Avoiding costly payment disputes in construction contracts

The recent Placefirst Construction Ltd (Placefirst) v CAR Construction (North East) Ltd (CAR) case serves as a crucial reminder for construction contract parties to get their paperwork right or risk costly consequences.

Whether a contractor or acting for an employer, if you're managing a construction contract, you'll know issuing notices correctly is critical. Many contracts include conditions precedent — rules that must be followed before you can claim extra time, additional costs, or withhold payment. This means if you don’t strictly comply with the contract’s requirements, your notice could be invalid, and you may lose your entitlement to these rights — even if you had a valid reason for the claim.

In very general terms, the more serious the consequence, the stricter the courts are in terms of looking for exact compliance with the contract requirements. That can include making sure the addressee and sender are correct (eg if the contract says the notice should come from the employer, does it count if it is issued by their contract administrator?). Does the contract say where notices should be sent, when and how?

Why payment and payless notices matter

The paying party (normally the person instructing the work, the employer) needs to issue these notices correctly otherwise they may have to pay the full sum claimed, even if there are legitimate reasons to dispute all or part of it. The question of whether a paying party issued a valid payment notice and/or payless notice came before the Technology and Construction Court (TCC) in England in the Placefirst case.

As the paying party must pay what is called the “notified sum”, the key question in many payment disputes is – in which document/notice can we find the notified sum?

Sounds simple? Not always. 

The dispute arose here when, in response to CAR’s application for payment, Placefirst sent CAR an email with a letter attached that included the words “Payless Notice” in the title and an excel spreadsheet — “Valuation 30”. 

CAR argued the payless notice was invalid under the 1996 Act and the contract between the parties because it was given before notice of the notified sum (eg a payment notice).

Placefirst’s position was that either —

• CAR’s application for payment was the payment notice; and/or

• The spreadsheet attached to Placefirst’s email was the payment notice, and the letter was the payless notice

In this case, Placefirst disputed a £867,000 payment order made by an adjudicator, arguing it had served a valid payless notice.

The TCC ruled in Placefirst’s favour, determining a payless notice could be issued at any time after a payment application, and the documents Placefirst provided met statutory requirements.

Common mistakes in payment disputes

Many payment disputes crop up due to administrative errors. Some of the most common issues include —

• Failing to issue a payment notice or payless notice within the required timeframe;

• Not including the correct information in the notice;

• Not serving the notice correctly

If a business gets any of these steps wrong, it may find itself in a costly legal battle.

The Placefirst decision is a good example of the court not taking an unduly legalistic interpretation to payment and pa-less notices, in favour of a common sense approach, reflecting the substance of the documents rather than simply what they are called.  The decision to serve a payment notice and a pay-less notice together, or just one or the other, was considered to be entirely up to the payer.

Both a payment and a payless notice can be served simultaneously via the same email or letter, and provided the two notices are distinct and separate, the notices will be accepted as valid. It is also clear that there is no bar to the paying party serving an “early” payless notice immediately following an application for payment.

What are we seeing in practice?

Our construction team frequently sees arguments like those CAR used, and we’ve dealt with several cases where payment and payless notices have been challenged.

In one recent case, we acted for a contractor who had to issue a payless notice after the employer made a damages claim against them. The contract stated notices for the employer were to be sent to the contract administrator (CA). However, during the project, the CA was replaced. Our client served the notice to the CA and copied the employer, only for the employer to argue it was invalid because it should have been sent directly to them and copied to the CA.

We successfully argued the notice was valid, and the adjudicator agreed. Had the adjudicator ruled differently, the contractor could have been forced to pay out hundreds of thousands of pounds before having to reclaim it. This case illustrates just how crucial it is to comply with service requirements exactly.

In another matter, we helped a contractor secure payment after the employer failed to issue the required notices. As a result, the employer lost the ability to challenge specific claims, and we were able to resolve the dispute through adjudication, leading to a favourable settlement for our client.

What this case means for the construction industry

This ruling reinforces the need to understand the notice requirements in construction contracts and getting those right. While Placefirst was ultimately successful in court, the initial adjudication decision could have resulted in a significant financial loss. The case is a good example of the court’s common sense approach, but businesses should not have to rely on litigation to achieve that. Preventing issues from arising in the first place is always the best approach.

To reduce the risk of payment disputes, businesses should —

• Review construction contracts carefully — ensure payment and notice provisions comply with the requirements of the 1996 Act and all parties clearly understand them

• Keep track of deadlines — set up internal reminders to issue notices on time

• Ensure notices are properly drafted — include all required information to avoid ambiguity

• Seek legal advice early — if a dispute arises, taking early legal advice can help protect your position

If you are involved in a construction dispute or want to ensure your payment processes are compliant, our team can help. Contact our construction law experts for guidance.