Companies must follow contractual process to challenge interim construction payments, rules High Court

Out-Law News | 03 Dec 2014 | 5:22 pm | 2 min. read

Companies that want to challenge building contractors' demands for interim payment during a project can only do so using the methods laid out in the contract governing the work, the High Court has ruled.

If they do not challenge a payment using the methods outlined in the contract those companies cannot begin a separate adjudication process to produce an alternative valuation of work carried out so far, Mr Justice Edwards-Stuart said in his ruling.

Allowing those extra challenges would undermine the contract governing the project and the laws governing construction disputes, the judge said. The Housing Grants, Construction and Regeneration Act was amended in 2009 to give contractors the right to payment by instalments.

Contractor ISG Construction was working for Seevic College and the work was governed by a contract based on the JCT Design and Build model contract. ISG made an interim payment application under the contract in May and Seevic did not challenge the amount applied for in the timeframe or manner set out in the contract. No payment notice was served by Seevic and its payless notice was served out of time.

ISG asked the High Court to enforce one adjudicator decision backing their original claim for the full amount applied for and to quash another adjudication which put an alternative value on the work done. Pinsent Masons, the law firm behind Out-Law.com, acted for ISG in the dispute.

Mr Justice Edwards-Stuart ruled in favour of ISG, saying that the law clearly stated when and how companies could challenge payment demands by contractors.

"The sum due to the contractor on an interim application is either the amount stated in the application or the lesser amount stated in the employer’s payment notice, if it has served one," said the ruling. "If the employer intends to pay less than the sum stated in the payment notice or interim application…it may give the contractor notice of that intention by serving a pay less notice no later than five days before the final date for payment."

"The only other circumstance under which the contractor is entitled to payment follows the submission of the Final Statement by the contractor…[t]here is no other entitlement to payment under the contract," he said.

Seevic was not entitled to ask for adjudication on the amount owed, as it did in what the judgment of the court referred to as Adjudication No 2, because Seevic had not served a compliant payment notice or payless notice. The first adjudicator ruling, known as Adjudication No 1 had ruled that since no compliant payment notice or compliant payless notice had been served by Seevic that the full amount applied for by ISG was due to be paid by Seevic.

"It is clear that Seevic, aware that it had not served the relevant notices in time, was seeking to frustrate or reduce the impact of the likely decision in Adjudication No 1 in the hope that it could obtain a decision in Adjudication No 2 that the value of ISG’s works up to the date of the application was less than the amount claimed by ISG," said the ruling.

Construction disputes expert Michael Hopkins of Pinsent Masons, the law firm behind Out-Law.com, said that the ruling sends "a very clear message".

"If the paying party fails to serve a compliant payment notice or pay less notice within the timeframe stipulated in the contract the paying party has to pay the full amount of the application," he said. "No ifs, no but buts, no maybes. This decision of the court re-enforces the statutory payment regime laid down by the 2009 Act and underlines the need for the paying party to serve a compliant notice on time. The decision could not be clearer.”   

The judge said that the adjudicator did not have the right to rule as he did in Adjudication No 2 because the issue had already been decided by Adjudication No 1.

"Not only does this decision recognise the policy behind the 2009 Act regarding the statutory payment regime it also recognises the policy of enforcing adjudicator’s decisions save where there is a want of jurisdiction or a breach of natural justice,” said Hopkins.