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Articles from the Silver Shemmings Ash Team on contractual matters, recent case law changes and items of interest in the construction and property world

Payment Notices & Payless Notices by Richard Silver

August 15, 2018 | Silver Shemmings

Payment Notice or Payless NoticeIntroduction
In a change of approach to earlier decisions in ISG v Seevic and Galliford Try v Estura, it was held in February 2018 in Grove Developments v S&T that an employer can by way of an adjudication dispute the amount due to a contractor as stated on an interim payment application, despite the fact that the employer has failed to serve a Payment Notice or Payless Notice. This means that an employer is entitled to commence a claim for a finding as to the true value of the sum due.

What actually is an interim Payment Application, Payment Notice and a Payless Notice?
Pursuant to the Housing Grants, Construction and Regeneration Act 1996 (“Construction Act”), a payment regime must form part of all construction contracts if the Works is specified, or estimated to take, more than 45 days. Such a payment regime must set out a process for determining when and what payments become due and provide for a final date for payment

An interim Payment Application from the payee is an application to the payer setting out the sum the payee considers to be due and the basis of the calculation. Following this, the payer can elect to serve a Payment Notice, which pursuant to Section 110A of the Construction Act, must be given to the payee no later than five days after the payment due date, which is the date payment becomes due – this will be set out as a requirement under the construction contract. Such a Payment Notice will specify the amount the payer considers to be due at the due date and the basis on which the amount has been calculated.

In this instance, a Payless Notice is an opportunity for the payer to pay less than the Notified Sum (the sum detailed in the interim payment application). Unless the contract states otherwise, the default position is that the deadline is seven days before the Final Date for Payment. Like a Payment Notice, a Payless Notice must specify the amount considered to be due at the date the notice is given and the basis of the calculation.

How can you fail to serve a Payment Notice or Payless Notice?
There are a number of ways that someone can fail to serve a Payment Notice or Payless Notice:

  • You do not serve a valid notice (i.e. you do not specify the amount considered to be due and/or the basis of the calculation)
  • You do not serve a timely notice (i.e. you do not comply with the aforementioned deadlines)
  • You simply choose to not serve a notice

What are the consequences of failing to serve a Payment Notice?
If the payer fails to issue a Payment Notice then:

  • If the contract expressly provides for the giving of a Payment Application and a valid Payment Application has been submitted then the amount stated in the Payment Application becomes the Notified Sum and the payer is required to pay the amount stated in the Payment Application, provided that a valid Payless Notice is not issued
  • If the contract does not expressly provide for the giving of a Payment Application, but the payee has issued a Default Payment Notice as soon as the payer defaults, then the payer is required to pay the amount stated in the Default Payment Notice, provided that a valid Payless Notice is not issued
  • If the payer fails to issue a Payment Notice, but issues a valid Payless Notice, then the payer is required to pay the amount stated in the Payless Notice which will be the sum less than the Notified sum

ISG v Seevic and Galliford Try v Estura
It was held in both of these cases that not only, as mentioned, is the payer required to pay the amount stated in the Payment Application / Default Payment Notice, if the payer fails to issue a Payment Notice or Payless Notice, but that the payer is deemed to have agreed to the amount stated in the contractor’s interim payment application. This meant that the employer (i.e. payer) could not challenge the ‘true value’ in adjudication.

The case of Grove Developments v S&T
Contrary to the above two cases, it was held in this case that the payer, who has failed to issue a Payment Notice or Payless Notice, can pay the contractor the sum stated as due in the contractor’s interim application, and then seek, in an adjudication to dispute the sum that was due. The main reasons why this was permitted are summarised as follows:

There is no limitation on the jurisdiction of the adjudicator – in any case where the parties have conferred upon an adjudicator the power to decide all disputes between them, pursuant to paragraph 20 of the Scheme, “an adjudicator may open up, revise and review any decision taken or any certificate written by any person referred to it in the contract unless the contract states that the decision or certificate is final and conclusive”.

The JCT contract provides a deliberate distinction between “the sum due” and “the sum stated as due”. Clause 4.7 mentions “the sum due”, which is in reference to the true valuation. Contrastingly, clause 4.9 of the JCT contract provides that, in the absence of a Payment Notice and/or a Payless Notice from the employer, it is “the sum stated as due” which will be payable. An employer should have the right to refer the dispute about the true valuation to adjudication, once he has paid the sum stated as due, because of considerations of equality and fairness. The contractor has the right to refer a dispute about the true value to adjudication if the employer serves a notice which is in a lower sum that that for which the contractor applied, so it be would be wrong from prohibiting the employer from doing that which the contractor can do.

Conclusion
The judgment in Grove Developments v S&T states that where a paying party fails to issue a Payment or Payless Notice:

  • it is still required to pay the amount in the payee’s application, BUT
  • is now able to refer a dispute by adjudication as to the true value of the works – the paying party is no longer deemed to have agreed to the amount stated in the contractor’s interim payment application

Author Richard Silver is Senior Partner at Silver Shemmings Ash. He is multi qualified as a Barrister, Solicitor & Chartered Quantity Surveyor with over 30 years of experience in the Construction Industry

Aside from his work globally as a legal advisor, his main focus is dispute resolution, encompassing the Construction, Building, Rail & Civil Engineering sectors. Having acted as Arbitrator, Adjudicator, Mediator, Lead Representative and Expert Witness on quantum, programme & planning he is widely experienced, as Lead Representative & Advocate, in all forms of Dispute Resolution

At Silver Shemmings Ash, we provide seminars and training alongside our core activities in contentious and non-contentious matters, the purpose if these is to facilitate a greater knowledge and understanding of construction and property law. There remains a considered lack of training in such areas for companies and one to which we look to address

 


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