Lessons to Learn in Construction

Our construction team successfully defended an Adjudication brought against its contractor client for £350,000 by a subcontractor. The case was largely successful due to establishing through expert forensic evidence that a quotation for a fixed fee had not been received by email. In other cases in the past few months, issues ranged from the validity of Pay Less Notices and also payment terms.

This lack of clarity has led to adjudications which could have been avoided.

The Housing Grants Construction and Regeneration Act 1996 (“the Act”) brought in to force a clear procedure for procuring payment and objecting payment should the contract in place between the parties not provide its own mechanism. .

The procedure is as follows:

• The subcontractor applies for payment to the main contractor stating how much is due.
• 7 days later is the ‘Due Date’. This is not the date the money is paid but rather a legal term to start the next stages of the payment process and acts as a reference point in time for other processes. Importantly it is the point in time for which the dates of the Payment Notice, Pay Less Notice and Final Date for Payment are based on.
• 5 days after the Due Date the main contractor must issue a Payment Notice or a Pay Less Notice stating how much they intend to pay and showing the calculation that forms that valuation.
• 14 Days after the Payment Notice or Pay Less Notice is the Final Date for Payment. If the parties agree the value due the payment is made or; if they cannot agree the value the parties will refer the dispute to an Adjudicator.

The appointment of adjudicators and provisions for Pay Less Notices are governed by The Scheme for Construction Contracts (“the Scheme”)

On the face of it this process seems fairly simple but yet is the subject of many adjudications.

Two recent adjudications even concerned the same invoice.

The first issue was the subcontractor having a rather shambolic way of invoicing our Client. There were a number of administrative errors with the invoice and it was rescinded and re-issued with revised numbers. Furthermore two invoices were later sent with the same invoice number but for different amounts and it had been sent to our Client by two separate companies.

The subcontractor also maintained that the invoice was physically handed to our Client some months earlier but had no proof. Our client’s evidence was accepted.

The issue here is timing. The issuing of the Invoice is key to setting the timeframes for the rest of the payment procedure following the Act. If it is not known or agreed when the Application for Payment occurs then there is the potential for lengthy arguments to ensue regarding whether a Pay Less Notice has been issued in time or when the Final Date for the Payment is.

Following the Adjudicator finding in our client’s favour the subcontractor referred the issue to another Adjudication, this time submitting that the Payment Application was served on a different date.

In another Adjudication, we argued that a valid Pay Less Notice had been issued within the correct time frame. The consequences of issuing a Pay Less Notice out of time is that the main contractor is liable for whatever figure is on the Application for Payment. We argued that a valid Application for Payment had not been received until a certain date and as such relied on an email served on time as our Pay Less Notice.

If it is ambiguous as to when a payment application has been issued it will naturally be ambiguous as to if a Pay Less Notice has been served on time, it is in that ambiguity that costly and time consuming arguments thrive

The requirements under the Scheme for a Pay Less Notice to be valid are as follows:

• It must clearly state what value the main contractor believes is the correct amount due for the work carried out; and
• How they have calculated that figure.

There is no further guidance on format, the document does not have to state that it is a Pay Less Notice. It is easy to see how parties can attempt to rely on all sorts of documents as Pay Less Notices. Once again, these can lead to drawn out tedious arguments in adjudications as to what constitutes a valid Pay Less Notice.

Whenever drafting a Pay Less Notice, it is drafted with absolute clarity, clearly setting out the amount the issuing party intend to pay and how that figure was reached. The more detailed the calculation the better. Whilst is not a requirement under the Scheme it is good practice to mark the document as a Pay Less Notice, heading the email as Pay Less Notice and if sent under a cover letter, state clearly that a Pay Less Notice is being issued.

We are regularly advising on Construction Law and drafting the relevant documents such as Pay Less Notices, Referral Notices and other Adjudication documents. With the government’s current drive to ‘Build Back Better’ and focus on these types of projects we can only see more on the horizon. From drafting clear documents to avoid disputes and drafting the necessary documents as a result of disputes, we have knowledge and expertise in all aspects of Construction Law and offer well informed advice to all our construction industry clients.