Does (or should) a payment notice need to evidence intention?

27 February 2017


We recently reported on a Technology and Construction Court (TCC) decision highlighting that where validity of a pay less notice is in issue, both substantive content and the intention of the sender will be determinative. In this update, we review a subsequent Scottish decision which appears to take an inconsistent approach as to whether or not "intent" is needed at the point notices are given, in order for those notices to be compliant with the requirements of the Housing Grants, Construction and Regeneration Act 1996 as amended (the Act).

Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Limited

As set out in our earlier report, in Surrey and Sussex Healthcare NHS Trust (the Trust) v Logan Construction (South East) Limited (Logan), one of the issues related to whether or not the Trust had issued a valid pay less notice. The decision on this point turned on whether the sender had the required 'intention' that the document issued should take effect as a pay less notice. 

The TCC held that, despite the fact that there was no reference to 'pay less notice' or the pay less notice clause in the contract anywhere in the relevant document, the question was whether, viewed objectively, it had the requisite intention to fulfil that function; in that case it did.  The TCC Judge confirmed that intention was "an essential requirement" but stated that "intention must be derived from the manner in which it would have informed the reasonable recipient" - so potentially, intention can be demonstrated even where not explicit.

Trilogy Services Scotland Ltd v Windsor Residential

We now have a subsequent judgment which revisits the need (or not) to demonstrate intention in this context - the decision is from the Scottish Sheriff Appeal Court: Trilogy Services Scotland Ltd (Trilogy) v Windsor Residential (Windsor) [2017]. As a Scottish decision, it will not be binding on the courts of England and Wales, but it will be regarded as persuasive caselaw.

In Trilogy, the notice in question was the default payment notice. The contract between the parties was contained on one sheet of A4 paper and did not include the payment/notice provisions required by the Act. Accordingly, the relevant provisions of the Scheme for Construction Contracts (Scotland) 1998 were implied into the contract.

When the time came for the fourth and final payment, an invoice for £14,000 was issued by Trilogy, the contractor. The employer, Windsor, did not issue a payment notice. Trilogy's solicitors then sent letters to Windsor (the Letters) demanding payment of the £14,000 and appending copies of the original invoice. Although not stated in the judgment, it appears implicit that Windsor did not then issue a pay less notice.

As there was no contractual provision stating that the invoice itself was capable of becoming the default payment notice, the case turned on whether the Letters demanding payment were capable of constituting a valid default payment notice. While Windsor accepted that in terms of form and substance, the Letters complied with the requirements of the Act, relying on previous caselaw, Windsor argued that the Letters did not constitute a valid notice as Trilogy could not demonstrate that the authors of the Letters intended them to constitute a notice under the Act. 

The Court did not agree with Windsor as to the absolute need for intention stating:

"We do not read the decision of Akenhead J. in Henia Investments…as importing a requirement of "intention" in each and every case… "

It was held here that the Letters did constitute a valid default payment notice under the Act and Windsor was therefore required to pay the sums demanded. Notably, the Court stated that it was the "contractual terms and the factual content" that were of key importance and that Trilogy was not required to demonstrate the "intention" argued for by Windsor.

Softening the test for intention?

At first glance, this decision appears to conflict with the approach taken by the TCC to date, but query whether it could be asserted that the decision in Trilogy is, rather, a progression from the (again, one might argue) more permissive approach taken by the TCC in Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Limited?  

It might be contended that (as previously reported) the TCC in that case 'softened' the requirement for 'intention', in that the pay less notice in that case contained no overt suggestion on the face of the document that it was so intended.  Compare this to earlier cases setting clear stringent requirements - in Henia Investments Inc v Beck Interiors Ltd [2015], the TCC stated that in order to constitute a valid interim application, the document must be: "... in substance, form and intent an Interim Application stating the sum considered by the Contractor as due at the relevant due date and it must be free of ambiguity"  (Emphasis added).

As set out above however, Trilogy is a Scottish decision and therefore not binding on the TCC - it will be interesting to see how that judgment is dealt with by the TCC in subsequent cases. As we have seen many times, and as referenced in Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Limited, a key concern in this context is that potentially, "draconian consequences [can]...flow from a failure to serve a compliant Pay Less Notice in response to an Interim Payment Notice".  Rather than Trilogy heralding a change in direction on this point, we may well therefore see a restatement of the clear requirement for intention, inferential or explicit, as opposed to an advancement towards a less stringent approach. 

Practically

It makes sense to adopt a straightforward approach wherever possible - where a notice is intended as a notice under the Act, then make it clear on the face of the document and you can hopefully avoid the skirmish surrounding validity or otherwise of notices.

We will continue to keep you updated.   If you need any advice on notices or generally, please call us.


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