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Pay less notices explained

21 Sep 20 Jonathan Nugent, managing director of Arbicon ADR Ltd, explains pay less notices and what to do when you receive one

When a pay less notice is served it means that the previously agreed payment is not now going to be paid, in whole or in part.

If you disagree with a pay less notice that you have received, but the notice is valid, then formal proceedings such as adjudication become the only option open. You will likely need professional help to take your payment dispute forward.

Despite the detailed statutory law on payment in construction contracts being in place for almost 10 years, it is still not always understood and leaves many confused. Here are some frequently asked questions:  

What is a pay less notice and what does it mean?

A pay less notice is the opportunity for a paying party to change their mind on what has already been agreed on payment, altering the payment due to the payee near to the end of the payment cycle. It is as defined above already, a legal “payment notice” that sets out the “notified sum” for payment even if it is zero or negative. If it is validly served it is the sum due and can only be overtunned by an adjudicator, arbitrator or the court. It means your payment is being legally reduced and you potentially have a dispute.

Conversely, if you are the paying party and you have failed to serve the initial “payment notice” within five days of the contract payment due date and the payee has made a valid payment application which is required by the contract, if you do not serve a valid pay less notice, it means the payee’s payment application becomes a default payment notice automatically and the sum due. You lose the chance to challenge the payee and must pay what the payee has asked for.  

When and how should a pay less notice be served, what form and content should it be in?

If you are the payer and you want to reduce the sum certified already in the same payment period, you should serve a pay less notice. You must make sure you can prove that the other party has received the notice before the “prescribed period” and after the expiry of 5 days from the payment due date. The “prescribed period” is open to agreement, but it must work within the payment period otherwise it will be an inadequate mechanism and the scheme will apply. By example, the scheme is seven days and JCT contracts are five days.

There is no particular form that a pay less notice should be in, except that it must be in writing, intentional, unambiguous and clear that it is a pay less notice. It must include a statement of the sum due and how that sum is calculated, including the exact calculation. There is no set level of evidence required to back up the calculation, there just needs to be some kind of basis showing what it is made up of. It would of course be sensible to provide evidence in respect of any reductions, if the reasons are inadequate, false or unreasonable, such will fall foul in adjudication.

One important point that is often missed regarding what should be included in a pay less notice is that the value of works at the date of serving the notice must be incorporated. Work which could have moved on considerably since the valuation must therefore be included. This point is seldom appreciated or understood by claims consultants or solicitors acting for payees. The value may actually be greater than the original agreed sum due.

How do I challenge a pay less notice if I disagree with it? Is it set in stone?

If you are a payee and do not agree to the reductions as often is the case, it is understandable that you will want to challenge the new value. The first thing to do is to raise your objections and seek to negotiate a different payment. For example, contra charges, damages, blame, losses for delays or abatement for quality suddenly appear in the penultimate evaluation in a pay less notice, which sadly is normal and often underhanded. Depending on the extent, dialogue might quash the accusations together with an assessment of the value of work done at the date of the pay less notice and a withdrawal from the battle agreed. However, if a full-blown dispute arises as the payer will not stand down the Notice, if validly served, will need to be challenged formally, mostly practically by adjudication.

The pay less notice might not be validly served, which will mean the Notice falls away legally if so. However, this is a challenge that should be canvassed to the payer to attempt to quash the attempt to pay less or again if that does not work, an adjudicator can determine the validity. See later question on invalid pay less notices.

An adjudicator has the power to deal with any dispute arising under the contract (Section 108 of the Construction Act). A pay less notice dispute arises from the contract, thus an adjudicator can determine the disputed pay less notice as to its true value and order a payment if one is due. The Notice is therefore not set in stone and you can challenge it but you will need to adjudicate it to determine the true value.

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Does a pay less notice need to be signed?

There is no legal requirement to sign a pay less notice, the legal requirement is that the sum due is stated and the basis of calculation given. As noted above it needs to be effectively served, that is, received by the payee.

Can a pay less notice be negative?

A pay less notice can be negative; it simply needs to calculate the sum due. If it is negative it is saying the payee has been overpaid. Generally, that means no further sums are due, but if the contract expressly requires an overpayment to be repaid then the payer would be able to demand repayment. How practical that is and depending on the value involved and what stage the project is at determines whether or not an adjudication would be commercially viable.

Can a pay less notice be served one day before payment legally?

As noted above the parties are free to agree the “prescribed period” for apay less notice, that is the deadline before payment is actually due to be made. If the contract has been amended to one day before the final date for payment then this is legally valid. As an example, contracts where 90-day payment terms have been agreed with a provision to allow service of a pay less notice one day before payment is due. That legally entitles the payer to not pay for three months and then at one minute to midnight wipe out the whole agreed payment due with a pay less notice. If you are a victim of this kind of conduct and a dispute arises, the value of works on day 89 needs to be assessed and an adjudication option considered.

When is a pay less notice invalid?

As can be drawn from all the points above the pay less notice must comply primarily with the Construction Act, the contract and where the contract is inadequate it must comply with the scheme. If it does not it will be invalid. Determining that compliance can be a grey area, which is always the cause for legal argument and dispute.

The content of the pay less notice is not relevant to the validity of a notice, if a basis and calculation is provided it is classed as one. Citing the paying party’s reasons for reducing the money is not a pay less notice validity point and will not make it invalid. An adjudicator will determine the disputed content when valuing the pay less notice.

To be valid the pay less notice must have form/substance, intent and timely delivery.

Form and substance: the pay less notice must be presented correctly, clearly and unambiguously showing the amount to be paid/repaid/zero and the basis for calculation included.

Intent: there must be a clear and unambiguous statement to show that the document served is a pay less notice. Simple canvassing of proposed figures and issues without any clear intention, that such canvassing is a pay less notice might later risk losing an argument that the document is in fact a pay less notice and determined as void.

Timely delivery: the pay less notice must be served within the time parameters set out in the contract after the Payment Due Date, plus 5 days and before the “prescribed period”. It must also be proven to be delivered to the payee. It is possible that a Notice is served, but if the contract terms are in a state of flux and the reality is that the payment periods are different, perhaps due to the scheme applying. A consequent error in timing might result in the pay less notice being served outside the time period, making the notice void.

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