Practicalities of payment and pay less notices

Recent cases on applications for payment, payment notices and “pay less” notices under the Construction Act have brought more clarity to this thorny area, despite some unanswered questions remaining. With payment disputes between social landlords (and other employers) and contractors on the rise, there are some key steps that should be followed to help avoid costly legal challenges.

We now know that:

• the court will not supplement payment schedules that “run out” (Grove Developments v Balfour Beatty) but will correct “obvious” date errors (Bouygues v Febrey Structures);
• a contractor’s application for payment can only become a default payment notice (where the contract administrator fails to serve a payment notice in time) if it:
  • is clearly, in “substance, form and intent”, an application for payment (Caledonian Modular v Mar City, Jawaby v Interiors);
  • states the “amount due” (Severfield v Duro) and how it is calculated (Maxi Construction v Mortons Rolls)
  • is served on time, never early (Leeds v Waco, Caledonian Modular) and not too late , Jawaby Interiors); and
  • is accompanied by any documents the contract requires (Kersfield Developments v Bray);
• if the contract administrator doesn’t issue a payment notice and the employer doesn’t serve a pay less notice, the employer must pay the amount applied for (Henia v Beck) unless the contractor is (or becomes) insolvent (Melville Dundas v George Wimpey, Wilson & Sharp v Harbour View);
• with an interim application, the employer may not be able to adjudicate to determine the “correct” amount payable (ISG v Seevic, Galliford Try v Estura), although this may be changing (ICI v MMT);
• a pay less notice will be valid if it “is intended as such”, states the amount the employer considers due and states how that amount is calculated (Surrey and Sussex Healthcare v Logan Construction); and
• with a final account, the employer can adjudicate to determine the “correct” amount due, even though no payment notice or pay less notice has been served (Harding v Paice, Kilker Projects v Purton).

There are still some uncertainties. For example, can an application for payment be “adjusted”, “corrected” or “replaced” by a substituted application? Case law (Caledonian Modular) seems to suggest not, although not in clear terms. Despite these, it is now possible to set out some practical pointers for contractors, contract administrators and employers when preparing these applications and notices.

Contractors should ensure that:

• payment schedules cover the possibility of overruns and extensions of time;
• applications for payment:
  • are clearly labelled as such;
  • state the payment due date;
  • clearly state the amount due on that date;
  • are served “on time” under the contract (having regard to the “time of service” provisions in the contract); and
  • include everything the contract states must be provided with them. 

Contract administrators should:

• issue payment notices on time and as set out in the contract, even if they are “querying” items within the application with the contractor; and
• exclude items where the contractor has not provided any documentation the contract requires - they can always be picked up on the next payment run.

Employers should issue a pay less notice if:

• there is (or may be) a valid application for payment and the contract administrator doesn’t issue a payment notice on time;
• the employer thinks the contract administrator has overvalued the work up to the due date;
• they want to deduct costs recoverable from the contractor (eg liquidated damages); and/or
• they are entitled to set-off amounts due from the contractor under another contract against the amount payable.

Contractors are facing difficult market conditions, as prices for construction materials continue to rise and labour becomes harder to obtain. Contractors (usually) need to submit valid applications for payment before being entitled to be paid. Contract administrators need to know whether applications are valid and to serve payment notices promptly. Social landlords (and other employers) need to know how to protect their position if they think their contractor is overcharging or heading towards insolvency. Hopefully these practical pointers should help each of them get these applications and notices right and reduce disputes over them.

Andrew Millross is a partner at Anthony Collins Solicitors LLP. Mike Williams is relationship manager (asset management) at Procurement for Housing (PfH)