Just a few weeks ago, I wrote that section 105(2) of the Construction Act 1996 should be consigned to George Orwell’s fate worse than death, Room 101. It seems that Coulson J has similar feelings, although he expressed it rather differently in round two of the dispute between Severfield (UK) Ltd and Duro Felguera UK Ltd.
Severfield (UK) Ltd v Duro Felguera UK Ltd – round one
Round one involved Severfield’s interim application 15 and Duro’s alleged failure to serve the appropriate pay less notice. The issue really centred on the extent of Severfield’s works that fell within the scope of section 105(1) and which works were excluded under section 105(2). The parties’ contract did not include Construction Act-compliant payment provisions, which is what led to the parties’ finding themselves in this position.
The payment dispute was referred to adjudication and Severfield calculated the proportion that it thought was appropriate to claim under section 105(1). It was no surprise that Duro disagreed with the percentage calculation and so, when the adjudicator agreed with Severfield, it refused to pay and the parties headed off to the TCC for enforcement proceedings. Stuart-Smith J refused to enforce the adjudicator’s decision.
Severfield (UK) Ltd v Duro Felguera UK Ltd – round two
Round two of the parties’ dispute involved some interesting litigation tactics, which Duro’s counsel described as Severfield “playing fast and loose with the court’s procedure”. Duro alleged that discontinuing the first set of proceedings (the enforcement proceedings), and starting a fresh claim was an abuse of process.
While I cannot possibly comment on a party’s litigation tactics, it is clear that Coulson J did not agree with either point. However, I’m getting a touch ahead of myself. First, a bit about the new proceedings.
After failing to enforce the adjudicator’s decision, Severfield went away and looked again at its interim application 15. In July 2015, it put forward a revised claim for the works it said fell within section 105(1). It said this new, revised claim was worth £1.4 million. It took 10 pages to explain this and the explanation:
“…went far beyond simply identifying items that they had stripped out of the original claim. On the contrary, it argued all sorts of positions by reference to drawings and other material, and produced an entirely new variations spreadsheet.”
Therefore, it’s no surprise that Coulson J held this was a revised claim, and that Severfield could not rely on interim application 15 to argue that the claim had been before Duro previously, and that there should be summary judgment because Duro had failed to serve a pay less notice in January 2015. The revised claim could not “piggyback” off Severfield’s December 2014 default payment notice. Even if it could (which he said it couldn’t), there was the extra hurdle that the payment notice had to set out the basis on which the sum was calculated. From interim application 15, it was not possible to identify clearly the £1.4 million now claimed.
Absence of notices
In reaching this conclusion, Coulson J looked at several recent judgments on payment (including ISG Construction v Seevic and Galliford Try v Estura), and reinforced the fact that in the absence of a pay less notice, the employer has to pay the amount the contractor has claimed (the notified sum).
To counter the “potentially draconian consequences” of the lack of an employer’s notice, he also reinforced the need for the contractor’s payment notice to be clear and unambiguous (Caledonian Modular Ltd v Mar City and Henia Investments v Beck Interiors).
Section 105 is a “muddle”
It is probably something of an understatement to say that if parties enter into a contract that covers both included and excluded works – what Coulson J termed a hybrid contract – then they are likely to get themselves into a “muddle”, because section 105 requires the parties to grapple with the exceptions. It is probably somewhat trite to suggest that the easy way out of the muddle is to agree Construction Act-compliant payment provisions from the outset. Trite, but true. As Coulson J put it:
“….under a hybrid contract such as this, there are two very different payment regimes… I find that uncommercial, unsatisfactory and a recipe for confusion.”
An alternative is to have non-Construction Act compliant payment provisions and not to fall out. Clearly here the parties were happy for 14 applications for payment. We don’t know what went wrong last December, but something clearly did.
Adjudication is a “blessing”
I will leave you with a few more of Peter’s words, which summarises the position under section 105 extremely well:
All of the difficulties here, in both the old and the new proceedings, can be traced back to s.105 of the 1996 Act and the legislature’s desire to exclude certain industries from adjudication. A review of the debates in Hansard reveal that Parliament was aware of the difficulties that these exceptions would cause, but justified them on the grounds that (i) adjudication was seen as some form of ‘punishment’ for the construction industry from which (ii) the power generation and some other industries should be exempt, because ‘they had managed their affairs reasonably well in the past’.
I consider that both of these underlying assumptions were, and remain, misconceived. Adjudication, both as proposed in the Bill and as something that has now been in operation for almost 20 years, is an effective and efficient dispute resolution process. Far from being a ‘punishment’, it has been generally regarded as a blessing by the construction industry. Furthermore, it is a blessing which needed then – and certainly needs now – to be conferred on all those industries (such as power generation) which are currently exempt. As this case demonstrates only too clearly, they too would benefit from the clarity and certainty brought by the 1996 Act.
Who’d have thought adjudication would ever be described as a blessing, but it is certainly true that it has brought “clarity and certainly”, at least with regard to payment. We may have some fun and games with adjudicators’ jurisdiction and natural justice challenges, but the overwhelming majority of adjudicators’ decisions are honoured and parties move on, and carry on. I for one look forward to the next 20 years.