A string of High Court cases have underlined the importance of issuing payless notices correctly. It is essential that procedures are followed to maintain cashflow until final account stage

Stephanie Canham

Given the column inches devoted to this subject in the industry press, the following statement will come as no surprise: payless notices are really important if a deduction from the amount of a payment application is to be upheld. It is the law. Even if we cannot quote the Housing Grants Construction and Regeneration Act 1996 verbatim, the string of decisions by the High Court over the last couple of years have brought that to the industry’s attention.

The courts have even gone so far as to comment on the “draconian” effects of not serving valid payless notices. If one is not served (or is not served in time) and regardless of the merits, the entire sum claimed in the payment application is payable.

A tiny bit of comfort (be it small) for anyone on the wrong side of a dispute about payless notices is that the courts have also said that the intention of the act is not to permanently deprive the payer of an interim payment of its money, but to maintain cashflow until a “proper” reckoning is made at final account stage. All well and good, but what happens if the payee goes insolvent (or simply disappears) in the meantime?

From a contract management perspective, how do you make sure that you, whether the client or administrator/adviser, get the payment procedures right? The obvious place to start is to understand the payment provisions and timescales in your contract, or those which are implied if it is not act compliant; the absolute imperative being to make certain that all notices that have to be served are served and on time.

As far as payless notices are concerned, they actually need to be a payless notice. You might wonder if there is any “wriggle room” if there is any doubt as to whether the document served on the other party is sufficient. Once again, the courts have helpfully stepped in to offer some guidance.

From a contract management perspective, how do you make sure that you, whether the client or administrator/adviser, get the payment procedures right?

In the case of Surrey and Sussex Healthcare Trust vs Logan Construction (South East), Surrey and Sussex engaged Logan to carry out a comprehensive refurbishment of one of its hospitals. There was considerable debate (adjudication proceedings as well as an application to the Technology and Construction Court) about the effectiveness of both Logan’s interim payment notice (it was) and also whether the contract administrator served a payless notice in response.

The purported payless notice comprised an email and attachment which included the final certificate. It was not identified as a payless notice and not specifically addressed to Logan.

The court’s decision turned on what “the overall message and purpose” of the email and attachment would have been understood to be by a reasonable recipient. On the facts, the judge found that they were intended to be a response to Logan’s application for interim payment and that the email and attachment were substantively capable of fulfilling the requirements of a valid payless notice.

That all sounds straightforward, but a note of caution - in another recent case, Jawaby Property Investment Limited vs Interiors Group Limited, a document relied on as a payless notice was held to be invalid because its format departed from the parties’ previously established practice for dealing with such notices.

So what are the lessons to be learnt from those two court decisions? The question of “form”, “substance” and “intent” is important, but from a practical point of view, attention to detail is vital.

A payless notice should be clearly identified as such and served strictly in accordance with the applicable contract terms and its administrative rules. The other party must be able to objectively understand that it is intended to be a payless notice.

Furthermore, the notice should contain sufficient information, including that which might be needed to form the basis of an adequate agenda for adjudication for the true value of the relevant part of the works.

Even though a court might be persuaded to take a common sense view, possibly to apply a less restrictive interpretation of a document held out to be a payless notice than it would in relation to a payment application, a cavalier approach to payless notices is unwise. Don’t take any chances, get it right.

Stephanie Canham is head of construction at law firm Trowers & Hamlins