Building Contract: alternative time for Pay Less Notice implied

Under section 111(3) of Housing Grants, Construction and Regeneration Act 1996 (as amended) (“the Act”) a payer can serve pay less notices.

By sub-section (5) the pay less notice must be given “not later than the prescribed period before the final date for payment” but not before the notice by reference to which the notified sum is determined. That notice may be an invoice.

The Act requires the following sequence of events:

-a payment due date,
-service by the contractor of a notice stating the sum due within five days thereafter,
-service of a pay less notice (if required) by the employer not later than the “prescribed period” prior to the final date for payment and,
-finally, payment (of the sum stated in the last notice) on the final date for payment.

Section 111(7) provides that the “prescribed period” means either such period as the parties may agree or, in the absence of such agreement, the period provided by the Scheme for Construction Contracts (“the Scheme”), which is 7 days. So, if there has been no agreement as to the prescribed period, then it is 7 days.

In Manor Asset Ltd v Demolition Services Ltd (Rev 1) [2016] the dispute was about the non-payment of Demolition Services Ltd (DSL)’s invoice for 60% of the price which DSL issued on 23 October 2015, asserting that it had achieved the first milestone in accordance with the terms of the building contract. DSL said under the building contract “payment [was] to be made within 72 hours of receipt of invoice, issued when the milestone [was] achieved”, namely on or by 26 October 2015. So, it contended that the pay less notice issued by Manor Asset Ltd (MAL) on 28 October 2015 was invalid. The adjudicator said that MAL should have issued a pay less notice before 23 October 2015.

However the High Court said that the Act made it clear that the pay less notice could not be issued before the invoice to which it related.

Unless there was a compelling reason to give them any other meaning, the contract words “Payment to be made within 72 hours of receipt of invoice” were clear and unequivocal. They must be understood as referring to “the final date for payment.” They could not have been referring to the deadline for service of the pay less notice.

Clause 4.5.4 of the contract had said the prescribed period for service of the pay less notice expired on the date 5 days before the final date for payment. That date would have been non compliant with the Act and impossible since it would have been 21 October 2015. That date would have been two days before the notice stating the sum due which had only been afforded by the issue of the invoice.

On that reasoning the parties would have reached no agreement about the prescribed period, with the result it defaulted to the even more non compliant and impossible period ending “7 days” before the final date for payment, under the Act.

This was, therefore, a situation where the building contract made no express provision for what was to happen in relation to pay less notices.

It was therefore necessary to construe the contract or imply a term, that the prescribed period was to be “nil” – thus enabling MAL to serve a pay less notice at any time within 72 hours after receipt of the invoice. In other words, it could be served at any time between receipt of DSL’s invoice and the expiry of the 72 hours following such receipt.

MAL’s “pay less” notice dated 28 October 2015 was therefore out of time and DSL was entitled to summary judgment on it’s claim.

This blog is posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.