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Court of Appeal confirms meaning of section 111 of Construction Act 1996

In Adam Architecture Ltd v Halsbury Homes Ltd, the Court of Appeal has confirmed that section 111 of the Construction Act 1996 (and the requirement to serve pay less notices) applies to payments due following completion or termination of a contract, as well as interim payments.

In giving the leading judgment, Jackson LJ said he reached this conclusion based on the clear words in the Act and in light of the authorities (of which, see below). Consequently, employers (and their agents) need to be alive to the need to serve a pay less notice in response to any such account if they wish to avoid the prospect of an adjudicator’s decision against them for the full amount claimed.

Adam Architecture v Halsbury Homes

Adam Architecture Ltd (Adam) was retained by Halsbury Homes Ltd (Halsbury) to carry out architectural design services for a new development at Loddon in Norfolk. However, on 2 December 2015 (and after a number of weeks of Adam working on the proposal), Halsbury sent an email to Adam saying that it had decided to proceed on the project with another architect.

On 3 December 2015, Adam wrote to Halsbury saying that its:

“… original scope of work was void and their agreed fee was no longer relevant and they needed to draw a line under their work to date.”

It enclosed an invoice for work done up to 2 December 2015, some £46,239.

Halsbury did not serve a pay less notice and it did not pay the invoice. Therefore, Adam commenced an adjudication. The adjudicator found in its favour, essentially because Halsbury had failed to serve any pay less notice.

Halsbury then issued Part 8 proceedings for a declaration that the pay less regime did not apply to the December invoice and, therefore, Halsbury was not liable to pay. In response, Adam issued Part 7 proceedings to enforce the adjudicator’s decision.

At first instance

Both claims were heard at first instance by Edwards-Stuart J, who held that:

  • Halsbury’s email dated 2 December 2015 was a repudiatory breach of contract, which Adam accepted in two emails of the same day and its letter of 3 December 2015 enclosing its invoice (mentioned above).
  • Halsbury was not required to serve a pay less notice because:
    • the contract had been discharged so that neither party was required to perform its primary obligations under the contract; and
    • as a matter of contract construction, there was no requirement under the RIBA Conditions for Halsbury to serve any pay less notice in response to a termination account.

Consequently, the court held that Halsbury was entitled to the declaration it sought and Adam’s application for summary judgment was dismissed.

Section 111 of the Construction Act 1996

Section 111(1) of the Construction Act 1996 provides that:

“… where a payment is provided for by a construction contract, the payer must pay the notified sum (to the extent not already paid) on or before the final date for payment.”

Section 111 (3) provides that:

“The payer may in accordance with this section give to the payee a notice of the payer’s intention to pay less than the notified sum.”

It is to be noted that Adam did not take the point at first instance that, whatever the parties’ contract provided, the payment notice regime contained in sections 110 and 111 of the Construction Act 1996 obliged Halsbury to serve a pay less notice if it wished to avoid paying the invoice.

Therefore, on Adam’s appeal, Halsbury took the preliminary point that Adam should not be permitted to rely upon section 111 of the Construction Act 1996, having failed to argue the point in the court below. However, the Court of Appeal said that it would be unrealistic to decide the appeal ignoring the relevant provisions of the Act and that it would be doing a “disservice to the construction industry” if it gave a judgment that disregarded the relevant statutory provisions.

Court of Appeal

The Court of Appeal made almost equally short shrift of the repudiation point. Contrary to the conclusion reached at first instance by Edward-Stuart J, Jackson LJ (with whom Lindblom and Thirlwall LLJ agreed) said that he did not think that Adam accepted any repudiatory breach. His reasons are not easy to discern. He merely said that Adam treated the email dated 2 December 2015 as a termination of the engagement without the appropriate notice and hence it stopped work and notified Halsbury that it was doing so. Some might think that, by doing so, Adam was clearly accepting the breach but the Court of Appeal disagreed.

Of course, if the Court of Appeal had upheld the first instance judge on the repudiation point, then that would have been an end of the appeal because both parties would have been discharged from their primary obligations under the contract, including any obligations imposed by the Construction Act 1996.

However, the Court of Appeal was understandably keen to pronounce upon what it saw as the central issue raised by the appeal, namely whether section 111 applies only to interim payments or whether it also applies to payments due following completion of the works or termination of the contract. On that question, the Court came to the firm conclusion that it does. It reached that conclusion on the basis of the wording of the Act and in the light of the authorities cited to it.

Those authorities included the House of Lords’ decision in Melville Dundas Ltd (in Receivership) v George Wimpey UK Ltd, which was a case about interim certificates and the operation of section 111, and where:

  • Lord Hoffman expressed the view that “the concept of the ‘final date for payment’ only applied to interim payments.”
  • Lord Hope said that section 111(1) was concerned only with the entitlement to stage payments referred to in section 109.

The Court of Appeal decided that neither comment formed part of the ratio of the decision and was therefore not binding upon them.

In Rupert Morgan Building Services (LLC) Ltd v Jervis and Harding (t/a MJ Harding Contractors) v Paice (two other authorities referred to), it was agreed by the parties in both cases that section 111 applied to final certificates as well as interim certificates. Of the Court of Appeal’s judgment in Rupert Morgan, Jackson LJ said it was based on the Construction Act 1996, as originally enacted, and it “seems to make good sense”.

So far as Harding v Paice is concerned, Jackson LJ noted that I was also counsel for the employer on that appeal, but did not take the point then that the pay less notice regime did not apply to termination accounts. The reason I did not do so was because, as I explained to the Court of Appeal (but which is not reflected in the judgment), I did not think it was open to me given that the point had not been argued by my predecessor below.

What does this mean?

The conclusion is clear, namely that the payment notice regime contained in sections 110 and 111 of the Construction Act 1996 applies as much to final or termination accounts as it does to interim payments. Therefore (and as I said at the start), employers (and their agents) need to be alive to the need to serve a pay less notice in response to any such account if they wish to avoid the prospect of an adjudicator’s decision against them for the full amount claimed.

David represented Halsbury in the Court of Appeal.

Crown Office Chambers David Sears QC

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