Payment notices in construction contracts: Lessons learned from Placefirst v CAR Construction

Not exactly. Even though they may end up doing the same thing, this does not mean that they are the same thing (see the next section).

The intended purpose of having several notices under construction contracts was explained in previous case law, notably by Akenhead J in Henia v Beck, where he explained – in relation to a JCT Standard Contract without Quantities (2011 edition) – that having three notices would given the contractor an opportunity to value its works, a payment notice could then be issued by a contract administrator / quantity surveyor (or, a “specified person” under the Act) to adjust sums in the contractor’s payment application and, lastly, the employer would have an opportunity to pay less by serving a pay less notice.

That said, it seems pretty established in practice – especially in the sub-contract scenario – that the pay less notice effectively serves as a ‘second bite of the cherry’ for employers / contractors who are paying parties under the contract.

In the present case, the court commented on the similarities between payment and pay less notices, stating that:

“the substance of what is required to be contained in a payment notice and what is required to be contained in a payless notice is precisely the same”

and

“both a payment notice and a payless notice are required to do the same, i.e. to state the sum that the payer or payee considers to be due and the basis on which the sum is calculated.”

Yes, both notices can be served simultaneously through a single communication. However, paying parties should be aware that the notices cannot purport to be the same thing, another point confirmed by the judge in this case.

So, whilst you may send them concurrently, both must still be issued – one notice cannot operate as both a payment and payless notice.

A word of caution: if your contract says that notices must be served separately (which tends to be the case in NEC contracts), then they must be served separately. At the end of the day, the contract is king (subject to statutory exceptions of course!).

No. The Act requires pay less notices to be served after the notified sum has been established. As the judge said:

“The reason why a payless notice should not be given before the interim payment application is given is fairly obvious, because otherwise there would be no known sum from which a deduction could be made.”

One argument raised by CAR was that Placefirst’s pay less notice was invalid because it was given before “the notice by reference to which the notified sum is determined”. This was because, it said, that the pay less notice had been served before the deadline for serving the payment notice.

The Court decided that the application which CAR had submitted on 24 July 2024 established the notified sum. Therefore, the pay less notice which was submitted on 31 July 2024 had not been submitted earlier than necessary.

This means that, provided the contract permits or requires a payee to notify the payer of the sum it considers due and the calculation of that sum before a payment notice is served (in effect, a payment application), the notified sum would be established on the date the payment application is submitted to the payer (i.e. in this case the 24 July 2024). The judge explained however that this would only become the case at the point where there has been a failure to serve a valid payment notice.

Readers should note, however, that if a payment notice is validly served by the deadline for doing so, then the sum stated in the payment application will not become the notified sum – rather, the sum stated in the payment notice will be. And remember, there will then usually be a second bite of the cherry, where the payer has the option of serving a pay less notice, which will then establish the sum due.

There is nothing in the Act to suggest that they must be labelled as such. In the present case, in response to CAR’s interim payment application, Placefirst sent an email with two attachments:

• A PDF letter entitled “Valuation 30 – Payless Notice” which reflected a negative amount due and contained a summary as to how the gross amount had been calculated; and
• An Excel spreadsheet which included a worksheet headed “subcontract payment certificate”. This provided a more comprehensive explanation of how the negative amount shown in the first attachment was calculated.

The court reviewed the subcontract payment certificate and adopted a common-sense approach. This document was described as a valuation, contained calculations, and was plainly intended to have an effect separate to a pay less notice, leading the court to conclude it “does amount in substance to a payment notice”.

On this basis, the court held it to be valid, despite it not being labelled as a payment notice. As James Riley would have said: “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck“.

Despite this, to avoid confusion and to mitigate the risk of costly litigation or legalistic arguments, best practice remains to label notices intended to be payment notices or pay less notices as clearly as possible.

If you believe the amount due is less than the notified sum, you do not have to serve both notices; one will suffice.

However, if what you believe is owed has changed between issuing a payment notice and the deadline to submit a pay less notice (i.e. you believe less is owed than what you initially set out in your payment notice), you will need to submit a pay less notice setting out the revised sum, ensuring it is issued within the timeframes and served in line with the requirements set out by the Act (or the relevant contract, if this differs).

As suggested above, if your contract provides for a specific process for serving payment notices of any kind, the safest approach is to stick to that process.

The judge stated that there is no reason why a payment notice could not state that a negative amount is due and that this won’t affect the validity of the notice. Caution should be exercised here though, as we have seen from previous cases that clarity is key: if a negative sum is stated, it must be abundantly clear that such sum is considered to be payable to the payer by the payee. We would also recommend specifically stating, separately, that the amount due to the payee by the payer is considered to be £nil to avoid any doubt.

Notwithstanding the above, the judge in this case made the point that even where a negative sum is stated it would not necessarily mean that this would create a contractual obligation on the payee to pay that amount. There is nothing in the Scheme or Act, nor in many standard-form contracts, which permits payments the other way in relation to interim payments, so such a mechanism would need to be specifically catered for in the contract itself in order for it to be enforceable.

Yes. In the present case, one of Placefirst’s attachments was an Excel spreadsheet which included a worksheet that provided calculations to support the pay less notice. Following the principles established in the well-publicised case of Grove Developments Ltd v S&T (UK) Ltd, this decision reaffirms earlier authority that parties can refer to other documents to evidence their calculation of the sum, as long as it is objectively clear to understand.

Even so, the safest option is likely to still be to include everything in one, clearly labelled document (where possible), so as to avoid any confusion whatsoever as to whether or not the notice is compliant.