Payment And Pay Less Notices Matter – The Court Has Spoken (Article 31)

Introduction

1. The new payment regime brought about by the Local Democracy, Economic Development and Construction Act 2009 has been in force since October 2011. However, until very recently there has been no guidance from the courts as to how this might be interpreted. There have now been two judgments by the same judge in the last two weeks.

2. These two cases emphasise the importance of payment notices and pay less notices. If paying parties (employers or contractors) wish to avoid overpayment, the regime in the contract and/or the scheme must be followed.

3. It had been thought by some that if a paying party had been forced to pay the total of a contractor’s or subcontractor’s claim for an interim payment because it had not issued a proper payment notice and/or pay less notice, then it could raise an adjudication to recover the overpayment based on the sum that was properly due, the true value. The position was considered to be different for final payments. The two cases where these issues are considered are ISG Construction Ltd v Seevic College (2014), which considers interim payments and MJ Harding Contractors and Gary George, Leslie Paice, Kim Springall (2014), which considers final payments.

ISG Construction Ltd v Seevic College (2014)

4. The form of contract in this case was the JCT Design and Build Contract 2011. ISG made an interim application for payment number 13. This was after practical completion but before the final account. The amount claimed was £1,097,696. It included sums of around £700,000 for loss and expense.

5. Seevic did not issue a payment notice. Seevic was also late in giving a pay less notice and therefore it was ineffective. ISG commenced an adjudication (adjudication 1) seeking payment of its application in full, on the basis that this became the default payment notice. The adjudicator decided that in the absence of a pay less notice, the full amount of ISG’s application, £1,097,696, must be paid by Seevic.

6. Seevic anticipated the adjudicator’s decision and commenced a new adjudication (adjudication 2). The same adjudicator was appointed. Seevic asked the adjudicator to decide on the true value of the works at the time of application 13. ISG invited the adjudicator to resign on the basis that the dispute in adjudication 2 was the same as that decided in adjudication 1 being the amount that should be paid arising out of application number 13. The adjudicator continued with adjudication 2 on the basis that it was a different dispute, which now concerned the true value of the work undertaken rather than a technical argument concerning the failure to issue a pay less notice.

7. In adjudication 2, Seevic asked the adjudicator to decide that the difference between the true value and the amount of the decision in the first adjudication, the sum of £768,525, should be repaid by ISG. The adjudicator decided that the true value of application 13 was £315,450 and, on the assumption that the college had complied with the first decision, he ordered repayment by ISG of £768,525.

8. In fact, when the decision in adjudication 2 was issued, Seevic had not paid the amount decided upon in adjudication 1 and paid the amount decided by the adjudicator in adjudication 2.

9. ISG brought proceedings to enforce the decision in adjudication 1 and sought declarations that adjudication 2 was void and that the adjudicator should have resigned.

10. The judge decided that adjudication 2 was void and that the college was not entitled to dispute the value of the works outside of the notice regime.

11. The judge held that:

    • the contractor’s only entitlement to payment is either through the machinery for interim applications or at the end of the project following the issue of the Final Statement;

    • the employer must follow the payment notice regime if he is to dispute the value of the works done;

    • the employer is not entitled to demand a valuation of the contractor’s work on any date other than the valuation dates for interim applications;

    • if the employer fails to serve any notices in time he is in effect agreeing to the value stated in the payment notice or default payment notice right or wrong;

    • if having failed to issue the necessary payment or pay less notice, a paying party could still question the value of the contractor’s work at the time of the interim application and then seek a decision requiring repayment. However, this would then undermine the Act and the payment and pay less notice regime.

12. The judge reiterated the position as follows:

“The contractor’s only entitlement to payment during the course of the project is by way of an interim application. Absent fraud, in the absence of a payment or pay less notice issued in time by the employer, the contractor becomes entitled to the amount stated in the interim application irrespective of the true value of the work actually carried out. The employer can defend itself by serving the notices provided for by the contractual provisions”

MJ Harding Contractors and Gary George, Leslie Paice, Kim Springall (2014)

13. It might be thought, following the ISG and Seevic case, that if the failure to issue a payment notice or pay less notice results in overpayment, then this might not be capable of being recovered. However, in this case it was held, by the same judge as in ISG and Seevic, that at final account stage there can be a further adjudication to decide what is properly due. The absence of the relevant notices does not forever preclude the paying party from disputing the notified sum.

14. The right to have the amount due properly determined does not, however, detract from the obligation to make payment in the meantime, because of its failure to serve a valid pay less notice.

Summary

15. Employers, contractors and subcontractors who are making or receiving payment in construction contracts must be careful to issue payment and/or pay less notices.

16. If an overpayment is made because of a failure to issue such notices, then it may be possible to retrieve the position in the next interim payment or at final account stage. However, there is a real danger that if a significant overpayment is made, it may not be practicable to recover this. You might be faced with hoping that the party who has received overpayment will still be around and able to repay, perhaps many months later at final account stage.

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