[2017] CSOH 132

This was a Scottish case which came before Lord Bannatyne. Following a lengthy dispute, the parties had agreed a Settlement Contract which was executed on 7/8 April 2016. The contract rectification period ran from 21 July 2015 to 20 July 2016. On 21 December 2016, Kapital issued a pay less notice (“PLN”) valuing the sums due to Muir at “zero”. The PLN was issued ten days before the retention sum was to be paid by Kapital to Muir pursuant to the Settlement Contract.

Kapital said that following the decision in Surrey & Sussex Healthcare NHS Trust v Logan (Dispatch Issue 200), a “common sense, practical view” of the contents of a pay less notice should be taken, not “an unnecessarily restrictive” one. Provided that the notice made “tolerably clear” what is being withheld and why, the courts should not intervene.

Here, the PLN included (i) a formal letter from Kapital to Muir on 21 December 2016; (ii) the formal PLN; (iii) a note of outstanding snagging; and (iv) an expert opinion which detailed defects and incomplete works. Where the retention amount was small and a very large amount of work was necessary for defects to be remedied, it was enough to say the remedying of the defects would require a sum well in excess of the retention sum. This was the basis upon which the PLN in this case arrived at “zero”.

Muir said that the PLN did not properly specify the basis of the “zero sum”. Taking a strict view, the Judge saw some “substantial force” in this argument. No basis for the zero sum figure was put forward in the PLN or the supporting documentation. The Judge noted that:

“From none of the information provided could the reasonable recipient work out the basis on which the zero sum figure was calculated. 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. The defender sets forth 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.

With no difficulty I reject the defender’s response with respect to this point. It 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. That is not providing a basis for the figure. I am persuaded that the PLN in order to properly provide a basis needs 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.“

In reaching this conclusion the Judge referred to the case of Maxi Construction Management Ltd v Mortons Rolls Ltd (Dispatch Issue 15) where Lord Macfadyen had said that: “specification of the basis of calculation” was required. There was no specification here. As a result the Judge said that the PLN was neither valid nor effective.

Further as part of the Settlement Agreement, where Kapital had undertaken work to remedy the defects, it could only recover costs where (i) it had already incurred the cost sought to be withheld and (ii) it could evidence that to Muir. This meant that the “mere crystallising of the liability” in terms of invoices becoming due and payable was not sufficient to satisfy the condition of costs having been incurred. To allow this, would potentially allow an invoice which did not, in part at least, represent work actually done and/or where payment was not made timeously but made some material time later, to form the basis for a valid PLN. On the facts here, the proper construction of “costs incurred” for the purposes of a valid PLN was that the sums in any invoices for work done had to have been paid by 21 December 2016.