Payment notices in construction contracts

Those within the construction sector will be familiar with the requirements of the Construction Act (the Housing Grants, Construction and Regeneration Act 1996, as amended), relating to the use of payment notices in construction contracts and the severe cost consequences that can arise as a result of getting it wrong.  The UK courts continue to generate new law in this area and parties should be aware of ongoing developments to guard against any pitfalls.

The two recent cases of Downs Road Development LLP v Laxmanbhai Construction (U.K.) Ltd (2021) and D McLaughlin & Sons Ltd v East Ayrshire Council (2021) provide guidance from the courts on the form and timing requirements in order for payment notices to be valid.

In Downs Road v Laxmanbhai, the court considered the consequences of the employer’s approach of issuing of multiple payment notices during the payment cycle. For each payment cycle, it issued two payment notices.  The first notice, which was issued within five days of the due date, was effectively a “holding notice”. This would specify a nominal sum of £1. The second notice was thereafter issued out of time but specified a greater sum that it actually considered was due.  The courts decided that the first notice was invalid as it was simply specified a nominal amount and therefore was not a sum that the employer truly considered to be due at the payment due date, as required by the Construction Act.

In McLaughlin v East Ayrshire Council, the contracting parties disagreed on the date which the works commenced. This date set the relevant due date for the purposed of the payment cycle. The court considered how the validity of an interim payment notice might be affected by the specification of an incorrect due date within a notice. Here the court decided that if a contractor specifies an incorrect due date in its payment notice, this does not meet the requirements of the Construction Act and therefore the notice would be invalid. The onus was placed on the contractor to get its notice right, as it places an employer at risk in circumstances where it wishes to pay less, as a failure to serve a pay less notice at the correct time would result in it being liable to pay the sum applied for.

The commercial implications of these two cases and how parties should best protect themselves against the risk of getting their notices wrong are key issues for consideration.