What happens when you are late issuing a Payment Notice?

We’ve all felt that pang of dread when you realise you’re late to issue a payment notice on time, and it’s on a questionable subcontractor valuation that you need to issue a Pay Less notice. What are your options when that happens?

Well, we put the following scenario to the experts at Commercial Risk Management:

I’m a Main Contractor working on a JCT Contract, latest edition. I’ve employed a major subcontractor on a 9-month programme and in month 8 I have failed to issue a Payment Notice / Certificate to them on time.

We then asked CRM the following questions:

1. How does this impact me and what are the main risks I’m now exposed to?
2. Can I use Pay Less Notice to cover myself?
3. Can I issue the Payment Notice / Certificate late?
4. Are there any other options available to help mitigate the impact/issue?
5. Does their valuation become the Pay Notice / Pay Less Notice and can I amend any assessments in the final Pay Notice / Pay Less Notice in month 9?

Here are the responses from J P Farnell, Adjudicator and CEDR Accredited Mediator…

1. How does this impact me and what are the main risks I’m now exposed to?

In the first instance, if the sub-contract provides, and the sub-contractor has actually issued an application for payment, then the sub-contractor’s application will become the “default” payment notice. Where the sub-contract does not provide for an application, but where you as Main Contractor has failed to issue a payment notice within (usually, five days from the “due date” of the interim payment installment) then the sub-contractor may issue an application for payment and this will then become the “default” payment notice. The final date for payment of that interim installment will be postponed by the same number of days as the sub-contractor’s application for payment was issued after the expiry of the 5 day period following the “due date”.

The effect of this is that the amount claimed by the sub-contractor in its application for payment is the amount that is due for payment by the final date for payment of that interim installment (the notified sum).

To be a valid payment application the sub-contractor must have both issued it on time (where a sub-contract payment application is required or permitted by the sub-contract) and it must be in “substance, form and intent” an application for payment. In other words the contractor must be in no doubt why the sub-contractor has issued it (e.g. “this is an application for payment”), it must contain sufficient detail to enable the contractor to understand how it has been prepared and the basis of the calculation of the claim, and most importantly it must actually request payment of a specific sum of money.

2. Can I use Pay Less Notice to cover myself?

“Cover myself” is a little “emotive” and implies that the contractor is avoiding making payment.

If a contractor has failed to issue a payment notice on time, and where the sub-contractor has issued a valid application for payment entitling it to be paid what it has applied for, if the main contractor disagrees with the sub-contractor’s application then it may issue a pay less notice and the amount shown in the pay less notice then becomes the “notified sum” which is payable by the final date for payment of that interim installment.

This is on the proviso that the pay less notice is itself a valid notice issued within time before the final date for payment (i.e. it must provide the basis of calculation, which can be by reference to other specific documents already issued to the sub-contractor, and must show an actual amount to be paid, even if the amount is zero). If it is not issued on time and in compliance with the contract and the relevant legislation then the last notified sum (i.e. in the payment or “default” payment notice) is the amount to be paid.

3. Can I issue the Payment Notice / Certificate late?

In short, no.

4. Are there any other options available to help mitigate the impact/issue?

Other options would be commercial or relationship based. If a payment notice were issued late, but there is no disagreement as to the amount to be paid then the sub-contractor may be comfortable with accepting the technical default and may not pursue a remedy. If there is a growing difference between the parties respective views as to the value of the sub-contract works, it is doubtful that such a casual waiver would be forthcoming.

The Housing Grants Construction and Regeneration Act 1996 (HGCRA) was enacted following the recommendations of the Latham Report. A primary objective of the Act was to ensure that cash flowed effectively through the construction industry from employer down to suppliers by providing that every construction contract should contain an effective payment mechanism that enabled contracting parties to know what they were to going to be paid and when.

5. Does their valuation become the Pay Notice / Pay Less Notice and can I amend any assessments in the final Pay Notice / Pay Less Notice in month 9?

If the contractor is late in issuing its payment and/or pay less notice and where the sub-contractor’s application is the notified sum then the contractor has little option other than to pay the amount that has been claimed and correct any over payment in the subsequent payment cycle.

Where a contractor fails to make payment of a sum due then, there are other sanctions available to the unpaid sub-contractor. It could give notice to suspend performance of part or all of its sub-contract works. This might have potentially detrimental implications for the progress of the project depending on the criticality of the sub-contractor’s works.

Pursuit of payment through adjudication would also be available to the sub-contractor for sums claimed and not paid. Adjudicators and the courts at enforcement will give effect to the intentions of the HGCRA and will direct that a sum due for payment is to be paid even in the circumstances of final payments on the basis that the parties are free to pursue a determination of the final value of the sub-contract works.

Keep on top of things!

The clear message is to be on top of the notices; know when they are due to be issued and ensure that they are. Where a notice is missed for whatever reason, remember that there is a back stop mechanism through the issue of the pay less notice. It is not worth defending clear failures of process in adjudication, which is wasteful. Better to rectify properly afterwards.

This piece was contributed by J P Farnell, FRICS, FCIArb, Adjudicator, CEDR Accredited Mediator March 2018

Image Credit: Late by Kenneth Flemming used under CC BY-ND 2.0

 

About Paul Heming

Paul was a Quantity Surveyor who gained 10 years experience of managing £200 million worth of flagship UK projects, including 20 Fenchurch Street and Battersea Power Station. In 2015, Paul founded C-Link with the intention of sharing his expertise of managing major projects with the SME market.