“Pay less” notices: the contractor’s payment prerogative?
The payment provisions of construction contracts can often lead to disputes between property developers and contractors. This insight considers the impact of two recent Court cases which have tested the application of pay less notice clauses.
Overview: recent case law
- Adam Architecture v Halsbury Homes provides that a paying party should serve a pay less notice if it wishes to challenge any claimed contractual sum. Failing that, they should pay the stated sum and then bring a challenge later, rather than attempting to withhold payment.
- Grove Developments Ltd v S&T shows that a paying party who has not served a valid pay less notice may still seek to challenge the “true” value of sums which are stated to be due under construction contracts after they have been paid.
- Both cases suggest that a paying party should either serve a pay less notice or pay sums which are stated to be due (in respect of both interim and final accounts) and challenge their “true” value at a later date.
- Service of an invalid pay less notice will not preclude the paying party from later bringing a challenge, although the contractor will (validly) demand that they first pay the claimed sum.
The impact of an invalid pay less notice
Grove Developments Ltd v S&T (UK) Ltd  EWHC 123 (TCC) (27 February 2018)
- In a significant recent decision, the High Court has held that a property developer who has served a deficient pay less notice (or failed to serve any pay less notice) must pay its contractor the contractual sum sought in its interim application for payment for works and then seek a decision through adjudication on the “true” value of the works.
- Grove Developments engaged S&T under a JCT Design & Build Contract 2011 to design and build a new Premier Inn Hotel at Heathrow Terminal 4. A dispute arose about the sum due under an interim application for payment and there were three adjudications between the parties. In the third, the adjudicator determined that Grove Development’s pay less notice was invalid, which meant that S&T was, on the face of it, entitled to receive the interim payment which was sought.
- The Court held that, in the absence of a valid pay less notice, the paying party must pay the sum stated as due and then commence a separate adjudication addressing the true value of the contractor’s work. The Court rejected previous authorities which had held that a failure to serve a valid pay less notice meant that the party had agreed or was deemed to have agreed the value.
The absence of a pay less notice
Adam Architecture Limited v Halsbury Homes Limited EWCA Civ 1735 (2 November 2017)
- Section 111 of the Housing Grants, Construction and Regeneration Act 1996 (as amended), which applies to every construction contract within the scope of the Act, states that where a payment is provided for in a construction contract, the payer must pay the notified sum on or before the final date for payment.
- The Court of Appeal had to decide whether Section 111 applies only to interim payments during the course of a construction project, or also to payments due under a final account or up to the date of termination.
- A firm of architects, Adam Architecture, sought to recover fees following termination of its engagement by Halsbury Homes, a property developer. Halsbury failed to serve any pay less notices for work done up to termination of the contract and also did not pay Adam Architecture’s final invoice.
- Adam Architecture commenced an adjudication to recover payment of its final invoice. The adjudicator found in its favour due to Halsbury’s failure to serve a pay less notice in respect of the final invoice. The parties then issued Court proceedings against one another.
- Halsbury sought declarations that:
- the pay less regime did not apply to the final invoice because it was a final account and the contract had been terminated by the invoice date; and
- that the adjudicator’s decision was unenforceable.
- The Court found in favour of Halsbury and dismissed Adam Architecture’s claim to enforce the adjudicator’s decision.
- Adam Architecture appealed the decision.
- The Court of Appeal held that Section 111 applies to all payments, not just interim payments, and that the paying party must therefore pay the sum stated to be due under a final account or a termination account and argue about it afterwards to determine the correct value of the contractor’s claim. The appeal was allowed and summary judgment was awarded in favour of Adam Architecture.
How can we help?
- We have experience of assisting clients to challenge the “true” value of sums which are claimed by contractors.
- We have successfully negotiated settlements of disputes between clients and contractors regarding sums due under JCT contracts, avoiding the need for drawn-out legal proceedings.
- We can help you to navigate the law and understand your contractual obligations.