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Are contractors required to give pay less notices under the LDEDC Act 2009 and the revised Scheme?

There I was, quietly drafting some LDEDC Act 2009-compliant payment terms when, hitting a patch of writer’s block, I turned to my trusty PLC mark-up of the revised English Scheme. All of a sudden it dawned on me that either I had fundamentally mis-read the LDEDC Act 2009 or the revised English Scheme was not Act-compliant.

In short, I had thought that the LDEDC Act 2009 applied in respect of payments in either direction, but the revised English Scheme only applies to payments from employer to contractor.

The problem arises where payment is due from the contractor to the employer, as the following example illustrates:

  • The contractor applies for £100.
  • The employer corrects this downward by £200 and certifies £-100.
  • No payment is made and no pay less notice is served.

Does the failure of the contractor to issue a pay less notice require him to pay the (negative) certified sum in full?

The 1996 Act

The original Construction Act 1996, that we know and love so well, was seemingly drafted on the assumption that the employer was the payer and the contractor was the payee. This did not stop one employer in Balfour Beatty v Modus Corovest from attempting to argue that it applied in respect of the employer’s claim for liquidated damages (or LADs). Coulson J knocked this argument on the head pretty swiftly, saying that the Construction Act 1996 was not intended to cover the payment of LADs.

LDEDC Act 2009

Wind forward a few years to the advent of the LDEDC Act 2009 and the position appears somewhat different:

  • Section 110A(1) now states that the notice obligations apply to “every payment provided for by the contract”.
  • Section 110A(6) goes on to define payer and payee “in relation to any payment” in terms of the person to whom that payment is due.

In other words, you have to look at each payment, work out who the payer and payee is from the direction that the money should flow, and then apply the rest of sections 110-112 accordingly.

Taking the example above, it then becomes a (probably disputed) question of fact whether the contractor or the employee is the payee. If the contractor owes money to the employer, then:

  • The employer is the payee.
  • The employer’s certificate becomes a 110A(3) notice (payee’s certificate).
  • But, the contractor’s notice is of uncertain statutory effect. It cannot stand as a section 111(3) notice (a pay less notice) as it pre-dates the certificate to which it applies (see section 111(5)(b)).
  • In the absence of a pay less notice, the contractor must therefore pay the notified sum in full.

The revised English Scheme

While the LDEDC Act 2009 has been drafted on the basis that the payer and payee will be identified on a payment by payment basis, the same is not true of the revised English Scheme. Under the revised English Scheme, payment only becomes due following completion of the work to which the payment relates or “the making of a claim by the payee”. All well and good, you say. If the employer is the payee then it simply makes a claim.

If only it were that simple.

A “claim by the payee” is defined in paragraph 12 of Part II of the Scheme as a notice “given by the party carrying out work”. This effectively precludes the employer from ever being the payee under the revised English Scheme. There is no mechanism under the revised English Scheme for payments other than in respect of work done (such as payments under indemnities, liquidated damages etc.).

The original consultation proposed a draft amendment of this wording to reflect the Act, but for some reason the amendment was dropped. The revised Scottish Scheme, in contrast, includes an amendment reflecting the fact that either party may be the payee, borrowing the language of the Act.

No doubt if the revised English Scheme comes before the TCC, the judges would bend over backwards to reconcile the fact that the LDEDC Act 2009 applies to any payment with the fact that the Scheme only seems to provide for payments to the person carrying out the work. For the life of me, I cannot see how they would do it.

One thought on “Are contractors required to give pay less notices under the LDEDC Act 2009 and the revised Scheme?

  1. Intriguing

    In a similar scenario, a sub-contractor submits its Application for £100, in response to which the main contractor neglects to issue a Payment Notice. The subcontractor’s Application therefore becomes the Default Payment Notice.

    The main contractor then issues a Pay Less Notice showing the amount due as minus £100, thereby making him the payee and the subcontractor the payer.

    Using the same principle as above, seeing as (by virtue of the main contractor’s Pay Less Notice) it would only be the Payer (sub-contractor) that could issue a Pay Less Notice, does this make the main contractors Pay Less Notice invalid?

    If so, we are back to the position whereby the subcontractor’s Application becomes the Default Payment Notice and, absent a Pay Less Notice, is due for to be paid in full.

    Answers on a postcard?

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