Reed Smith Client Alerts

Authors: Laura Riddeck Richard A. Ceeney

Since 2011, Employer and Contractors have been living with the payment regime prescribed by the updated Housing Grants, Construction and Regeneration Act 1996. This regime amounts to strict liability for the payer – if relevant, compliant, notices are not issued, then the payer must pay whatever sums are claimed without deduction. But what if you issue the relevant notice a month later, against the next payment application. Can you fix your mistakes?

The recent judgment of the UK Technology and Construction Court, in Henia Investments v Beck Interiors [2015] EWHC 2433, looked at (amongst other things) the validity of payment applications by the Contractor and pay less notices issued by the Employer.

The judgment looked primarily at the timing of payment notices and the critical point related to the Contractor’s ability to treat an out-of-time payment application from a previous month as an in-time payment application for the current month. The Court decided that this was not possible, and a fresh application had to be submitted.

One interesting analytical spin-off from the case related to the extent to which an Employer is able to use subsequent notices to correct failures in earlier notices.

Background to the typical payment provisions Payment provisions in construction contracts (such as the industry standard JCT and NEC forms) must comply with the mandatory provisions of the Housing Grants, Construction and Regeneration Act 1996 (as varied by the Local Democracy, Economic Development and Construction Act 2009) (the Act).

Typically, a monthly payment cycle will capture the following steps:

  • The Contractor issues an interim application, setting out the sums it considers due.
  • The ‘due date for payment’ is the date that the payment falls due (typically the later of a set monthly date and the date of receipt of an interim application). The ‘final date for payment’ is the date by which the payment must be made, a set period (usually 14 or 28 days) from the due date.
  • The Employer issues a payment notice, setting out its valuation of the works and the sums it considers due (which may or may not differ from the Contractor’s application). This notice must be issued no later than five days following the due date for payment – pursuant to the Act, this cannot be extended by agreement.
  • If necessary, the Employer issues a pay less notice. Under the typical JCT provisions, this must be issued no later than five days before the final date for payment. This is a further opportunity to set out the sum the Employer considers due.

This cycle then continues usually every month for the duration of the project.

Use of a pay less notice to ‘fix’ a payment notice In Henia, Akenhead J confirmed that pay less notices are not limited in their application. If a payment notice was not issued in time or contained errors, the Employer has the further opportunity to record its valuation of the works in the pay less notice.

The Act describes the contents of the payment notice and pay less notice in near-identical terms, and so this interpretation must be correct. Although it seems somewhat odd to effectively give the Employer two bites at the cherry, it would be extremely onerous (particularly on large and complex projects) to restrict the Employer to the five-day period to challenge the Contractor’s application.

Use of subsequent payment notices/pay less notices to ‘fix’ errors in a previous payment cycle The requirements on the Employer are strict – if neither a payment notice nor a pay less notice is issued reducing the amount it has been asked to pay, it must pay the sum applied for by the Contractor. In such circumstances, the usual way for the Employer to correct errors is for these to be addressed in the following month’s valuation process.

Employers cannot use payment notices or pay less notices in a subsequent payment period to rectify a failure to issue correct payment notices or pay less notices in the previous months. In other words, if the Employer fails to issue either of the relevant notices in time, it must make payment of the sum in the Contractor’s application. If the Employer does not make full payment and the Contractor does not exercise its right to bring an adjudication prior to the next payment, it cannot ‘get off the hook’ by issuing a pay less notice the following month.

However, an Employer can use subsequent payment and/or pay less notices to claw back sums that have been overpaid (whether due to a valuation error, a discovery of previous non-compliant work, or a failure to issue previous payment or pay less notices).

To illustrate:

  • If the correct valuation of application no. 1 was £1m, but a Contractor applied for £2m and no payment or pay less notice was issued, the Employer must pay the full £2m.
  • The following month, if the correct valuation by application no. 2 was £3m (i.e. a further £2m of work had been performed), the Employer can issue a payment or pay less notice with the correct valuation of £3m gross. That way, the Employer would only have to pay a further £1m, and could correct the error and over-payment.

The onus is therefore on the Employer to issue its notices correctly (i.e. on time); if it does not do so, it will need to pay up front and seek to claw back later.

The problem here really arises in circumstances where a Contractor becomes insolvent, or when the process happens at the end of a project or within the defects liability period. At that point, subsequent valuations may not contain enough value to claw back the overpayment. In those circumstances, an Employer would need to commence its own adjudication or Court/arbitration proceedings to claim the money from the Contractor (which is never as easy and, in an insolvency scenario, may not be possible in any event).

It must also be the case that an Employer cannot use the payment process to overrule an adjudicator’s decision, which is binding (at least until a court overturns it). If the Employer’s valuation of a piece of work was £1m and an adjudicator decided it should have been valued at £2m, an Employer could not seek to revalue this at £1m in subsequent payment notices. Its recourse in that scenario would be to go to court to seek to overturn the adjudication decision.


Client Alert 2015-262