This is a Scottish case that considered what is required to satisfy the wording “the basis on which that sum is calculated” for pay less notices. Simply stating the amount due was zero, but not adding any more information rendered the pay less notice invalid in this case.
The requirements for a pay less notice are provided for at section 111 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”). Section 111(3) entitles the payers (or their specified agents) of a construction contract to give the payee a pay less notice. Subsection (4) requires that pay less notices must:
- (i) specify the sum that the payer considers to be due on the date the notice is served, and
- (ii) the basis on which that sum is calculated.
Subsection (4) of the Construction Act makes it clear that it is immaterial that the sum referred to may be zero. In the present case, it appears that the contract in question provided a specific clause relating to pay less notices which largely mirrored the requirements of the Construction Act.
In 2014, Kapital Residential Ltd (“Kapital”) wished to procure the design and construction of a new-build housing scheme at Admiralty Road, Rosyth. They instructed Muir Construction Ltd (“Muir”) to carry out the construction of the project. Following lengthy disputes concerning various defects in the works and the final account, both parties entered into a settlement contract in 2016. One of the conditions of the settlement contract concerned the retention monies held. These were to be paid to Muir when the notice of completion of making good defects was issued. However, Kapital were entitled to issue a pay less notice if they considered defects still remained. The relevant clause of the contract stated that a pay less notice “shall specify both the sum that the Employer considers to be due to the Contractor at the date the notice is given and the basis on which that sum has been calculated.”
Accordingly, Kapital issued a pay less notice of the sum they considered to be due to Muir; it simply stated “we consider that the sum that is due on the date this notice is given is: Zero (£0.00)” with no substantiation for the figure arrived at. This was the basis for the dispute heard by the Scottish court. Muir argued that Kapital had unsuccessfully met the requirements of the contract by not specifying the basis on which the zero sum was calculated. It appears that Kapital included a letter to Muir with the pay less notice, but it was not possible to assess from this letter the nature of the defects, the purported breach, nor what was required of Muir to remedy the defects.
Agreeing with Muir’s argument, Lord Bannantyne considered that there was “substantial force in the argument that no basis for the zero sum figure” had been given and thus, the pay less notice fell short of the requirements of the contract. Lord Bannantyne concluded that “(f)rom none of the information provided could the reasonable recipient work out the basis on which the zero sum figure was calculated.” He stated that there was “no calculation put forward which would allow the reasonable recipient to understand how that figure [was] arrived at.”
Kapital asserted that because “the retention amount is small and a very large amount of work is necessary for defects to be remedied,” it would have been clear on the facts, that remedying the works would cost a sum in excess of the retention monies and as such, the basis on which the sum of zero was calculated was “sufficiently stated.” Lord Bannantyne rejected this argument with little difficulty. He made it clear that their argument was “not providing a basis for that figure” and he was persuaded that a pay less notice needed “at least to 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,” which in this case, Kapital failed to do.
Lord Bannantyne considered his conclusion was supported by the case of Maxi Construction Management Ltd v Moroton Rolls Ltd  ScotCS 199, in which Lord Macfadyen decided that an interim valuation could not be deemed a claim by the payee because it lacked specification. In that case, the valuation also needed to specify the basis on which the payment claimed was calculated in order for it to be valid. It was found that it lacked such specification. Applying the same reasoning, Lord Bannantyne found that the pay less notice in this case did not provide a proper basis for the zero sum. As such, the pay less notice was not valid.
This is one of the first cases to consider the detailed requirements for pay less notices. It acts as a clear reminder of the importance of how pay less notices are drafted. Whilst it relates to the drafting of a specific contract, the wording appears to be almost identical to that of section 111(4) of the Construction Act and is therefore likely to have wider implications. As a result, the industry may see an increase in the number of disputes concerning the substance of pay less notices for lack of substantiation.
Furthermore, the requirement for setting out the basis on which a specified sum is calculated is also a requirement of payment notices under sections 110A(2) and (3) and payees’ notices in default under section 110B(4) of the Construction Act. As such, the implications could be wider still and relevant to both the paying and receiving party. If a payment notice does not make clear what the basis on which the sum considered due is due, this could render such notice invalid. However, if an employer considered this to be the case, it would still be advised (in our view) to issue a (valid) pay less notice rather than rely on an argument that the payment notice was not valid.
Although this is a Scottish case and therefore not binding on the courts of England and Wales, the judgment will be considered persuasive should our courts be faced with answering a similar question. This case furthers the much commented upon position, that if the payer fails to submit a valid pay less notice against an interim application, it is deemed to have agreed the sum stated in the application (/default notice) regardless of whether the sum claimed is correct. This can have significant ramifications for the payer as they are not then able to bring a valuation dispute against the same interim application. The case of ISG Construction Ltd v Seevic College  EWHC 4007 (TCC) all but confirms this position, leaving the payer with having to solve any payment dispute in the next payment cycle.