In Downs Road Development LLP v Laxmanbhai Construction (UK) Ltd ([2021] EWHC 2441 (TCC)), Downs Road Development LLP (the employer) made an audacious (yet rather inventive) attempt to eschew potential ‘Smash and Grabs’ by submitting monthly pay less notices of 97p to the contractor (Laxmanbhai). This case offers useful guidance on the submission of pay less notices, in particular the need for a definitive and frank statement of the amount considered due.
In this article, specialist construction solicitor, Lawrence Pearce and trainee solicitor Chrissie Parkes, explore what constitutes a valid pay less notice and the additional lessons learned from Downs Road v Laxmanbhai.
Section 111 of the Housing Grants Construction and Regeneration Act 1996 (Construction Act) allows a paying party (e.g., the employer) to pay a payee (e.g., the contractor) less than the sums requested by the payee in any payment application issued (or indeed the sums certified in its own payment notice). Failure by a payer to issue a valid payment notice (PN) and/or PLN followed by a refusal to pay a payment application, leaves an employer vulnerable to a ‘Smash and Grab’ adjudication whereby the contractor is permitted by statute to recover the full amount claimed under their payment application. Should the contractor be successful in a ‘Smash and Grab’ adjudication (which is inevitable without service of a valid PN/PLN) the employer would be ordered to pay the full amount owed under the payment application in question before being able to argue the ‘true value’ of the amount they considered payable. This is aptly referred to as ‘pay now, argue later’ and is a rather bitter pill to swallow for a sincere employer who has legitimate reasons not to pay the amount stated on a payment application, yet nonetheless failed to issue a valid PN/PLN.
This begs the question: if you do not agree with a payment application, how do you issue a valid PLN? Under Section 111 of the Construction Act, for a PLN notice to be valid, it must adhere to the following requirements:
The influential case of Grove Developments Ltd v S&T (UK) Ltd [2018] cemented these requirements for a valid PLN. In Grove v S&T (and its subsequent appeal), the disputed PLN was held to be valid as: 1) It had been served in time; and 2) It had set out the basis of the calculation. S&T sought to rely on the defence that as the detailed calculation was not set out in the PLN but had instead been specified in an earlier PN, of which the PLN referred to; the PLN was not valid on the basis that it did not itself include the reasoning for the sum considered as owed.
However, the court held that the obligation to specify the basis of the calculation did not extend to a requirement of a specific method of doing so. In other words, as long as there is a detailed explanation as to how the payer arrived at the sum stated in the PLN that would be sufficient, it does not matter in what form this takes.
The very recent case of Downs Road Development LLP v Laxmanbhai Construction (UK) Ltd (DRD v LC) adds a further layer to the requirement of a valid PLN. Following receipt of interim payment applications from Laxmanbhai Construction (LC), Downs Road Development (DRD) habitually issued spurious PLNs of 97p to buy time before issuing a detailed payment notice for the real amount that they considered to be due. A rather innovative method of attempting to circumvent exposure to smash and grab adjudications, on the face of it, yet ineffective in practice.
In response to an interim application for £1.88m, DRD issued a PLN of 97p which was subsequently followed by a detailed PLN of £903,884 fully setting out the basis on which the amount had been calculated. Unsurprisingly, this all came to a head leaving the court to decide the validity of this particular PLN. As the first PLN of 97p was quite clearly a specious effort to buy themselves time to value the works without the risk of missing the PLN date. Nevertheless, DRD did miss the relevant date! The second PLN of £903,884 was held to be out of time as it had not fallen within the prescribed period and was deemed to be invalid.
The Court held that, the PLN must be a ‘genuine’ calculation of the amount considered due and it is not enough to submit a PLN within the prescribed time that is clearly disingenuous.
The requirements of section 111 of the Construction Act still stand. However, DRD v LC has supplemented the Act with the further requirement that the PLN must be reflective of a genuine calculation of costs. In essence this means that the PLN could very well be for £1, however this must result from of a legitimate analysis of the sums owed as well as setting out precisely how the payer arrived at this sum. A PLN is not (as attempted by DRD) a preventative mechanism to restrict the payee of his statutory right to adjudicate. Instead, it is a shield to protect the payer from being forced to pay a sum which they do not consider to be due. The guidance for a valid PLN is now as follows:
It is further imperative that you are alive to the payment terms to which you have agreed to. Chiefly, knowledge of the prescribed period (under the contract or statute) will prove invaluable should you be presented with an interim application to which you disagree with and wish to amend by issuing a PLN (or conversely if you have issued an application and have not received a valid PLN in time).
Navigating payment terms can be a minefield, not least with the potential inclusion of insidious terms aiming to tip the balance in one party’s favour (and the common scenario which we see, wherein the parties do not follow the contractual payment timetable). Should you require advice on the interpretation or drafting of payment terms, or enforcement of the same, contact the specialist Construction Team at Holmes & Hills Solicitors on 01206 593933.
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