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Lack of pay less notice meant “open and shut” adjudication case

I have to confess to having a small chuckle to myself when I read Edwards-Stuart J’s comments in Harding v Paice about how the third adjudication appeared to be “a model of how an adjudication should not be conducted”. This didn’t seem to be a reflection of the adjudicator, who the judge had “considerable sympathy for”, but how the referring party had conducted itself. For example, the judgment refers to a considerable volume of material put before the adjudicator, hundreds of pages of authorities, electronic copies provided when the adjudicator wanted hard copies and a refusal to extend the 28 days to 42 days because the referring party thought it had an “open and shut matter” (which the adjudicator clearly did not agree with). I’m sure many of us will share the judge’s sympathy for the adjudicator, as we’ve all been there in one way or another.

However, aside from procedural issues, the stand out issue for me is that this judgment demonstrates how the new payment regime has affected adjudication.

Harding v Paice

Briefly, the facts were as follows:

  • The contractor (Harding) agreed to build two houses for two property developers (Mr Paice and Ms Springall). The parties entered into a JCT Intermediate Building Contract, 2011 Edition (IC11).
  • Work started in April 2013.
  • In November 2013, the contractor gave notice that it was suspending its works (under clause 8.9.2.2). (There had been a purported termination by the property developers in September 2013, which the contractor had rejected.)
  • In January 2014, the contractor gave notice of termination of its employment (under clause 8.9.3).
  • In August 2014, the contractor submitted its account for the works (under clause 8.12.3), valued at £797,859, with £397,912 plus VAT unpaid. This sum was due for payment by 6 September 2014.
  • No pay less notice was served and, on 1 September 2014, the contractor started the third adjudication, arguing that because a pay less notice had not been served by 30 August 2014, it was entitled to the £397,912 plus VAT that remained unpaid.
  • The third adjudicator decided that the contractor had terminated the contract and, in the absence of a valid pay less notice (the pay less notice that was served had not set out the basis on which the sum was calculated), the contractor was entitled to the £397,912 plus VAT claimed.
  • The property developers started a fourth adjudication in October 2014, seeking to have the contractor’s account valued, and for defects in the works to be taken into account.

Payment and pay less notices

In some respects, this case seems relatively straightforward. The lack of a valid pay less notice has resulted in a sum claimed becoming the sum due under the contract. As the judge said, that didn’t mean the adjudicator had determined what was “properly due in respect of the account”, nor that the parties were bound forever by that amount. The obligation was to pay what was due and to comply with the adjudicator’s decision and pay that sum now.

While it may be a moot point that parties need to ensure they draft a pay less notice correctly, a failure to do so here proved fatal to the defence against the contractor’s claim. The judgment does not elaborate on why the adjudicator decided the notice failed to set out the “basis on which that sum is calculated”, as required by section 111(4)(b) of the Construction Act 1996. That is a shame, since we seldom see case law on the Act’s payment provisions and this is one of the few occasions that the payment provisions in the JCT’s 2011 suite of contracts have been referred to. Guidance on what the “basis on which that sum is calculated” would have been welcome.

Further, whether the contractor’s account on termination (under clause 8.12.3) falls to be dealt with in the same way as other payments under the contract was not something the judge considered, other than to say that he wasn’t expressing an opinion on whether the adjudicator’s proposition that a pay less notice was required, was correct. It is interesting that the judge doesn’t mention that well known principle in adjudication about the court enforcing an adjudicator’s decision provided the adjudicator answered the right question, even if he got the answer wrong. Without knowing what the parties’ submissions were, I can only guess at whether that means the judge agreed that the adjudicator was right or not.

New payment regime has affected adjudication

One thing that I have noticed in the last few years is how the new payment regime has affected adjudication.

This case is typical of those I’ve seen where there has been an initial adjudication dealing with the lack of a pay less notice (a sort of “smash and grab” style adjudication), followed by a second or counter adjudication, where the other party is looking for the return of money or is attempting to set off against monies paid or awarded. In this case, that was the fourth adjudication, which the property developers started and which the court held did not cover the same ground as the dispute that the third adjudicator had decided.

This two-stage approach has, ultimately, resulted in more referrals, particularly in relation to interim accounts, where a referring party can keep the scope of the adjudication sufficiently narrow. Here, the question simply revolved around the absence of a valid pay less notice, which meant the adjudicator did not have to consider the value of the contractor’s account. That means these “initial” adjudications are often as “open and shut” as this contractor argued its case was.

That said, I’m not so sure I’ve seen a situation such as this one, where it relates to the contractor’s account after termination. Perhaps that is because it is rare to see a contractor terminate its employment under a building contract. If the case had been about the contractor’s final account, that might have been a different story.

(As an aside, there was an interesting discussion about the meaning of “same or substantially the same” in paragraph 9(2) of the Scheme for Construction Contracts 1998, but perhaps that is a topic for another day.)

Postscript: ISG v Seevic

Since writing this post, Edwards-Stuart J has handed down his judgment in ISG v Seevic. This case was also about the lack of a pay less notice which, unsurprisingly, meant the contractor was entitled to the sums applied for. However, in contrast to Harding, the court went further and held that, in the absence of a pay less notice, the employer had agreed the value of the works in the interim application (it was the amount claimed). As such, by deciding that the sum claimed was the sum due to the contractor, the first adjudicator had decided the value of the works in that particular interim application and a subsequent adjudicator had no jurisdiction to do so again.

Consequently, ISG v Seevic is likely to mark a turning point in adjudication and the tactics parties adopt, particularly with regard to serial adjudications. I will leave Jonathan to consider the impact of this one further next time.

4 thoughts on “Lack of pay less notice meant “open and shut” adjudication case

  1. While it is impossible to second guess what the parties may have done if this case was about the contractor’s final account, rather than its termination account, it is worth noting that clause 4.14.4 of the IC 2011 expressly provides for a pay less notice (unlike the termination provisions in clauses 8.9 and 8.12, which are silent on paying less than the contractor’s account).

  2. If on Application 1 there is no valid Pay Less Notice, but there is then Application 2 which does. Could we still go on Application 1 for the Adjudicator to decide that in the absence of the pay Less Notice, the Employer agrees the value of the Application?

  3. You could adjudicate interim certificate 1 (under the principle of “at any time”), but the fact that there is a subsequent certificate and valid pay less notice means that the first application has been superseded. While the lack of a pay less notice in relation to certificate 1 means the sum certified should have been paid by the final date for payment, the subsequent certificate and pay less notice is likely to have corrected all of this. I guess I could see some entitlement to late payment interest, which may be of little comfort!

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