The Importance of Pay Less Notices

We recently acted for a construction client regarding a winding up petition, to successfully recover all of their claim for a Pay Less Notice. The case really highlighted the importance of getting the procedure right – our client was really appreciative of our work, as they had initially offered to settle for substantially less than was recovered after our intervention.

A number of High Court cases have underlined the importance of issuing payless notices correctly. It is essential that the correct procedures are followed to maintain cash flow until final account stage.

An accurate payless notice is really important if a deduction from the amount of a payment application is to be upheld. Construction companies may not be able to quote the Housing Grants Construction and Regeneration Act 1996 word for word, but the string of High Court decisions demonstrates how vital it is to instruct people who can.

The courts have commented on the “draconian” effects of not serving valid payless notices. If one is not served (or is not served in time) and regardless of the merits, the entire sum claimed in the payment application is payable.

The courts have also stated however, that if you are on the wrong side of a dispute about payless notices, the act is not to permanently deprive the payer of an interim payment of its money, but to maintain cash flow until a “proper” reckoning is made at final account stage.

That is all very well, but what happens if the payee goes insolvent (or simply disappears) in the meantime?

From a contract management perspective, how do you make sure that the payment procedures are correct?

The obvious place to start is to understand the payment provisions and timescales in your contract, or those which are implied if it is not act compliant. It is absolutely imperative to make certain that all the notices that have to be served are served and on time.

As far as payless notices are concerned, they actually need to be a payless notice. You might wonder if there is any room for manoeuvre, if there is any doubt as to whether the document served on the other party will be sufficient.

Once again, the courts have helpfully stepped in to offer some guidance. A payless notice should be clearly identified as such and served strictly in accordance with the applicable contract terms and its administrative rules. The other party must be able to objectively understand that it is intended to be a payless notice.

The notice should contain sufficient information, including what might be needed to form the basis of an adequate agenda for adjudication for the true value of the relevant part of the works.

Our skilled and experienced Litigation team have a wide depth of knowledge relating to the construction industry – if you are experiencing issues with enforcing a contract you can contact us at ph@rogers-norton.co.uk.