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“Payment of any final sum… is based on enforcement of the contractual bargain”

Let me begin with an apology. It may not have escaped your notice that the titles to the majority of our recent posts have been quotes from the cases that we’ve written about, so I was loathed to do so again this week. However, when I read the judgment in Kilker Projects v Rob Purton (t/a Richmond Interiors), this sentence jumped off the page at me, so I couldn’t resist using it.

We can add this case to those that deal with merits based valuations following “smash and grab” adjudications (like ISG v Seevic, Galliford Try v Estura and so on).

Kilker v Purton

This is the most recent judgment from O’Farrell J, although she was still sitting as a deputy High Court judge at the time. As she has now been sworn in as a High Court judge, I’ll refer to her as O’Farrell J for ease.

By way of background, Mr Purton undertook work for Kilker at the Dorchester Hotel under an oral construction contract to which the Scheme for Construction Contracts 1998 applied. In the first adjudication the adjudicator, Mr Hough, decided that Mr Purton was entitled to payment of the full sum claimed in his final account application because Kilker had failed to serve a payment notice and/or a payless notice. Therefore, Kilker commenced a second adjudication in which it asked the adjudicator (who happened to be Matt) to value the final account on the merits. Matt ordered Mr Purton to repay Kilker roughly £55,000, and to pay his fees.

Mr Purton didn’t pay and so off everybody went to the TCC to enforce Matt’s decision. Relying on ISG v Seevic, Mr Purton argued that Mr Hough had decided the value of the final account in the first adjudication. As such, Matt didn’t have jurisdiction to decide the dispute referred by Kilker in the second adjudication. Kilker submitted that the Construction Act 1996 and the Scheme regulate payment and cash flow, and they do not:

“…decide the true substantive entitlement to payment under the contract and they do not determine entitlement to payment on a conclusive basis.”

Therefore, Kilker submitted that, while a paying party has to pay up following a “smash and grab” adjudication regarding a final account payment, after doing so it is entitled to refer a dispute concerning the merits of the valuation to adjudication. It relied on the Court of Appeal’s judgment in Harding v Paice and Springall.

The position after Harding v Paice

Before looking at what O’Farrell J decided, it is worth recapping on the position prior to the argy-bargy about the Dorchester Hotel project. I wrote about this in some detail at the time in my Christmas special post although, for those of you that read my most recent post about these parties, I think this one should be renamed “Episode IV – Return of Jackson LJ”. Unsurprisingly, Jackson LJ gave the leading judgment in the Court of Appeal that day.

In December 2015, I summarised the position as it then was where a payer failed to issue a payment notice and/or pay less notice, the payee had issued a valid default payment notice (in the form of its application or otherwise), and an adjudicator awarded the payee the sum stated in its valid default payment notice. I made it clear that, regardless of relevant payment provisions and whether it was an interim or final payment, the payer must pay the sum stated as due in the default payment notice (unless this would result in a manifest injustice as in Galliford Try v Estura). I then stated that the next steps the payer could take would depend on the nature of the relevant payment provisions, in particular:

  • Interim payments under the JCT Design and Build Contract, 2011 Edition (the relevant standard form in both ISG v Seevic and Galliford Try v Estura). Here, the payer cannot successfully refer to adjudication a dispute about the value of the work properly executed at the same payment due date as that will amount to the same dispute. The payer will have to move on to the contract’s next payment due date and ensure that the relevant payment and/or payless notices are served at this point.
  • Interim payments under the Scheme for Construction Contract 1998’s payment provisions. On the basis of what Coulson J said in Severfield v Duro Felguera, it is arguable that the findings in ISG v Seevic and Galliford Try v Estura apply to interim payments under construction contracts that incorporate the Scheme’s payment provisions.
  • Final accounts following termination under the JCT Intermediate Form, 2011 Edition (the contract in Harding v Paice). The payer is entitled to adjudicate in order to determine the correct value of the payee’s claims and its counterclaims.
  • Other final accounts. Jackson LJ expressly stated that the findings in ISG v Seevic and Galliford Try v Estura “do not apply to final accounts”, so it is arguable that his findings apply to all final accounts. However, he relied on the express wording of the contractual termination provisions in reaching his conclusion, so it is also arguable that his findings were limited to termination accounts under JCT contracts.

O’Farrell J’s findings

It is the last bullet point that O’Farrell J has clarified in Kilker v Purton, finding (with refreshing brevity) that, where an adjudicator has found that a payer must pay-up following its failure to issue a payment notice and/or pay less notice against a final account, the payer is entitled to refer the merits of that valuation for determination in another adjudication. She therefore concluded that Kilker was entitled to refer the merits of the final account valuation to a second adjudication, and enforced Matt’s decision.

O’Farrell J agreed with Kilker that the provisions of the Construction Act 1996 and the Scheme for Construction Contracts 1998 establish a regime for determining stage or periodic payments to aid cash flow. As such:

“…an adjudication decision as to the ‘notified sum’ payable precludes a challenge to the interim payment on grounds of valuation in a subsequent adjudication.”

However, she also said that the Act and the Scheme do not:

“…affect the ultimate value of the contract sum that the parties have agreed is the price for the works and/or services provided. Very clear words would be required if Parliament intended to impose a scheme that would interfere with the commercial value of the bargain freely negotiated by the parties.”

To me, O’Farrell J’s findings make perfect sense, and this is summed-up in the title of this post: the final sum due to either party is based on the enforcement of their contractual bargain and not a value established following a failure to issue the correct notices.

In my view, this judgment clears up the only outstanding question that remained following the Court of Appeal’s judgment in Harding v Paice. Therefore, for the time being at least, we now know where the law stands regarding the different situations outlined above. However, no doubt there will be other arguments raised in the future, and that this is a topic we might well be revisiting in the not too distant future.

MCMS Ltd Jonathan Cope

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