The Court of Appeal has recently endorsed a new practical test for determining the validity of a pay less notice.
The case arises from a dispute between RBH Building Contractors Limited (“RBH“) and Mr and Mrs James in relation to site and project management services for the construction of a luxury property in North Devon. We reported on the High Court decision here.
As a reminder, there was an oral contract between the parties under which RBH was entitled to both a weekly and monthly fee of £1,000 and £10,000 respectively with sub-contractor costs and overhead and profit later added as modifications to the original arrangement. The Court described the resulting arrangement as a “sort of construction management contract“.
RBH stopped working in April 2024, just over 2 years into the project, as a result of disputes with Mr and Mrs James. The works were not completed and at that point RBH had been paid £1,310,039.
RBH, acting via a representative and without any advance warning, served an application for payment on Mr and Mrs James in November 2024, claiming £1,973,055.20 minus the £1,310,039 already paid, giving a balance of £663,016.16. Mr and Mrs James issued a “withholding notice” in relation to the full £663,016.16.
RBH commenced an adjudication, arguing that that the pay less notice was invalid. Mr and Mrs James raised two points in defence:
- Residential occupier exclusion – the contract was excluded by virtue of the “residential occupier” exclusion under s106(2) of the Housing Grants, Construction and Regeneration Act 1996 (“HGCRA 1996”) on the basis that Mr and Mrs James intended to live in the property and, as such, the adjudicator had no jurisdiction to determine the dispute.
- Validity of the pay less notice – Mr and Mrs James argue that their letter setting out the basis on which they intended to pay less than the sum in the application (primarily on the basis of insufficient evidence and/or the inclusion of unpaid invoices by RBH, plus further contentions) was a valid pay less notice.
The adjudicator decided in favour of RBH that (i) he had jurisdiction and (ii) the pay less notice was invalid. RBH was awarded its entire claim, Mr and Mrs James did not pay any sums due under the Decision and enforcement proceedings were commenced. Unusually, the TCC refused to grant summary judgment. This was the subject of an appeal by RBH. In dismissing RBH’s appeal, the Court of Appeal’s judgment should be of interest to most in the industry on two distinct points.
Pay Less Notices
While much has been said about the Court of Appeal’s first consideration of the residential occupier exclusion, the Court’s endorsement of a new practical test for assessing the validity of pay less notices is likely to have a broader impact on industry practice.
The TCC at first instance considered that the pay less notice provided an adequate agenda for adjudication on the basis that “any reasonably objective reader, with knowledge of the contract works, would have understood” how the bullet points in the pay less notice related to the payment application and, in addition, a valid pay less notice did not require a detailed arithmetical calculation.
Coulson LJ agreed with the judge at first instance (who, coincidentally, was drawing from Sir Peter Coulson’s own authoritative text “Coulson on Adjudication”). The new test was summarised as follows:
“In reality, the question is a simple one. Does the payment notice explain in a tolerably clear way what is due and why? Does the payless notice explain, also in a tolerably clear way, what (if any) part of the payment notice is said to be due, and why less is being paid than has been sought?” (paragraph 85, emphasis added).
Everything else was mooted to be a “lawyerly over-complication” – perhaps a warning that challenges based on obscure technicalities are likely to fail under the new guidance and a signal that the law has moved on from the previous understanding that notices must be “sufficiently clear and unambiguous” as to what is being paid and how that figure was calculated.
Practically, this establishes a higher threshold for any party seeking to dispute the validity of a pay less notice and may embolden a party which needs to rely on such a notice.
Residential Occupier exclusion
The Court of Appeal has consolidated and clarified the legal principles applying to the residential occupier exclusion under section 106 of the Construction Act 1996.
In particular, Coulson LJ articulated a two-element test under section 106 for determining whether a party “intends to occupy” property as their residence. First, there must be a bona fide intention to occupy in the future, which is largely subjective but can be supported by objective evidence. Second, there must be a realistic, rather than a fanciful, prospect of bringing that occupation about. Confirming previous case law, this test applies to the position when the contract was made, though evidence before and after may be relevant.
The Court of Appeal agreed with the TCC at first instance that the conflicting evidence on this issue was enough to preclude the application for summary judgment. It is of note that the Court:
- did not consider Mr and Mrs James’ breach of their commercial development loan agreements rendered occupation unlawful; and
- found an intention to let the property on a short-term basis for part of the year did not preclude the residential occupier exclusion from applying. While ultimately dependant on the facts in each case, here an intention to let for 25% of the year did not affect the exclusion.
Why is this important? Where a contract is not a “construction contract” for the purposes of the Construction Act, there is no automatic right to refer a dispute to adjudication and the strict payment provisions would not apply, unless specifically provided for by the terms of the contract. This is critical to the James’s position as there was no written contract and so if the residential occupation is found to apply, the statutory provisions would not be implied into the contract.
Such drafting is present across the industry standard form contracts, often only applying where specifically selected to do so. Any party using these standard forms (such as the JCT Home Owner contracts) should carefully consider whether adjudication in particular is to apply to a residential contract or, alternatively, check the contract to see if it has been noted to apply.
