Practical Law

It was Max Abrahamson who famously once wrote:

“A party to a dispute, particularly if there is arbitration, will learn three lessons (often too late): the importance of records, the importance of records and the importance of records. It is impossible to exaggerate the extent to which lawyers can find unexpected grounds, often quite real, on which to cast doubt on evidence if it is not backed by meticulously established records.”

Following ISG Construction v Seevic College, parties wishing to defend claims for sums allegedly owed under construction contracts should focus on the importance of notices, particularly payment and pay less notices.

ISG v Seevic

This was a case all about two adjudications between the same parties and with the same adjudicator.

ISG Construction Ltd (the contractor) and Seevic College (the employer) had entered into a JCT Design and Build Contract, 2011 Edition, with a monthly payment cycle starting on 11 February 2013.

When Seevic did not pay ISG’s interim application 13 for just under £1.1 million, ISG referred the dispute to an adjudicator, Mr Juniper. In a decision dated 5 September 2014, the adjudicator decided that ISG was entitled to the £1.1 million claimed, plus interest, on the ground that Seevic did not serve a payment or a pay less notice.

However, in an attempt to “frustrate or reduce the impact of the likely decision”, Seevic served its own notice of adjudication on 1 September 2014, four days before the first decision was due. Mr Juniper was appointed again. This time he was asked to value ISG’s works on the merits as at the date of interim application 13 (mistakenly said to be 13 May 2014). Based on his valuation of ISG’s works, in his second decision (dated 10 October 2014), the adjudicator decided that ISG was owed the sum of £315,000 odd. The adjudicator assumed Seevic had paid the sums awarded in the first adjudication, and so he awarded a repayment from ISG to Seevic of some £770,000.

Seevic did not pay the amount awarded in the first adjudicator’s decision and so ISG issued enforcement proceedings. It also sought a declaration that the second adjudicator lacked jurisdiction because the matters decided in the second adjudication were the same or substantially the same as those decided in the first adjudication. It also argued that the value of the works included in interim application 13 had been agreed because the employer had not served any notices.

Edwards-Stuart J’s judgment

Edwards-Stuart J held that Seevic’s failure to serve a payment or a pay less notice meant it had agreed the value of the works ISG claimed in interim application 13. As the first adjudicator had decided that the sum ISG claimed was the sum due to it, he had decided the value of the works. At paragraph 28 Edwards-Stuart J stated:

“…if the employer fails to serve any notices in time it must be taken to be agreeing the value stated in the application, right or wrong.  In my judgment, therefore, in that situation the first adjudicator must be in principle taken to have decided the question of the value of the work carried out by the contractor for the purposes of the interim application in question.”

The second adjudicator was then asked to decide the same dispute, which meant he lacked jurisdiction to do so. ISG’s enforcement application (in respect of the first adjudicator’s decision) and its declaratory relief application (relating to the second adjudicator’s decision) were both successful.

What does Edwards-Stuart J’s judgment mean in practice?

Following ISG v Seevic:

• If the 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 payment notice.
• Then, the payer must pay the sum stated as due in the default payment notice and cannot successfully refer to adjudication a dispute as to the value of the work properly executed at that date as that will amount to the same dispute.
• The payer will have to move on to the next payment due under the construction contract and ensure that the relevant payment and/or payless notices are served at this point

I can certainly follow the logic of Edwards-Stuart J’s conclusion, but I was a little surprised at how he got there, in particular:

• His conclusion was based on the wording of the contract, rather than the wording of the amended Construction Act 1996. I was surprised that no mention was made of sections 111(8) and (9) of the Construction Act 1996, which provide for payment of a further sum where a payee has referred a payer’s payment notice or pay less notice to adjudication, but make no mention of a payer referring a default payment notice to adjudication and repayment in those circumstances.
• He relied on Watkin Jones & Son Ltd v Lidl UK GmbH [2002] EWHC 183 (TCC), a case concerning an earlier version of the same form of contract and which pre-dated the Construction Act 1996 amendments. This suggests Edwards-Stuart J is clearly of the view that payers have never been able to refer the merits of a payment dispute to adjudication once a sum has been found to be due as a result of a lack of notices under the JCT design and build contract.

I also struggled slightly with the example Edwards-Stuart J gave when considering what the practical consequences would be if Seevic was right. He set out a scenario where an employer fails to serve the relevant notices and then refers a dispute about the merits of the sum due to adjudication, and the adjudicator finds that the contractor is due less than the sum applied for.

Edwards-Stuart J said that there would then be nothing to stop the contractor referring “a further dispute to adjudication, namely the sum due on the last interim application”. If the adjudicator found that there was a lack of payment or payless notices, then the adjudicator would have to find that the sum due was the amount stated in the default payment notice (assuming it was valid).

However, if Edwards-Stuart J is right and that, in deciding the contractor’s referral, the adjudicator would be deciding “the question of the value of the work carried out for the purposes of the interim application in question”, then surely this would amount to the same dispute as the employer’s referral?

I have to say that I was somewhat surprised that ISG, as a main contractor, brought this case. While it obviously resulted in it obtaining full payment of the adjudicator’s first decision, the implications for main contractors going forward will be that they have to pay up now, and argue about the proper value of the work executed by sub-contractors in the next interim or final valuation.

The consequences of ISG v Seevic

There will probably be a considerable amount written about the consequences of this case over the next few months, but some that I’ve thought of are:

• Under many form of contracts, including the JCT suite, there is no right to repayment of an overpayment until the final payment. As such, while a payer might be able to issue a negative payment notice in respect of the following interim application, it would not be entitled to repayment of the sum due. I suspect we’ll see contracts amended so that a payer can be repaid in interim valuations, as well as in the final payment.
• We might see a rise in professional negligence claims against quantity surveyors who have failed to issue payment or pay less notices meaning that their client has to pay the sum claimed in a default payment notice. In particular, if a client has to pay a sum well in excess of the value of the works executed and that results in the insolvency of the client, I could certainly anticipate insolvency practitioners pursuing quantity surveyors.
• I’ve come across a few payee-led payment notice regimes recently. If a payee succeeded in obtaining the value set out in its payment notice and this amounted to as significant windfall, in theory it could decide not to submit any further payment notices meaning that the employer would not have the opportunity to submit a pay less notice or recover the sum paid.

I will leave you with this 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?

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.