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When should you issue a ‘pay less’ notice in construction and engineering projects?

The Court of Appeal has ruled (in the recent case of Adam Architecture v Halsbury Homes) that the ‘pay less’ notice regime applies to final payments and termination payments which fall due under “construction contracts” (as defined in the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”)) in the same way that it applies to interim payments. This means that if a payee wishes to pay less than the amount claimed in a final account or termination account, it must serve a pay less notice.

What is the ‘pay less’ notice?

A ‘pay less’ notice is a notice which can be issued by the paying party to pay less than the ’notified sum’ as defined in the Construction Act. Prior to the decision of the Court of Appeal on 2 November 2017 it had not been confirmed whether the pay less notice regime was limited to interim payments or had wider application.

The underlying facts of the dispute

The Court of Appeal’s decision was the conclusion of a dispute between architect firm Adam Architecture and housing developer Halsbury Homes which led to Adam Architecture terminating the contract and invoicing Halsbury Homes for work carried out up to the date of termination. Halsbury Homes disputed the amount claimed by Adam Architecture but failed to issue a ‘pay less’ notice.

Adam Architecture commenced adjudication proceedings to recover the amount claimed and the adjudicator found in favour of Adam Architecture on the basis that Halsbury Homes had failed to give a pay less notice. Following the adjudication, both parties issued proceedings in the Technology and Construction Court: Halsbury Homes issued proceedings for declarations including that the pay less regime did not apply; Adam Architecture issued proceedings to enforce the adjudicator’s decision.

The Technology and Construction Court concluded that Halsbury Homes had not been required to give a pay less notice and granted the requested declarations (part of the reasoning behind this decision was that the pay less regime did not apply to final or termination accounts); Adam Architecture’s claim was dismissed. Adam Architecture appealed to the Court of Appeal who overturned the decision of the Technology and Construction Court, finding that section 111 of the Construction Act (which relates to pay less notices) contained no such restriction in respect of final and/or termination payments.

What do we think about the ruling?

Our Property team commented on the decision as follows:

”This was an expected and predictable outcome of what we considered to already be the case.

Where a party has an obligation to make payments under a ‘construction contract’ but wishes to make a deduction then it must serve a pay less notice otherwise it will be required to make full payment of the ‘notified sum’. Making payment voluntarily or via a decision of an adjudicator is not final and determinative in most cases but it does create the issue of “pay now, argue later” which does not help cashflow for the paying party and creates additional expense by way of litigation costs; the importance of serving a timely payless notice is therefore very important.”

Want more information?

Our Property team keep updated with the latest court appeals to ensure they have the latest information and knowledge to help your business. If you are looking for an experienced legal expert to have on your side, contact us on 01332 340 211.

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