The Construction Act, or more formally The Housing Grants, Construction and Regeneration Act 1996, is the key piece of legislation governing construction practice in the UK. Amongst the many gems of the Act, it sets out the various notice requirements in respect of payment applications and pay less notices. Those who practice in this area will be very familiar with such notices and the importance of the content of these notices particularly the sum which the party considers is actually payable and how this figure is calculated. The question that springs to mind however is, how realistic does this “consideration” have to be?
Judge Eyre QC, sitting in the Technology and Construction Court in England has recently shed some light on this interesting question in the case of Downs Road Development LLP v Laxman Construction (UK) Ltd. This case involved two payment notices. It was essentially agreed between the parties that the later notice was invalid due to it being given out of time. Attention therefore shifted to the earlier notice and whether it alone constituted a valid payment notice.
Section 110A (2)(a) of the Construction Act provides that a payment notice must specify:-
"(i) the sum that the payer considers to be or to have been due at the payment due date in respect of the payment; and
"(ii) the basis on which that sum is calculated."
The Claimant argued that the first payment notice did express the sum the paying party “contended” was due and that they had provided an adequate basis of calculation. The Defendant disagreed with this assessment and asserted that the first payment notice was little more than a “place holding exercise”. The court found the Defendant’s argument to be the more persuasive and held that the second, invalid, notice fatally compromised the first notice. This conclusion was reached on the basis that within the covering notice of the first email it stated that a second notice would follow. The court agreed with the Defendant that this implied that the party did not consider, or rather did not “reasonably believe”, that the sum narrated within their own first notice was actually due. Interestingly, the court held that questions of bad/good faith were irrelevant; all that mattered was whether at that time was the sum narrated in the notice the sum which the party had a reasonable belief was due.
Those who follow our team’s publications will be familiar with our commentary on the trend and effect of “smash and grab” adjudications. As a recap such adjudications usually occur where a paying party has failed to serve a valid pay less notice and the other party proceeds with an adjudication to obtain a decision that the sum in the payment application is the sum due by the paying party. This recent decision is likely to lead to an even greater occurrence of these type of adjudications where parties may not only argue that a pay less notice is late (and therefore invalid) but also that the sum within the payment notice is not one which the payee reasonably believes is due. This is tactically important as the courts have consistently indicated that the sum identified in a “smash and grab” adjudication must be paid before a “true value” adjudication can be raised by the paying party. Parties wishing to minimise the risk of their pay less notice being challenged on this basis would be well advised to clearly set out in their calculation how they have determined the sum they consider to be due in an effort to demonstrate that this is their “reasonable belief”.
The full judgement is available here: https://www.bailii.org/ew/cases/EWHC/TCC/2021/2441.html
If you would like to discuss any of the issues raised within this judgement our construction team is on hand to help.