When a project starts running into trouble contractors may find it tempting ‘spread the pain’ of payments being interrupted or withheld from them, by withholding payment to subcontractors.
That can have dire consequences for many smaller subcontractors, who may not have the resources to easily weather any unforeseen delay in payment.
A subcontractor has a legal right to interim or staged payment for works done or services provided, and a statutory mechanism is in place designed to ensure a subcontractor’s cash flow is not unreasonably interrupted by a contractor that is unwilling to pay for no good reason.
The mechanism kicks in on the issue of a payment notice, which can be issued by or on behalf of the subcontractor or the contractor. It must simply be clear it is intended to be a payment notice, and it must state the amount to be paid and the basis upon which the amount was calculated. The raising of an invoice by a subcontractor is often sufficient, if it contains the necessary information.
The sum set out in the payment notice must be paid by the final date for payment, unless the contractor issues a valid pay less notice in time, setting out the amount it believes should be paid and the basis upon which the amount was calculated. The final date for payment and the date for issuing the pay less notice will be set out in the contract, or statutory ‘fall-back’ provisions will apply:
- Final date for payment: 17 days from the payment due date. The payment due date will be set out in the contract, or it will be when the subcontractor makes a request for an interim payment
- Pay less notice: Seven days before the final date for payment
One excuse often used by contractors for failing to pay a subcontractor in time is that it has not yet received payment from whoever is further up the contractual chain. ‘Pay when paid’ clauses in construction contracts are prohibited, save in very limited circumstances, so this is not usually a valid reason to withhold payment or to issue a pay less notice.
If the contractor does not pay the amount included in any payment notice, and no valid pay less notice has been issued, then a subcontractor’s options include:
- Suspending works for the duration of the non-payment, but only after giving the requisite written notice of the intention to do so, which under the Scheme is seven days. The subcontractor’s costs of the suspension can also be recovered from the contractor.
- Referring the dispute to adjudication. An adjudication must be completed within 28 days of referral, though it can be quicker in straight forward cases. Save in very exceptional cases the order will be that the contractor pays the amount in the payment notice, regardless of any deductions or set-offs that might otherwise have applied. If the contractor still does not pay, an application can be made to the Court to enforce the adjudicator’s decision, which can often be dealt with in around one month.
- Issue a statutory demand for payment of the amount due in the payment notice. Non-payment gives rise to the ability to issue winding-up proceedings against the contractor. It is therefore a powerful tool, but it should be used with care. It will likely damage the relationship with the contractor, and there are potentially heavy costs consequences if it is used improperly.
If a pay less notice has been issued, and there is a genuine dispute as to whether or not any deductions or set-offs have been properly made, then a subcontractor should be very cautious about simply proceeding with the options listed above, at least without first getting legal advice.