When a Pay Less Notice is served it means your payment that you have already agreed is not now going to be paid in whole or in part. Arbicon are often asked for help about what it means and how to deal with this aspect of the payment process.
A Pay Less notice is a formal legal written document the reduces the sums due. The reasons might be due to accounting error, delays, defects or plain deliberate reduction.
If you disagree with a Pay Less Notice that you have received, but the notice is valid, then in a nutshell, formal proceedings such as Adjudication is the only option and you will need professional help to take your payment dispute forward.
Despite the latest statutory law on payment in construction contracts being in place for over 12 years, it is often misunderstood and confuses the parties. Typical questions we are often asked in respect of a Pay Less Notice include the following:
Frequently Asked Questions on Pay Less Notices
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 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 overturned 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 5 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.
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 pay less notice. 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 is commonplace and often underhanded. Depending on the extent, effective dialogue might resolve the accusations, establish a new increased value of work done at the date of the Pay Less Notice and a withdrawal from the dispute. However, if a full-blown dispute arises as the payer will not stand down the Pay Less 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. The challenge on validity should be canvassed to the payer to attempt to make them withdraw or if that does not work, an adjudicator can be appointed to determine the validity. The validity of the Pay Less Notice will be determined construction contract terms, timing and content. See later questions 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 construction 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 Pay Less Notice is therefore not set in stone and can be challenged by using an Adjudicator.
When should a Pay Less Notice be served? 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 start of 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 "prescribed period' under the Scheme is 7 days and JCT contracts are 5 days before the end of the payment period.
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 is a must that proper evidence is provided to back up any reductions, if the itemised reasons are inadequate due to lack of evidence, including bare, false or unreasonable statements and values, such items will be struck through with the Adjudicator’s thick black pen.
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.
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. However, the Construction Acts leave it open for the parties to agree how contract Notices shall be served, so care should be taken at the procurement stage on identifying any specific onerous procedures!
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 a Pay Less Notice, that is the last day a Pay Less Notice can be served 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, provisions of the Scheme are imported. If the Pay Less Notice is non-compliant it will be invalid. Determining that compliance can be a grey area, which is always the cause for legal argument and dispute.
The Pay Less Notice must state the sum due and the basis for calculation. Simply listing the paying party’s reasons for reducing the money is not a Pay Less Notice, it must make a statement at the bottom of what is due.
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 will risk losing an argument that the document is a Pay Less Notice and it might be judged 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 Pay Less Notice void.
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The Law on Pay Less Notices A Pay Less Notice is a “Payment Notice” pursuant to the Construction Acts[1], which set the law out under Section 110 and for Pay Less Notices under Section 111. Briefly, these Sections set out that payment under a construction contract must be “notified”, either by a Payment Notice or Pay Less Notice and in the absence of either of these a Default Payment Notice is served by the payee. There are thus three types of “Payment Notice” that might achieve the “notified” payment during the relevant payment period. The contract must comply with the Construction Acts on payment, any clause that does not comply falls away and if absent then the Scheme[2] rules on payment are implied. The position generally is that in a given payment period the payee has to ask for the money and the payer has to respond, the result being an obligation to make an imminent payment of a defined sum. If either party fails to do this they do so at their peril. Specifically, looking at the Pay Less Notice, the Construction Acts rule under Section 111(3) that the payer can give this notice to pay less than a previously notified sum; and under section 111(4) that the notice must (a) contain the actual sum the payer considers due on the date the notice is served and (b) the basis on which the sum is calculated even if the sum is zero. Section 111(5) further requires the Pay Less Notice to (a) be given no later than the “prescribed period” and (b) not before the time the first/original Payment Notice is due. (So the start point is 5 days after the payment due date). The “prescribed period” is the agreed or implied period just before the Final Date for Payment, by which a Pay Less Notice can be served. It is open for the parties to agree the “prescribed period” (Section 111(7)) or the Scheme applies, the Scheme says 7 days before the Final Date for Payment. A valid service of a Pay Less Notice is open to error in both timing and form, falling foul of such will make the notice void. Arbicon have adjudicated countless cases where the Pay Less Notice was void and payment of the payee payment application/invoice has been due in default. There have been several adjudication enforcement cases that have dealt with the validity of “Payment Notices”, the principles that generally arise are all to do with “Payment Notices” being clear and intentional. The sum notified must clearly be set out and the basis on which the sum is calculated must be given with the notice. The Notice must be unambiguous and clear. Importantly it also needs to express the intention that it is a Payment Notice for the relevant payment period. The cases also deal with the importance of timing of the purported Payment Notices which is paramount. |
In summary, if a dispute arises from a Pay Less Notice being served, it is a concern and will require expert assistance. Arbicon can evaluate the validity and the content, including the actual value of work done at the Pay Less Notice date and the spurious or otherwise reasons for paying less. Our expert team can help you challenge a Pay Less Notice, we can take the matter to adjudication and recover payments due.
[1] Housing Grants Construction & Regeneration Act 1996; updated by Local Democracy, Economic Development & Construction Act 2009
[2] The Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011