Payment and Payless Notices – the Basis of Calculation – Judicial Guidance at last
Whilst the Scottish case of Muir Construction Limited v Kapital Residential Limited is not binding on the English courts, the judgment is not only perfectly sensible but also provides useful guidance on the requirements for a payless notice under the amended Housing Grants, Construction and Regeneration Act (the Act) - an area which has not had much judicial attention since the change from the withholding notice regime. In a bumper month for payment notice disputes, we also had guidance from the Court of Appeal on the need for payment notices following termination – both decisions coming just as the Government announced its consultation on the 2011 amendments to the Act.
Muir Construction Limited (Muir) entered into a design and build contract with Kapital Residential Limited (Kapital) for the construction of a new housing complex in Rosyth, Scotland. Various disputes arose between the parties, namely in relation to defects and the valuation of Muir's final account. A number of differences were resolved and as a result, the parties entered into a settlement agreement in April 2016.
The rectification period under the contract was twelve months from 21 July 2015 and, pursuant to the settlement agreement, Kapital were to release the final moiety of retention monies to Muir by 31 December 2016, having deducted any costs incurred by Kapital for the remedy of any defects.
Kapital purported to issue a payless notice on 21 December 2016 valuing the sum due to Muir as zero. Muir claimed that the payless notice was invalid on the basis that it did not specify the basis on which the sum had been calculated. Kapital argued that previous correspondence between the parties explained the calculations.
The basis of calculation
Lord Bannatyne held that the intended payless notice was not valid. The payless notice simply stated the sum due as zero and did not detail how that sum had been calculated. He explained that the information provided in a payless notice needed to allow a reasonable recipient to work out the basis on which the sum had been calculated. Additionally, in a nod to the old regime, the Judge also suggested that in order to provide the basis on which the sum is calculated, the payless notice needed to set out "the grounds for withholding and the sum applied to each of those grounds with at least an indication of how each of those sum were arrived at."
Lord Bannatyne added that the settlement agreement was clear in that Kapital had to have incurred the costs which they intended to retain. A liability to pay those costs (for example, under a due and payable invoice) was not sufficient and instead the costs had to have been paid by Kapital in order for Kapital to be able to exercise its right of retention.
Whilst heard in the Scottish courts, this case does provide useful guidance which would likely be followed in England and Wales when ensuring that payless (and payment) notices are compliant with the Act. Such notices need to be clear and contain sufficient detail to ensure the recipient understands the basis on which the sum is calculated.
On the back of the Muir judgment, it appears that paying parties can dust off their old pro-forma withholding notices and use those as a starting point for their payless notices. To mitigate the chances of a payee being entitled to a windfall payment on a technicality, paying parties should specify the sum they consider to be due as at the date of the notice and the basis of calculation which should include an arithmetical calculation and set out the grounds for any deductions made and the amount attributable to each ground. In practice, this is often done in a schedule appended to and forming part of the notice itself. Paying parties should also continue to be aware of and comply with all other requirements for payless notices including the time and means of service.
Given the requirements for a payment and payless notice under the amended Act are identical, the above requirements will apply equally to payment notices.
Court of Appeal
On the topic of payment notices, there was also a guidance from the Court of Appeal this month on the application of the payment provisions of the Act when, in Adam Architecture Ltd v Halsbury Homes, the court confirmed that the provisions apply not only during the currency of a construction contract but also following completion or termination.
Halsbury had sought a declaration from the court that the payless notice requirements did not apply following termination of their contract with Adam but in giving the leading judgment, Jackson LJ dismissed such a suggestion based on the "clear words in the Act".
Consequently, paying parties need to serve a payless notice in response to any application received if they wish to avoid the prospect of an adjudicator’s decision against them for the full amount claimed on the basis of a technicality. Consistent with guidance from the 2015 case of Harding v Paice if a paying party fails to serve a payment or payless Notice in response to a final application, then the sum applied for has to be paid in the first instance albeit the paying party will still have the right to commence its own adjudication to determine the true value of that final application.