Paul Henderson: Pay less notices – getting the specifics and timings correct
The case of Muir Construction Limited v Kapital Residential Limited  CSOH 132 served as a timely reminder of the importance for parties to a construction contract to understand the role of pay less notices. As economic uncertainty continues, maintaining cashflows and ensuring the correct amounts are being paid on time is even more essential. Paul Henderson of Anderson Strathern flags some key points in relation to pay less notices in construction contracts.
Pay less notices apply to any type of interim or final payment, but in order to be effective they must contain specific information. This includes clearly stating the amount that the paying party considers to be due, and the necessary basis of how that valuation was calculated (even if it is £0). The sum should account for the value of works carried out up to the date that the notice is served. A recent addition to these criteria is the subjective requirement that the figure must be a genuine calculation. The tactic employed in Downs Road Development LLP v Laxamanbhai Construction (UK) Ltd  EWHC 2441 TCC to issue a notice for £0.97 to buy additional time was held not to be appropriate.
There is no prescribed format for pay less notices. They must be in writing, be clear and unambiguous of their intentions and are normally served by letter or email. Three tests were also established in S&T (UK) Limited v Grove Developments Limited  EWHC 123 in relation to the proper construction of pay less notices, as well as other types of notice. In this case, Grove’s cross-reference to an earlier document for the sum considered to be due was held to be permissible in the circumstances. The principles to help with general interpretation were laid down as follows:
- Would a reasonable recipient understand the notice.
- Common sense within the objective contextual scene will be applied when assessing the contents of a notice.
- The notice must provide an adequate agenda for adjudication.
For this particular decision, the relevant calculations were clearly set out in an identified document which S&T, as a reasonable recipient, would have been able to understand. There could have been no doubt, therefore the notice was valid. It should be stressed however, that this is not a blanket rule, and any reference will be a question of fact and degree to ensure that the required degree of specificity is achieved.
Once drafted, a pay less notice must be served on the payee no later than the prescribed time period and before the final payment date. The parties are free to determine the length of this period within the contract, but where no provision is made, or a payee submits a notice after a contract concludes, the Scheme for Construction Contracts (Scotland) Regulations 1998 will fill the gap. This would require a notice to be received by the payee no later than 7 days before the final payment date to be effective.
The parties are also free to negotiate their own procedural processes within the contract. Again, where this is not provided, the rules of the Scheme step in. If a pay less notice has insufficient detail or is served late and the final payment date lapses, then the payee is entitled to suspend performance (subject to the relevant notice period) and/or refer the matter to adjudication. This is the so-called “smash and grab” and can result in the paying party being forced to settle the notified sum before being able to open an adjudication on the true value of the figure. Ironically, the requirement for the figure to be a genuine calculation could increase the amount of smash and grab adjudications, with employers challenging the authenticity of the amounts given and therefore the validity of the notices as a whole.
Where a pay less notice is validly submitted but subsequently challenged, an adjudicator can be appointed to determine the true value of the works carried out before any payments need to be made. From the paying party’s perspective, it is therefore absolutely essential that if the sums are disputed, an effective notice must be served to retain payment pending judgement on the amount due.
- If cross-referencing be very specific so that the intended document(s) can be easily identified.
- Clearly name all correspondence or documentation and only refer to the relevant clauses or sections.
- Include correct terminology such as “notified sum” which should have been used in a payee’s payment notice.
- Serve the notice to the correct recipient, give detailed reasoning for intending to pay less than the notified sum and set out exactly how the sum you considered to be due has been calculated.
- Ensure that all parties to a contract are aware of their respective obligations and the deadlines within the payment cycle.
Paul Henderson is a trainee solicitor at Anderson Strathern