In this scenario, the Contractor made an Interim Payment Application (IPA) on 19 August 2021. The Employer’s Agent (EA) was on leave when the IPA was received and only when the Employer’s Project Manager came to review the IPA in more detail did the Employer conclude that the IPA was for an inflated amount. The due date of the IPA was 26 August 2021. The EA issued a Payment Notice on 1 September 2021, which both the EA and the Employer knew was outside of the contractual timeframe. The Employer is now worried that the inflated amount claimed by the Contractor will become payable, and so wants to issue a Pay Less Notice. The Employer wants to know the last date on which it can issue the Pay Less Notice in this situation.
What is the last date that a Pay Less Notice can be issued?
As with Scenarios One and Two, we are using the unamended JCT D&B 2016. The starting point is Clause 4 (Contract Sum and Adjustments), specifically Clause 4.7 (Interim Payments – Contractor’s Interim Payment Applications, due dates, and Payment Notices).
Clause 4.7.2 provides that (subject to clause 4.7.3), the due date for payment is 7 days after the Interim Valuation Date. Clause 4.7.3 tells us that the Contractor must make an application (the IPA) to the Employer which states the sum the Contractor considers due on the due date (and shows the basis on which the sum has been calculated). In circumstances where the IPA is received by the Employer on any day up to and including the Interim Valuation Date, the due date is (as per 4.7.2) 7 days after the Interim Valuation Date; in other words, whether the IPA is issued 5 or 15 days in advance of the Interim Valuation Date, the due date remains 7 days after the Interim Valuation Date. However, if the IPA is received later than the Interim Valuation Date, then the due date is 7 days after receipt of the IPA by the Employer.
For the purposes of our scenario, it is not relevant whether the due date of 26 August is 7 days after the Interim Valuation Date or 7 days after receipt of the IPA by the Employer, but it useful to be aware of these timeframes.
Clause 4.7.5 goes on to provide that the Employer must give a Payment Notice to the Contractor no later than 5 days after the due date (this time period cannot be amended, it is statutorily mandated). The Payment Notice must set out the amount the Employer considers due on the due date. In our scenario, the last date on which the Employer could have issued a Payment Notice was 31 August 2021 (26 August + 5 days). Accordingly, as the Employer recognised, issuing the Payment Notice on 1 September 2021 meant that it was outside of the contractual timeframe.
However, all is not lost for the Employer!
Clause 4.9 addresses the final dates and amounts of interim payments. Clause 4.9.1 tells us that the final date for payment of an Interim Payment is 14 days from its due date; in our scenario, that makes the final date for payment 9 September 2021 (26 August + 14 days).
In circumstances where the Employer wants to pay less than the sum stated in a Payment Notice (or indeed the IPA), Clause 4.9.5 allows the Employer to issue a Pay Less Notice. This notice must comply with Clause 4.10 (i.e., it must specify the sum considered due at the date the notice is given and the basis on which that sum has been calculated) and must be issued no later than 5 days before the final date for payment[1]. In our scenario, that makes the final date on which a Pay Less Notice can be given 4 September 2021.
Therefore, if the Employer issues its Pay Less Notice by 4 September 2021, then it is not obliged to pay the sum the Contractor considered due in the IPA; rather, on the final date for payment (9 September) it must make payment of the amount stated in the Pay Less Notice (but note it cannot pay less than this amount). The 4th September 2021 is in fact a Saturday, and so in such circumstances it would be recommended to issue the Pay Less Notice on the preceding business day.
In summary, for an Interim Payment Application issued on 19 August 2021, the due date, the final date for payment, and the last dates on which the Employer can issue a Payment Notice or a Pay Less Notice are as follows:
| Event | Date | JCT D&B Clause |
| Due date (+7 days from either the Interim Valuation Date or the date of receipt by the Employer of the Interim Payment Application) | 26 August 2021 | 4.7.2 / 4.7.3 |
| Last date on which Employer can issue a Payment Notice (+5 days from due date) | 31 August 2021 | 4.7.5 |
| Last date on which the Employer can issue a Pay Less Notice (-5 days from the final date for payment) | 4 September 2021 | 4.9.5 |
| Final date for payment (+14 days from the due date) | 9 September 2021 | 4.9.1 |
If the Employer does not issue its Pay Less Notice by 4 September, then on 9 September it will be obliged to pay the Contractor the sum stated as due in the Interim Payment Application; this is because the Employer’s Payment Notice was not correctly given in accordance with Clause 4.7.5[2]. Had the Employer’s Payment Notice been given in time, and no Pay Less Notice been issued, then the amount due on 9 September would be the amount stated in the Payment Notice[3].
Commentary
In our scenario, having missed the deadline for issuing the Payment Notice, it is absolutely essential that the Employer ensures that the Pay Less Notice is issued in time and is compliant in respect of its substance. If the Employer and its EA fail to issue the Pay Less Notice in time, then irrespective of the validity of the Contractor’s over inflated claim it is the sum set out in the Contractor’s IPA that will become due and payable. Failure by the Employer to then pay this sum will give rise to a right for the Contractor to suspend works on site. In such circumstances the Employer is usually, therefore, required to seek to address the overpayment in the next interim payment cycle.
[1] Clause 4.9.5
[2] Clause 4.9.3
[3] Clause 4.9.2
