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Court of Appeal: employer may challenge the amount due under a builder's final account despite his failure to serve a pay less notice

Failure to serve a payment or pay less notice does not prevent an employer from disputing his building contractor's final account in adjudication proceedings, even where the contractor has already obtained an adjudicator's decision in his favour, the Court of Appeal has ruled.

Lord Justice Jackson backed the High Court's earlier finding that the employer was entitled to have the question of what sum was properly due resolved either by adjudication or litigation. The contractor, who had applied unsuccessfully to the court for an injunction to stop the employer's adjudication going ahead, had only obtained an adjudicator's decision on one of the issues in dispute, he said.

Among the reasons for the dispute in the case was the fact that the employer had not served a valid 'pay less' notice on the contractor, which would have required him to pay back money that was owed to the employer. Construction disputes expert and adjudicator Lawrence Davies of Pinsent Masons, the law firm behind Out-Law.com, said that by finding in favour of the employer the Court "seemed to dilute the importance of paying parties serving effective payment and pay less notices".

"The Court of Appeal anticipated this concern and suggested that the contractor had obtained a cash-flow advantage as a result of the first adjudicator's decision in its favour - it was entitled to retain the monies paid as a consequence of the decision until another adjudicator or court reached a decision on the valuation," he said. "However, such an advantage may be very short-lived in the future."

"It may be understandable that neither court was willing to prevent the valuation of a final account to be decided by adjudication, simply because of the absence of payment or pay less notices. However, it is disappointing that the Court of Appeal has declined to indicate whether the ISG Construction v Seevic College case of 2014 was correctly decided in relation to interim payments. Lord Justice Jackson's comments seem to disapprove of that decision and may make it more difficult for payees to obtain payment of the interim amounts they have applied for. This seems to be a step backwards," he said.

The dispute arose out of a JCT Intermediate Form 2011 standard form building contract for the construction and fit-out of two houses. Problems arose after work began and the employers, Gary Paice and Kim Springall, replaced their architect and project administrator. The contractor, MJ Harding, refused to recognise the new administrator, and after his relationship with the employers broke down the latter attempted to terminate the building contract. Harding denied that they were entitled to do so.

Harding then successfully pursued adjudication against the employers on two occasions, each time in relation to interim payments due. He also gave his own notice of termination of the contract. He then sent his final account to the employer showing a balance of £397,912 due, and commenced a third adjudication to recover that sum. The next day, the employer served a 'pay less' notice indicating that Harding had already been overpaid.

During the third adjudication, Harding sought a decision from the adjudicator that he was entitled to be paid the sum he had claimed, either because it was the sum properly due or because the employer had not served a valid pay less notice. The adjudicator upheld his claim on the grounds that the pay less notice was invalid. The contractor then began High Court enforcement proceedings.

While this was going on, the employers began their own adjudication seeking a correct value for the final account. The contractor attempted to have the High Court stop this adjudication, on the grounds that the amount due had already been established by the third adjudication. In the High Court, Mr Justice Edwards-Stuart dismissed the contractor's claims on the grounds that the employer's failure to serve a pay less notice could not deprive him of the right to challenge the contractor's final account altogether. This decision seemed at odds with the same judge's decision in ISG v Seevic.

The adjudicator in the fourth adjudication found in favour of the employer, holding that Harding had to repay a substantial sum. However, when the employer attempted to enforce the adjudication in the High Court, it was rejected on the grounds of "apparent bias". The employer announced its intention to bring a fifth adjudication, as permitted by Mr Justice Edwards-Stuart's High Court judgment. The contractor then appealed that judgment.

Backing Mr Justice Edwards-Stuart's reasoning, Lord Justice Jackson agreed that that the third adjudicator did not finally settle the valuation question. He had instead taken the "short route", settling the question on the contractual ground that a valid pay less notice had not been served only.

"The long route was to embark upon an analysis of the evidence and submissions on all the valuation issues," he said. "Both parties deployed their full evidence on valuation, so that the adjudicator could take whichever route he thought was appropriate. In the event the adjudicator took the short route."

"In my view the employer's failure to serve a pay less notice (as held by the previous adjudicator) had limited consequences. It meant that the employer had to pay the full amount shown on the contractor's account and argue about the figures later. The employer duly paid that sum, as ordered by a previous adjudicator. The employer is now entitled to proceed to adjudication in order to determine the correct value of the contractor's claims and the employer's counter-claims," he said.

The parties to the case had used a standard form contract with a "modest number of amendments", according to the judge. Construction disputes expert Lawrence Davies said that the verdict would "give further encouragement to contract draftsmen seeking to insert clauses into the standard form contracts to protect paying parties from the consequence of failure to serve payment and pay less notices".

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