Payless notices: Is it crystal clear?

The status of interim applications issued a few days late, the basis on which an employer can elect to “pay less” than the sum certified and whether an assessment of time due to the contractor is a condition precedent to levying liquidated damages: these are the kind of issues that keep contractors and employers (not to mention their lawyers) up at night. 

Fortunately, in the recent decision in Henia Investments Inc vs Beck Interiors Limited, Mr Justice Akenhead considered these very issues and provided some welcome guidance.

Here, Henia, the employer, entered into an amended JCT contract with Beck, the contractor, for fit out and new construction works. The original contract sum was just under £4m and completion was set for 5 September 2014.

The contract provided that:

• Interim payment due dates were 29 November 2013 and thereafter on the 29th of each month  
• The contractor could make interim applications no less than seven days before the due date
• The contract administrator (CA) must issue an interim certificate no later than five days after each due date.

Unfortunately, the project did not go to plan: the works were delayed by over 11 months, leading the contract administrator to issue a non-completion certificate and costs spiralled. Beck issued a payment application which Henia disagreed with and so Beck referred the matter to adjudication.

In the meantime, Henia issued Part 8 proceedings which resulted in Mr Justice Akenhead having to decide which applications, notices and certificates were valid and effective in circumstances where:

• The CA issued a non-completion certificate on 5 September 2014, despite the contractor complaining that he had not assessed the contractor’s claim for an extension of time (EOT)
• The contractor issued an interim application 18 on 28 April, six days late
• Interim certificate 18 was issued on 6 May 2015, one day late
• No interim application for payment was issued by the contractor in May 2015
• Interim certificate 19 was issued on 4 June 2015, three minutes late
• The employer issued a payless notice in time, on 17 June 2015, saying that, based on the previous valuation certificate 19 and its entitlement to liquidated damages, there was “£0” due to the contractor. 

In considering this muddle of administration and missed dates, the court held in favour of Henia. Key points arising from the judgment include:

• If a contractor issues a payment application late, not only is it invalid for the assessment on the due date it missed but it does not, by default, constitute an effective or valid interim payment notice for the next payment due date. This meant that interim application 18 was not a valid payment notice for 29 April and nor was it a valid application for the 29 May due date. The court held that to be a valid interim application, the contractor needs to make it clear that the application is an interim application relating to a specific due date and what’s more the application should state what the contractor considers to be due.
• An employer can serve a payless notice to challenge a CA certified valuation or, where applicable, an interim payment notice. So here, had there been a valid application 19, it was held that the payless notice would have been valid. This means that where the employer disagrees with the interim application submitted by the contractor but where the CA’s certificate was issued out of time or the employer simply disagrees with what the CA has certified, the employer may issue a payless notice based on its own valuation, whether that is the same, or less than the CA’s out of time assessment. 
• The CA’s failure to make the EOT decision does not invalidate the CA’s non-completion certificate or otherwise prevent the employer from deducting and/or claiming liquidated damages. Here, the adjudicator had already determined that no valid EOT application had been made but even if it had, the court held the non-completion certificate would have been valid. This means that the CA making an assessment of the contractor’s EOT is not a condition precedent to issuing the non-completion certificate or levying liquidated damages. If the contractor doesn’t agree that liquidated damages are due, it is free to challenge the employer by starting an adjudication or issuing court proceedings.

In conclusion, the key lessons for contractors and employers are:

• Contractors must make sure that their applications are issued in time and where they are delayed, should be aware that unless the application refers to the next due date, it won’t be treated as an interim application for that due date
• Employers who disagree with the CA’s assessment or are worried that the CA’s certificate was issued out of time can issue a payless notice for the sum they consider appropriate. 

Catherine Gelder is a partner in the construction & engineering team at Berwin Leighton Paisner