Adjudication Matters - February 2025

by Carly Thorpe, Seumas Cram and David Maclellan

Payment Notices and Pay Less Notices: A cautionary tale…

Placefirst Construction Limited v CAR Construction (North East) Limited

Background:

Placefirst Construction Limited (“Placefirst“) was engaged as the contractor in respect of works at Ridding Road, Esh Winning, Durham. Placefirst appointed Car Construction (North East) Limited (“CAR“) as its subcontractor, using a JCT D&B 2016 form of subcontract, as modified by a bespoke schedule of amendments (“the Subcontract“).

In respect of payment, the Subcontract provided that:

• CAR was required to submit interim payment applications by the 25th of each month
• the due date would be 16 days after the interim valuation date (which was the last calendar date of each month)
• the final date for payment would be 12 days after the due date
• Placefirst was required to issue any payment notice no later than 5 days after the due date. The Subcontract did not provide any specific requirements regarding the format of the payment notice.
• Placefirst was required to issue any pay less notice no later than 2 days before the final date for payment.

CAR issued an interim payment application to Placefirst on 24 July 2024. Placefirst responded on 31 July 2024 by way of an email purporting to attach a pay less notice and a separate document setting out a valuation of CAR’s payment application. The second attachment to Placefirst’s email set out the gross sum due to CAR along with a breakdown of the basis on which that figure had been calculated.

CAR subsequently commenced an adjudication against Placefirst, in which it argued that Placefirst’s email dated 31 July 2024 constituted neither an effective payment notice, nor an effective pay less notice. The adjudicator agreed with CAR and directed Placefirst to make full payment of the sum applied for by CAR in the July 2024 payment application.

Proceedings:

CAR sought to enforce the Adjudicator’s decision by way of Part 7 proceedings, whilst Placefirst commenced a Part 8 claim seeking a declaration that it had served a valid payment notice and/or an effective pay less notice, and that the Adjudicator’s decision should therefore not be enforced.

Whilst there was no dispute that Placefirst’s email dated 31 July 2024 had been served more than 2 days prior to the final date to payment (and so was clearly not too late), CAR sought to argue that it had been served too early to constitute a valid pay less notice. CAR argued that on the proper reading of s.111 of the Construction Act, an effective pay less notice can only be validly issued once a payment application has been deemed to constitute a payment notice (i.e. after the deadline for the paying party to serve a payment notice had passed).

Under the payment terms of the Subcontract, CAR’s interim application would have been deemed to have become the effective payment notice 5 days after the due date – i.e. when the date for Placefirst to issue its own payment notice had lapsed. At this point, the sum applied for by CAR in the payment application would become the “notified sum“, pursuant to s.110A(3) and s.111(2)(c). As set out at s.111(3), any pay less notice served by the payer will constitute an intention to pay less than the “notified sum“.

CAR’s therefore argued that Placefirst’s purported pay less notice could not be valid until the point at which the sums applied by CAR had become the “notified sum“. At the date on which Placefirst issued its purported pay less notice, CAR’s original payment application had not yet become the effective payment notice, and so the sums applied for had not yet become the “notified sum“. As a consequence, CAR argued that there was no effective “notified sum” for Placefirst to serve a pay less notice in response to at the time of the email dated 31 July 2024.

Decision

The Court rejected CAR’s arguments, and agreed with Placefirst that the email dated 31 July 2024 constituted a valid pay less notice. In particular, the Court found that a pay less notice can be validly served before the period for serving a payment notice has elapsed (and where the paying party has not in fact served a payment notice). Whilst the Court confirmed that a valid pay less notice cannot be served in advance of receipt of the relevant payment application, there is nothing to stop a paying party from serving a valid pay less notice once the application has been issued.

The Court additionally confirmed that a payment notice and pay less notice are both required to state the sum which the payer or payee considers due as at the date of the application, and state the basis on which that sum is calculated. The valuation document attached to Placefirst’s email dated 31 July 2024 was sufficiently clear as to the sum considered due to CAR at the date of the application, and the basis on which this had been calculated. The attachment was therefore sufficient to constitute a valid payment notice – notwithstanding that it had been served at the same time as the email attaching the pay less notice.

As a consequence of the above, the Court awarded judgment in favour of Placefirst and refused to enforce the Adjudicator’s prior decision in favour of CAR.

Takeaways

This judgment should provide some comfort to parties required to serve payment notices / pay less notices under construction contracts. The Court reiterated that it will not take an overly pedantic approach in deciding upon the validity of purported payment notices or pay less notices. However, it remains essential to ensure that such notices contain the information required under sections 110A and 111(4) of the Construction Act. These sections require that payment notices and pay less notices specify the sum considered to be due at the time of the notice, and the basis upon which that sum has been calculated. Parties must additionally ensure that the deadlines for service of such notices are met, or risk facing smash and grab applications from unpaid parties.

Payment Notices and Pay Less Notices – Continued

Bon Groundworks Limited v Project Beckenham Limited

Background

This was an unreported case heard before the High Court (TCC) in Leeds. Similar to Placefirst this case involved the enforcement of an adjudicator’s decision following a smash and grab adjudication.

However, unlike in Placefirst, the adjudicator’s decision was enforced despite Project Beckham Limited raising various defences premised upon an interpretation of the payment provisions under the Scheme, and issues of natural justice.

Takeaways

This judgment aligns with the typical narrative in respect of resisting adjudication enforcement, particularly with respect to smash and grab adjudications. Resisting enforcement of these adjudication decisions is very difficult, and a party on the wrong side of a smash and grab ought to strongly consider the merits of their position at the very outset of any adjudication for this reason.

Payment Notices and Pay Less Notices – a practical refresher

The focus on payment provisions in Placefirst and Bon Groundworks warrants a practical refresher of payment terms under the Construction Act.

Where a party to a construction contract agrees to carry out works which are specified or predicted to take more than 45 days to complete, that party will be entitled to stage/interim payment [1]. In practice, this usually means that the party carrying out the works will submit monthly payment applications reflecting that party’s assessment of the value of the works carried out up to a specified date, which is commonly referred to as the “due date” [2].

In the event that the paying party accepts the valuation set out in the payment application, it will be required to make payment by the final date for payment [3]. The construction contract should clearly set out the basis for calculating the final date for payment.

On the other hand, where the paying party disputes the sums applied for, it must serve either a Payment Notice or Pay Less Notice within strict timeframes.

The default position under the Construction Act requires that the paying party serves a Payment Notice no later than 5 days after the due date [4]. This timeframe can be extended or reduced by way of bespoke drafting within the construction contract. The Payment Notice must specify (i) the sum which the paying party considers due as at the due date [5] and (ii) the basis on which that sum has been calculated [6].

Where the paying party serves a Payment Notice, the sum stated in the Payment Notice will become the “notified sum”, and the paying party will need to ensure that this sum is paid by the final date for payment. Where the Payment Notice states that the sum due is zero, then no payment will be required.

If the paying party declines to serve a Payment Notice within the required timeframe, then the sums set out in the payment application will become the notified sum.

The notified sum must be paid by the final date for payment – unless the paying party serves a Pay Less Notice. A Pay Less Notice must set out (i) the sum which the paying party considers due on the date the Pay Less Notice is served [7] and (ii) the basis on which that sum has been calculated [8]. Parties should ensure that the construction contract is clear as to when any Pay Less Notice is to be served. If the contract fails to specify when Pay Less Notices should be served, then the Scheme for Construction Contracts will apply [9], with the effect that any Pay Less Notice must be served no later than 7 days prior to the final date for payment [10]. Where the parties wish to extend or reduce the timeframe for serving a Pay Less Notice, this must be set out explicitly within the contract.

Where a paying party fails to serve either a Payment Notice or a Pay Less Notice within the required timeframes, then it will be liable to make full payment of the sums set out in the relevant payment application by the final date for payment – regardless of the merits of the payment application. If a paying party fails to make payment in circumstances where it has failed to serve either a Payment Notice or Pay Less Notice, the unpaid party may commence a “smash and grab” adjudication to force payment of the applied-for sums. Additionally, the unpaid party may elect to suspend performance of its works where the paying party fails to make payment of the notified sum by the final date for payment (assuming it has not served a valid Pay Less Notice) [11].

Parties should therefore ensure that sufficient attention is given to the payment provisions of a construction contract in both the drafting and contract administration phases. In particular, it is crucial that paying parties understand the timing and content requirements applicable to Payment Notices and Pay Less Notices, in order to ensure that the right to challenge disputed payment applications is retained.

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[1] Section 109(1) Construction Act 1996

[2] Section 110(1)(a) Construction Act 1996

[3] Section 110(1) Construction Act 1996

[4] Section 110A(1)(a) Construction Act 1996

[5] Section 110A(2)(s)(a)(i) Construction Act 1996

[6] Section 110A(2)(s)(a)(ii) Construction Act 1996

[7] Section 111 (4)(a) Construction Act 1996

[8] Section 111(4)(b) Construction Act 1996

[9] Section 117 Construction Act 1996

[10] Schedule 1, paragraph 10 Scheme for Construction Contracts (England and Wales) Regulations

[11] Section 112 Construction Act 1996