Despite Pay Less Notices having been around for over a decade, we frequently see parties get themselves into difficulties over them.
This month’s newsletter looks at what Pay Less Notices are, what they should include, what you can do when you receive one, and concludes with a list of practical tips to consider when dealing with Pay Less Notices, which you might find useful for future reference.
What is a Pay Less Notice?
A Pay Less Notice is a written notification from the payer to the payee of the payer’s intention to pay less than the value stated in either 1) the previous Payment Notice, or 2) the payee’s Application for Payment.
When should a Pay Less Notice be issued?
This depends on the contract. The default position as per section 111 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (“the Construction Act”) and Paragraph 10 of Part II of the Scheme for Construction Contracts and is that they must be issued not later than seven days before the final date for payment.
A Pay Less Notice (or a Payment Notice) must be issued on time.
A Pay Less Notice issued late will be invalid and of no effect, potentially exposing the payer to a ‘smash and grab’ adjudication in which the payee is entitled to the full amount on a ‘default’ basis, even if that is significantly more than the proper value of the work carried out.
What needs to be included in a Pay Less Notice?
The Construction Act requires that a Pay Less Notice must set out:
- The sum that the payer considers to be due on the date the notice is served; and
- The basis on which that sum is calculated.
This means that a Pay Less Notice must contain the sum that the payer considers should be paid (even if it is £0) and then the calculation of how that sum has been arrived at.
The Construction Act is ambiguous as to how those two requirements can be met and so case law has provided further information to help define what should be included in a Pay Less Notice, as set out below.
Court guidance: Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC)
This case, which has subsequently been approved by the Court of Appeal, set outs three key principles which would determine the validity of a Pay Less Notice:
- Would a reasonable recipient have understood it to be a Pay Less Notice;
- It would be inappropriate to apply a ‘fine textual analysis’ to the contents of a Pay Less Notice and ‘artificial and contrived’ arguments that they are invalid are not allowed;
- The contents of the notice should provide an ‘adequate agenda’ for dispute about valuation and/or any cross claims.
1. Would a reasonable recipient have understood it to be a Pay Less Notice?
Objectively, is the Pay Less Notice clear enough that a reasonable recipient would understand that it is a Pay Less Notice?
Closely linked to this principle is whether the intention of the sender was that the notice was intended to be a Pay Less Notice, and whether the recipient would have understood it to be one.
A very simple and practical way to make sure your Pay Less Notice complies with this principle is to make sure it is labelled ‘Pay Less Notice’!
It is also sensible to refer to the relevant clause of the contract which provides for a Pay Less Notice, or in the absence of such a clause/contract, the section of the Construction Act which allows the provision of a Pay Less Notice. Failing to label it as a Pay Less Notice or referring to the relevant clause or statutory provision does not necessarily make it invalid however.
The Pay Less Notice must make clear what, if any, sum is due. It will not be good enough that the reasonable recipient might have been able to work out the sum due and the fact that it is a Pay Less Notice.
2. It would be inappropriate to apply a ‘fine textual analysis’ to the contents of a Pay Less Notice and ‘artificial and contrived’ arguments that they are invalid are not allowed
The courts will take a practical and common-sense view when assessing the contents of a Pay Less Notice. As long as the Pay Less Notice makes it reasonably clear what amount is being held and why, this should be sufficient.
In Thomas Vale Construction Plc v Brookside Syston Ltd [2006] EWHC 3637 (TCC) Thomas Vale tried to argue that although the notice said it was holding sums for making good defective works, it was invalid because it should instead have said that it was for a failure to use reasonable endeavours to rectify the defects. The judge considered that this argument was “artificial and contrived” and the notice was valid. It was observed in Grove that a notice is “intended simply to communicate why a certain payment was not to be made”.
Simplicity and ease of understanding are therefore key factors. Clearly set out the reasons behind the sums that have been calculated.
3. The contents of the notice should provide an adequate agenda for dispute about valuation and/or any cross claims
In Henia Investments Limited v Beck Interiors Limited [2015] EWHC 2433 (TCC), it was indicated that one way to test the validity of a Pay Less Notice is whether it provides “an adequate agenda for an adjudication as to the true value of the works and validity of the alleged entitlement” to payment.
This means that the Pay Less Notice should include the information that an adjudicator would need to know in respect of the dispute in an adjudication to decide the proper value (or ‘true value’) of the account.
When preparing a Pay Less Notice it is advisable to put your revised figures next to those in the payee’s application for payment and add a column for comments as to why your figure is less than the one applied for in relation to the relevant items, and explain any contra charges that had been introduced.
Does the Pay Less Notice set out the sum genuinely considered to be due?
In a more recent judgment, Downs Road Development LLP v Laxmanbhai Construction (UK) Ltd [2021] EWHC 2441 (TCC), payment notices were issued in payment cycles 31, 32, 33, and 34 giving a net amount for payment of £1 or £0.97, then followed with a payment notice a few days later in a substantially larger amount. In the case of the interim payment in question, it increased to £657,218.50!
The court found that the first payment notice was invalid as it did not set out the sum considered to be due or the basis of calculation, because:
- The covering email said that a second payment notice would be issued;
- Downs clearly envisaged that the second payment notice would set out a different figure which would be the figure it in fact considered to be due; and
- Whilst Downs may not have formed a view as to the precise amount it believed was due at the time of giving the first notice, it must have realised that a substantially greater sum was due.
The same principle applies to Pay Less Notices.
What should you do if you receive a Pay Less Notice?
When receiving a Pay Less Notice, check:
- Has it been issued in time? If not, it may be invalid.
- Has it been issued in accordance with the relevant contractual and statutory provisions referred to above? If not, it may be invalid.
- If it is valid but you do not agree with its valuation or contents then you can challenge it in adjudication (or court or arbitration, depending on what the contract says). You should assemble all of the documents, information and arguments that support your position.
Practical Tips for the contents of a Pay Less Notice
Whilst case law sets out the guidelines it can be difficult to understand what this means in practical terms. The following tips will help ensure that your Pay Less Notices comply with all the requirements:
- Make sure that the Pay Less Notice is issued at the right time and by the correct method (e.g. is email sufficient?).
- Label the document a Pay Less Notice and include a reference to the relevant clause (or section of the Construction Act) which entitles the issue of a Pay Less Notice.
- Very clearly set out the sum that you consider is due to be paid to the payee at the date of the Pay Less Notice. If this amount is £0 or is a negative figure (i.e. you are owed money), it is advisable to state that no payment is due to the payee.
- Provide a calculation which shows how you have arrived at the figure you have (i.e. the sum which is less than the notified sum). It is a good idea to also set out your reason(s) for paying less than the notified sum.
- Make sure that the Pay Less Notice sets out the sum genuinely considered to be due.
- Best practice is to attach all documentation to the Pay Less Notice that it refers to, even if you have previously sent it.
- If attached documents contain mathematical breakdowns, make sure that these are consistent with the calculations in the actual Pay Less Notice.
How CCC can assist
Whether you are issuing or receiving a Pay Less Notice, they can be complex and the issues difficult to navigate. We have extensive experience both with commercial assistance and dispute resolution and can assist with:
- Drafting a Pay Less Notice to make sure it is fully compliant.
- Advising on whether or not a Pay Less Notice is valid.
- Providing advice on the prospect of success to dispute a Pay Less Notice.
- Preparing a claim either to defend the validity of a Pay Less Notice, or bringing an action against an invalid Pay Less Notice.
