‘Pay Less’ notices under the new construction act

Construction law solicitor, Mark Cornell, discusses the new Construction Act.

One of the wrongs to be righted by the new Construction Act was the failure of clients (or more probably the contract administrator) to issue payment notices under the contract. The new Act gives the contractor teeth to issue his own notice.

If you are a “paying party” under a construction contract it is very important that you understand the statutory requirements for giving a “pay less” notice if you disagree with the sum being requested by the contractor. Failure to comply with the process will leave you with little option other than to pay the sum notified.

If under the terms of the contract it is the paying party (the client) that is obliged to issue payment notices, there are now consequences for failing to do so. All notices must be served within deadlines created by the contract. If no deadlines are expressly agreed, then the amended Scheme for Construction Contracts will apply. The client’s notice must normally be issued within 5 days of the due date. As indicated above, the contractor can now issue a notice of default specifying the sum it considers due if the client misses a payment notice deadline. The final date for payment is then extended by the time that has expired between expiry of the 5 day period and the issue of the contractor’s default notice. However, the paying party/client has one more chance to rectify the situation, by serving the “pay less” notice (7 days before the final date for payment).

The new Section 111(3) of the Construction Act allows the client (or the contract administrator) to give the contractor notice of the client’s intention to pay less than the notified sum. Section 111(3) requires a pay less notice to specify:

1. The sum that the payer/specified person writing the notice considered to be due on the date the notice is served.
   
2. The basis on which that sum is calculated (even if the sum is zero).

A pay less notice must be served whether the reason for doing so is a set-off, counterclaim or abatement. Under the old regime it was possible to abate amounts without serving a withholding notice but this no longer applies.

What figure should be shown in the pay less notice?

The wording of section 111(3) raises an issue about valuations: What does “the sum that the payer considers to be due on the date the notice is served” mean? Is it the sum that was due at the due payment date under the contract or is a further valuation required to take account of work done between the due date and the date of the pay less notice? The normal meaning of the word due answers the question. Payment for work done between the due date for a period for work and the deadline for a payless notice does not fall due until the next due date. The pay less notice should therefore start by setting out the sum which the paying party considers was due at the payment due date even though the figure is determined at the date of service of the pay less notice. A pay less notice can then go on to take account of set-offs arising after the most recent due date but before the deadline for issuing a pay less notice.

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