The Elephant Test

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The Elephant Test

March, 2018
John Riches

The Oxford English Dictionary describes an elephant as, ‘the largest living land mammal, with a prehensile trunk, used for taking up food and water, a hairless body and usually, a pair of long curved tusks, of which two species remain in existence’.

Try to draw a picture of an elephant from that!

The Elephant Test is a very important legal test, or, if it isn’t it should be. It goes like this; I can’t describe an elephant, but I know one if I see one. It is much easier than a written description. All you need is a picture or a visit to the zoo.

 There are some things that are just drop-dead obvious, or they ought to be. That is, unless it is the Construction Industry and Payment Notices.

I think, where payment is concerned, our friends in central government took a rather simple idea and made it all too complicated.

The simple idea was that I send you a bill for the work I have done. If you don’t say something and respond to that bill then that is the sum I am owed. On receipt of the bill the payer could keep quiet or could issue a thing called a payment notice. That simply says, never mind what your bill says, this is what I am prepared to pay and this is why.

The payer gets a second shot with a thing called a Payless Notice. At an agreed point, so many days before the established amount is to be paid, the payers’ second bite of the cherry is a pay less notice. All the payer is required to say is that I want to pay you less than the amount in your bill or even my Payment Notice, the payer can choose to disagree with the bill and his own previous stab at how much to pay.

The whole idea was about getting to a payment, and that was more important than whether the figure was right or wrong. It did not matter if it was an interim payment, a final account payment a termination payment; they are all subject to the same system.

In terms of cost benefit analysis it does not matter if the payment made is over or understated; the interests of individuals are subsumed in the greater benefits to the economy and construction industry costs in terms of huge savings from improved cash flow and the waste in arguing down to the last penny.

Probably the only case that reflected this system is ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) (03 December 2014).

Many of the subsequent cases have found ways distinguish and not adhere to this simple principle. That case has been under attack from the outset and remains under attack. It gave rise to the phrase “smash and grab adjudication” and gave rise to the suggestion that the payment rules as drafted were “draconian”.

Well sorry, from the words that Parliament used that was exactly the intention. There was no robbery in the idea that someone sending in the bill was just trying to get paid what he thought he was entitled to. The safeguard for the payer was in the two bites of the cherry in terms of a Payment Notice and Payless Notice.

It didn’t help that the drafters of the legislation chose to say not only too much, but they went to great and unnecessary lengths to do so. This left a simple idea full of loopholes and I am not sure that all the flaws have been found and fully exploited yet.

To make matters worse we operate this system over four jurisdictions. England, Wales is now a separate legislative body, Scotland was always separate and Northern Ireland which has its system of enacting the legislation under an Order.

The legislative bodies took great care in their consultations and drafting which lead us to the current legislation. What they sought to achieve was legislation with no differences at all (or any difference would be so minor it would be of no great effect) so prospectively the application of the legislation ought to have been the same in all jurisdictions. No conflicting case, no different outcomes, no chance.

There is parting of the ways. It now appears that there is a different approach on payment notices, in Scotland, to an established pattern in England and Wales.

The case that contrasts with the English Courts came out of the Sheriff’s Appeal Court. The Scottish Courts seems pretty complicated to most of us outside of it. The Sheriff is a cast back to the old system of the Shire Reeve, who was a chief executive of the crown. They existed both in Scotland and England. The derivation is Anglo-Saxon and survived the Norman Conquest.

So how powerful is the Sheriffs Appeal Court of give a comparator with say the Technology and Construction Court in England and Wales?

When appealing from a decision of a Sheriff you appeal to the Sheriff Appeal Court and is pretty well the end of the legal road. You can only take it beyond that after the Sheriff Appeal Court decision to the Inner House of the Court of Session in extremely limited circumstances, that is the appeal court- 3 judges where the legal point raised is novel; significant etc. (Thank you Lindy Patterson QC, for clarifying all of that.)

This case is an appeal by Windsor Residential against Trilogy Services Scotland Limited.

The parties were only arguing over £14,000.00, and the Sheriff Principal made the point that the costs of the case were likely to exceed that sum in dispute by reference to Jarndyce and Jarndyce as an example of such excesses.

The parties entered in to a simple contract, which was on one A4 sheet of paper and included four payments (increments).

The contract provided for a payment due date which was within 7 days of receipt of an invoice.

Windsor failed to give a Payment Notice five days after the due date. By all accounts there was no defence to the claim made by Trilogy.

There was no mechanism in the contract to automatically make the sum applied for, or the sum invoiced due in the face of no payment notice under the provisions of s110B 4 of the Construction Act.

Trilogy argued that its Solicitor’s letter chasing payment should be treated as a default payment notice issued after no payment notice had appeared from Windsor (as per s.110B(2) and s.110A(3) of the Construction Act). 

Windsor acknowledged the letter met the requirements of substance and form, but argued that it failed to demonstrate the requisite intention to be such a payment notice.  Substance and form, it undoubtedly passes the elephant test in terms of it look like an elephant.

The question before the court boiled down to this: did the solicitor’s letter meet the requirements of a payment notice? 

Windsor argued although the Solicitor’s letter had the requisite form and substance it did not satisfy the requirement of intention.

Windsor relied on Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC) (14 August 2015) for the intention part of the test to determine whether or not the Solicitor’s letter constituted a default payment notice.

In Henia, Mr Justice Akenhead said ‘I consider that the document relied upon as an Interim Application under Clause 4.11.1 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 from ambiguity.’

Arguably this is a four-part test; substance, form, intent and free from ambiguity.

It was the intent bit that Windsor latched on to. To quote from paragraph 11 of the case Windsor argued;

‘Before this court, counsel for the appellants conceded that he could not dispute that the form and substance required by s.110A(3) was present in the communications of 9 October 2015, however, he contended that it was incumbent upon a party to make it clear that it was applying for payment. He contended that there required to be (a) a considerable degree of clarity that an application was a notice under the 1996 Act; and (b) an intention for it to be such a notice before it could legally be one. Counsel invited us to have regard to the stage in the present action at which the respondents contended that the letters ought to be regarded as notices. He argued that it could not have been the intention of the author of the letters that they be notices under the 1996 Act.’ (as amended by Local Democracy, Economic Development and Construction Act 2009)

And later at paragraph 13;

‘The appellants argue that there needed to be a considerable degree of clarity on what had been done. They submit that the letters lacked clarity and that it could not have been the writer’s intention to create a notified sum by way of the letters’.

The Sherriff Principal was having none of it. He said:

 ‘Looking at the wording of the letters, it was clear that they complied with the requirements of s.110A(3) of the 1996 Act and that was the end of the matter. The appellants were seeking to introduce an additional, subjective assessment of notices’.

Further on in the judgment:

‘There can be no doubt as to the respondent’s intentions. They wished to be paid the amount they had first claimed some three months earlier. We do not read the decision of Akenhead J. in Henia Investments Inc at paragraph 17 as importing a requirement of “intention” in each and every case, as, in effect, the appellants argue for. To borrow from a phrase quoted by the learned sheriff in his decision, such an interpretation would “drive a horse and cart through” the provisions of the 1996 Act’.

The English Courts have followed the three (arguably four) part test in Jawaby Property Investment Ltd v The Interiors Group Ltd & Anor [2016] EWHC 557 (TCC) (16 March 2016) and Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd [2017] EWHC 17 (TCC) (13 January 2017) and the most recent application in Kersfield Developments (Bridge Road) Ltd v Bray and Slaughter Ltd [2017] EWHC 15 (TCC) (18 January 2017).

There is little doubt that part of the test applied in these cases in the English courts is one of intention (intent).

The Scottish Courts at present seem less fussed, if they can see form and substance it is a payment notice. It looks like an elephant it is an elephant. They are not going to question the elephant on whether it really wanted to be an elephant.

We have a parting of the ways, intent is at least much less important in Scotland, almost non-existent, than it is to the English Courts.

By John L Riches of Henry Cooper Consultants Ltd

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