of problems founded upon in the PLN the cost of remedying these would clearly amount to a figure well in excess of the retained sum and thus a basis for the zero sum figure was provided”.
It is not hard to see why that was found not to meet the Act’s requirement to state “the basis on which [a] sum is calculated”. It might have met a requirement to set out why sums were not being paid, but that is not the same as setting out a calculation. The court suggested that, at least, Kapital would have needed to set out the grounds for withholding and the sum applied to each of these grounds with an indication of how each of these sums were arrived at.
Whether a notice meets that requirement will continue, it seems, to be a fact-sensitive question. In some cases a crude calculation may suffice, particularly if (for example) the details of a cost have yet to crystallise and so only an estimate can be put forward - but even then some back up must be provided: it will not be enough to say that the value of a cross-claim ‘obviously’ means nothing is due. The best rule of thumb continues to be that the more detail that can be provided, the better, both to tick the formal requirements of the Act and to ensure that everyone knows where they stand.