Tue 10 Apr 2018

HGCRA Week 7 - Paying Less

The start of a new week can only mean one thing - a brand new HGCRA 1996 anniversary blog.  With the big anniversary fast approaching, this week we turn to Pay Less Notices as they apply to payments under construction contracts.  As you might recall, payment mechanisms under the various SBCC contracts have already been covered in one of our previous blogs.

The Construction Act, as amended, contains various provisions that seek to ensure that the payments provided for under a construction contract are made promptly and properly throughout the term of the contract (s.110 - s.116 of the 1996 Act).   Payment disputes will frequently arise as a result of the failure of one of the parties to the contract to carry out its obligations in respect of the payment procedure, especially when it comes to issuing notices. 

Pay less notices are specifically dealt with under s.111 of the Construction Act, which requires the paying party under a construction contract to make payment of the notified sum by the final date for payment, unless a valid Pay Less Notice has been issued.  Where the paying party intends to pay less than the notified sum, the law requires that they give written notice, in other words a Pay Less Notice (formerly known as withholding notice), within the period stipulated in the contract  and before the final date for payment .

A notice under s.111 of the Construction Act must clearly set out:

1. The sum that the payer/specified person writing the notice considers to be due on the date the notice is served; and

2. The basis on which that sum is calculated.

There are strict time frames to comply with when issuing a pay less notice which must be given no later than 7 days before the final date for payment (or such other period as agreed between the parties).  If the paying party fails to issue a notice, or the notice is served late or found to be invalid, then the unpaid party may be found entitled to payment of the full sum claimed, whether that sum is properly reflective of work undertaken or not.  "Smash and grab" is, it seems, in certain situations, the name of the game. 

It has always been the case that the Act's payment provisions have been reflected in the clauses contained in the SBCC standard form contracts and the changes introduced in the 2016 Editions have further consolidated the Act's requirements in respect of Pay Less Notices.  Good examples of this are the latest editions of the SBCC Design & Build and Minor Works Contracts, which now contain a single sub-section which applies to both final and interim payments, dealing with the final date for payment, the amount of interim payments and the final payments.  In previous editions these issues were dealt with separately.

But why would  a party want to pay less?  The notified sum is either the sum certified by the Contract Administrator as the sum due in respect of work undertaken in the relevant period as at the due date or the sum claimed by the payee.  For obvious reasons these values can vary widely, particularly at an interim stage.  A paying party may wish to pay less than the sum claimed or certified for a variety of reasons, reflecting sums which are due to it, for example as a result of delay or defective works.  Within the construction industry cash is king but once that cash changes hands, its not always straightforward to recoup afterwards. 

It is critical that a party seeking to pay less follows the contractual requirements to the latter.  We recommend advice is taken at an early stage if in any doubt as to the notice procedure.  Failure to issue a pay less notice in the correct form, within the specified timescale, can result in an obligation to pay the full sum certified or claimed.  We see adjudications founded in these propositions regularly. 

So what if the sum claimed is excessive, yet there is an obligation to pay?  The recent case of Grove Investments provides some clarity on this.  The paying party is entitled to refer the true value of an interim payment to adjudication, and to seek repayment of sums overclaimed or overcertified. This doesn't necessarily allow the paying party to make deductions and pay less than the true value but can provide some certainty on what the true value of an interim payment ought to be, or have been.  In that instance the paying party can seek repayment of sums overpaid.

Paying less?  Should be straightforward, but rarely is.

For advice or assistance either in paying less, or pursuing sums certified or claimed in the absence of adequate notices under the Act or the Contract please contact any member of our construction team.

Make an Enquiry

From our offices we serve the whole of Scotland, as well as clients around the world with interests in Scotland. Please complete the form below, and a member of our team will be in touch shortly.

Morton Fraser MacRoberts LLP will use the information you provide to contact you about your inquiry. The information is confidential. For more information on our privacy practices please see our Privacy Notice