Pay Less Notice in Construction – Understanding Your Rights

Pay Less Notices & Dealing with Payment Disputes Effectively

In the construction industry, the importance of managing payments and resolving disputes quickly is critical and becoming even more important given the current economic climate with rising material costs, labour challenges, and a notable rise in insolvencies.

In our recent article ‘UK Construction Companies in Crisis’ our construction lawyers explained that 5,919 construction companies are on the brink of insolvency, representing about 1.6% of the total firms in the UK’s construction sector. Moreover, an additional 72,257 companies, or 20% of the industry, face substantial financial difficulties.

This precarious economic situation in the construction industry highlights the need for businesses to have strict financial management controls, where Pay Less Notices play a critical role. Mismanagement or misunderstanding of these notices can trigger disputes, ‘smash and grab’ adjudications, project delays, and cause financial instability.

Understanding and correctly using Pay Less Notices can lead to more stable financial management within construction projects. Proper use of notices ensures that only the correct amounts are paid, reflecting the actual work completed. This not only minimises disputes but also helps maintain steady cash flow and project timelines particularly when non-payment could give the contractor a right to suspend works (section 112 of the Housing Grants, Construction and Regeneration Act 1996).

If you are worried about the financial stability of a contractor, you can sign up to our free Insolvency Tracker and Claims Protection service or give us a call for a Free Consultation on 0207 459 4037.

What is a Pay Less Notice?

A Pay Less Notice is a formal declaration issued by a party in a construction contract, typically the employer, indicating their intention to pay less than the amount claimed by the contractor.

Section 111 of the Housing Grants, Construction and Regeneration Act 1996 provides that:

“(1) A party to a construction contract may not withhold payment after the final date for payment of a sum due under the contract unless he has given an effective notice of intention to withhold payment.

(2) To be effective such a notice must specify—

(a) the amount proposed to be withheld and the ground for withholding payment, or

(b) if there is more than one ground, each ground and the amount attributable to it,

and must be given not later than the prescribed period before the final date for payment” (emphasis added).

The purpose of a Pay Less Notice is to adjust requests for payments to reflect the actual value of work done or to account for any set-off or discount that the employer believes is warranted. This is crucial in construction due to the frequent discrepancies between work claimed and work completed or agreed upon. If managed well, Pay Less Notices prevent overpayment and underpayment, ensuring that payment disputes are addressed promptly.

The importance of Pay Less Notices in construction cannot be overstated. They serve as a key tool in managing cash flow and maintaining transparency in financial dealings. When utilised correctly, these notices help avoid ‘smash and grab‘ adjudications, where the full amount claimed is awarded due to a failure to serve a valid notice. They allow for a fair and balanced approach to payment adjustments, reflecting changes in scope, quality, or delays in work.

What Are the Common Pitfalls with Pay Less Notices?

The common pitfalls with Pay Less Notices in the construction industry typically stem from misunderstandings or errors in preparing or issuing Pay Less Notices. Our expert construction lawyers have seen many common disputes with Pay Less Notices and it is important to get things right to avoid disputes. The common issues include:

  1. Timing Issues: One of the most frequent errors is missing the strict deadlines for issuing a Pay Less Notice. The notice must be served within the time frame specified in the contract. Late notices are often deemed invalid, leaving the employer liable for the full claimed amount in the payment application.
  2. Inadequate Detail: A valid Pay Less Notice must clearly state the sum considered to be due and the basis for its calculation (section 111 above). Vague or incomplete notices that fail to provide a clear breakdown or rationale can be challenged and rendered ineffective, leading to disputes and potential overpayment.
  3. Improper Service: The notice must be served in a manner prescribed by the contract or acceptable under common practice. Failure to serve the notice correctly, whether in terms of format, delivery method, or to the right party, can result in the notice being considered invalid.
  4. Failure to Understand Contractual Terms: Misinterpretation of the contract can lead to issues in the timing, amount, or validity of the notice. Parties must fully understand their contractual obligations and rights regarding Pay Less Notices to avoid unnecessary disputes.
  5. Overlooking Contractual Amendments: Sometimes contracts undergo amendments that can affect the notice requirements. Not staying updated with these changes or failing to reflect them in the Pay Less Notices can lead to invalid notices.
  6. Delay Payment: Often some employers may serve a Pay Less Notice to delay payment and in fact does not properly represent the true value of the work done. This approach can increase costs, escalate disputes and can lead to severe credibility and reputational issues which may affect the completion of a project.

Our expert construction lawyers are experienced and well-versed in the common pitfalls and issues with Payless Notices, if you have any questions please call us for a Free Consultation on 0207 459 4037.

What Are the Requirements of a Pay Less Notice and When Must It Be Issued?

The requirements of a Pay Less Notice are set out in Section 111 of the Housing Grants, Construction and Regeneration Act 1996 (as amended). In particular, a Pay Less Notice must:

  1. Be in Writing: The notice should be a written document indicating its purpose as a Pay Less Notice.
  2. Specify the Sum Due: It must state the exact amount the employer intends to pay, which could be less than the sum applied for by the contractor or previously notified as due. This could be zero if the payer believes no payment is due.
  3. Provide the Basis for the Calculated Sum: The notice should include a clear and detailed breakdown or rationale for the reduced amount, including any deductions or offsets being claimed.

The timing of issuing a Pay Less Notice is critical and typically bound by strict deadlines stipulated in the contract. Generally, the Pay Less Notice should be served:

  1. Before the Final Date for Payment: The exact timing can vary depending on the JCT contract (usually 5 days before final date for payment) or, if not specified in the contract, by default under Regulation 10 of Part 2 of the Scheme for Construction Contracts (England and Wales) Regulations 1998, a Pay Less Notice must be served no later than 7 days before the final date for payment.
  2. After a Payment Notice is Issued: A Pay Less Notice is often in response to a Payment Notice or an application for payment by the contractor. It serves as a counter-notice, altering the amount stated in the initial notice.

Parties involved in construction contracts must understand and follow the requirements and timings for issuing Pay Less Notices. Failure to issue a valid Pay Less Notice can leave the employer liable for the full amount claimed by the payee, even if there are legitimate grounds for paying less which could cause cash flow issues and financial difficulties.

What Happens If a Pay Less Notice Is Incorrect or Late?

The implications of issuing an incorrect or late Pay Less Notice can be significant in the construction industry, affecting both the financial stability and legal standing of the parties involved.

If a Pay Less Notice is issued after the deadline specified in the contract or by statutory provisions or does not explain the basis of the calculation, will be invalid. The employer is then usually required to pay the full amount stated in the original payment application or payment notice.

However, this does not prevent the employer from starting a true value adjudication if terms cannot be agreed upon – you can see an article that our lawyers have recently written regarding Smash and Grab, and True Value Adjudications. The failure to comply with the requirements for issuing a Pay Less Notice can cause cash flow issues, and increase costs.

Can You Challenge a Pay Less Notice?

Challenging a Pay Less Notice is possible and sometimes necessary when disputes arise regarding the value or validity of the notice. There are several grounds that a Pay Less Notice can be challenged including:

  1. Incorrect Calculation: If the payee believes the amount stated or the deductions made are incorrect, they can dispute the calculation.
  2. Procedural Errors: Challenges can also arise if the payee believes the notice was served late, did not specify the required information, or was not issued according to the contract’s terms.
  3. Substantive Disagreements: Disputes over the quality of work, delays, or other contractual terms can also lead to challenges.

If the parties are unable to agree terms by agreement or negotiation. Under the Housing Grants, Construction and Regeneration Act 1996, parties in a construction contract have the right to refer disputes to adjudication.

Case Law on Pay Less Notices

Given the importance of Pay Less Notices, there have been extensive disputes by parties who have disagreed on the timings of notices, validity and compliance generally. Even when an adjudication has decided on the issues, it ultimately falls on the Technology and Construction Court (TCC) to enforce adjudicator decisions and resolve these construction disputes.

Grove Developments Ltd v S&T (UK) Ltd [2018] EWCA Civ 2448

Grove Developments Ltd (Grove) engaged S&T (UK) Limited (S&T) to design and construct a hotel at Heathrow Airport under a JCT Design and Build Contract. The contract sum was approximately £26 million. Issues arose when S&T submitted its 22nd interim application, claiming an additional £14 million, which Grove disputed. Grove’s purported Pay Less Notice and right to adjudicate the ‘true’ value of the works became central to the dispute.

The Court of Appeal held:

  1. Pay Less Notice Validity: The court concluded that Grove’s Pay Less Notice was valid and effective. It specified the sum Grove considered due (£0) and referenced a detailed breakdown of why the amount was £0.
  2. Adjudication on True Value: The Court of Appeal clarified that even if a Pay Less Notice was valid, an employer could still adjudicate to determine the ‘true’ value of the works. This was a significant clarification in the construction industry, providing a path for employers to rectify potential overpayments even after a ‘smash and grab’ adjudication.

Grove was entitled to adjudicate to determine the ‘true’ value, and its Pay Less Notice was held to be valid.

The requirements of Payless Notice are further considered in Henia Investments Inc v Beck Interiors Limited [2015] EWHC 2433 (TCC) and Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 2972 (TCC); all the case law confirms that Payless Notices must be issued on time and explain clearly why deductions are being made otherwise it will be in invalid.

Can a Payless Notice apply to Multiple Payment Applications?

In the Advance JV v Enisca Ltd case, the Court rejected Advance’s argument that a single Pay Less Notice could cover multiple payment applications in circumstances where it failed to issue a Pay Less Notice. The Court confirmed that each Pay Less Notice must be specific and referable to the individual application it seeks to address.

Advance’s Pay Less Notice, for Payment Application 25, was not seen as valid for Application 24. The decision resulted in the enforcement of the adjudicator’s decision, compelling Advance to pay the sum of £2,717,992.88 to Enisca in respect of Payment Application 24.

The collective message from the TCC case law is clear: Pay Less Notices must be precise, timely, and communicated clearly to be effective. Failure to adhere to these principles can lead to the invalidation of the notice and leave the payer liable for the full amount claimed, along with potential legal costs.

Best Practices for Avoiding Disputes with Pay Less Notices

There are several ways that you can seek to mitigate and protect your business from disputes including:

  • Adhere to Timelines
  • Ensure Clear and Detailed Notices
  • Maintain Accurate Records
  • Communicate Effectively
  • Consult with Our Expert Construction Lawyers

For more tips, our construction lawyers have written a Free Guide: “Resolving Payment Disputes: A Legal Guide for the UK Construction Sector.

Case Example – £1.2m Recovered for Sub-Contractor plus costs

Client A approached our expert construction dispute lawyers after receiving a contentious Pay Less Notice which the client assessed at zero.

Our dedicated construction dispute lawyers swiftly analysed the situation, and evidence (including an expert valuation report), identified key areas of contention, and helped Client A successfully challenge and mitigate the financial implications of the notice.

Our construction dispute lawyers were able to recover a significant multi-million-pound sum of over £1.2m for the subcontractor.

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Our lawyers’ extensive industry-specific knowledge and our commitment to justice make us the preferred choice for many businesses in the construction industry. Our construction dispute lawyers are passionate about this industry and are members of the Society of Construction Law and the Adjudication Society.

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