A recent decision of the Scottish Court of Session has struck down a pay less notice for failing to provide sufficient detail. The decision is the first to consider the meaning of the detail requirements for such notices introduced by the 2011 amendments to the Housing Grants, Construction and Regeneration Act 1999 (the “Construction Act”). The decision sets a high-bar for those giving pay less notices and requires that each ground of withholding be specified, together with the sum applicable to each ground and an indication of how each of those sums were arrived at.

Muir Construction Limited v Kapital Residential Limited

The parties entered into a design and build contract in relation to a new build housing scheme. Disputes arose between the parties. They entered into a settlement agreement under which Kapital was to release retention monies under the contract by a certain date, unless defects had been identified and remedied by Kapital.

In line with this settlement Kapital issued a pay less notice in accordance with the contract retaining the full retention sum from Muir. The relevant part of the notice read simply: “We consider that the sum that is due on the date this notice is given is: Zero (£0.00) (the ‘Amount Due’) …”.

The contract provisions in relation to pay less notices mirrored the requirements of the Construction Act and required Kapital to “specify both the sum that [it] considers to be due to the Contractor at the date the notice is given and the basis on which that sum has been calculated.”

Muir argued that the pay less notice was not valid as it did not state the basis on which the zero figure had been calculated. Kapital argued that the back drop of correspondence between the parties and other documents shared with Muir showed that a large number of defects had been identified. Given the relatively small retention sum, it was sufficient for Kapital to say that the remedying of defects would require a sum well in excess of the retention sum.

A detailed breakdown required?

The court rejected Kapital’s position, noting that from “none of the information provided could the reasonable recipient work out the basis on which the zero sum was calculated”. In the court’s view, in order for a pay less notice to properly provide a basis for the figure contained it 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.”

Conclusions and implications

This case is the first under the amended Construction Act to consider the detail requirements of a pay less notice. The same requirements also apply to payment notices under the Act and this decision is likely to be of general application.

The standard applied by the court is a high one, particularly when viewed against the legislative history of the Act. Prior to the 2011 amendments, a withholding notice (as it was then called) was required to state “each ground [of withholding] and the amount attributable to it”. This was replaced in 2011 with the current requirement for both a payment notice and a pay less notice to state the “basis” on which the amount due stated in the notice “has been calculated”.

The cases prior to the 2011 amendments had taken a practical view of the contents of a withholding notice, not allowing complaints as to form which might be described as artificial or contrived (Windglass Windows v Capital Skyline). In one Scottish decision, it was said to be permissible to attribute a global figure across a number of grounds of withholding (Aedas Architects v Skanska). This can be contrasted with the test laid down in the present case which not only requires a sum to be attributed to each ground of withholding but also an indication as to how each of those sums have been arrived at.

The decision is likely to be relied on by contractors in particular wishing to overturn pay less notices issued by employers. Employers would therefore do well to take notice of the requirements stipulated by the court. Parties should also be mindful of other requirements which can lead to the invalidity of a payment or pay less notice. For example, timescales for issue (i.e. pay less notices are to be issued a certain period before the final date for payment) and the formal requirements for sending the notice (e.g. by signed for post, to specified addresses or persons, etc).