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“It’s simply a question of being on top of the admin”

At least that was the view of Fraser J in his concluding remarks at Adrian Williamson QC‘s SCL talk earlier this week (and, yes, I did warn Peter that I was going to quote him). Adrian was discussing payment under the Construction Act 1996 and was highlighting where we currently are, when it comes to payment and pay less notices.

After a quick canter through the provisions of the Construction Act 1996, as originally drafted, and the amendments that came into force in 2011, Adrian turned his attention to the case law. He choose to start with ISG Construction Ltd v Seevic College, and then highlight a number of cases that he considered have made inroads into the principles that Edwards-Stuart J established in ISG.

Please note that much of what follows should not be directly attributed to Adrian. His talk was not recorded and I simply can’t write that fast! I have “borrowed” his idea and structure (and a few of his comments), and elaborated on them with some of my own.

ISG v Seevic

ISG v Seevic was one of the first cases to consider the Construction Act 1996’s amended payment provisions. It was a case where the employer (Seevic) failed to serve a pay less notice in relation to the contractor’s interim application for payment and failed to pay the sums claimed, resulting in the contractor referring the non-payment dispute to adjudication (commonly known as a “smash and grab” adjudication). In response, the employer started a counter adjudication seeking a valuation of the work claimed for in the contractor’s interim application.

Edwards-Stuart J held that the lack of a pay less notice meant the employer had agreed the value of the works claimed in the interim certificate and the adjudicator had decided the question of the value of those works. This meant the second adjudicator lacked jurisdiction as he was asked to decide the same dispute.

Inroad number one: manifest injustice

A similar situation to ISG v Seevic presented itself in Galliford Try v Estura. Edwards-Stuart J confirmed what he had meant in ISG v Seevic, that is, that the employer had agreed the value of the works claimed in an interim certificate and the adjudicator had decided the question of the value of those works. This meant the employer was prevented from starting a second adjudication to determine the value of the works at the date of the interim application, but it did not prevent the employer from challenging the value of work in the next (or later) application. However, on the facts, the court granted a partial stay of execution, finding that it would cause “manifest injustice” to the employer (Estura) if the adjudicator’s decision was enforced in full. This was because of the employer’s own impecuniosity.

At this stage, the door had been firmly closed on counter adjudications but we weren’t sure if another one had been opened, allowing parties to argue “manifest injustice” to resist enforcement.

Inroad number two: what does the application say?

In Severfield v Duro Felguera, Coulson J confirmed that because a contractor’s application for payment will be construed as a default payment notice in certain circumstances, it is important that the application not only sets out the sum due and the basis on which that sum is calculated, but that it is set out with proper clarity and is free from ambiguity.

It wasn’t the first time we’d seen reference to clarity and a lack of ambiguity (Akenhead J had referred to the need for it in Henia v Beck), but it was as clear an instruction as the TCC could give to parties. It probably didn’t help that the parties’ contract covered some works that were “construction operations” and some that weren’t. It was a muddle.

Inroad number three: can’t apply early 

In Caledonian v Mar City, Coulson J held that a party could not apply for payment early, as that would be inconsistent with the 28-day cycle they had agreed and was contrary to the notice provisions in the Construction Act 1996. It would enable a contractor to make a fresh claim every few days in the hope that the employer would “take his eye off the ball and fail to serve a valid pay less notice”, giving the contractor a “wholly undeserved windfall”.

However, all may not be lost if you apply late.

Inroad number four: interim means interim

In Harding v Paice, Jackson LJ in the Court of Appeal reminded us that interim payments are “interim”, which meant the employer was still entitled to refer the value of the contractor’s final account to adjudication. The court looked at a previous Court of Appeal authority (Rupert Morgan Building Services v Jervis, which dealt with withholding notices under section 111 of the Construction Act 1996, as enacted), and compared it to the findings in ISG.

Although Jackson LJ noted that he did not have to decide whether Edwards-Stuart J was correct in relation to interim valuations, Adrian questioned whether Jackson LJ did in fact prefer the reasoning in Rupert Morgan. If so, this raised the question of whether that left ISG in a precarious position. Some may argue that it doesn’t, since Edwards-Stuart J himself clearly emphasised the “fundamental difference” between payment obligations that arise on an interim application and those that arise on termination.

The judgment also left open the question of whether Jackson LJ had limited his findings to final accounts following termination, or whether they extended to all final accounts. There was also the question of whether, because the Scheme for Construction Contracts 1998 does not distinguish between interim and final payments, it applied to final accounts where the payment provisions of the Scheme applied.

We were provided with an answer to this question towards the end of last year.

Inroad number five: an inroad at all?

I must confess to being unclear why Manor Asset v Demolition was included in Adrian’s list. This was a case where the parties had agreed a payment mechanism that simply did not work. When it came before Edwards-Stuart J, he held that the offending pay less notice provisions could not be replaced with those in the Scheme for Construction Contracts 1998. Instead, he found an implied term that allowed the payment provisions to comply with the Construction Act 1996. The “only solution” was that, when amending the contract, the parties impliedly agreed that the prescribed period was reduced to nil, so that the employer could issue a pay less notice right up to the final date for payment.

I’m not sure it makes inroads into ISG, more it turned on its own particular and somewhat unusual facts. It is, after all, an example of how not to draft a payment provision.

Inroad number six: it’s all about intention

In Surrey and Sussex Healthcare v Logan, Alexander Nissen QC held that the contractor’s interim payment notice was “in substance, form and intent” an interim payment notice, which was clear and free from ambiguity. He also held that the employer’s pay less notice was valid. In contrast to the requirements for a payment notice, he said that it was wrong to focus on the “specific detail of the language used” in the email, rather one should look at the intention that would be conveyed to a reasonable recipient of the email. The email was saying that if the sender of the email was wrong about the contractual position, he was valuing the work on the same basis as he had set out in detail in the breakdown that accompanied the final certificate. This was the only sum that the contractor was entitled to, and that was the overall message.

Described by Adrian as a commonsense and purposive approach, he also wondered whether it was the first example of a contingent pay less notice.

Was this an inroad at all?

Adrian ended his talk by referring to Kilker v Purton. This was a case where the Scheme for Construction Contracts 1998 applied (because the parties’ contract was oral), and Finola O’Farrell QC (as she was then) held that the contractor could refer the valuation of its final account to a second adjudicator (the first adjudicator had simply decided that without a pay less notice, the notified sum in respect of the contractor’s final account was payable).

Adrian suggested that, if this judgment was correct, it strikes a reasonable balance between the parties. At the time, we suggested that it may give some respite from the draconian effects of section 111, but that it was still best practice to serve pay less notices within the relevant contractual or statutory timescales.

In theory, complying with the Construction Act’s payment provisions may be as simple as Fraser J indicated, but the growing list of cases suggests that, in practice, it isn’t always that straightforward. We have repeatedly suggested that project managers and contract administrators should take note, as they are the parties responsible for ensuring these notices are given and are given timeously. In at least one of the reported judgments, the employer indicated it was pursuing its agent in adjudication. We know it isn’t the only one.

 

Practical Law Michelle Rousell

2 thoughts on ““It’s simply a question of being on top of the admin”

  1. Many thanks for the article Michelle. Nicely summarised. I have been issuing contingent pay less notices for the last couple of years. Clearly there was no authority prior to Surrey and Sussex Healthcare that any such notice would be valid, but it seemed like a common sense thing to do when we disputed the right of the other party to submit an application but we we did not want to leave ourselves open, in any subsequent adjudication, to a finding of a valid application and the absence of a pay less notice. Thus I concur with Adrian Williamson QC’s view that Alexander Nissen QC did indeed make a common sense judgement in this regard! Thanks again for the article.

    Dean

  2. We have our own responsibilities and duties. I agree, project managers and contract administrators should also take note of the Construction Act’s payment notices.

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