Out-Law Analysis | 25 Jan 2018 | 12:48 pm | 10 min. read
In one of the most important adjudication-related judgments of the year, the Court of Appeal confirmed that the 'pay less' notice requirements set out in the Construction Act apply equally to termination payments as to interim payments. The same court cast considerable doubt on the ISG v Seevic decision, which prevents a party from challenging the underlying value of an interim payment in the absence of a pay less notice, but failed to confirm whether the ISG case had been rightly or wrongly decided - to the disappointment of many in the industry.
While payment notice disputes and adjudications, and court proceedings relating to them, remain common, they are in theory easy to avoid - providing that parties:
In the meantime, the courts have devised a work around solution for what are seen to be some of the main deficiencies in the amended Construction Act.
'Smash 'n' grab' adjudication: the background
The term 'smash 'n' grab' is increasingly used by the industry to describe claims for the full amount set out in an application where the payer fails to serve a valid pay less notice in time, following the 2014 ISG v Seevic case. It is, however, an unfortunate term, with the description 'smash 'n' grab' suggesting that this is some kind of illegal or even criminal activity, rather than a means of enforcing payment of the very amount that the contractor applied for in the first place.
The decision in ISG v Seevic appeared to open the floodgates to this type of adjudication. Although courts - and contract draftsmen - have increasingly been making these claims more and more difficult, payment disputes remain a particularly contentious topic.
As a reminder, the 2009 Construction Act amendments require the payee to serve a payment notice not later than five days after the due date, specifying the sum considered due and the basis of that calculation. Failure to serve a valid payment notice may trigger a default payment notice.
If the payer intends to pay less than the 'notified sum' as set out in the payment notice or default payment notice, a pay less notice must be served in advance of the final date for payment (FDP). Again, this must specify the sum considered due and the basis of that calculation.
The ISG v Seevic decision confirmed the effect of these amendments. Unfortunately, Mr Justice Edwards-Stuart went a little further in his judgment than he needed, holding that failure to serve a pay less notice amounted to deemed agreement to the value stated in the application. The adjudicator's decision therefore established the value of that interim payment, which could not be re-adjudicated.
The same judge rowed back on this a little the following year, in the Galliford Try v Estura case, clarifying that the value could be revisited at the time of the next interim payment or as part of the final account. Later that same year, in the Harding v Paice case, the Court of Appeal held that even though a first adjudicator had ordered the applied for sum to be paid, a second adjudicator could look at the real value of a termination account.
Although the Court of Appeal declined to say whether the ISG decision was right or wrong, implicitly it did not agree with the judgment in that case. There is nothing in the Act to suggest that termination payments should be treated differently in this way.
Lessening the draconian effect
The amendments to the Construction Act were intended to give it 'teeth', by imposing a sanction where the payer fails to serve either a payment notice or a pay less notice. The courts, however, consider this a draconian sanction and are very reluctant to allow a party that may have overpaid to be locked out of a speedy remedy - even though adjudicators' decisions are only temporarily binding.
In 2016, the courts made it clear that they would not allow contractors or subcontractors to succeed with these claims except in the clearest possible cases. The decisions in the Caledonian Modular Ltd v Mar City Developments, Henia Investments v Back Interiors and Jawaby Property v The Interiors Group cases established that, for a contractor to succeed, the payment notice must be unambiguous and a payment notice in 'substance, form and intent'.
This trend continued in 2017, beginning with the Surrey & Sussex NHS Trust v Logan Construction case in January. The dispute arose in relation to a £4.3 million contract for refurbishment of parts of a hospital based on the JCT IBC 2011 standard form contract, with practical completion (PC) achieved on 25 August 2015. The contractor, Logan, made no further interim application, but interim certificates were issued every two months as required by the contract.
Logan submitted some final account information, and the project surveyor issued his computation of a final adjusted contract sum of £4.9m in May 2016. Several meetings to discuss this took place between June and September, while in the meantime another interim payment became due. The final account meeting was ultimately fixed for 21 September 2016.
Shortly before midnight on 20 September 2016, Logan sent an email referring to the meeting and enclosing an attachment described as 'interim payment notice'. The document contained various worksheets showing a valuation as at 'due date 24 August 2016' for the total sum of £5.96m. The meeting took place on 21 September as planned, but no agreement was reached as to the final account.
After the meeting, the surveyor issued a final certificate confirming the sum of £4.9m. In the covering email, he described Logan's £5.96m interim payment notice as "out of date and void". In response, Logan served a 'smash 'n' grab' notice of adjudication for the outstanding £1.1m.
Deputy High Court judge Alexander Nissen QC had to decide whether Logan's 20 September email was a valid payment notice, but also whether the architect's covering email and final certificate amounted to a valid pay less notice. He ultimately decided that both were valid. While acknowledging that the architect had clearly not intended the final certificate to double as a pay less notice, the documents "provided an adequate agenda for an adjudication as to the true value of the works".
Check the notice clause
However, employers should not take comfort from this decision. Pay less notices do need to be served at the correct time, as the Kersfield Developments v Bray and Slaughter decision of later that same month showed. Kersfield had been on the receiving end of a 'smash 'n' grab' adjudication, for an interim sum which included a large loss and expense claim to which it had not been previously alerted. It attempted to resist enforcement, arguing that although its payment notice was late it had served a valid pay less notice. This had been sent by email at 9:50pm on a Friday night, ahead of a deadline which inconveniently fell on a Sunday.
Kersfield's argument failed. The JCT contract used by the parties included a notices clause which said that service had to be sent by post as well as email, and that notices would be deemed effective as of the next business day. Accordingly, Kersfield's pay less notice was out of time - therefore, the full notified sum had to be paid.
Separately, Kersfield also relied on the Harding v Paice decision to argue that although it might have to pay the notified sum, it was still entitled to have the underlying valuation dispute decided by an adjudicator. Reference was also made to the Construction Industry Scheme rules, which allow an adjudicator to open up, review and revise any certificate. This argument was a direct challenge to the ISG v Seevic decision.
The judge referred to the JCT 2011 payment provisions, which require the notified sum to be paid and which do not allow for that sum to be revised (or for negative interim payments). Accordingly, there was "no contractual basis on which to revise that payment by reference to a proper valuation of the works and therefore there is no relevant dispute that can be referred to adjudication".
While the judge acknowledged the risk of a windfall, she noted that the Construction Act regulates the parties' cash flow rather than their substantive rights. A payer is required by the Act to serve a valid payment notice or pay less notice, failing which to seek adjustment in the next interim valuation or final account.
This judgment effectively confirmed the ISG v Seevic case, albeit without the fiction of an implied agreement between the parties as to value. However, it is worth noting that it is only another first instance decision.
Payment notices and final accounts
While the result in the Kersfield case appeared to confirm the findings of the judge in ISG in respect of interim payments, the position in respect of final accounts has been different since Harding v Paice - as we saw vividly at the end of 2016 in the case of Universal Piling & Construction v VG Clements, which involved an NEC short form contract for civil engineering and signalling works on a railway.
After completion, a dispute arose about the value of Universal's next application, dated September 2015. An adjudicator found the sum due was the amount applied for because of Clements' failure to serve a payment notice or pay less notice.
Under the contract, all assessments had to be triggered by applications. However, after its successful adjudication, Universal made no further applications. Clements therefore issued a purported payment notice and pay less notice in August 2016, after issuing the defects certificate, valuing the works as a negative sum. Clements then commenced its own adjudication seeking to assess the proper sum due by reference to its August 2016 valuation. In response, Universal issued Part 8 proceedings to stop the second adjudication on the basis that this was the same dispute as the first adjudication.
At first sight, the application to the court seemed promising. The NEC short form contract does not have a separate final account process, and all payment assessments were to be initiated by the contractor making an application. However, rather surprisingly, the judge held that a different dispute was being referred to adjudication. The second adjudicator was being asked to carry out a proper valuation of the works up to August 2016: a different point in time, and addressing the release of retention.
Clearly, the court was concerned about Clements being locked out of a proper valuation of the final account. However, the court expressly declined to conclude whether the August 2016 valuation was valid, and hinted that a damages or restitution claim might be more appropriate. These were not matters suitable for determination in the Part 8 application.
ISG uncertainty continues
The July case of ICI v Merit Merrell Technology is worth mentioning in this context. A complex dispute arose between ICI and a contractor carrying out steelwork and tank installation works at a new paint processing plant. The parties fell out about quality of work and payment and eventually the contract was terminated by ICI, which purportedly accepted repudiatory breaches allegedly committed by the contractor. Several adjudications and court proceedings followed, including court orders enforcing adjudicator decisions on interim payment.
Mr Justice Fraser gave judgment on liability in the substantive litigation. In the course of doing so, he reviewed ISG v Seevic and set out his views on the status of 'smash 'n' grab adjudication. He considered that the Court of Appeal decision in Harding v Paice "cast some real doubt on whether [ISG] would be decided in the same way now", and was particularly sceptical about the suggestion in ISG that, in the absence of a payment or pay less notice, the application value was "deemed to be the value of those works".
The judge said that, in his view, ISG was a case concerned with "timing, not substantive underlying rights". The fact that the contractor had been entitled to be paid an interim payment due to the absence of a payment notice or pay less notice did not preclude the employer, after termination of the contract, from seeking to recover any overpayment. The judge also confirmed that the implied right to recover overpayments in line with an adjudicator's decision remained in force notwithstanding the repudiation of the contract.
This brings us to a November 2017 case in which the Court of Appeal had the opportunity to confirm whether or not ISG v Seevic had been decided correctly: Adam Architecture v Halsbury Homes.
Adam Architecture was seeking to recover fees due from a housing developer, Halsbury, after the parties had terminated their contract due to a disagreement over Adam's role. Halsbury disputed the total amount due, but as it had not served a pay less notice or made any payment an adjudicator had ruled in Adam's favour. In 2016, the High Court ruled that the pay less regime did not apply following the termination.
The Court of Appeal overturned the decision, holding that the relevant provisions of the Construction Act apply to all payments which are "provided for by a construction contract" and not just interim payments. Halsbury was therefore required to "pay whatever the adjudicator orders, but can argue about it later and claw back any overpayment".
However, we still don't know whether the Court of Appeal considers ISG v Seevic to be correct. Lord Justice Jackson made reference in his judgment to his previous decision in the Harding v Paice case, confirming that a payer who fails to serve a pay less notice in respect of a termination account can still challenge its underlying value in adjudication. In doing so, he effectively cast doubt on ISG, while failing to confirm whether it was right or wrong.
We still do not know the answer to that vital question.
Lawrence Davies is a construction disputes expert at Pinsent Masons, the law firm behind Out-Law.com.