Pay less notice for construction contracts

[edit] Introduction

The Housing Grants, Construction and Regeneration Act 1996 (also known as the Construction Act) include provisions to ensure that 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.

[edit] When must a pay less notice be given?

The contract sets out the prescribed period before the final date for payment by which a pay less notice must be given. Where the contract does not include such a provision, the default position under the Scheme for Construction Contracts applies, which requires a pay less notice to be given not later than seven days before the final date for payment.

If a valid pay less notice is not given within this period, the payer loses the right to pay less than the sum stated as due in the payee's payment notice (or default payment notice), and the full notified sum becomes payable.

[edit] Failure to give a pay less notice

In ISG Construction Ltd v Seevic College [2014 EWHC 4007 (TCC)], the court held that where no payment notice or pay less notice was given by the employer, the employer was deemed to have agreed the value stated in the contractor's application, and so could not subsequently refer the 'true value' of that application to adjudication. This became known as a 'smash and grab' adjudication.

This position was subsequently qualified by the Court of Appeal in S&T (UK) Ltd v Grove Developments Ltd [2018 EWCA Civ 2448], which confirmed that a payer who has paid the notified sum, having failed to give a valid pay less notice, remains entitled to commence a separate adjudication (or other proceedings) to determine the 'true value' of the works and recover any overpayment. A 'smash and grab' adjudication therefore only determines what is payable in the short term, it does not finally determine the true value of the works.

This qualification is now well established and is generally followed in subsequent case law and standard form contract guidance.

[edit] Related articles on Designing Buildings

• Certificate of non completion.
• Contract sum.
• Default payment notice.
• Due date.
• Extension of time.
• Fair payment practices.
• Final certificate.
• Housing Grants Construction and Regeneration Act.
• Interim certificate.
• Interim valuation.
• Payment.
• Payment notice.
• Payment schedule.
• Remedies for late payment.
• Retention.
• Scheme for construction contracts.
• Small Business, Enterprise and Employment Bill.

[edit] External references

• ISG Construction Ltd v Seevic College (2014).
• S&T (UK) Ltd v Grove Developments Ltd (2018).

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