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Default Payment & Pay Less Notices in Construction Contracts

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Construction Act Notices


In November 2011 I uploaded a power point presentation that I had presented to clients concerning the key changes that had been made to the Construction Act. To read these slides please follow this link

I was in 2011 of the opinion that the most significant change was the consequences where a party failed to respond to a Default Payment Notice; in this situation the amount claimed is the amount due – no argument, no defence, it has to be paid.

Default Payment Notice are served by a contractor when an employer fails to comply with his obligation to advise of an amount due. The contractor basically says I consider the amount due as [£100,000] and should go on to explain why; the Construction Act sets out exactly what the Default Payment Notice has to contain in order to be valid. If a valid “Pay Less” notice is not served by the employer in response then the amount contained in the Default Payment Notice has to be paid regardless of whether the contractor’s claim has merit or not. The employer has to pay that which has fallen due and reclaim any overpayment in subsequent valuations.

It is important to note that if the contract entitles the contractor to make application for payment (many standard forms and bespoke forms do) then this application is capable of amounting to a Default Payment Notice where the employer fails to advise of the amount due. The wisdom of bespoke terms providing for applications is therefore questionable unless an employer has adequate procedures to ensure he can respond to each application served. Conversely if you are the party being paid then you should always ensure that applications are submitted in a format that are capable of amounting to Default Payment Notices.

It is also worth bearing in mind contracts which are governed by the Scheme. It may well be that the contract is oral or there are no formal recorded terms save price, scope and programme; in this situation the contractor would be entitled to rely on the Scheme to serve its Default Payment Notices and again the amount applied for would be the amount that has to be paid.

Does it matter in the situation where there are interim payments and the amount can just be clawed back in subsequent applications? I think it does and particularly so as you approach the end of the programme. The employer is not only at risk of never seeing its money again but also the dynamics of any final account discussions can be altered because the contractor and not the employer holds the cash.

With all the above in mind my only surprise is that it has taken nearly 18 months before I have seen a dispute exactly on this matter. We recently advised a client to adjudicate simply on the fact that there was no Payless Notice and therefore the amount due in the Default Payment Notice was due. My advice was to not even bother putting forward a substitute argument of asking the adjudicator to value the application: why incur the cost of inviting the adjudicator to consider something that was not necessary? Why incur the cost of having to respond to the other side’s valuation when this was not necessary?

The other side realised the futility of resisting the adjudication and just paid up!

Matthew Dillon


MJD Solicitors | Matthew Dillon

Matthew Dillon

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