Construction payment and pay less notices under a microscope

A notable case, Laing O'Rourke v Shepperton Studios [2026] EWHC 612 (TCC), has recently been decided, clarifying what employers' payment and pay less notices must contain and offering timely guidance on drafting such notices to manage the potential risks.

In construction projects, the validity of payment and pay less notices is critical in ensuring prompt and proper payment and avoiding disputes.

What were the facts?

In brief, Laing O'Rourke Delivery Ltd (Contractor) submitted a payment application for £5,627,275.11. In response, Shepperton Studios Ltd (Employer) served a payment notice stating a notified sum of £2,420,516.84 but failed to provide any breakdown or explanation for this valuation. The Employer later served a pay less notice, this time with annexed calculations setting out detailed deductions and assessment.

In an adjudication, the adjudicator found that both the payment and pay less notices from the Employer were invalid. The payment notice was defective because it stated a figure for payment but it failed to explain the basis on which that sum had been calculated. The adjudicator further found that the pay less notice could not be used to retrospectively repair the payment notice's earlier non-compliance and so the pay less notice also could not be relied upon. Essentially, the earlier non-compliance of failing to set out the basis for calculation flowed down and contaminated the validity of the pay less notice. On that basis, the applied-for sum by the Contractor of £5,627,275.11 became the notified sum to be paid.

The Employer didn't pay, so the Contractor began enforcement proceedings in the court. The Employer advanced four defences, two of these defences were that (i) the adjudicator's decision was "obviously wrong" and so should not be enforced and (ii) its pay less notice was in fact valid.

Outcome of the hearing

The court held that the Employer's payment notice was invalid because it failed to set out the basis on which the sum was calculated. Stating only a single figure, without any supporting breakdown or clear incorporation of referenced documents, did not meet the statutory and contractual requirements. The court stressed that the recipient must be able to understand how the figure was reached.

However, the court confirmed that an invalid payment notice does not automatically taint a subsequently served pay less notice. The two notices perform different functions at different stages of the payment cycle. A pay less notice can be effective, if on its own terms, it complies with the contract and the law and is served on time.

Applying that analysis, the court held that the Employer's pay less notice was valid. It contained detailed calculations and annexures setting out the Employer's assessment and specific deductions. As a result, the amount properly due was reduced to the Employer's original notified sum of £2,420,516.84.

Why this matters

The case underscores the importance of disciplined notice practice and well-trained project teams. It also highlights the need to align contractual payment mechanisms with statutory requirements.

If an employer fails to serve a valid payment notice on time, a contractor can often insist on being paid the amount it claimed – even if the employer considers that figure too high. However, following this case, the employer may still be able to reduce the applied for amount by serving a properly drafted pay less notice. But if both the notices are invalid, it can lead to an employer having to pay first and argue about the true value later.

The judgment reinforces a couple of practical messages:

1. Payment notices must do more than state a bottom line. They must explain the basis of calculation or clearly signpost and incorporate a document that does so, within the notice itself.
2. Employers and contractors should not assume that a defective payment notice renders a subsequent pay less notice ineffective. If the pay less notice is timely and self-contained, with a proper breakdown, it can impact the notified sum.

Practical points

So, what should parties to a construction project look out for?

1. Form of payment notices - Employers should ensure that payment notices set out the sum considered to be due at the due date and the basis on which that sum is calculated. This can be done either by including a clear breakdown within the notice or by expressly and unambiguously incorporating an attached valuation or referenced schedule as part of the notice.
2. Do not assume knowledge - Employers are warned against relying on the contractor's familiarity with the project valuations to cure defects within payment notices. The notice must, on its face, enable the contractor to understand how the figure was derived.
3. Form of pay less notices - Pay less notices should be drafted to stand on their own. They should set out the sum considered to be due and the basis on which that sum is calculated. This may include the gross valuation, disallowed items and deductions to show the calculations that lead to the pay less figure. Annexes and schedules can be helpful, but the notice should refer to them expressly so that they form part of the notice.
4. Training - Project teams should be trained on timing and content requirements, including fallback positions where a payment notice may be missed or defective, and what information should be attached to such notices.