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You don’t need to have served a pay less notice to set off in adjudication (apparently)

In DC Community Partnerships Ltd v Renfrewshire Council, Lord Doherty held that the adjudicator failed to exhaust his jurisdiction when he failed to deal with a set off defence (which was pretty clear cut). While that part of the judgment is what immediately jumps out at you, to my mind the really interesting part is the fact that the judge found that the employer (Renfrewshire Council) did not need to serve a pay less notice in order to have delay damages set off.

DC Community Partnerships Ltd v Renfrewshire Council

In April 2014, the Council contracted with DC Community Partnerships Ltd for the construction of a special needs school at Linwood. The parties’ contract incorporated Option C of the NEC3 Engineering and Construction Contract (ECC) (June 2005), as amended.

Work started and reached the point where DC made application for payment 33, which claimed a sum of just under £19 million for the price of work done to date (PWDD). The project manager’s payment certificate 33,  issued shortly afterwards, assessed the PWDD as just over £15.6 million. After taking into account sums already paid to DC and the retention, this meant the amount due to DC was £287,000. The Council paid this sum in full (so it didn’t need to issue a pay less notice).

Given the divergence between the sum applied for and the sum paid, it is perhaps no surprise that, in June 2017, DC referred a dispute over the merits of three distinct items in payment certificate to adjudication.

In August 2017, the adjudicator decided that he could open up, review and revise payment certificate 33, and found that a sum of £820,000 odd was due to DC. Enforcement proceedings followed when the Council did not pay the sum awarded.

Delay damages defence

In the adjudication, the Council had advanced a claim for delay damages, which it said arose if the adjudicator opened up, reviewed and revised the project manager’s assessment of the sums due under payment certificate 33:

“However, if the Adjudicator opens up the PM’s assessment and decides that further sums are due in respect of the three items claimed (which is denied), the Responding Party rely upon their right of setoff. The delay damages are £468,666.00 (162 days (from 18 November 2016 to the due date) x £2,893) and should be offset against any sums which might become payable to the Referring Party.”

Helpfully, the Council explained why, in its view, a pay less notice was not required:

“Under X7 of the contract, the Responding Party are entitled to deduct delay damages from the Referring Party. If the PM’s [Project Manager’s] assessment had included the claims being sought under this adjudication, the Responding Party would have exercised its right to issue a pay less notice to limit the payment to the Referring Party.”

Although Lord Doherty said that it would have been “preferable” for this particular submission to have been advanced earlier (it was set out in the Council’s reply to sur-rejoinder, the parties’ sixth submission to the adjudicator since the notice), he accepted that it was a defence open to the Council to run because no pay less notice was required. Crucially for the enforcement challenge, it was one the adjudicator failed to address.

How did Lord Doherty arrive at his conclusion concerning the pay less notice?

Lord Doherty said that the payer’s obligation under section 111(1) of the Construction Act 1996 is to pay the notified sum, and where the payer has served a payment notice under section 110A(2) (as the Council did here with payment certificate 33), the notified sum was the sum set out in that payment notice.

The judge then went on to summarise sections 111(8) and (9), but I think it is useful to set these out in full:

“(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.”

Lord Doherty said that a pay less notice is only required where the payer wishes to pay less than the notified sum set out in a payment notice, and where the payer is content to pay the notified sum then there is no need to serve a pay less notice. Critically, he said that:

“… the words ‘the notified sum’ in s111(3) cannot sensibly be construed as meaning the sum specified in the payment notice or such other sum as an adjudicator may eventually decide is due.”

Lord Doherty distinguished between the words “the notified sum” and “the additional payment” and noted that liability for those payments will arise on different dates. He said that in this case, the notified sum was set out in payment certificate 33, and the Council paid that sum. As such, there was no need for it to give a pay less notice in response to payment certificate 33. He concluded on this point by saying:

“By advancing the set off defence in the adjudication the defender did not alter its position in relation to the notified sum. Rather, it sought to set off delay damages against any additional sums that the adjudicator might decide were payable. In my opinion the defender was entitled to deploy that defence to the claim for additional sums.”

So there we have it.

It is now clear that in Scotland, if a payee refers to adjudication a dispute concerning the merits of a valuation set out in a payment notice and seeks further payment, the payer can rely on a defence of set off even if no such set-off had been included in a pay less notice. Presumably, the same situation would arise if the payer issued a pay less notice and the payee referred the merits of that to adjudication.

There is no doubt that not everybody will agree with the Lord Doherty’s conclusion, and will have some sympathy for DC. In particular, it is at least arguable that under sections 111(8) and (9), an adjudicator’s task is to determine what the revised notified sum is in the payment notice, and therefore a pay less notice would still be required if the payer wants to pay less than that notified sum. If the payer is entitled to raise a set-off despite not serving a pay less notice aren’t we going back to the position under the original version of the Construction Act 1996?

So what is the position in England and Wales?

Well, as far as I am aware, the same point has not been dealt with in England and Wales. However, O’Farrell J dealt with the interpretation of sections 111(8) and (9) in Kersfield v Bray and she made it clear at paragraph 94 of her judgment that an adjudicator is not revising a payment notice when he decides a dispute under s111(8) and (9), but rather is simply deciding the additional sum due:

“I reject Mr Mort’s submission that section 111(8) and the scheme empower an adjudicator to open up and revise a payment notice or pay less notice. A payment or pay less notice is not a decision taken or a certificate given by any person referred to in the contract. 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.”

Whether it follows from this that a court in England and Wales would decide that no pay less notice is required for an entitlement to set-off to arise is a different matter: let’s watch this space.

MCMS Ltd Jonathan Cope

One thought on “You don’t need to have served a pay less notice to set off in adjudication (apparently)

  1. Happy New Year to you Jonathan, and thanks for your blog on this case.

    Personally I find the judgement a little bemusing. The paying party has two opportunities to set out its payment position, and it should take that opportunity to do so in full. If it decides not to advance one particular matter (such as delay damages) then that is its choice and it should not be allowed to change its mind at a later date (at least not until the next round of payment and/or pay less notices is due). To allow the paying party to change its mind and advance a particular matter at a later date when it has not previously done so in a payment notice and/or pay less notice creates uncertainty for the payee (something which the amended Act sought to alleviate) and could result in wasted costs in an adjudication (such as in this case).

    That’s my view anyway. I’m sure we shall see in due course whether the English courts agree with this judgement or completely disregard it (if I were to guess I would say it will be disregarded because of the uncertainty it creates, which goes to undermine the amended Act).

    Kind regards,

    Dean

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