High Court in Placefirst clarifies payment notices under the UK Construction Act

Even those well versed in construction contract payment mechanisms can easily fall foul of the complex notice requirements set out in the Housing Grants, Construction and Regeneration Act 1996 and its Scheme for Construction Contracts (England and Wales). The payment provisions of a Construction Act-compliant contract can easily catch parties out.

A recent decision by the Technology and Construction Court in Placefirst Construction Limited v CAR Construction (North East) Limited arose out of an adjudication in respect of whether a valid pay less notice had been served. The case illustrates the practical challenge of navigating construction contract payment mechanisms, but has provided some welcome further guidance and clarity in this area.

'Pay less' notices

A "pay less" notice in a construction contract allows the paying party to notify the other party that they intend to pay less than the "notified sum"; this being the amount stated in either an earlier payment notice or application for payment.

The Construction Act requires the pay less notice to be served no later than seven days before the final date for payment (unless the construction contract provides for an alternative timeframe). If it is served late or if it is defective, the paying party is obliged to pay the notified sum, which is the full amount stated in the previous payment notice or application for payment (unless and until decided otherwise by an adjudicator or court). A failure to pay the notified sum could lead to an adjudication or the payee suspending performance.

Placefirst v CAR

Placefirst was the main contractor for a construction project in Durham. It entered into an amended Joint Contracts Tribunal design and build 2016 form of subcontract with CAR .

The contractual mechanism for payment was:

• CAR was to submit a payment application by no later than the 25th day of each month, with valuation of the works taking place on the last day of each month.
• Each interim payment would become due 16 days after the valuation date.
• Placefirst was to serve a payment notice not later than five days after the due date.
• Placefirst was then obliged to pay the sum set out in the payment notice (or the sum set out in the payment application if no payment notice was issued) by the date 12 days after the due date.
• If Placefirst wished to pay less than the sum due, it could issue a pay less notice, setting out the sum it considered to be due, and the basis on which that sum was calculated, no later than two days before the final date for payment. 

The disputed notice

On 24 July 2024, CAR submitted an interim payment application for the month ending 31 July 2024.

Placefirst responded on 31 July 2024 with an email titled "CAR Construction Pay less Notice and Valuation 30". Attached to the email were a pay less notice and a valuation of works. The pay less notice provided a summary of the valuation and set out that the sum due was minus £22,812, citing delays to the subcontract works and including deductions for loss and expense. The valuation provided a detailed breakdown, including the gross amount due and the deductions made.

CAR disputed the validity of these notices in an adjudication, arguing that Placefirst had failed to serve a valid payment notice or an effective pay less notice. On 18 October 2024 and adjudicator issued a decision agreeing with CAR and ordering Placefirst to pay CAR £867,031 plus VAT.

Issues before the court

CAR sought to enforce the decision while Placefirst sought to resist on the basis that it had served valid notices, making it unconscionable to enforce the adjudicator's decision.

The court had to consider two primary issues: whether Placefirst served a valid pay less notice; and, if not, whether Placefirst served a valid payment notice.

CAR argued that because the pay less notice was served before the time for Placefirst to serve a payment notice had passed, it was invalid; that is, there was no notified sum at the time the pay less notice was served).

Validity of payment notice

His Honour Judge Davies determined that the document entitled "Valuation 30" was independent to the pay less notice. Valuation 30 included detailed breakdowns and calculations, making it clear that it was intended to have a formal effect under the contract, separate from that of the pay less notice. Accordingly, he deemed this document to be a valid payee payment notice, despite not being explicitly labelled as such, as it met the statutory requirements and was validly served.

The judge confirmed that the substance of what is required in a payment notice and a pay less notice under the Construction Act is the same: Both notices should include a valuation of the works and deductions from that valuation, effectively achieving the payer's overall purpose. Since a payment notice and a pay less notice can be identical in content, the Construction Act does not require both to be submitted separately.

The judge also confirmed that it is valid for a payment notice and pay less notice to be issued simultaneously.

However, he also confirmed that a single notice cannot operate as both a payment notice and a pay less notice. Therefore, if both notices are to be relied upon, they must be issued as separate documents.

Validity of pay less notice

The judge's determination rested on whether a pay less notice can be served before the time for a payment notice to be served has expired. When examining this, the judge reviewed section 111(5) of the Construction Act, which stipulates that a pay less notice must not be given "before the notice by reference to which the notified sum is determined."

Ultimately, as the judge had decided that the interim payment application submitted by CAR was a valid payee payment notice, the notified sum had been established. In those circumstances, there was no logical reason for Placefirst to wait until the time for it to provide a payment notice under the contract had expired before serving a pay less notice. Accordingly, it was held that Placefirst's pay less notice was valid. The judge noted that the alternative interpretation would have unhelpful consequences for the construction industry, where cashflow is critical.

Osborne Clarke comment

It remains to be seen whether the judgment in Placefirst v CAR will lead to a shift in the contractual mechanisms agreed in construction contracts (by, for example, providing that an application for payment cannot become the "notified sum" until the time for a payment notice to be served has passed). Alternatively, paying parties may simply choose to only serve a pay less notice rather than both a pay less and a payment notice (assuming they are not contractually obliged to serve both).

However, parties may see this as an opportunity to ensure they fully understand the requirements of their construction contract payment mechanisms and the complex notice requirements set out in the Construction Act to avoid falling foul of any other nuances; for example, by using a payment notice to deduct liquidated damages.

It is not yet clear whether this judgment signals a change in course by the courts in enforcing adjudicators' decisions. Placefirst took the correct procedural steps to challenge enforcement and so it is unclear whether the judgment would have been different had it not done so. It will also be interesting to see whether the courts take a similar approach in further adjudication enforcements.