What must a valid pay-less notice under a construction contract specify, and when must it be served, for a payer to reduce the notified sum?
To pay less than the notified sum a payer needs a valid pay-less notice. It must state the sum the payer considers due and the basis of it, and be served in time, or the notified sum must be paid in full.
A payer cannot pay less than the notified sum without a valid pay-less notice under section 111 of the Construction Act, as substituted by the 2009 Act, which must specify the sum the payer considers due on the date of the notice, even if that sum is zero, and the basis on which it is calculated, and must be given within the prescribed time before the final date for payment, failing which the notified sum must be paid
A party cannot pay less than the notified sum without a valid pay-less notice under section 111 of the Construction Act 1996, as substituted by the Local Democracy, Economic Development and Construction Act 2009 for contracts from 1 October 2011. The pay-less notice must specify the sum the payer considers to be due on the date it is served, even if that sum is zero, and the basis on which that sum is calculated, and it must be given no later than the prescribed period before the final date for payment, which under the Scheme is seven days. The courts require the notice to be in writing, as in Strathmore Building Services v Colin Greig, and given in time, as in VHE v RBSTB, but otherwise take a practical view of its contents, asking whether a reasonable recipient would understand the sum said to be due and why. Under the former withholding-notice regime, Windglass Windows Ltd v Capital Skyline Construction Ltd held letters that stated neither the amount nor the grounds ineffective, so the employer's cross-claims for delay and defects failed and the sum due had to be paid; the same consequence follows today under the pay-less regime. A valid cross-claim is worthless without a compliant notice.
| Notice required | No paying less than the notified sum without a valid pay-less notice |
| The sum | State the sum you consider due at the date of the notice, even if zero |
| The basis | Give the basis on which that sum is calculated |
| Timing | Within the prescribed period, seven days under the Scheme |
| Windglass | Former regime: a notice stating neither amount nor grounds was ineffective |
The problem
A party that wants to reduce a sum otherwise due by a set-off, for example for delay or defects, cannot simply pay less. The construction legislation requires a notice, and if the notice is not valid the set-off fails and the full sum must be paid. What the notice must contain, and when it must be served, is the question.
The statutory requirement
The payment regime is in the Housing Grants, Construction and Regeneration Act 1996, as substituted by the Local Democracy, Economic Development and Construction Act 2009 for contracts made on or after 1 October 2011. Once a payment notice, or a default payment notice, has fixed the notified sum, the payer must pay that sum by the final date for payment unless it serves a pay-less notice. Under section 111 the pay-less notice must specify the sum the payer considers to be due on the date the notice is served, even if that sum is zero, and the basis on which that sum is calculated. The notice must be given no later than the prescribed period before the final date for payment, which under the Scheme for Construction Contracts is seven days. Before the 2011 substitution the equivalent withholding notice had instead to state the amount to be withheld and the grounds for it.
The court guidance
The courts have added guidance. A notice must be in writing, as held in Strathmore Building Services v Colin Greig, and must be given at the right time before the final date for payment, as in VHE v RBSTB. Beyond that the courts take a practical view of a notice's contents and will not accept contrived arguments that a notice is invalid, asking whether a reasonable recipient would understand the sum said to be due and the basis for it. What they will not overlook is a notice that fails to state the sum considered due and how it is calculated.
An ineffective notice
Even under the former regime, a notice that failed the test was fatal to a set-off, and the same consequence follows today.
Decided under the former withholding-notice regime, this case shows what an ineffective notice costs. A glazing subcontractor's applications for payment were met by letters saying they would not be processed because they were not in the required format or signed by the site manager. On adjudication the letters were held not to meet the Act, because they stated neither the amount to be withheld nor the grounds for withholding, and there was no binding requirement that applications take any particular form. The employer's cross-claims for delay and defective work failed for want of an effective notice, and the adjudicator's decision was enforced. That same result follows today: without a compliant pay-less notice stating the sum considered due and its basis, the notified sum must be paid.
Practical steps
Serve a pay-less notice before paying less than the notified sum; without it the set-off fails and the notified sum is due.
State the sum you consider due at the date of the notice, even if that sum is zero, and the basis on which it is calculated.
Put the notice in writing and give it no later than the prescribed period before the final date for payment.
Do not rely on a letter that merely rejects an application or asks for it to be resubmitted; that is not a valid notice.
Remember that a valid cross-claim for delay or defects is worthless without a compliant notice; the notified sum must be paid.
Authorities
The pay-less notice requirement stated on this page is section 111 of the Housing Grants, Construction and Regeneration Act 1996, as substituted by the Local Democracy, Economic Development and Construction Act 2009.
| Authority | Citation | What it decides |
|---|---|---|
| Strathmore Building Services v Colin Greig | (2001) | A payment-withholding notice must be in writing; the writing requirement carries into the pay-less notice regime |
| VHE Construction v RBSTB Trust Co Ltd | (2001) | A withholding notice must be given at the requisite time before the final date for payment; the timing requirement carries into the pay-less notice regime |
| Windglass Windows Ltd v Capital Skyline Construction Ltd | [2009] EWHC 2022 (TCC) | Under the former withholding-notice regime, letters that stated neither the amount to be withheld nor the grounds were not effective notices, so the cross-claims for delay and defects failed and the sum due had to be paid |