Payments disputes are common in the construction industry; particularly, 'smash and grab' adjudications, where an Employer fails to serve a required notice in accordance with the payment mechanism.
It is important that paying parties find ways to keep on top of notice deadlines. The consequences of missing the deadlines can mean payments having to be made that do not reflect the true value of the work undertaken.
The Housing Grants, Construction and Regeneration Act 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009) applies to construction contracts. It provides that, unless the contract is under 45 days duration, the payee is entitled to payment by instalments. This entitlement comes with notification requirements.
Generally, the Act sets out that:
- A payment notice must be issued within five days of the 'due date' for payment. This notice must set out the sum considered due and the basis on which that sum is calculated.
- The payer must issue a pay less notice if it intends to pay less than the notified sum. This notice must set out the sum considered to be due and the basis on which that sum is calculated.
- Unless the payer issues its notices on time, it must pay the notified sum – normally being the sum in an application for payment or a payment notice – on or before the final date for payment.
The parties may agree different dates on which notices become due, but cannot contract out of the general need for notices set out in the 1996 Act. It is therefore important to understand the requirements of your specific contract.
Points to remember:
- Take care in drafting payment or pay less notices. Would a reasonable recipient of the document understand it?
- The requirement under the 1996 Act to issue notices does not necessarily end when the works are finished. If a Contractor submits a payment application after completion of the works, the Employer’s obligation to issue a payment notice or pay less notice may remain.
- 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.
How can we help?
If you have any questions about your contractual rights/obligations, including payment or pay less notices, please get in touch with a member of our specialist Construction Law team.