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High Court confirms distinction in law between interim and final payments

Out-Law News | 21 Oct 2016 | 4:07 pm | 4 min. read

A second 'valuation' adjudication confirming the value of the final payment due under a construction contract is permissible, the High Court has ruled.

Rob Purton, a joinery subcontractor, had argued that main contractor Kilker Projects Ltd was not entitled to a second adjudication, as the sum due had already been adjudicated in accordance with the Scheme for Construction Contracts. In the first adjudication, the full amount of the final payment was due on the grounds that no payment notice had been served. However, Mrs Justice O'Farrell in the High Court disagreed

This meant that although the payment found for Purton by the first adjudicator, and which had been paid in full by Kilker, was a 'notified sum' for the purposes of the Scheme, it was not the final account valuation. Although Kilker was required to pay this sum in full, it did not lose its entitlement to challenge that sum by way of a second adjudication in order to ascertain the actual final contract sum.

There was "no agreement by the parties that the final account would be conclusive as to the final sum due under the contract and the statutory payment provisions do not have such effect", the judge said.

The judgment appears to have settled the debate in the industry over whether there was a distinction between interim and final payments for the purposes of the application of the payment provisions under the relevant legislation and the related statutory Scheme, according to construction disputes expert Michael Hopkins of Pinsent Masons, the law firm behind Out-Law.com.

In 2014, the High Court ruled that Seevic College was liable for the full interim sum notified by contractor ISg Construction, because it had not provided either a payment notice or 'pay less' notice within the required timescale. Unlike the decision in the present case, however, the High Court held that it was not open to the paying party to commence a second adjudication in relation to the same interim payment application. The cases differ in the fact that the ISg case concerned an interim payment application, while the Kilker case was concerned with a final payment application at the end of the contract, Hopkins said.

This issue "was always there to be resolved" from the moment that the 2009 amendments to the payment provisions of the 1996 Housing Grants, Construction and Regeneration Act (Construction Act) came into force, according to Hopkins, who acted for ISG in the 2014 case.

"The Construction Act payment provisions came in for criticism since they failed to provide any real sanction for the payer not having served a valid payment notice," he said. "The amendments to the payment provisions brought about in 2009 meant that the sanction became and remains that if they payer fails to serve a valid payment notice or "pay less" notice that the sum contained in the contractor's application becomes the notified sum which the payer has no choice but to pay."

"This latest decision of the court now makes it plan that there is a distinction for these purposes between interim and final payment applications. Although the judge could not point to a distinction between interim and final payment under either the 2009 legislation or the Scheme, the decision appears to rest on the distinction drawn between the 'final account' (final payment) and the 'final contract sum' justified by reference to the presumed intention of parliament. Whether there is such a distinction is open to question, but the decision is certainly one based on common sense and sound policy," he said.

Kilker had employed Purton to carry out some specialist joinery work on its behalf at the Dorchester Hotel on Park Lane, London. In 2014, Kilker lost an adjudication on a final payment claim by Purton because it failed to give a payment notice or pay less notice. In subsequent enforcement proceedings, the High Court found that there had been an oral contract between the parties into which the payment terms set out in the Scheme for Construction Contracts were implied.

The contractor paid in accordance with the judgment, but then brought its own adjudication on the substantive valuation of the final account. This second adjudicator found that Purton's payment claim overvalued the work by about £66,000, and that Kilker had therefore overpaid. Purton challenged the validity of this adjudication, on the grounds that the previous adjudicator had decided the same or substantially the same claim and Kilker should be deemed to have agreed the valuation of the final account because it had not given a payment or pay less notice, as in the ISG case.

Mrs Justice O'Farrell disagreed. She found that the Construction Act and the Scheme "establish[ed] a regime for determining stage or periodic payments throughout a relevant construction contract", and did not affect the ultimate value of the sum due under the contract.

"Very clear words would be required if parliament intended to impose a scheme that would interfere with the commercial value of the bargain freely negotiated by the parties," she said.

"Subject always to the express terms of the contract, where the 'notified sum' is in respect of an interim payment, usually there is no contractual basis on which the contractor's entitlement to that payment can be re-opened ... However, where the 'notified sum' determined in adjudication is in respect of a final payment, unless the contract provides that such payment is conclusive as to the contract sum due, although the 'notified sum' must be paid, either party is entitled to have the ultimate value of the contract sum determined in a subsequent adjudication, litigation or other form of dispute resolution," she said.

It was not necessary for the contract to set out "any specific mechanism" for that final accounting exercise, as the payment of the final sum was based on "enforcement of the contractual bargain", she said.