REUTERS | Vasily Fedosenko

Paying your fair share: when can an adjudicator decide more than the notified sum must be paid?

Kersfield Developments (Bridge Road) Ltd v Bray & Slaughter Ltd is the latest authority in a line of cases providing guidance on interim payments in construction contracts under the Construction Act 1996.

While a wide number of arguments were deployed in the case, perhaps the most interesting point for construction practitioners is that it offered the first judicial guidance on the meaning and effect of sections 111(8) and (9) of the Construction Act 1996.

Adjudicator’s decision and court proceedings

The case concerned an adjudicator’s decision that Kersfield pay Bray a sum in excess of £1 million. The adjudicator had decided that:

  • While Bray’s application for payment did not meet the employer’s requirements (as set out in the contract), Kersfield was estopped through a course of dealing from relying on that to invalidate Bray’s application.
  • Kersfield had not issued a valid payment notice or pay less notice.
  • Bray’s application for payment became a default payment notice, and the sums notified within it were due.

Declaratory relief proceedings

Kersfield issued a Part 8 claim seeking a final determination of the validity of the notices and the estoppel points; alternatively a declaration that it was entitled to dispute the valuation of the interim payment application and to refer that dispute to a further adjudication.

Bray sought enforcement of the adjudicator’s decision by way of summary judgment.

O’Farrell J in the TCC

The court found that:

  • The payment application was not invalidated by any lack of particularity in certain items. There is a distinction between the validity of an application, and the validity of the claims within an application. Inadequate substantiation may justify rejection of a claim, but it does not of itself invalidate the application.
  • Had the payment application been invalid, it would have rejected the argument that Kersfield was estopped from relying on its invalidity by a course of dealing.
  • The contractual requirement concerning the effect and timing of service by email did not offend the Construction Act 1996: it was a valid process clause.

The court rejected Kersfield’s submission that Bray was prevented from treating the payment notice as invalid on the principle of approbation and reprobation. It also rejected submissions concerning a stay of the enforcement proceedings and procedural unfairness.

Sections 111(8) and (9) of the Construction Act 1996

In considering Kersfield’s alternative argument that it was entitled to dispute the valuation of the payment application and refer that dispute to adjudication, the court offered guidance on the meaning and effect of sections 111(8) and (9) of the Construction Act 1996 which state:

“(8) Subsection (9) applies where in respect of a payment—

(a) a notice complying with section 110A(2) has been given pursuant to and in accordance with a requirement of the contract (and no notice under subsection (3) is given), or

(b) a notice under subsection (3) is given in accordance with this section,

but on the matter being referred to adjudication the adjudicator decides that more than the sum specified in the notice should be paid.

(9) In a case where this subsection applies, the decision of the adjudicator referred to in subsection (8) shall be construed as requiring payment of the additional amount not later than—

(a) seven days from the date of the decision, or

(b) the date which apart from the notice would have been the final date for payment,

whichever is the later.”

Section 111(8) appears to envisage a scenario where a valid payment or pay less notice has been given, but an adjudicator decides that more than the notified sum should be paid. (Section 111(9) deals with payment of that sum.) This suggests a tension between section 111(8) and section 111(1), which requires payment of the notified sum: how does the adjudicator decide that more than the notified sum should be paid, if that is all that is contractually due?

This tension had been exacerbated by case law, which has found that in the situation of a default payment notice it was the notified sum that was to be paid – this could not be challenged by way of a second adjudication as to the true value of the works at that date. This appeared to support the position that as far as interim payments were concerned, it was the contents of the notices that mattered, and not the value of the works.

For example, in ISG Construction Ltd v Seevic College, the adjudicator decided that the contractor was entitled to be paid the sum stated in a default payment notice, as the employer had failed to serve a payment notice or pay less notice. The employer started a second adjudication as to the value of the sums due under the payment application. The court found that the second adjudicator had no jurisdiction as the question had already been decided. In the absence of payment and pay less notices, the sum in the payment application (the default notice) was deemed to be the value of those works so that the employer must pay the sum applied for. The employer was deemed to have agreed this. The employer could defend itself by use of payment and pay less notices. On this point, the court concluded:

“Accordingly, if either the contractor or the employer asserts that the contractor’s right to payment at any particular time in the contract is a sum equal to the value of the work properly executed up to that time, less any sums already paid, that in my view would be to assert an entitlement that does not arise under the contract. In fact, it does not arise at all.”

This appears to assert the primary role of notices under the contract, over the true value of the works, in determining what is contractually due.

This position was clarified in Galliford Try Building Ltd v Estura Ltd, where the court stated that the value to be paid could be challenged at a future interim payment, at the final account, or by Part 8 proceedings. It was merely for the interim payment itself that the notified sum was final. Again, this was a default notice situation, where no payment notice or pay less notice has been given.

The position was also summarised in Kilker Projects Ltd v Rob Purton:

“… where the ‘notified sum’ is in respect of an interim payment, usually there is no contractual basis on which the contractor’s entitlement to that payment can be re-opened. Any errors can be corrected in subsequent interim or final valuations. Therefore, an adjudication decision as to the ‘notified sum’ payable precludes a challenge to the interim payment on grounds of valuation in a subsequent adjudication.”

Again, this appears to support the position that it is the notified sum that determines what is contractually due, rather than any reference to the true value of works carried out.

What was perhaps not explicitly apparent until the decision in Kersfield is that the rationale for these restrictions is the default notice situation itself.

The decision in Kersfield

Kersfield argued that the effect of sections 111(8) and (9) was that an adjudicator was entitled to open up any payment notice or pay less notice. Bray meanwhile argued that sections 111(8) and (9) could only be operated by the contractor. The notices referred to in these sections are those an employer gives, and so it is only a contractor who will be disputing that greater sums should be paid.

The court rejected both submissions:

“Wherever there is a dispute under the contract, either party is entitled to refer such dispute to adjudication as provided in section 108 of the Act… In the absence of a valid payment notice or pay less notice, there is no dispute as to the sum to be paid in respect of the relevant application because the default notice mechanism provides that the ‘notified sum’ must be paid and there is no provision for that sum to be revised…

The notice sets out the sum that the employer considers is due and payable to the contractor in response to the contractor’s application. Section 111(8) empowers an adjudicator to determine what sum is due and payable in the event that competing valuations are asserted by the parties. The notice is not revised by the adjudicator if a different sum is determined to be due. Section 111(9) simply provides for the payment of any additional sum determined by the adjudicator. Any right to additional payment arises under section 111(9), based on the adjudicator’s decision, and not under a revised payment notice…

…where a particular interim payment has been fixed by the default notice mechanism under the contract, as in this case, there is no contractual basis on which to revise that payment by reference to a proper valuation of the works and therefore there is no relevant dispute that can be referred to adjudication.”

This explains that in the default notice situation there is no dispute over the value of the works: it is deemed to be agreed. If the matter is referred to adjudication, the adjudicator can look only to the validity of the notices and establish the notified sum, which must be paid. There can be no second adjudication on the value of the works because it is deemed to be agreed. This plainly follows the reasoning in the Seevic line of cases.

However, this “deeming” analysis is only expressed as holding true for default payment notices. Where a payment notice (or pay less notice) has been given, then it would seem that an adjudicator can look to the value of the works (if there are “competing valuations”), and can decide that more than the notified sum is to be paid. This would also appear to leave open the option that if an adjudicator decided only the validity of the notices, there could be a second adjudication on the value of the works.

At first glance, such an outcome would appear directly contradictory to the passage from Seevic quoted above. However, this would fail to give the word “accordingly” its due. The preceding passage in Seevic had read:

“Absent fraud, in the absence of a payment or pay less notice issued in time by the employer, the contractor becomes entitled to the amount stated in the interim application irrespective of the true value of the work actually carried out. The employer can defend itself by serving the notices provided for by the contractual provisions.”

In light of Kersfield, the “accordingly” must relate back to this default notice situation. Seevic would then be saying that it is only in the default notice situation that the parties cannot assert an entitlement based on valuation. It is not entirely clear how the contractual entitlement to more than the notified sum can arise where a notice has been served. The argument appears to be that it arises under section 111(9), specifically by way of the words “the decision of the adjudicator… shall be construed as requiring payment”. Adjudication itself is a contractual mechanism of dispute resolution. An adjudicator’s decision is therefore contractual, and this provision appears to say that in these specific circumstances that decision shall be construed as requiring payment under the contract.

If this interpretation is correct, the decision in Kersfield appears to provide a rather neat means of giving effect to sections 111(8) and (9) in a way that avoids contradicting existing case law. The notices determine the notified sum, but section 111(9) permits an adjudicator to require payment of something more. It would also appear that construction practitioners will need to ensure that any adjudication on interim payments considers the value of the works, so that they do not leave themselves open to subsequent adjudications.

However, a number of practical questions remain that the judgment does not answer. For example:

  • What constitutes a “competing valuation”?
  • How is an adjudicator to determine what sums more than the notified sum are to be paid?
  • In the context of JCT contracts, which expressly state that the sum due under interim payments is the amount specified in the relevant notice, what is the contractual basis by which more than the notified sum can be due? Is this term ousted by the wording of section 111(9)?

Given that Kersfield was granted permission to appeal on the second adjudication point, it may be that answers to these questions will be forthcoming.

Hardwicke Louis Zvesper

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