Payment notices: key issues and pitfalls

25 October 2016

Laurence Cobb highlights some key issues with payment notices – and some pitfalls to avoid

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The best way to avoid problems when issuing a payment notice or a pay less notice is to agree at the outset of the contract a payment mechanism that identifies when each notice needs to be issued.

Clear understanding of this is absolutely critical. Missing a deadline, especially with a pay less notice, can be fatal in resisting any claim under that particular interim application, even if you are only late by a matter of a day.

This is demonstrated by the case of ISG Construction v Seevic [2014] EWHC 4007, in which it was stated:

'If the Employer fails to serve any notices in time it must be taken to be agreeing the value stated in the application, right or wrong.' Furthermore, 'in the absence of a payment or pay less notice issued in time by the Employer, the Contractor becomes entitled to the amount stated in the interim application irrespective of the true value of the work actually carried out.'

Written schedule

In practical terms, it is best to have a written schedule of dates either open on your screen or to hand as near to your computer as possible. It is also advisable to have made and agreed in advance any extensions of time or variations to the contract period due to overrun or for any other reason. As a result, all parties remain clear as to the dates for service of the various notices.

This approach is clearly sensible from a business perspective as well, because if the person responsible for that schedule is out of the office then there will be some form of back-up to ensure that the dates will not be missed. Comments such as 'I missed the date because I was at the gym/dentist/holiday retreat (delete as applicable)' will not save the day.

Regarding the notices themselves, it is perfectly legitimate to challenge the content of a payment application if it is not adequately set out. As referred to in the case of Henia Investments v Beck Interiors [2015] EWHC 2433,

'The document relied upon as an Interim Application … must be in substance, form and intent an Interim Application stating the sum considered by the Contractor as due at the relevant due date and must be free from ambiguity.

'In this context, the Interim Application should be considered in the same light as a certificate … If there are to be potentially serious consequences flowing from it being an Interim Application, it must be clear that it is what it purports to be so that the parties know what to do about it and when.'

Full content required

A notice must be of full content as indicated in the case of Jawaby Property Investment v The Interiors Group [2016] EWHC 557, where it was found that a valuation described as an initial assessment by the contractor did not constitute a valid interim application for payment because it did not set out what the contractor considered was due on the valuation date.

It was stated that:

'If a Contractor wishes to have the benefit of the interim payment regime such as that contained in the Contract, then its application for interim payment must be in substance, form and intent an interim application stating the sum considered by the Contractor as due at the relevant date and it must be free from ambiguity.'

Please remember that a final account is also an application for payment, and under many contracts there are payment provisions entitling applications after practical completion. Therefore, you should be aware that what may appear to be a fairly straightforward repeated claim for money after practical completion might, if reviewed with some care, transpire to be an interim application. If it is ignored, this could lead to a considerable payment being due without the possibility of challenge because no pay less notice has been served in regard to that application.

There are ways in which payment notices can be challenged even if a pay less notice has not been correctly issued. These usually relate either to the inadequacy of content of the original application or – more usually by accident rather than by design – the mistiming of such an application under the contract. However, if you are having to contemplate those remedies then something has already gone seriously wrong.

So if you are involved, as many of you will be, in dealing with payment regimes under building contracts, make sure that you fully understand the provisions regarding applications and notices. You should also understand the period in which applications are permitted throughout the contract and beyond practical completion, including the final account application.

Also make sure that any notices served under the contract contain sufficient detail, whichever party you represent, to be certain there can be no arguments as to lack of clarity of content. Getting any of this wrong is likely to prove to be a very expensive and painful experience.

Laurence Cobb is Partner at law firm Taylor Wessing

Further information

• Related competencies include Legal/regulatory compliance
• This feature is taken from the RICS Building surveying journal (October/November 2016)