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Sat December 09 2023

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Lawyer warns of fog surrounding ‘pay less notices’

5 Dec 22 A 2018 legal judgment concerning pay less notices continues to have ramifications. Construction lawyer Tim Seal explains.

There have been unexpected issues arising in adjudication since the 2018 Court of Appeal judgment of Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123. This has had an impact on claimants and defendants, as well as their legal advisers.

S&T, a construction company, was contracted by Grove Developments to design and construct a Premier Inn at Heathrow Airport's Terminal Four l. S&T would issue regular interim applications for payment to Grove Developments. In response to interim payment application 22, Grove Developments disagreed with the valuation of the workbut did not send a payment notice within the deadline. However, they did send a pay less notice (PLN) to S&T, but this was found by an adjudicator to be invalid, and therefore Grove Developments should have paid interim payment application 22.

Grove Developments launched proceedings. The Technology & Construction Court (TCC) said, when referring to Grove Development’s PLN, that: “The issue is how a reasonable recipient would have understood the notice. In addition, when construing the notice, the court must take into account the relevant 'objective contextual scene’……The court will be unimpressed by nice points of textual analysis, or arguments which seek to condemn the notice on an artificial or contrived basis.”

Applying that approach the Court decided that Grove Development’s PLN was valid and this was upheld in the Court of Appeal.

It did so because, in its view, the PLN did specify the basis of the calculation of the sum due, and therefore it did comply with S.111(4) Housing Grants, Construction & Regeneration Act 1996 (as amended), which requires as much from a PLN. S&T’s challenge on that basis therefore failed.

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The situation in Grove was that while the PLN itself contained or attached no basis of calculation, it was plain on the face of the PLN where the calculation could be found, namely in a spreadsheet attached to a payment notice served a few days earlier. That was sufficient, according to the court. “There can be no possible objection in principle to a notice referring to a detailed calculation set out in another, clearly-identified document,” it said, and the mere fact that the spreadsheet had not been re-served with the PLN was not fatal. Toargue otherwise, was artificial and contrived.

At our firm, we had an adjudication recently in which our client challenged a PLN on several grounds. One of them was that it did not specify the basis of calculation. Our client lost on the Grovean ‘contrived and artificial’ basis. Just as in Grove, the adjudicator considered that the PLN referenced a calculation found elsewhere and the fact that it was not re-attached was not fatal. However, in our view, unlike in Grove, that calculation was not contained in another clearly-identified document. Far from it.

Here are some issues that arise from this Grovean approach:

  • Binary options are often lazy and unhelpful. From Grove we get the reasonable recipient versus the pedant who makes contrived points of textual analysis. However parties often don’t really fall into either stereotype but instead present along a range. Yet a binary choice forces someone to be cast as one thing or the other. Therefore if you make any observations based on textual analysis, you risk being lumped together with anyone not being starkly pragmatic. Likewise if the PLN doesn’t make it entirely impossible to work out where the calculation can be found, the risk is that that will be enough.
  • Second, I have seen the unhelpfulness of this binary choice, spread out wider than the PLN context. I have seen adjudicators applying it to a whole range of notices and well outside the Act. It has become a habit. It may yet drift wider than notices.
  • Third, the endorsement of realism/pragmatism with PLNs, in one sense contrasts with the policy underpinning the notice regime, as the TCC recognised: “The 1996 Act was designed to promote clarity and certainty and it must of course follow that, if a notice is unclear or uncertain, then it would be contrary to that policy, and invalid”. Therefore when applying the Grovean approach, it requires some thoughtful balancing of those two competing forces. However, I have often not seen that in adjudications; instead just a simplistic preference for the pragmatic over the clear and certain. Doubtless the courts will start to remind of the need for this balance, but it was there in Grove itself (see above quote).
  • Fourth, who are these reasonable recipients? Even though lawyers usually draft the adjudication submissions, it can’t be them, as they didn’t receive the notice initially. It also can’t be the court, even though in Grove you see the words: “the court must take into account the relevant 'objective contextual scene'”. It must be the client or the project advisor (quantity surveyor for example) who was sent the PLN. But the client could be anywhere up or down the supply chain and hence anyone from a sophisticated and experienced construction industry veteran through to a young subcontractor. Likewise the advisor. That encompasses a wide range of people and perspectives. It is hard to prescribe the reasonable recipient from among all of them.

I have heard a number of clients and non-clients say that this ‘contrived versus not contrived’ approach set out in Grove, is not as straightforward and problem-free as one might think on first impression. It has some consequences in adjudication that the court perhaps did not foresee, and with the above issues in mind, the construction industry and their legal advisers may soon be looking to the UK courts for clarification.

About the author: Tim Seal is head of construction law at Ridgemont,  a specialist construction and real estate law firm

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