Get your contractual notices right

Notices under the spotlight: pay less notices and liquidated damages notices

Two important points on notices under JCT Design & Build Contracts have recently been clarified by the courts:

  1. Pay less notices can set out the basis upon which the sum to be due is calculated by reference to another document; and
  2. Two notices need to be issued to deduct liquidated damages, and they must be served in the correct order to be valid.

Pay Less Notice

A pay less notice must specify: (a) the sum which is said to be due; and (b) the basis on which that sum is calculated.  In the case, it was argued that the pay less notice was defective because it did not set out the calculation of the sum the employer considered due.  However, the pay less notice did refer to a detailed calculation in a payment notice sent 5 days earlier and on this basis the court judged the notice to be valid.  A party can incorporate documents by reference in a pay less notice.

Parties must, however, be wary in adopting this drafting approach.  The court recognised that by referring to a document in a notice, a party takes the risk that something may go wrong and the figures are unclear, in which case the notice would not be found to be valid. To mitigate this risk, the best approach is to set out the calculations in the notice or to enclose a copy of the relevant document with the notice.

Liquidated Damages notices

If an employer wishes to withhold or deduct liquidated damages, under the standard JCT wording they are required to take three steps.   Firstly the employer must issue a non-completion notice stating that the works did not complete on time.  Clause 2.29.1.2 then requires two further notices, firstly one setting out that the employer "may require payment of, or may withhold or deduct, liquidated damages” and then, before sums are deducted, the employer must issue a second notice pursuant to which the employer "requires" the contractor to pay liquidated damages and/or that the employer "will" withhold or deduct liquidated damages. 

If the contract requires the notices to be sent in a particular sequence, the court confirmed that the period of time between the notices was irrelevant so long as the notices were received in the right order.  On the facts, 7 seconds separated the receipt of the two notices and, despite the brevity of the interval, the notices were not defective. The court pointed out that this time period was not ideal and it may not come to this conclusion in all circumstances.  It is therefore sensible for employers to issue the notices with a larger gap between the two notices to make sure the contractual requirements have been satisfied.

Grove Developments Limited v S&T (UK) Limited

For information on the “smash and grab” element of the judgment, please read Alison Garrett’s blog here.

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