Linzi Hedalen, partner at Dentons, explores pay less notices and the provisions to be aware of
RECENTLY, we have noticed a marked increase in instructions to issue pay less notices. Mostly, employers are seeking to levy liquidated damages on a delayed project or they are disputing the true valuation of the works to date. Additionally, with the current state of the economy, stalled projects and rising contractor insolvency, employers are being even more cautious when it comes to releasing money to a contractor.
However, upon being instructed to review notices drafted by clients, or reviewing purported pay less notices already served, it is clear that many underestimate the criticality of drafting and serving the pay less notice correctly. Accordingly, the below sets out, at a very high level, key aspects of a pay less notice which the paying party should ensure it gets right in order to pay less, and which the payee party should assess critically to consider if the notice is in fact valid.
What is a pay less notice and why are they issued?
A pay less notice is the means by which a paying party (the employer) notifies the payee (the contractor) that it intends to pay less than the sum notified by the contractor in its application for payment or the sum certified as due in a payment certificate.
It is a right offered to the employer under the Housing, Grants, Construction and Regeneration Act 1996 and, provided certain requirements are met (as prescribed by the Act and contract (or the Scheme if the contract has an inadequate payment mechanism)), it allows the employer to withhold monies from the contractor legitimately.
Form and content
Unless provided for in the contract, there is no prescribed form that a pay less notice should take, but it should be in writing and clear that it is a pay less notice. The notice should specify the sum that the employer considers due at the date of the notice and the basis on which the sum is calculated. It is immaterial whether the sum considered due is zero or a negative figure.
Importantly when it comes to issuing a pay less notice, it must be given and received no later than the prescribed period before the final date for payment. Unless there is a specific reason, it is always good practice to issue a pay less notice earlier than the last possible date for receipt by the contractor. This avoids any arguments over days to be counted, which are quite common depending on the wording of the contract.
Standard form contracts will provide for the prescribed period in the payment provisions. However, we regularly see amendments to this period, anywhere from five days to one day before the final date for payment. Therefore, if you are an employer, you should make sure that your notice is received in a timely manner and, if you are a contractor and receive a pay less notice, always check the contract and any amendments to see if the notice has been given out of time. If it has, you may wish to pursue a smash and grab adjudication.
Deemed receipt provisions should also be considered in the absence of proof of delivery, as this may also affect when you should aim to deliver the pay less notice.
In standard form construction contracts, there are notice provisions which set out how a notice should be issued. Typically, these will include postal or hand delivery, although email is also becoming a regular method.
The address will usually be stipulated in the contract. Often this section is not completed or the addresses may change. Ideally, you should clarify the position before serving any notices. This will avoid any argument that the notice was not validly served.
Also worth a mention is that, if a pay less notice is being issued to levy liquidated damages, then under standard form contracts such as the JCT there are notices that must be issued before liquidated damages can be deducted. Therefore, if an employer wishes to deduct liquidated damages from a sum due, it should make sure any advance notices have already been issued.
Consequences of invalid pay less notices
If an employer does not issue a valid pay less notice on time, then it will be contractually bound to pay the sum due, which is often the sum contained in the contractor’s application for payment.
If the employer does not then make payment of that sum, there is a risk the contractor may suspend works until it is paid or adjudicate.
If the employer does issue a valid pay less notice, then the contractor will receive less than what it has claimed and will either need to try to resolve the matter through discussions, or adjudicate to have the value of the works determined. There are, therefore, quite costly consequences for both parties when it comes to pay less notices.
Accordingly, it is recommended that any party wishing to pay less or on the receiving end of a pay less notice reviews its contractual position in terms of validity and seeks advice where appropriate.