Practical Law

Ever since the payment rules in the Construction Act 1996 were amended, we have been waiting for parties to argue over them and for the TCC to give its guidance on them. Each year in January, we have suggested that this might be the year when that guidance would be forthcoming. Even at the start of this year we were saying the same thing, the only difference being that by the end of 2014, Edwards-Stuart J had handed down two judgments that dealt with a party’s failure to serve a pay less notice (Harding (t/a MJ Harding Contractors) v Paice and another and ISG Construction Ltd v Seevic College).

However, those two judgments were given in the context of the enforcement of an adjudicator’s decision. The court was not considering the payment rules as such, it was merely looking at what the adjudicator had done in each instance to see whether he had jurisdiction to make his decision, or whether he breached the rules of natural justice when he did so. Now we have a third decision (Galliford Try Building Ltd v Estura Ltd), again given in adjudication enforcement proceedings, this time in the context of the paying party’s application for a stay of execution of the enforcement proceedings.

These three judgments highlight an adjudication practice that is no longer permissible.

Statutory payment mechanism

Before looking at what happened in these three cases, it is worth considering the Construction Act 1996’s payment mechanism (sections 109-111). In addition to providing for stage payments and dates for payment, a construction contract should provide that:

• A payment notice will be given not later than five days after the payment due date. That notice should specify the amount considered to be due at the payment due date and the basis of that calculation, even if the amount due is zero. A payment notice can be given by the paying party, a specified person or the unpaid party (section 110A).
• There is a default payment notice mechanism, which means an unpaid party’s application for payment may be a payment notice if the paying party (or specified person) fails to serve a payment notice within time. Alternatively, the unpaid party may serve a separate default payment notice (section 110B).
• The amount included in a payment notice is called the notified sum. The paying party must pay the notified sum on or before the final date for payment. If a lesser sum is to be paid, a pay less notice must be served not later than the prescribed period before the final date for payment (the parties can agree what the prescribed period is). That notice should specify the sum considered to be due and the basis on which it is calculated. A pay less notice cannot be combined with a payment notice (section 111).

Straightforward yes, but as these three cases demonstrate, there are still plenty of opportunities for a party to trip up.

Harding v Paice

In Harding v Paice, Edwards-Stuart J considered payment following the contractor’s termination of its employment under a JCT Intermediate Building Contract, 2011 Edition (IC11).

After the contractor gave notice of termination of its employment, it submitted an account for its work. The contractor started an adjudication when the employer failed to serve a valid pay less notice and failed to make payment of the outstanding sum. The adjudicator found for the contractor. The employer’s pay less notice had not set out the basis on which the sum was calculated. In addition, the adjudicator did not address the merits of the contractor’s valuation because the lack of a valid pay less notice meant that the notified sum was automatically due.

The employer did not pay the sum awarded by the adjudicator. Instead, it started its own adjudication, asking the adjudicator to decide what sum the contractor was entitled to in respect of its final account.

ISG v Seevic College and Galliford Try v Estura

The facts of both ISG v Seevic College and Galliford Try v Estura are very similar, with Edwards-Stuart J looking at the payment provisions of the JCT Design and Build Contract, 2011 Edition (DB11).

In both cases, the employer failed to serve a payment or a pay less notice, resulting in the contractor starting an adjudication claiming the amount set out in its interim application. Unsurprisingly, in both instances the contractor was successful in its adjudication and the employer started its own adjudication, seeking the sum claimed in the interim application to be revalued. Although the timing of this second adjudication differed in the two cases, the employer’s intention was the same: to reduce the amount it had to pay to the contractor.

Failure to serve a payment or pay less notice

So, three cases and three mistakes leading to what is often termed a “smash and grab” adjudication, followed by a subsequent counter adjudication seeking the claim to be revalued. However:

• In Harding v Paice, the court noted that, in the absence of a pay less notice, the employer had to pay the amount claimed. (No opinion was expressed on whether an account given under clause 8.12 (which dealt with termination) required a pay less notice.) However, the adjudicator had not determined the amount “properly due” to the contractor under clause 8.12.5. He had simply found that the lack of a pay less notice meant the sum claimed had to be paid. The absence of a pay less notice could not convert a sum that was not “properly due” into one that was “properly due”. In the subsequent permission to appeal proceedings, it was noted that the absence of a notice served in time or in the correct form did not mean a dispute over payment was resolved “for all time”.
• In ISG v Seevic, the court held that the lack of a pay less notice meant 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 second adjudicator lacked jurisdiction as he was asked to decide the same dispute.
• In Galliford v Estura, the court confirmed what it 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. However, that did not mean there was agreement as to the value of the work at some other date. It also 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.

In light of Edward-Stuart J’s findings, the practice of a party starting a counter adjudication to obtain a revaluation is no longer permissible. If a party wants to correct the situation, it must do so within the confines of the contractual and statutory payment mechanism, at the next application/certificate or at final account.

The impact of Edward-Stuart J’s judgments

There are two obvious points that arise from these three judgments:

• There will be fewer disputes referred to adjudication since parties no longer have the option of starting a counter adjudication. As Edwards-Stuart J said in ISG v Seevic, to reach another conclusion would be tantamount to undermining the statutory payment regime (although he may have managed to do that for other reasons in Galliford Try v Estura).
• It is not possible to emphasise enough the importance of serving a payment and a pay less notice within the contractual and statutory time limits. Arguably, it is even more important now, since parties no longer have the option of a second bite of the cherry, through a counter adjudication.