Let me take you back almost 12 months to my blog on ISG v Seevic. I left you with the following question:
“What would have been the case if this had been the final payment, rather than an interim payment?”
Would the same principle apply so that Seevic was not entitled to refer a dispute concerning the merits of the final payment to adjudication?
Well, almost 12 months later we may (see below for my caveat) have the answer from the Court of Appeal.
Harding v Paice (number four)
This is our fourth blog on the long-running battle between property developers, Gary Paice and Kim Springall (P&S), and their building contractor, MJ Harding (the most recent one was Harding v Paice and Springall – the prequel).
Matt wrote about Edwards-Stuart J’s judgment (which was appealed), and set out the facts, so I won’t bore you with them again. All you need to know is that the third adjudicator found that Harding was entitled to payment of the sum claimed in its termination account due to P&S’s failure to serve an effective pay less notice. Thereafter, Edwards-Stuart J refused to grant an injunction preventing P&S from having the merits of the termination account decided. That fourth adjudication proceeded, but went horribly wrong, and was not enforced by Coulson J due to a finding of apparent bias, as I wrote about earlier this year.
P&S’ counsel have written an excellent blog on the Court of Appeal’s conclusions, and I would urge you to read that. In a nutshell, in refusing Harding’s appeal and confirming that Edwards-Stuart J’s decision was correct, the Court of Appeal found that:
- P&S’ failure to serve a pay less notice against Harding’s final account following termination meant that they had to pay the full sum claimed, which they have done.
- P&S is not deemed to have agreed the value of Harding’s termination account.
- P&S is entitled to adjudicate in order to determine the correct value of Harding’s claims and their counterclaims in the termination account.
Let’s consider these findings in more detail.
Court of Appeal’s findings
There were two grounds of appeal:
- The judge erred in his construction of paragraph 9(2) of Part I of the Scheme for Construction Contracts 1998, which provides that an adjudicator must resign where the dispute is:
“…is the same or substantially the same as one which has previously been referred to adjudication and a decision has been taken in that adjudication.”
- The judge erred in his analysis of the scope and effect of the adjudicator’s decision in the third adjudication.
First ground of appeal
Harding argued that the TCC was wrong to find that paragraph 9(2) only applied to a dispute previously referred to adjudication that had actually been decided. I don’t wish to speak for Harding’s legal team, but I’m guessing that they didn’t rate their chances particularly high in succeeding on this point, and unsurprisingly Jackson LJ did not agree with Harding. This is neatly summed-up in paragraph 58 of the judgment:
“The word ‘decision’ in paragraph 9 (2) means a decision in relation to the dispute now being referred to adjudication. I arrive at this interpretation as a matter of construction rather than implication. It is what the paragraph obviously means. Parliament cannot have intended that if a claimant refers twenty disputes or issues to adjudication but the adjudicator only decides one of those disputes or issues, future adjudication about the other matters is prohibited.”
Second ground of appeal
Harding’s second ground of appeal was by no means as clear cut given the judgments in ISG v Seevic and Galliford Try v Estura.
Harding said that the dispute referred in the third adjudication was what sum was due to Harding on its termination account, and the adjudicator could get to the answer in two ways (and I really like the paraphrasing!):
- The “short route”, namely that P&S had not served a pay less notice, so they were obliged to pay the sum claimed.
- The “long route”, being on the merits of the valuation.
Harding said that the third adjudicator took the short route and reached a final decision on the sum that was due to Harding on its final account. Harding argued that this question could be re-opened in litigation, but not adjudication.
Jackson LJ did not agree with Harding’s analysis. He said that the dispute referred involved two alternative issues: the pay less notice point and the valuation on the merits point. He said that:
“The first issue is a contractual one. The second issue is one of valuation. The adjudicator dealt with the contractual issue. He did not need to deal with the valuation issue.”
He said he reached this conclusion on the clear language of the notice of adjudication, the referral and the third adjudicator’s decision.
Let’s just pause there for a second. If Jackson LJ is right that these are different disputes, then what is the difference between this scenario and the one that arose in ISG v Seevic, where the pay less notice point was decided in the first adjudication and the valuation on the merits point in the second adjudication?
Jackson LJ then went on to consider the cases of Watkin Jones & Son Ltd v Lidl UK GmbH  EWHC 183 and Rupert Morgan v Jervis, and said that in the latter case the Court of Appeal found that:
“…the absence of a Pay Less notice under section 111 did not prevent the employer from subsequently challenging the valuation underlying that certificate.”
Jackson LJ said that Edwards-Stuart J had taken a “somewhat different line” in ISG v Seevic and Galliford Try v Estura, but I have some difficulty with this conclusion, at least in respect of Watkin Jones. In that case, the court found that Lidl could not adjudicate on the merits of Watkin Jones’ interim application where an adjudicator had already ordered full payment of that application due to the lack of a withholding notice. That is what Edwards-Stuart J decided in ISG v Seevic and Galliford Try v Estura, albeit under the pay less notice regime.
Rupert Morgan also concerned a withholding notice under the original section 111, rather than a pay less notice under amended section 111. The court also addressed a different question, namely whether a party could abate an amount from a certificate where no withholding notice had been served. Some might argue that this case should therefore be distinguished. However, if it is relevant, then I acknowledge that Jacob LJ did state in paragraph 14(d) of the judgment that section 111:
“…does not preclude the client who has paid from subsequently showing he has overpaid. If he has overpaid on an interim certificate the matter can be put right in subsequent certificates. Otherwise he can raise the matter by way of adjudication or if necessary arbitration or legal proceedings.”
While Jacob LJ referred to an employer putting right an overpayment in a subsequent interim certificate, the use of the word “otherwise” in the final sentence suggests that the employer can also adjudicate the merits of the valuation in the original certificate. This is also consistent with paragraph 14(b) of the same judgment, which refers to the employer “raising the disputed items in adjudication”, and appears to be consistent with Akenhead J’s comment in Henia v Beck, where he stated the following about Rupert Morgan at paragraph 29 of his judgment:
“…on analysis this was only authority for the proposition that in the absence of a withholding notice an Employer could not resist enforcement of an adjudicator’s decision requiring payment of a certified sum, albeit that the Employer could obtain relief from an adjudicator or the final resolution tribunal for the subject matter of what would have been covered by any withholding notice which could have been legitimately served.”
However, in Harding v Paice, Jackson LJ said that he didn’t need to consider whether Edwards-Stuart J’s conclusions in ISG v Seevic and Galliford Try v Estura were correct in respect of interim valuations, because they do not apply to final accounts. Jackson LJ pointed out that mistakes in interim valuations can be put right in subsequent interim valuations, and that different contractual provisions apply. In particular, Jackson LJ referred to clause 8.12.5 of the parties’ contract which requires an assessment of the amount which is “properly due in respect of the account” and permits a “negative valuation”.
The current position
So what is the current position where a payer fails to issue a payment notice and/or pay less notice and the payee has issued a valid default payment notice (in the form of its application or otherwise), and an adjudicator awards the payee the sum stated in its valid default payment notice?
Well, regardless of the relevant payment provisions and whether it is an interim or final payment, the payer must pay the sum stated as due in the default payment notice (unless this would result in a manifest injustice as in Galliford Try v Estura). Thereafter, I think the situation depends on the nature of the relevant payment provisions. For example:
- Interim payments under the JCT Design and Build Contract, 2011 Edition (the relevant standard form of contract in both ISG v Seevic and Galliford Try v Estura). Here, the payer cannot successfully refer to adjudication a dispute about the value of the work properly executed at the same payment due date as that will amount to the same dispute. The payer will have to move on to the contract’s next payment due date and ensure that the relevant payment and/or payless notices are served at this point.
- Interim payments under the Scheme’s payment provisions. In Severfield v Duro Felguera, the parties’ contract did not contain Construction Act-compliant payment provisions and, as such, the Scheme applied. Coulson J said that ISG v Seevic and Galliford Try v Estura are authority for the proposition that:
“…if there is a valid payment notice from the contractor, and no employer’s payment notice and/or payless notice, then the employer is liable to the contractor for the amount notified and the employer is not entitled to start a second adjudication to deal with the interim valuation itself.”
It is therefore arguable that the findings in ISG v Seevic and Galliford Try v Estura apply to interim payments under construction contracts that incorporate the payment provisions of the Scheme, and not just those under the JCT D&B Contract.
- Final accounts following termination under the JCT Intermediate Form, 2011 Edition (the contract in Harding v Paice). The payer is entitled to adjudicate in order to determine the correct value of the payee’s claims and its counterclaims.
- Other final accounts. Jackson LJ expressly stated that the findings in ISG v Seevic and Galliford Try v Estura “do not apply to final accounts”, so it is arguable that his findings apply to all final accounts. However, he relied on the express wording of clause 8.12.5 in reaching his conclusion, so it is also arguable that his findings are limited to termination accounts under JCT contracts (hence my caveat at the beginning of this blog).
Is the distinction between interim valuations and final valuations justified?
As a matter of principle, I think that the distinction is entirely justified. As I said at the end of my blog on ISG v Seevic:
“I struggle to believe that Parliament intended for payees to have windfalls in such circumstances, which in ISG’s case would amount to something in the region of £800,000.”
However, legally there is rather a large elephant in the room. The relevant contracts in Harding v Paice, ISG v Seevic and Galliford Try v Estura are all subject to the payment provisions in the amended Construction Act, but the Act makes no distinction between interim payments and final payments. Therefore, as a matter of law, how can it be that a payer cannot refer to adjudication a dispute concerning the correct value of an interim valuation where an adjudicator has already decided the sum due on the basis of a lack of pay less notice, but the same payer can refer to adjudication a dispute about a final account in the same circumstances?
Any suggestions would be welcome.
I appreciate that I have gone on for some time, but I will leave you with two thoughts:
- In a number of the cases referred to above, the courts have said negative interim valuations could not be made under the contracts in question. I don’t necessarily think that is the case. For example, the JCT D&B 2011 contract states that the value of an interim payment shall be the gross value of the works less the relevant deductions (namely retention, advanced payments and previous payments). If the gross valuation is less than the sum of the deductions, then it goes without saying that it will result in a negative valuation. What this contract does not expressly permit is a payment from the contractor to the employer where such negative interim valuations have arisen.
- I hope for the sake of the parties that they can settle their disputes without embarking on another adjudication and/or further court proceedings, but that is probably a Christmas wish too far.