The purpose of a pay less notice is to give the paying party the right to pay less than/withhold all or part of the notified sum. The pay less notice should be a separate document from the payment notice.
Paying parties should carefully examine any request for payment received and treat it as a payment application/default notice unless it is clear that it is not one. If the request contains the necessary requirements under the Act or the Scheme, it is irrelevant if the party issuing the request did not intend for it to be treated as such. In the case of Trilogy Services Scotland Ltd v Windsor Residential the paying party, Windsor, failed to serve a pay less notice in response to letters from Trilogy enclosing outstanding invoices for an interim payment. Trilogy sued for payment and the Sheriff Court took the view that as the letters complied with the requirements of the Act they constituted a default notice regardless of whether Trilogy had intended them to be such. That decision was upheld by the Sheriff Appeal Court.
The pay less notice must be clear and unambiguous. It must be made plain that it is a pay less notice. The notice must specify the sum that the paying party considers they require to pay and the basis on which the sum has been calculated, even if that is zero.
The Court of Session has taken the view that a valid pay less notice must, as a minimum, set out grounds for withholding and the sum applicable to each ground in order to give an indication of those sums were arrived at.
A pay less notice must be given within a prescribed period before the final date for payment and may not be issued before the notice containing the notified sum. The prescribed period is either agreed between the parties, in which case it will be detailed in the contract, or as per the Scheme. The Scheme requires a pay less notice to be served no later than seven days before the final date for payment.
If the paying party does not serve a valid pay less notice timeously they are obliged to pay the notified sum without deduction, regardless of whether they have a valid challenge to the sum.
If the paying party fails to serve a pay less notice timeously, or serves a defective notice, and does not pay the notified sum, the unpaid party is also entitled to give notice to suspend any or all performance of its contractual obligations and/or may refer the dispute to adjudication. For more information on adjudication please see our adjudication blog series.
If the unpaid party suspends performance, they are also entitled to payment of reasonable costs and expenses incurred in exercising their right to suspend. Further, if the unpaid party suspends performance, this is likely to have a knock on effect on completion, and they may also be entitled to an extension of time.
If the party receiving payment commences an adjudication and no pay less notice has been issued, the paying party will have no defence to the adjudication. This is known as a "smash and grab adjudication".
In next week's blog we will discuss payment notices, which includes the right of the unpaid party to serve a default notice. If you haven’t read our previous payment blogs they can be found here.
Should you require assistance with any aspect of a construction contract, we have a large and experienced construction team who would be happy to discuss this with you.