Construction Contracts – Payless Notice

The Construction Act defines construction contracts. All design and construction contracts, including professional appointments, are likely to be construction contracts as long as they relate to “construction operations”.

Construction operations includes a very wide range of construction operations and the most common forms of engineering operation – for example, civil engineering projects. However, some engineering projects such as mining, nuclear and power generation are expressly excluded, as are contracts with residential occupiers.

A construction contract will have to require a payment notice to be given for every payment provide for by the contract, not later than five days after payment due date.

Recently, we were instructed by a building construction company (our client) who had sub-contracted certain works to another building construction company (the sub-contractor). After practical completion of the works, the sub-contractor applied for payment of additional costs and expenses due to alleged variations of works, daytime works, delays of the works caused by our client. Our client disputed those costs as well as the alleged delays and causation. In addition, our client considered the works of the sub-contractor to be sub-standard and defective, and demanded payment of the costs for the required remedial works. The sub-contractor issued proceedings at the Technical Construction Court (TCC) and applied for summary judgment and payment of the “notified sum” in accordance with section 111(1) of the Housing Grants, Construction and Regeneration Act 1996, as amended (the Construction Act), in conjunction with the Scheme for Construction Contracts (England and Wales) Regulations 1998, as amended (the Scheme). The application centred on the question whether or not our client had provided the sub-contractor with a valid payless notice of sufficient content, section 111(4), and done so in time, section 111(5) of the Construction Act.

In another case, a sole trading painter (the painter) was sub-contracted by a building developing company (the developer) for the decoration of a flat. After finishing the decoration, the painter issued his invoice and demanded payment. The developer refused to make payment. He argued that after receipt of the invoice, he had provided the painter with a payless notice in accordance with the Construction Act and the Scheme. He referred to dispute to adjudication. The painter viewed that he had not entered into a construction contract, and the Construction Act and the Scheme did not apply, in the alternative, the developer’s email was not a valid payless notice, and in addition, the adjudicator had no jurisdiction to decide the dispute.

The above is just an example of the issues that arise in relation to construction contracts and payless notices. The reasons for those issues can be put in the following categories:

• The client has not been aware of the provisions of the Construction Act and/or the Scheme.
• The client believes that the Construction Act and/or the Scheme are not applicable to his services.
• The client believes that the special terms of contract, agreed between the contract parties, apply over and above the provisions of the Construction Act and/or the Scheme.
• The client does not understand the provisions of the Construction Act and/or the Scheme.
• The client does not comply with the provisions of the Construction Act and/or the Scheme.

Be aware of the Construction Act and the Scheme

Regrettably, the provisions of the Construction Act and the Scheme are hidden. Obviously, the name of the Construction Act itself does not help very much. Who would assume to find payment and adjudication provisions in an act which title starts with “Housing Grants”? In addition, the provisions are included in Part II of the Construction Act, which is sandwiched between Part I – Grants, &C. For Renewal of Private Sector Housing, and Part III – Architects.

However, as will be seen later on in this article, the Construction Act and the Scheme include compulsory payment and adjudication provisions which no party to a construction contract can afford to ignore.

Construction Act and/or the Scheme are applicable

The Construction Act and/or the Scheme only apply to “construction contracts”. The definition at Section 104(1) of the Construction Act includes at sub-section (a) “the carrying out of construction operations”. “Construction operations” include (among others) the “painting or decorating the internal or external surfaces of any building or structure”, in accordance with section 105(1)(f) of the Construction Act.

Part II of the Construction Act does not apply to a construction contract with a residential occupier, which means a construction contract which principally relates to operations on a dwelling which one of the parties to the contract occupies, or intends to occupy, as his residence. In this context, “dwelling” means a dwelling-house or a flat, and “dwelling-house” does not include a building containing a flat, see section 106(1)(2) of the Construction Act.

For the reasons set out above, in Dispute 2, the painter’s view was wrong. He had entered into a construction contract, and the Construction Contract and the Scheme were applicable.

Further, notwithstanding that the parties had not agreed adjudication in their contract, the adjudicator had jurisdiction in accordance with section 108(1)(5) of the Construction Act and Part I of the Scheme.

Special Terms of the Contract

In Dispute 1, the construction contract was in writing and based on the template of the JCT Short Form Sub-Contract 2016 together with its Short-Sub Conditions 2016. Those Conditions included clause 14.5 which stipulated that if the contractor (our client) intended to pay less than the (notified) sum, he shall not later than 5 days before the final date for payment give the sub-contractor notice of that intention stating the sum, he considers to be due and the basis on which that sum has been calculated.

In addition to those terms, our client had drafted, and the parties had agreed detailed special Sub-Contract Terms and Conditions which included special terms of “Payment Charter”. By the agreement of those special terms, our client thought that the parties had varied clause 14.5 of the Short-Sub Conditions 2016 to the effect that our client was entitled to serve the payless notice until the final date for payment.

Unfortunately, when drafting, negotiating and agreeing those terms, our client had not sought our services. We were instructed only five days before the hearing of the application for summary judgment. It came therefore as a shock to our client when we had to advise him that notwithstanding the agreement between the parties of the special terms, he and the sub-contractor could not contract out of the provisions of the Construction Act and/or the Scheme, see sections 110A(5) and 114(4) of the Construction Act and paragraph 10 of Part II of the Scheme.

At the hearing, the TCC found that on their true interpretation, our client’s special terms did not include an agreement that varied clause 14.5 of the Short-Sub Conditions 2016 to the effect that our client was entitled to serve the payless notice until the final date for payment. Clause 14.5 of the Short-Sub Conditions 2016 remained an effective term. The “prescribed period”, as defined at section 111(7) of the Construction Act, had been agreed as “not later than 5 days before the final date for payment”, in the alternative, the period provided by paragraph 10 of Part II of the Scheme, “not later than 7 days before the final date for payment”.

This meant that our client had served the payless notice five, in the alternative, seven days too late, and consequently, notwithstanding the genuine dispute as to the alleged delays of work, causation and defective works, he was ordered to make payment of the “notified sum” within 14 days from the date of the order.

Of course, this was an order for preliminary payment in that any argument about variations, daytime works, defective works, the alleged delays etc. could still be raised by our client by way of issuing his own claim, or referring the dispute to adjudication, for repayment and/or loss of damages. However, he must first pay the notified sum, as ordered by the court, see Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC).

This is by some authors referred to as the practice of “smash and grab”.

For the avoidance of doubt, even if the payless notice is late by only one day, under the provisions of the Construction Act and Part II of the Scheme, the payless notice is out of time and not valid anymore.

It is regrettable that our client did not seek our legal advice before he drafted, negotiated and/or entered the construction contract.

 Understanding the provisions of the Construction Act and the Scheme

In our discussions with our client, it became clear that although an experienced contractor, our client had not fully understood the provisions of the Construction Act and the Scheme. For example, under the Construction Act and the Scheme, the payless notice is not considered a payment notice. It is admitted that the provisions are detailed, technical legal language, and consequently, not easy for lay clients to understand.

We pride ourselves that we explain to our client the relevant provisions in plain and clear English so that our clients fully understand the legal situation.

 Compliance with the provisions of the Construction Act and/or the Scheme

In Dispute 1, our client did not comply with the relevant provisions of the Construction Act and the Scheme.

It is regrettable that our client did not seek our legal advice and assistance at the required time of providing his payless notice. Had he done so, he would have been aware by what date he had to serve such notice, and any questions as to the content of the same could have been discussed, and by doing so, any uncertainty as to the payless notice could have been avoided.

Similar in Dispute 2, we could have advised the painter at an early stage that the developer’s email was a valid payless notice, and that the adjudicator had jurisdiction to decide the dispute.

We would hope that with this article, we make our clients, and potential clients, aware of some of the issues in relation to construction contracts and payless notices, and help them to avoid mistakes, unnecessary litigation, and legal costs.

Our services in relation to construction contracts include (among others) the following:

• We inform our client of the relevant provisions of the Construction Act and/or the Scheme.
• We advise our client whether the Construction Act and/or the Scheme are applicable to his services.
• We review and advise upon the terms of contract which the contract parties may agree in accordance with the provisions of the Construction Act and/or the Scheme.
• We explain the provisions of the Construction Act and/or the Scheme to our client.
• We advise and assist our client to be in compliance with the provisions of the Construction Act and/or the Scheme.
• We, of course, also provide review, negotiation, advice and drafting of construction contracts in all shapes and value sizes.

If you wish to discuss any of the above with us, or indeed wish to obtain legal advice, review and/or drafting of construction contracts from us and/or to instruct us to represent you prior to, or in litigation or adjudication, contact us Kerseys Solicitors in Ipswich 01473 213311 or Kerseys Solicitors in Colchester 01206 584584, or  email [email protected], alternatively Kerseys are only a click away on or visit our website and click “Call Me Back” a member of our construction team will be happy to contact you at a time that is convenient to you.