In the last few months of 2023, we represented parties in three different adjudications; an Employer, a Main Contractor and a Sub-Contractor. The common denominator was that all three involved a Referral for a true value adjudication of works undertaken and in each case there were issues concerning compliance with any payment regime and the ineffectiveness of payless notices.

In this article, we consider the requirements of the statutory regime and offer guidance as to how to comply.

What is a Payment Regime in the Construction Industry?

A Payment Regimes is nothing more complicated than the contractual provisions directing when payments are to be made and what the timetable is for applications and payment notices.

The principal parties are the ‘payer’ (often the Employer) and the ‘payee’, often the Contractor.

In the first instance, the payment regime may be set out in the contract. If it is then it must comply with the minimal requirements set out in the Housing Grants Construction and Regeneration Act 1996 (“the Act”).

Where the contractual payment regime is insufficient, or the contract does not provide a regime, the Statutory Payment Regime (Scheme for Construction Contracts 1998) will apply.  The Scheme applies where certain payment provisions are missing, or in some circumstances, the entire Scheme will apply as there is no contractual payment provision at all.

The starting position is that the payee makes an application for payment on a regular basis. The payer then has a limited number of days to assess and issue a valuation of the application. It then issues a Payment Notice setting out the sum it intends to pay. If it intends to deduct money from the assessed value of the application it has to issue a Payless Notice.

The regularity of the payee’s payment applications must comply with the contractual payment regime, and if not applicable, the Statutory Payment Regime. The same applies to the payer when issuing payment notices. This is particularly important where the payer decides to withhold some or all of the payment and issues a Payless Notice. Failure to comply with the relevant regime will render such a Payless notices invalid.

Statutory Payment Regime

There are two key considerations here; content and timing.

Content

The payee’s payment application must be written, specifying the amount of any payment(s) it considers to be due and how those payments are calculated. In short, the payee must be able to support and evidence its claim and calculations.

When issuing a Payment Notice, the payer must also clearly set out how the Payment Notice is calculated, to what it relates and specify the amount it proposes to pay. This is crucial when issuing a Payless Notice – it is simply not enough to deduct an amount from the payment notice without clearly explaining the reasoning.

Timing

If the contract does not provide a regular period for payment, then the Statutory Payment Regime  requires invoices to be issued every 28 days. This is known as the ‘relevant valuation period.’ It does not matter what point in the month this 28-day period runs from but it must be consistent month to month.

The payment ‘due date’ is 7 days after the expiry of the relevant valuation period. Therefore, payment is due 7 days after the date of the invoice (assuming it is has been issued in accordance with the above.)

The ‘final date’ for payment is 17 days from the due date and the date for issuing a payment notice/payless notice is 5 days after the date on which payment becomes due.

For example, if an invoice was raised on 30 January in any given year payment would be due 7 days later on 6 February. The final date for payment would be 17 days later on 23 February. Payment Notices or Payless Notices are only valid if served no later than 5 days after this, on 28 February. Any Payless Notices received after this date would not be enforceable.

Smash and Grab Adjudications

Compliance with the Statutory Regime or a contractual provisions can be difficult, but if undertaken correctly, it opens the option for a technical adjudication, colloquially known as a ‘smash and grab’ adjudication.

Where the payer fails to issue a Payment Notice then the payment application stands as the assessed value. Where the payer gives an assessment of value or even a Payment Notice then in the absence of a valid Payless Notice the payer has no right to make a deduction.

In either case, in the event of non-payment of the assessed sum due, this constitutes a dispute which the payee can refer to Adjudication. The adjudicator is not asked to determine the value of the work in question but instead whether the payee has complied with the relevant regime (contractual or statutory) and if so in the absence of a Payless Notice, the payee will be awarded payment on a technicality.  

True Value Adjudications

Many Employers and Contractors are unaware of these requirements and so their contracts do not comply with the Statutory Regime. In such circumstances, where disputes over payment arise and neither party has complied, it is necessary to seek a true valuation of the works undertaken via an adjudication. By nature, these involve more work, evidence and may require an extension to the 28 days timescale to be determined.

Our Recent Cases

1) Our client was an Employer who had appointed a Contractor to complete construction works. A dispute arose when our client (for various reasons) did not pay the contractor who then referred the matter to adjudication. As the contractor had brought the adjudication based on it having applied for payment in accordance with the Statutory Scheme, the Adjudicator had to consider whether the requirements of the Statutory Scheme had been met. The Adjudicator concluded that the contractor had not adhered to the Scheme and that therefore our client was not in breach of their payment notice obligations and no payment was due.

2) Our client was a main contractor who was completing building works for a development company. Our client sub-contracted an element of the works to a sub-contractor. A dispute arose as to what was payable to the sub-contractor and whether payless notices were valid. In this case, it was clear that the Statutory Scheme had not been complied with and our client referred the matter to an Adjudicator for a true value of the works undertaken by the sub-contractor. The sub-contractor was unable to demonstrate the value of work it had undertaken and no further payment was found to be due.

3) We acted for a sub-contractor company which contracted to undertake maintenance works under a framework agreement. Payless notices were issued by the contractor and our client contested their validity., Our client later commenced a true value adjudication which was successful.

Analysis

In each of these disputes our clients were successful for two specific reasons:

1              They maintained good records; and

2              They won on the law by analysing the facts and applying the law appropriately.

Non-compliance with the contractual (or statutory) regime is commonplace and generally does not cause an issue where the parties have a good relationship and there is no dispute. Unfortunately, disputes will inevitably arise in some construction contracts in terms of valuation and payment. 

Operating under compliant contracts and understanding what notices are due, in what form and when are key to succeeding in adjudications.

If you need assistance with a construction dispute, or advice on how to ensure your payment regime is compliant, please contact us on 020 3814 2020.

This article is for general information only and does not constitute legal or professional advice.