Payment and pay less notices – a timely reminder

Payments disputes are common in the construction industry. In particular, ‘smash and grab’ adjudications, where, for example, a notified sum is claimed by a Contractor due to the Employer’s failure to serve a payment or pay less notice in accordance with the payment procedure, are a regular occurrence.

Recent judgments from the TCC have yet again emphasised the importance of parties correctly serving their payment and/or pay less notices and the court’s position on enforcing smash and grab adjudication decisions.

With remote and disrupted working, and key staff potentially unavailable, it is more important than ever that paying parties find ways to keep on top of contractual deadlines and ensure that deadlines for serving payment and pay less notices are not missed. The consequences of missing the deadlines can mean payments having to be made that do not reflect the true value of the work undertaken.

The recent case of Broseley London Limited v Prime Asset Management Limited [2020] EWHC 944 (TCC), heard in April of this year, related to proceedings to enforce an adjudicator’s decision on an interim application.   The paying party, Prime, sought a stay of execution pending resolution of the final account (either by way of a further adjudication or court proceedings).  Applying the principle set out in in S&T (UK) Ltd v Grove Developments [2018] EWCA Civ 2488, the Judge held that a party could not challenge the decision of the adjudicator in another adjudication without first paying the amount held due.  As such, it was not open to Prime to commence an adjudication to establish the true value of the final account without first paying the sum due in adjudication no.1.  The Judge further held that Prime had not satisfied the tests for a stay of execution pending resolution of the final account by way of court proceedings and Prime was ordered to make payment.  Read our full article on this case here.

The following month (i.e. May 2020), the TCC heard the case of J&B Hopkins v Trant Engineering Limited [2020] EWHC 1305 (TCC). Again, the proceedings related to enforcement of an adjudicator’s decision based this time on a failure by Trant to serve payment or pay less notices in respect of Hopkins’ application for payment in the sum of approximately £800,000.  In a somewhat novel argument, Trant sought to resist enforcement of the adjudicator’s decision on the grounds that the payment cycle had moved on since the time of the interim application in question. Trant argued that Hopkins was no longer entitled to be paid the sum in the payment application because it had been superseded by subsequent interim payment cycles. Trant also argued that by enforcing the adjudicator’s decision, this would undermine the “correction” principle whereby interim payments can be corrected in the next payment cycle.

Whilst the Judge accepted that an interim payment which becomes due as a result of a failure to serve notices can be corrected on later applications, he held that this correction principle does not have the effect that the amount due was not due at all.  The Judge therefore rejected Trant’s submissions and gave judgment in favour of Hopkins.  You can read our full article on this case here.

These cases serve as a reminder of the court’s robustness in enforcing adjudicator’s decisions, and a warning to parties to construction contracts to ensure they are serving payment and pay less notices correctly and on time.  It is very difficult to successfully argue one’s way out of a situation after notices have been missed.   

The statutory payment provisions – a recap

The Housing Grants, Construction and Regeneration Act 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009) (the Act) applies to construction contracts (as defined by the Act).  It provides that, unless the contract is under 45 days duration, the payee is entitled to payment by instalments, stage payments or other periodic payments. It also provides that a construction contract must contain an adequate mechanism for determining what payments become due and when as well as a final date for payment. The ‘due date’ is essentially a point in time that triggers an entitlement to the next instalment or payment and the ‘final date’ is the one by which that instalment or payment must be paid.  If the contract does not comply with the Act, provisions are implied by way of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (as amended) (the Scheme).

The Act sets out the procedure for making payments and the notice requirements. In brief:

• The payer (or payee depending on the contract) must issue a payment notice within 5 days of the ‘due date’ for payment, setting out the sum considered due at the due date and the basis on which that sum is calculated.
• If the contract requires the payer to give the payment notice, and this is not given, the payee can issue a default payment notice or alternatively if the payee made an application for payment (and was permitted to do so by the contract) then this may stand as the default payment notice.
• The sum in the payment notice (or default payment notice) is known as the notified sum.
• The payer must issue a pay less notice if it wishes to pay less than the notified sum. The pay less notice must set out the sum the payer considers to be due on the date the notice is served and the basis on which that sum is calculated. The pay less notice must be served no less than the prescribed period (set out in the contract, or implied by the Scheme) before the final date for payment.
• Unless the payer issues a pay less notice on time, it must pay the notified sum on or before the final date for payment (subject, potentially, to a limited exception in the event of payee insolvency).

Adjudications based on a failure by the paying party to serve the requisite notices on time are known as “smash and grabs” and have become common.  As discussed in this bulletin, the courts have been robust in enforcing such decisions, even when the sum to be paid is overclaimed.  Adjudications will generally be enforced by the courts save where an adjudicator has acted outside his or her jurisdiction or where there has been a material breach of natural justice.  The current case law provides that a party must make payment of an adjudicator’s decision before it can commence its own adjudication seeking to establish the “true value” of the works.

It is crucial that paying parties implement procedures for ensuring notices are correctly served and keep these under review.  As Mr Justice Fraser stated it the case of JB Hopkins v Trant  “Serving the relevant and required notices is not an impossible or Herculean task.  Failure to do so has certain consequences. These are widely known and this judgment provides another example.”.

For more information on the article above please contact Lianne Edwards and Sarah Wasniowski.