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The importance of pay less notices

30 July 2015 #Construction


In late 2014 two TCC decisions (Harding v Paice and ISG v Seevic) considered the effect of failures to serve payment and pay less notices in response to applications for payment.

In a recent case (Galliford Try v Estura), the TCC has provided some useful guidance on how these two decisions are to be applied.

This article considers these cases and how an employer can challenge payment applications in the absence of a pay less notice in light of the decision in Galliford Try v Estura.

1. MJ Harding Contractors v Paice and another [2014]

The dispute related to a post-termination account payment application. The contractor terminated the contract and submitted an account in respect of the work executed at the date of termination. Under clause 8.12.5 of the JCT Intermediate Building Contract 2011, the employer was required to pay “the amount properly due in respect of the account within 28 days”.  The employer failed to pay the amount claimed and so the contractor commenced an adjudication claiming no valid pay less notice had been served.

The adjudicator determined that, in the absence of a pay less notice, the employer had to pay the sum stated as due in the application, but made no decision on the proper value of the account. The employer commenced a second adjudication challenging the contractor’s account and claiming the return of the sums awarded by the first adjudicator. 

As a result, the contractor applied for an injunction from the TCC to prevent the employer’s second adjudication proceeding on the grounds that the first adjudicator had already decided the value of the termination account.

The injunction was refused because the adjudicator had not decided what was “properly due” to the contractor. It was held that the absence of a pay less notice does not convert the sum applied for into one that is properly due. This meant that the proper value of the account could still be determined by adjudication or litigation. However, this right did not remove the employer’s obligation in the meantime to make payment in the absence of a pay less notice.

Significantly, this decision confirmed that a failure to issue a valid pay less notice will not forever prevent the paying party from disputing the “notified sum” which becomes payable in the absence of the pay less notice.

2. ISG Construction Ltd v Seevic College [2014]

The dispute related to a post-practical completion application for payment. As in Harding v Paice, the employer failed to issue either a payment notice or pay less notice. Consequently, the contractor referred the dispute to adjudication and the employer was ordered to pay the sum that had fallen due. It was decided that the employer had failed to serve the required notices under the contract and so had no grounds to dispute payment.

In a second adjudication, the employer sought a decision that the value of the contractor’s works was less than the amount claimed by the contractor in the first adjudication.  In this second adjudication, the adjudicator agreed with the employer, decided the correct value of the contractor’s works (an amount considerably less than the amount originally awarded by the first adjudicator), and ordered the contractor to repay the overpayment.
 
The contractor applied to the court for summary judgment, seeking enforcement of the first adjudicator’s decision and for a declaration that the second adjudication was invalid due to a lack of jurisdiction. The court granted summary judgment in favour of the contractor.

In contrast to the decision in Harding v Paice, it was held that the employer’s failure to serve payment notices in response to the interim payment application had resulted in the acceptance of the amount in the payment application regardless of whether the value stated in the application was right or wrong. Thus the employer was prevented from bringing a further adjudication for a true assessment of the value of the works claimed in the payment application.

3. Galliford Try Building Limited v Estura Limited [2015]

Importantly, this case provides useful guidance as to how the contrasting decisions in Harding v Paice and ISG v Seevic are to be applied.

The first adjudication related to the contractor’s interim application 60 (in the form of a pre-practical completion “indicative final account”). As with the above cases, the employer did not submit a payment notice or pay less notice in response to the interim application and the contractor obtained an adjudicator’s decision ordering payment of the amount claimed in the application. The adjudicator decided that no valid payment notice or pay less notice had been issued and so the employer was obliged to pay the sum stated in the application.

The employer then commenced a second adjudication asking the Adjudicator to decide the proper value of the works claimed in interim application 60, but the Adjudicator refused to proceed on the basis of the decision in ISG v Seevic.

The employer resisted enforcement of the first adjudicator’s decision claiming that the decision in ISG v Seevic was wrong.

The court rejected the employer’s submissions, confirming that the first adjudicator’s decision was valid and summary judgment was given. In reaching his decision, the judge maintained the decisions in Harding v Paice and ISG v Seevic were both right on the facts and terms of each contract. The judge highlighted the difference between the two decisions arose because of the way the JCT contracts dealt with interim payments (ISG v Seevic) and payment on termination (Harding v Paice). 

It should be noted, however, that the court did award a partial stay of enforcement on the grounds that application 60 was akin to a final account and so didn’t offer the employer the opportunity to correct the account in its next certificate (a “manifest injustice”). This meant that the employer was ordered to pay £1.5m of the £3.9m awarded by the Adjudicator, which order included conditions aimed at incentivising the contractor to reach practical completion and submit a final account.

4. Options open to employers who are out of time for serving a pay less notice 

As a result of the decision in Galliford Try v Estura, an employer has the following options if they have failed to issue a valid pay less notice but still wish to challenge the true value of the contractor’s application:

i. Correct the value in the next payment application (an approach clarified in ISG v Seevic); or

ii. Start a final account resolution process; or

iii. Commence Part 8 proceedings in the Technology and Construction Court, challenging an adjudicators decision (e.g. it wasn’t a valid application notice or a Valid Pay Less notice was served, etc); or

iv. Ask the court for a stay of the enforcement of an adjudicator’s decision. 

However, if no pay less notice has been served, and the payment application was the final application or termination account, the decision in Galliford Try v Esturar states the application will still be deemed to be agreed. Employers should therefore consider:

i. Whether the contract contains an express term entitling the employer to have the value revised?

ii. Whether the contract contains an implied term that any over-payments to the contractor should be re-paid?

iii. Whether the application’s validity can be attacked?

iv. Whether it can challenge the validity of the payment application on basis the sum claimed therein is not the sum the payee considers due under section 110(A)(3) of the Housing Grants, Construction and Regeneration Act 1996.

It should be noted that the decision in Harding v Paice is going to the Court of Appeal in late 2015, so the Court may provide some useful guidance about an employer’s right to challenge the final payment application. 

 

Clarkslegal, specialist Construction lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Construction matter please contact Clarkslegal's construction team by email at constructionsector@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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Victoria  Kempthorne

Victoria Kempthorne
Senior Solicitor

E: vkempthorne@clarkslegal.com
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