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14 Dec 2017

It is a common requirement in the construction industry that a Pay Less Notice must be served by the Payer if it is intended to pay a reduced figure from the sum included in the Contractor’s application for payment. It is not unusual for the parties to the contract to include a specific term setting out the form and contents of the Notice that is required. In the absence of a particular contractual term, the requirement to serve a Notice is implied into a construction contract by the “Construction Act 1996” (as amended).  The Act provides that the Pay less Notice must specify:

  • The sum that the Payer considers to be due on the date the Notice is served;
  •  The basis on which that sum is calculated.

Whilst the Act sets out the relevant time limits in which the Notice must be served, it provides no guidance as to the form the Notice should take, nor what it should include, apart from the matters listed above.

Adequacy of the Pay Less Notice

We have to look at the relevant case law to ascertain what the court will accept as an adequate Notice under the Act.  In the case of Surrey & Sussex Health Care NHS Trust v Logan Construction (South East) Limited (2017) EWHC 17, the Payer relied upon an email and the accompanying attachments he had sent to the Payee as constituting his Pay Less Notice. The court decided those documents were sufficient in the particular circumstances of the case. The Judge held that to be valid, it was unnecessary for the Notice to contain the heading “Pay Less Notice” or to refer to a particular clause of the contract.  The Judge commented that he was interested in what a “reasonable recipient would have appreciated” from the documents that the Payer had sent, and in the present case, the intention of the email and its attachments was to respond directly to the Payee’s interim payment notice.

A “Zero” figure is insufficient

A Scottish case that came before Lord Bannatyne this year provides a cautionary tale about simply including the figure “£0” (zero) in the Pay Less Notice. In the case of Muir Construction Limited v Kapital Residential Limited (2017) CSOH 132, the Payee issued a payment application for a sum of just over £102,000, and in response, the Payer issued a Pay Less Notice showing that the sum due to the Payee was £0. However, the Notice did not explain how the figure of zero had been calculated, nor was it accompanied by any documents supporting that conclusion.

pound sterling

Taking a similar approach to the Surrey & Sussex Health Care case, the Judge held that a “reasonable recipient” must be able to work out how the zero figure had been derived.  Without a breakdown, a reasonable recipient could not make any sense of the figure arrived at.

The Judge went on to say that a valid Pay Less Notice must set out the basis for the payment figure included in the Notice and must “…at least set out the grounds for withholding and the sum applied to each of these grounds with at least an indication of how each of the sums were arrived at”.

Provide an explanation in the Notice

The question of whether a party has served a valid Pay Less Notice can occupy a large amount of time in adjudication proceedings.  It therefore pays to get the basics right, and as a minimum, the Notice should set out each ground the Payer intends to rely upon and the sum applicable to each of the grounds, together with a breakdown of how these sums were arrived at. Whilst a formal document is not required, it is important to ensure that a “reasonable recipient” understands that the documents provided by the Payer are intended to be in response to the Payees’ application for payment.

The consequences of failing to serve a valid Pay Less Notice can be financially disastrous, particularly where a “smash and grab” adjudication has been issued in which it is alleged that either the Notice has been served out of time or it is invalid in form or content. The courts have demonstrated that they are extremely keen to enforce the Adjudicator’s Award in a “smash and grab” adjudication, even if it can be clearly shown that the Contractor has “over-egged” the value of his payment application.  By the time the Payer commences a merits based adjudication to recover the overpayment, the Payee may be long gone over the horizon with money in hand. A valid Pay Less Notice would save the day.

For further information, please contact Graham Sutton on 0191 232 8345 / Email: Graham.Sutton@hay-kilner.co.uk