Timing and attachments are everything if you need to send notices over damages or reduced payments

Contract administrators have to serve a plethora of notices under building contracts during a project. It is important to get them right as the financial consequences of mistakes can be material.

A recent case, Grove Developments Ltd v S&T (UK) Limited, in which my firm represented the claimant, provides clarification for those serving pay less notices or the notices required under several JCT forms of building contract should the contractor is in delay and liquidated damages (“LADs”) are to be deducted.

Pay less notices

If an employer wishes to pay less than the amount stated in a contractor’s application for payment or a payment notice, it has to inform the contractor in a pay less notice. The Construction Act requires pay less notices to specify both the sum that the payer (in this case, the employer) considers to be due on the date the notice is served; and the basis on which that sum is calculated.

In Grove v S&T, the employer specified the basis of its calculation by referring in the pay less notice to the valuation breakdown in the previous payment certificate (which had been served too late). The contractor contended that the employer had to attach to the pay less notice any documents that it referred to, in order for it to be effective.

The judge disagreed – documents can be incorporated by reference into a pay less notice. As a result, copies of any documents referred to in a pay less notice do not have to be attached to that notice (although it is safer to do so where practicable). Whilst this is a welcome decision, three things in particular are worth remembering. First, the documents need to be clearly identified (so that it is clear to a “reasonable recipient” what is being referred to) and effectively incorporated; secondly, the underlying document must state the sum which is proposed to be paid and include a calculation showing how that sum was reached; and the document referred to should have been previously provided to the contractor.

Liquidated damages notices

Under most JCT forms of building contract, before the employer can deduct or claim liquidated damages for delay, it must issue, first, a ‘warning notice’ stating that the employer may require payment of, or may withhold or deduct, liquidated damages; and secondly a ‘deduction notice’ confirming that it requires the contractor to pay liquidated damages and/or will withhold or deduct liquidated damages.

In Grove v S&T, the contractor argued that the contract (in this case an amended JCT Design and Build 2011) required the employer to leave enough time between service of the two notices for the contractor to read, understand and digest the warning notice before receiving the deduction notice. In this case, there had been only seven seconds between S&T’s receipt by email of the two notices, which the contractor claimed made the deduction notice invalid.

The judge rejected the contractor’s argument and confirmed that the period of time between the two notices is irrelevant, as long as they are received in the right order. Again, this is good news for employers and provides important clarity on the interpretation of the JCT building contract forms.

Employers and those advising them must ensure that the notices required under the JCT building contract forms are sent sequentially, and in order. Despite this decision, it is also advisable to leave sufficient time between notices to ensure that there can be no debate over whether or not the contractor received the notices in the right order – for example, if the notices are to be served by post, they should be sent on separate days.

In plain English: deemed delivery

Many contracts include provisions which clarify how parties communicate with one another and how notices are to be sent, to whom they should be addressed and when they are deemed to have been received. Deemed delivery or receipt is important where notices have to be provided within particular timescales. If a notice is not deemed to have been delivered until after the relevant deadline, it will be out of time. To provide a practical example – notices sent by post are generally deemed in contracts to be delivered two business days after being sent. So, if a notice is sent by post on a Friday, it will be deemed to have been delivered on the following Tuesday (assuming there are no intervening bank holidays) even if it may have actually been delivered on the Monday or even the Saturday.

This article was published in the July 2018 edition of RIBA Journal.