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Ask the team: can I combine a payment notice and a pay less notice into one notice?

By now, most construction practitioners will be aware that Part II of the Construction Act 1996 has been amended by Part 8 of the LDEDC Act 2009. Among the many changes, this has introduced the pay less notice (in place of the withholding notice).

Therefore, the two key notices under the Construction Act 1996 (as amended) are:

  • The payment notice.
  • The pay less notice.

Under the Construction Act 1996 (as enacted), a paying party could combine a payment notice and a withholding notice. The question is, can a paying party still combine those two notices under the amended Act?

In short, no. Before we explain why, there are three things to briefly consider under the amended Act:

  • When does the amended law apply from?
  • What is a payment notice?
  • What is a pay less notice?

When does the amended law apply from?

The Construction Act 1996 (as amended) applies to construction contracts entered into (that is, dated) on or after 1 October 2011 in England and Wales (1 November 2011 in Scotland) (the effective date). So, for older contracts, the parties must stick to payment and withholding notices, as required.

For a mark-up of the amended legislation and more information on our other Construction Act 1996 resources, see Getting ready for the Construction Act 1996 changes.

What is payment notice?

A payment notice is the generic name for a statutory notice issued by the payer under a construction contract.

The most common form of payment notice is the notice envisaged by section 110A(1)(a) of the Construction Act 1996 (as amended). That subsection requires a payer to provide a notice to the payee “not later than five days after the payment due date”.

Often, the payment process under a construction contract starts with a notice from the payee (an application for payment). This usually sets the “due date for payment” as the date of the application, or the date the payer receives the application.

However, because the Construction Act 1996 (as amended) also allows the payer to initiate a payment cycle, the payee may give the payment notice in some circumstances. To keep this post simple, we only refer to a payment cycle initiated by a payee’s application for payment.

Section 110A(2) of the Construction Act 1996 (as amended) requires the payment notice to set out the:

  • Sum the party serving the notice considers to be due, on the due date for payment. This may be given by the payer or the architect, project manager or other “specified person”.
  • Basis on which that sum is calculated.

What is a pay less notice?

A pay less notice under the Construction Act 1996 (as amended) is broadly equivalent to the withholding notice under the Construction Act 1996 (as enacted). It allows a paying party to, for example, give notice that it intends to set off a sum due from the payee against a sum otherwise due to the payee. The details are set out in sections 111(3) to (7) of the Construction Act 1996 (as amended).

Can the paying party combine the two notices?

As we mentioned above, in short the answer is no.

Under the Construction Act 1996 (as enacted), section 111(1) allowed a payer to combine a payment notice and a withholding notice into one notice (as long as it set out all the necessary details for both notices). However, for construction contracts dated on or after the effective date, “old” section 111(1) has been deleted. (The Construction Act 1996 (as amended) does not reinstate “old” section 111(1) somewhere else). As a result, from a legal perspective, the Construction Act 1996 (as amended) requires separate notices.

From a practical point of view, the need for two notices is reinforced by, for example, section 111(5)(b) of the Construction Act 1996 (as amended), which provides that a pay less notice can’t be served before the payment notice to which it relates.

While we cannot be certain how a court would interpret the situation where both notices are included in the same envelope, even if a party decides to take that potential short cut, it does not seem appropriate to risk combining the two notices into one document.

21 thoughts on “Ask the team: can I combine a payment notice and a pay less notice into one notice?

  1. I am not sure that I agree with this article. In my opinion, the question itself is a nullity because under the LDEDCA the only difference between the requirement for a payer’s certificate and a pay less notice is the date upon which the sum due is assessed (the due date and the date of the notice respectively).

    Both s.110A and s.111 require the respective notices to state “the sum that the [payer] considers to be due… and the basis on which that sum is calculated”. Given that the wording is identical, it surely follows that the requirements of the two notices are at least similar.

    This means that under the LDEDCA you now certify the NET sum due, rather than certifying the sum that would have been due before set-off and abatement. Therefore a s.110A notice necessarily includes withholdings within it (hence there is no longer any need for the old s.111(1)). Therefore the only reason that you would want to serve a pay less notice with the payer’s certificate is if a new right of set-off has arisen in the 5 days since the due date.

    I think the article also misses the key distinction between a withholding notice and a pay less notice. With a withholding notice you were obliged to state the sum being withheld. With a pay less notice you are required to re-state the sum due. That might make quite a big difference to a busy PM trying to keep track of multiple withholdings.

  2. I am not sure that I agree with this article. In my opinion, the question itself is a nullity because under the LDEDCA the only difference between the requirement for a payer’s certificate and a pay less notice is the date upon which the sum due is assessed (the due date and the date of the notice respectively).

    Both s.110A and s.111 require the respective notices to state “the sum that the [payer] considers to be due… and the basis on which that sum is calculated”. Given that the wording is identical, it surely follows that the requirements of the two notices are at least similar.

    This means that under the LDEDCA you now certify the NET sum due, rather than certifying the sum that would have been due before set-off and abatement. Therefore a s.110A notice necessarily includes withholdings within it (hence there is no longer any need for the old s.111(1)). Therefore the only reason that you would want to serve a pay less notice with the payer’s certificate is if a new right of set-off has arisen in the 5 days since the due date.

    I think the article also misses the key distinction between a withholding notice and a pay less notice. With a withholding notice you were obliged to state the sum being withheld. With a pay less notice you are required to re-state the sum due. That might make quite a big difference to a busy PM trying to keep track of multiple withholdings.

  3. Thank you, Simon. Here are two practical circumstances we had in mind:

    1. If the parties have needed to agree a long payment cycle, then the payment and pay less notices may be some time apart. Anything could have happened!

    2. Let’s say a main contractor has two separate sub-contracts with the same sub-contractor, and (to keep things simple) the sub-contracts allow the main contractor to use cross-contract set-off. Under sub-contract A, the contractor owes the sub-contractor £1,000. Under sub-contract B, the sub-contractor’s works are defective and the sub-contractor owes the main contractor £1,000. The payment notice under sub-contract A may say that the sum due under that contract is £1,000, but then the main contractor may say that he intends to pay less (£1,000 less £1,000 = £0).

    Finally, this Ask the team article was written in response to subscriber feedback and is limited to suggesting an answer to the question it poses: that is, if a party needs to serve both notices, can it combine them? We think not.

  4. Thank you, Simon. Here are two practical circumstances we had in mind:

    1. If the parties have needed to agree a long payment cycle, then the payment and pay less notices may be some time apart. Anything could have happened!

    2. Let’s say a main contractor has two separate sub-contracts with the same sub-contractor, and (to keep things simple) the sub-contracts allow the main contractor to use cross-contract set-off. Under sub-contract A, the contractor owes the sub-contractor £1,000. Under sub-contract B, the sub-contractor’s works are defective and the sub-contractor owes the main contractor £1,000. The payment notice under sub-contract A may say that the sum due under that contract is £1,000, but then the main contractor may say that he intends to pay less (£1,000 less £1,000 = £0).

    Finally, this Ask the team article was written in response to subscriber feedback and is limited to suggesting an answer to the question it poses: that is, if a party needs to serve both notices, can it combine them? We think not.

  5. I may have a very simple way of looking at this so please tell me if I am wrong:

    If I were issuing payment notices every month to various sub-contractors and in the month there were some contra-charges floating around for example – “sub-contractor A” has a variation for replacing some damaged goods casued by “sub-contractor B” in which we pay “sub-contractor A” for those works the that month. Surely when issuing “sub-contractor B” with a payment notice I can also have a section in their notice for setting off/witholding monies on the valuation due to the damaged they caused. This would solve the issue in one notice therefore notifying “sub-contractor B” of why we are witholding or setting off the monies on the valuation. If I were to write a payment notice out for “sub-contractor B”, then wait a few days and then write a pay less notice and issue that I think that makes things a little more complicated and unclear????

    I undertand that if the damaged casued was only known after issuing the first payment notice then we would have to issue a second play less notice before the due date – but if we know the damage was caused before we issue the first payment notice why can’t we combine them in one go???

  6. I may have a very simple way of looking at this so please tell me if I am wrong:

    If I were issuing payment notices every month to various sub-contractors and in the month there were some contra-charges floating around for example – “sub-contractor A” has a variation for replacing some damaged goods casued by “sub-contractor B” in which we pay “sub-contractor A” for those works the that month. Surely when issuing “sub-contractor B” with a payment notice I can also have a section in their notice for setting off/witholding monies on the valuation due to the damaged they caused. This would solve the issue in one notice therefore notifying “sub-contractor B” of why we are witholding or setting off the monies on the valuation. If I were to write a payment notice out for “sub-contractor B”, then wait a few days and then write a pay less notice and issue that I think that makes things a little more complicated and unclear????

    I undertand that if the damaged casued was only known after issuing the first payment notice then we would have to issue a second play less notice before the due date – but if we know the damage was caused before we issue the first payment notice why can’t we combine them in one go???

  7. I think the actual utilising of a withholding or pay less notice is being misunderstood here.

    A pay less notice is only to be issued should there be any further deductions/withheld sums post payment notice.

    E.g. A payment notice is provided which states a sum due of £10,000. In the time between this notice being issued and the final date for payment a defects report is received which itemises a number of items against said subcontractor. A pay less notice is subsequently issues stating that £xxx will be withheld against the originally due £10,000.

  8. I think the actual utilising of a withholding or pay less notice is being misunderstood here.

    A pay less notice is only to be issued should there be any further deductions/withheld sums post payment notice.

    E.g. A payment notice is provided which states a sum due of £10,000. In the time between this notice being issued and the final date for payment a defects report is received which itemises a number of items against said subcontractor. A pay less notice is subsequently issues stating that £xxx will be withheld against the originally due £10,000.

  9. Thanks, JoeV. I think your illustration is similar to what may happen in practice.

    Conor, if the contract allows it, you can include contra-charges in a payment notice. As we say above, what you can no longer do is combine two notices (if you do need two notices) into one.

    Remember that a party can typically wait for the next payment cycle to make deductions, if it doesn’t want to get caught up in an argument about notices.

    The LDEDC Act 2009’s amendments have changed the payment mechansims: our Practice note says more.

  10. Thanks, JoeV. I think your illustration is similar to what may happen in practice.

    Conor, if the contract allows it, you can include contra-charges in a payment notice. As we say above, what you can no longer do is combine two notices (if you do need two notices) into one.

    Remember that a party can typically wait for the next payment cycle to make deductions, if it doesn’t want to get caught up in an argument about notices.

    The LDEDC Act 2009’s amendments have changed the payment mechansims: our Practice note says more.

  11. Hi John

    I’m afraid we cannot answer specific questions, but I think you will need sufficient information to demonstrate what is being deducted and why, and how those sums are calculated. Each occasion is likely to be fact specific.

  12. Hi John

    I’m afraid we cannot answer specific questions, but I think you will need sufficient information to demonstrate what is being deducted and why, and how those sums are calculated. Each occasion is likely to be fact specific.

  13. Hi – we are on 14 day payment terms – would the payment due date be the date of our application. If that is the case, when would the contractor have to issue either the payment or payless notice? If the contractor simply decides to deduct monies from our account on very flimsy grounds, i.e. he is attempting to charge us for a change to the specification – i.e. we priced and are producing a fair finish – the client subsequently requires an acid etch finish to walls which the contractor is undertaking and being paid for as an extra, but intends to deduct very substantial amounts from our works to the walls for works we know form a part of the acid etch process, (in other words he will double up his payment by being paid for the works then deducting a good part of it from us) what action can we take quickly to avoid this simply being stopped from our next payment?

    If our only recourse is adjudication, this in itself is not the inexpensive, quick process it set out to be even if you are successful, but most subcontractors cannot wait that long for their money.

    My other question is this, can a contractor issue a payless notice which is referring to items not within that valuation and application for payment period i.e. we are on 14 day terms, have issued our latest application dated 12th July but the notice we have recently received refers to works from our start on site 20th May up to 30th June. The previous application was dated 28th June and he paid us all our monies up to that point without any mention of deductions.

    Once a valuation period has passed and been paid for, has a contractor backtrack and suddenly decide to go back over the whole contract period and deduct whatever he likes. (We are fully aware this is company losing money on this contract and believe he is seeking to recover his losses from us!)

    Would appreciate some help please – most subcontractors cannot afford to employ solicitors etc. especially at a time when the contractor has stated he is deducting, in our case some 20% of our contract value. Incidentally the works we are producing are of a high quality and within the spec we priced, we are working to programme and the client is pleased with them. We are working for another subcontractor who is in turn working for a main contractor.

    Many thanks for any information you can give me

  14. Hi – we are on 14 day payment terms – would the payment due date be the date of our application. If that is the case, when would the contractor have to issue either the payment or payless notice? If the contractor simply decides to deduct monies from our account on very flimsy grounds, i.e. he is attempting to charge us for a change to the specification – i.e. we priced and are producing a fair finish – the client subsequently requires an acid etch finish to walls which the contractor is undertaking and being paid for as an extra, but intends to deduct very substantial amounts from our works to the walls for works we know form a part of the acid etch process, (in other words he will double up his payment by being paid for the works then deducting a good part of it from us) what action can we take quickly to avoid this simply being stopped from our next payment?

    If our only recourse is adjudication, this in itself is not the inexpensive, quick process it set out to be even if you are successful, but most subcontractors cannot wait that long for their money.

    My other question is this, can a contractor issue a payless notice which is referring to items not within that valuation and application for payment period i.e. we are on 14 day terms, have issued our latest application dated 12th July but the notice we have recently received refers to works from our start on site 20th May up to 30th June. The previous application was dated 28th June and he paid us all our monies up to that point without any mention of deductions.

    Once a valuation period has passed and been paid for, has a contractor backtrack and suddenly decide to go back over the whole contract period and deduct whatever he likes. (We are fully aware this is company losing money on this contract and believe he is seeking to recover his losses from us!)

    Would appreciate some help please – most subcontractors cannot afford to employ solicitors etc. especially at a time when the contractor has stated he is deducting, in our case some 20% of our contract value. Incidentally the works we are producing are of a high quality and within the spec we priced, we are working to programme and the client is pleased with them. We are working for another subcontractor who is in turn working for a main contractor.

    Many thanks for any information you can give me

  15. Thank you for taking the time to share these issues. However, I am sorry to say we can’t answer detailed questions on our blog.

  16. Thank you for taking the time to share these issues. However, I am sorry to say we can’t answer detailed questions on our blog.

  17. Thank you for these interesting points.

    As I understand things – the bottom line is that a payment notice can legitimately under the LDEDC Act 2009 incorporate deductions/contra charges without the requirement to deal with such issues through the use of a separate pay less notices.

    Example, one sub-contractor damages another’s work, I can therefore include an adjsutment in my payment notice for a contra charge for the remedial works required.

    Standard Building contracts don’t specifically contain provision for making deductions/contra charges within certificates – therefore there is no express term allowing this – although, this is standard practise in construction. One assumes there is no issue with this.

    It would seem overly complicated and time consuming to deal with these deductions through issue of separate pay less notices.

  18. It is worth noting that, following Akenhead J’s judgment in Henia Investments Inc v Beck Interiors Ltd, it has been suggested that the court is open to the possibility that a party’s payment notice could also stand as a pay less notice. However, although the matter was before the court in Grove Developments Ltd v Balfour Beatty Regional Construction Ltd, Stuart-Smith J did not decide the point.

    For more discussion on this point, see Brenna Conroy’s Blog posts, Henia v Beck: time for a rethink? and Pay less notices under the Construction Act 1996.

    1. Hi,

      The above cases deal with pay less notices.

      There is nothing to suggest that a payment notice can not contain contra charges.

      Do we all agree that a payment notice can contain contra charges?

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