Well the recent spate of cases finally interpreting the amended HGCRA 1996 should have taught us all one thing – CHECK THE APPLICATION AND MAKE SURE YOU SERVE YOUR PAYMENT NOTICE ON TIME.

As we know all construction contracts1 must contain an adequate payment mechanism to determine how much should be paid to a contractor (or subcontractor).  It should include due dates for payment, the obligation on the payer to serve a payment notice and that where the payer fails to serve a payment notice, the interim application becomes a default payment notice.

Now imagine you have employed me as your bricklaying subcontractor on a job for £1m with some 10 interim payment due dates.  I apply for an interim payment of £100,000 – it's probably only worth £50,000 (there's a row).

The first thing you must do is check the application:

  • Is it a valid interim application?
  • Has it been issued too early or too late?
  • Has it been submitted in accordance with the payment cycle?
  • Does it set out "the sum that the payee considers to be or to have been due"?If it doesn't then it won't be a valid interim application.

1. If you don't serve a Payment Notice you will be obliged to make payment to me of the full £100,000 whether it's due or not (absence fraud). 

How does the Act do this: 

  • My interim application for payment if unanswered can become a default payment notice and the £100,000 will have to be paid whether due or not3.

To avoid this happening:

  • Serve a Payment Notice specifying the sum that you consider is due and the basis upon which you have calculated that sum.  
  • The Payment Notice has to be served in time (normally no more than 5 days after the due date for payment).  
  • Serve a Pay Less Notice within the prescribed period4 before the final date for payment setting out the amount you consider is due on the date of the notice and the basis on which you have calculated the sum due.

2. Say you've served a Payment Notice for £75,000 because your QS has measured my work wrongly at £75,000 then the £75,000 will be due and payable on the final date for payment unless:

  • You serve a Pay Less Notice within the prescribed period setting out the amount you consider is due i.e. the £50,000

The Pay Less Notice must set out the basis on which you consider that the £50,000 is due:

Click here to view the Table

  • Or say you find after you served the Payment Notice for £75,000 that there is £25,000 worth of defective work. Then serve your Pay Less Notice with the following calculation:

Click here to view the Table

3. Say you have failed to serve a Payment Notice and my interim payment application has become a default payment notice and the full £100,000 will have to be paid UNLESS:

  • You serve a Pay Less Notice in time setting out the amount you consider is due and on what basis.

4. Say you have served a late Payment Notice (which would be ineffective) it may be that that late Payment Notice could stand as a Pay Less Notice (provided it sets out the amount that is due and on what basis). The courts have not yet finally decided this point.

  • The better course is to serve a Pay Less Notice if you have time.

SO YOU HAVE PAID ME THE FULL £100K.  WHAT CAN YOU DO?

  • Try to get the £50K back in the next payment application but unamended JCT won't allow you to recover overpayments until the final payment (I might well be insolvent by then).

YOU DON'T PAY ME AND THE ADJUDICATOR HAS ORDERED YOU DO SO. WHAT CAN YOU DO?

  • Check to see whether I am insolvent before you pay and if I am apply for a stay of execution.
  • Check to see if there has been a breach of natural justice and apply for a stay.

PREVENTION IS BETTER THAN CURE

  • Consider amending your contracts to allow you to recover overpayments before the final certificate so you can issue a negative payment notice.
  • Prescribe in detail the form of the interim application for payment e.g. require them to be sent by recorded delivery.

LESSONS

  1. Follow the payment terms in the contract diligently.
  2. Check the interim application.
  3. Serve Payment Notices or Pay Less Notices.
  4. Stop me getting that disputed extra £50,000.
  5. Amend your contracts and be vigilant.