Payless notices: Serves them right?

Part II of the Construction Act 1996 has been in force for over 17 years. It is well known that under this act a valid payless notice is essential if the employer plans to pay less than the amount specified in the payment notice or, if there is no such notice, the contractor’s default payment notice.

If there is no payless notice, the default position under the Construction Act and the Scheme for Construction Contracts, or “Scheme” for short, is that the amount stated as due in the payment notice or, if none, the contractor’s default payment notice, must be paid in full.

Under many construction contracts, the contractor’s application for payment will constitute the default payment notice.

Good practice is, of course, to issue a payment notice and/or a payless notice whenever a contractor’s application for payment is received. Despite this, we continue to see cases where a valid payless notice is not issued and, in thesubsequent adjudication, the full amount of the application, however inflated, is given to the contractor.

There are many possible reasons why the issuing of a payless notice is missed, but recent examples we have seen include:

• The payment application is received during the contract administrator’s absence on holiday, without adequate cover arrangements
• Failure to appreciate that, with the appropriately worded covering letter, submission of the contractor’s package of “final account” information can also constitute an application for payment
• A mistaken belief that a particular contract was not covered by the Construction Act.

The clear intention behind the legislation is to require the employer to set out, in the payless notice, the justification for paying less than the amount claimed by the contractor.

In most cases, adjudicators will award the contractor the full amount of the application where there is no payless notice. The courts will only in very limited circumstances refuse to enforce an adjudicator’s decision.

The reasoning behind this is that the underlying dispute can be re-opened in separate proceedings: as Mr Justice Edwards-Stuart said in MJ Harding Contractors vs Paice and Springall, the employer is entitled to have the sum properly due determined by adjudication or litigation, but this does not detract from the employer’s obligation to comply with the decision in the first adjudication.

Through analysis of the application for payment can identify possible defences for use in adjudication, despite the lack of a payless notice

The main exception to this principle is where the contractor is insolvent, as the courts accept that there would then be a real risk that the employer would not be able torecover any overpayment.

The options available to the employer who has missed serving a payless notice are very limited, but it is always worth scrutinising the contractor’s application for payment and considering whether this complies with the detailed provisions of the contract or the Scheme.

Thorough analysis can identify possible defences for use in adjudication, despite the lack of a payless notice: if there is no valid application for payment, then arguably there is no need for a payless notice.

For example, under the Scheme and the JCT building contracts the contractor’s applications for payment must state the sum that the contractor considers due and the basis on which that sum is calculated.

If the application states an amount which is either not based on the valuation method specified in the contract or the Scheme, or for which no “basis of calculation” is given, then this does not comply with the contract or the Scheme and the application is arguably invalid.

Similarly, where, in the context of ongoing final account discussions, the contractor has specifically agreed that certain items are not recoverable, but then includes those items in an application for payment,
it is arguable that the contractor cannot genuinely “consider” those items to be due, and the application therefore does not comply with the contract or the Scheme.

Ideally, these arguments will be set out in a validly served payless notice. However, they have succeeded in adjudication proceedings in the absence of a payless notice.

David Johnson is a partner and head of construction at Boodle Hatfield