Pay less notices: clearing up confusion
The Construction Act changes last autumn has caused uncertainty over pay less notices. Laura Phoenix from Thomas Eggar explains the criteria for an effective pay less notice, and clarifies the wording of the new act.
Confusion about pay less notices has become common as the construction industry gets to grips with changes to the Construction Act, which came into force last Autumn.
It is crucial that a paying party grasps the statutory requirements for pay less notices.
An ineffective pay less notice leaves the payer (usually the client) with little alternative than to pay a sum notified no matter how strongly it disagrees with the figure in question. This must be taken all the more seriously now that payment notices can be issued by the payee (usually the contractor).
The amended Construction Act allows the parties to negotiate and agree whether the client or the contractor issues payment notices.
Where in accordance with tradition, the client is obliged to issue payment notices under the contract, that obligation now has teeth: the contractor can issue a notice of default specifying the sum it considers due if the client misses a payment notice deadline.
The client then has one more ‘bite at the cherry’ which if missed or inadequately performed results in an obligation to pay the sum set out in the contractor’s notice. This ‘bite’ is the pay less notice.
Differences to witholding notices
Statutory requirements for a pay less notice differ from more familiar requirements for a withholding notice (to specify the amount(s) to be withheld and the ground(s) attributable to each amount). These still apply to construction contracts entered into before 1 October 2011.
The new Section 111 (3) of the Construction Act allows the client (or client’s specified person e.g. the contract administrator) to give the contractor notice of the client’s intention to pay less than the notified sum.
Section 111(3) requires a pay less notice to specify:
- The sum that the payer / specified person writing the notice considers to be due on the date the notice is served (even if this is zero), and
- The basis on which that sum is calculated (again, even if the sum is zero).
To be effective, a pay less notice must be served before any contractual deadline.
If no deadline is expressly agreed, then the amended Scheme2 implies a strict timetable into the contract.
Provided you use an up to date standard form (e.g. JCT 2011), your contract will be compliant with the new Act. Check that your contract refers to pay less notices and generally complies with the 2011 legislation before entering into it. – A non-compliant contract will have unintended consequences.
Question over wording
The wording of new Subsection 111(3) (a) raises an interesting question: What does “the sum that the payer considers to be due on the date the notice is served” mean? The sum that was due at the due date? Or is a further valuation required to take account of work done between the due date and the date of the pay less notice?
The question has given rise to different opinions amongst legal advisors. The answer lies in the use of the word ‘due’. Payment for work done between the due date for a period of work and the deadline for a payless notice does not fall due until the next due date.
In our opinion, the pay less notice should therefore start by setting out the sum which the notice writer (the payer) considers was due at the payment due date even though the figure is determined at the date of service of the pay less notice. A pay less notice can then go on to take account of set-offs arising after the most recent due date but before the deadline for issuing a pay less notice.
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This article was published on 01/02/2012 (last updated on 01/02/2012).