On an application for an injunction which came before Mr Justice Edwards-Stewart of the Technology and Construction Court in Harding (T/A MJ Harding Contractors) v Paice and Springle [2014] EWHC 3824 (TCC), it became clear, that in an earlier adjudication, the Claimant had argued that the failure on the part of the Employer under a building contract to issue a valid Pay Less notice meant that the adjudication was “an open and shut matter”. Despite the way in which the adjudication in question was run by Harding, the adjudicator agreed that in the absence of a valid Pay Less notice the full amount of a Contractor’s interim application was payable. Pay Less notices are crucial in construction contracts and this bulletin serves as a short reminder of the salient provisions.
The Law
The Housing Grants, Construction and Regeneration Act 1996 (also known as the Construction Act) includes provisions to ensure that in construction contracts payments are made promptly throughout the supply chain.
These provisions include:
- The right to be paid in interim, periodic or stage payments
- The right to suspend (or part suspend) performance for non-payment and to claim costs and expenses incurred and extension of time resulting from the suspension.
- Pay when certified clauses are not allowed and the release of retention cannot be prevented by conditions within another contract.
In addition, there are specific provisions in relation to the procedures for making payments.
- The client must issue a payment notice within five days of the date for payment, even if no amount is due. Alternatively, if the contract allows, the contractor may make an application for payment, which is treated as if it is the payment notice.
- The client must issue a pay less notice if they intend to pay less than the amount set out in the payment notice, setting out the basis for its calculation.
- The notified sum is payable by the final date for payment.
- If the client (or specified person) fails to issue a payment notice, the contractor may issue a default payment notice. The final date for payment is extended by the period between when the client should have issued a payment notice and when the contractor issued the default payment notice. If the client does not issue a pay less notice, they must pay the amount in the default payment notice.
The fatal consequences of a failure to serve a Pay Less Notice.
A high proportion of adjudications involve a Contractor’s claim for the full amount of a payment application in circumstances where the Employer has failed to serve a Pay Less notice or the Pay Less notice that has been served is invalid as it does not comply with the Construction Act. Such an adjudication is technical. The quality of the work in question is irrelevant. Whether or not the amount applied for by the Contractor is an amount that is properly due to the Contractor under the building contract is also not a factor.
In the absence of a valid Pay Less notice, the full amount applied for by a Contractor is payable and this was the outcome of the Harding –v- Paice and Springall case. However in that case, whilst the adjudicator found in favour of the Contractor, he made it clear that he was not making any finding as to the correct value of the work carried out by the Contractor.
Further recent development in relation to this issue comes by way of further guidance from the Court as to the interim value of a Contractor’s account if the Contractor is paid the full amount applied for in an interim application because of the absence of a Pay Less Notice.
In ISG Construction Limited v Seevick College [2014] ENEIC 4007 (TCC) Mr Justice Edwards-Stuart went further and found that where an Employer has paid a full amount of a Contractor’s application because he has failed to serve a Pay Less notice, the Employer cannot cross adjudicate on the same application for payment contending that the amount applied for does not represent the true value of what is due to the Contractor. In failing to serve a Pay Less notice the Employer is held to agree, on an interim basis, the value of the works claimed by the Contractor.
Conclusion
The payment provisions of the Construction Act are complicated. The failure to serve a valid Pay Less notice on time can be fatal. Ignore the rules at your peril.
This bulletin should not be taken as definitive legal advice on any of the subjects covered.
