Scottish courts could benefit Carillion subcontractors

Ross Taylor

Ross Taylor, director at Young & Partners business lawyers, explains how relevant legislation to help the supply chain has been interpreted differently by the Scottish Courts and the implications for payment

A regime for payment which helped improve cash flow down the supply chain was introduced by the Housing Grants, Construction and Regeneration Act 1996. Its aim was to “pay now and dispute later”.

Difficulties developed in the application of the payment regime as it came to be interpreted by the courts and the 1996 Act was overhauled with changes taking effect in late 2011.

The legislation is complex, but in summary, under the 1996 Act, if the paying party wished to withhold all or any part of the amount due they required to issue a withholding notice within the contractual time limit. The parties had flexibility to agree when that date would be. If their contract did not adequately do so, a Scheme fixed the date.

If the payer missed the deadline for serving the withholding notice, they had to pay the amount due under the contract by the final date for payment. However, the 1996 Act fell down because the payer could sometimes still dispute what the amount due actually was before requiring to make payment.

The 2009 Amendments tried to stop this, while maintaining the flexibility to agree dates. The withholding notice was replaced with a pay less notice. If a valid pay less notice is not served on time, the notified sum must be paid even if that does not represent the true value of the work done.

The notified sum is created by a payment notice from the payer; and if that notice is not served, by a default notice by the payee. Depending on the contract, a claim for payment by the payee may be needed first.

To be valid, each notice – the claim for payment (if required), the payment notice, the default notice or the pay less notice – must state the sum considered to be due and the basis upon which that sum has been calculated.

Again, the updated payment regime has required interpretation by the courts, leading to a contrasting approach north and south of the border.

In England and Wales there has been a tightening of interpretation, as payers have made arguments to avoid payment and payees have sought “smash and grab” payments which may not reflect the true value due to them.  The English courts have focused on the need for intention. The party giving the notice must have intended to do so, making their notice clear and unambiguous. The English courts have also said that the same rules must apply to both the payer and the payee equally.

In January 2017, however, the Scottish Appeal Court departed from the focus of the English Courts regarding intent. The Appeal Court held that two lawyers’ letters, accompanied by copies of their client’s invoice, and demanding payment within fourteen days, constituted a default notice under the 2009 Amendments. A notified sum had been created, because there was enough detail in the documents, despite there having been no intention upon the payee to give a default notice. 

The Sheriff Court ruled subsequently that there may have been enough in supplied correspondence between the parties to be construed as a default notice, even though the payee had not intended to give such notice. 

These decisions supported the payee. On the other hand, in October 2017, the Scottish Court of Session decided that a document purporting to be a pay less notice served by the payer was not valid, because it and accompanying documents did not provide sufficient detail about the basis upon which it was said that no sum was due. 

While English courts have required clear intent, the Scottish Appeal Court has said that intention is not required in every case. 

The result is that it is more likely payment will have to be made in Scotland, leaving any dispute about whether the amount paid is correct to be argued later. 

Carillion’s supply chain should consider raising proceedings for payment without delay, relying upon the benefits given to them by the 2009 Amendments.  The people who may feel the real squeeze may be Carillion’s direct sub-contractors, because they may be forced to pay their sub-contractors, with less prospect of recovering that money from an insolvent Carillion up-stream. And, those payees whose contracts fall within the Scottish courts may have a better chance of being paid that their English counterparts.