Payment disputes in the construction industry are rife and more frequently we see payments awarded by Adjudicators and subsequently enforced by the courts as a result of “smash and grab” adjudications where one party’s failure to carry out its obligations in respect of the payment procedure in the Housing Grants Construction and Regeneration Act 1996 (as amended) (“the 1996 Act”) results in another party’s financial gain.
In the past month, two cases considering the impact of not issuing payment or pay less notices as required by the 1996 Act were: Muir Construction Limited v Kapital Residential Limited a decision of 18 October from the Outer House of the Scottish Court of Session; and Adam Architecture Limited v Halsbury Homes Limited a decision of 2 November 2017 from the English Court of Appeal. Although each case was decided on different sides of the border, the relevant provisions of the 1996 Act that were considered broadly have UK wide applicability.
Before considering Muir and Adam, a brief recap of the 1996 Act requirements for payment and pay less notices:
|Must Specify:||Must be issued not later than:|
|Payment Notice||i. Sum payer considers due at the payment due date; and
ii. The basis on which that sum is calculated.
|5 days after the due date.|
|Pay Less Notice||i. Sum payer considers due on the date the notice is served; and
ii. The basis on which the sum is calculated.
|7 days before the final date for payment or such other period as agreed between the parties.|
Simple enough? In practice, NO! Muir and Adam highlight some of the difficulties:
Muir Construction Limited v Kapital Residential Limited  CSOH 132
In Muir the court had to consider whether a pay less notice issued by the Employer provided a basis on which the sum noted therein was calculated.
The court asked whether a reasonable recipient of the pay less notice would have been able to: work out the basis on which the figure in the pay less notice was calculated; understand how the figure was calculated; and make sense of the figure arrived at by the Employer. The Employer’s pay less notice sought to pay £0 to the Contractor on the basis that the value of remedying defects outweighed the sum held in retention. The court did not consider this a basis for substantiating the zero figure and deemed the pay less notice invalid.
While the decision does not analyse the full detail (or lack thereof) of the pay less notice, it does provide useful guidance that was previously lacking. The court set a minimum standard:
“[A] pay less notice in order to provide a basis needs at least to set out the grounds for withholding and the sum applied to each of these grounds with at least an indication of how each of these sums were arrived at.”
Adam Architecture Limited v Halsbury Homes Limited  EWCA Civ 1735
In Adam the contract between the Employer and the Architect was terminated and the Architect issued its final account. Among other matters, the court was asked whether the Employer’s failure to issue a payment or pay less notice in respect of the final account, resulted in the sum claimed by the Architect in its final account becoming the “notified sum”, by virtue of s.111 of the 1996 Act.
The parties did not dispute that s.111 applied to interim payments. It was also the Architect’s position that s.111 extended to final payments and the Employer disputed this point. Further, the contract between the parties only required the Employer to issue a pay less notice in respect of interim applications, not the final account. Following consideration of the “clear words” of the 1996 Act and a body of case law, the court confirmed that irrespective of the terms of the contract, s.111 did apply to both interim and final payment applications. Had the Employer sought to pay less than the notified sum it ought to have issued a pay less notice in respect of the final account. Its failure to do so rendered it liable to make payment to the Architect of the sum claimed in the final account.
This decision follows precedent and does not come as a surprise. It does however demonstrate the importance of contract operators having a sound understanding of the contract, and the payment provisions in the 1996 Act. The consequence of not being clued up could result in an Adjudicator’s award in favour of the Contractor, subsequent enforcement proceedings and the Employer having to pay up and argue later in a subsequent litigation or arbitration. These costs could be avoided if the correct knowledge and administrative procedures are in place from the contract’s inception.
Lessons to Learn
- Take care in drafting payment or pay less notices. Would a reasonable recipient of the document have a clear understanding of the reasons and figures?
- Be clear on the terms of the contract and the requirements of the 1996 Act.
- The requirement under the 1996 Act to issue payment and pay less notices does not die when the contract ends. If a Contractor submits a payment application after termination of the contract or practical completion, the Employer’s obligation to issue a payment notice or pay less notice remains.
- Even if a Contractor’s payment application appears invalid, an Employer should issue a payment or pay less notice to avoid potentially paying out the full sum claimed by the Contractor.
For more information, contact our Construction team.