HELL IS PAVED WITH ABSENT NOTICES

Introduction Beware! The new payment and adjudication regime provided in the Local Democracy, Economic Development and Construction Act 2009 (the “Act”) which amended the Housing Grants, Construction and Regeneration Act 1996, has recently been considered in two eye-opening cases on the consequences of failing to issue a valid pay less notice. The outcome of these cases is significant and essential reading for anyone responsible for payments in construction contracts. Harding (t/a M J Harding Contractors) v Gary George Leslie Paice Kim Springall [2014] EWHC 3824 (TCC) (21 November 2014) Background In the case of Harding v Paice, the court had to consider whether an employer, who had failed to issue a valid pay less notice, could commence a second adjudication on the same payment application. Harding, a contractor, was engaged by Paice under a JCT Intermediate Form of Building Contract 2011 with amendments to carry out the construction and fit-out of two residential houses. On 3 January 2014, Harding served a notice of termination of its employment under the contract pursuant to clause 8.9.3. In such circumstances, Harding was entitled under the contract to submit an account for the value of work carried out up to the date of termination. Harding submitted its account on 8 August 2014. The value of works was said to be £797,859.49, with a balance owing of £397,912.48 plus VAT. Paice made no payment and failed to serve a valid pay less notice. First Adjudication Harding referred the dispute to adjudication on 1 September 2014, arguing that the pay less notice had not been served by 30 August 2014 and therefore it was entitled to be paid the full amount of £397,912 plus VAT. Paice argued a valid pay less notice had been issued. The adjudicator found in favour of Harding and decided that Harding was entitled to payment of the whole £397,912.48. The adjudication rejected Paice’s argument that a valid pay less notice had been served because it did not specify the basis on which the sums set out in it were calculated. This is

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notable because, so far, there has been no case law to decide the basis upon which a sum should be calculated. On this issue, we live in uncertain times and there will surely be litigation to come. Second Adjudication Paice attempted to evade the adjudicator’s decision by commencing a second adjudication. This was in relation to the value of work undertaken up to the date of termination. Paice hoped that the value decided in the second adjudication would be less than the first In response, Harding made an application to the court for an injunction to restrain Paice from proceeding with proposed second adjudication, arguing that the dispute had already been decided in the first adjudication. Mr. Justice Edwards-Stuart dismissed Harding’s application for an injunction against the second adjudication stating that the amount due to Harding under clause 8.12.5 should be “the amount properly due in respect of the account”. In other words, Harding should only be entitled to the true value of works undertaken at the time of termination. The court concluded that the first adjudication had decided upon Paice’s non-compliance with notice provisions in the contract. The decision for Paice to pay Harding £397,912.48 was based solely on its failure to serve a valid pay less notice. Therefore, Paice was entitled to have determined, either by adjudication or litigation, the question of what sum is properly due in respect of Harding’s account. This, however, did not detract from Paice’s obligation to pay the sum ordered in the first adjudication. Paice had to pay Harding the sum of £397,912.48 and hope for reimbursement after the second adjudication. ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) (03 December 2014) Background In the case of ISG v Seevic, Mr. Justice Edwards-Stuart was again asked to consider whether an adjudicator could decide upon the true value of the contractor’s works, even though a previous adjudication had already considered the same payment application. Again, the payer was left battling for a second adjudication after failing to issue a valid payment notice and pay less notice. Sound familiar? Maybe, but this decision was very different to the Harding v Paice case. In this case, Seevic engaged ISG (a contractor) under a JCT Design and Build Contract 2011. Crucially, the contract provided that the sum due for interim applications is either:  

the amount stated in the employer’s payment notice; or the amount stated in the application

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On 13 May 2014, ISG issued its Payment Application No. 13 which requested payment of £1,097,696.29. This included more than £1 million for loss and expense which was later found to be overstated. Following Application No.13, Seevic failed to issue a payment notice and the pay less notice was served out of time. Seevic also refused to pay the amount claimed in ISG’s application. As a result, ISG referred the dispute to adjudication. First Adjudication In the absence of a payment notice and pay less notice, Seevic was fearful that it would be ordered to pay the full amount of ISG’s application, irrespective of the actual value of work undertaken. Whilst the first adjudication was still ongoing, Seevic commenced a second adjudication concerning the true value of ISG’s work up to the date of Application No. 13. As with Harding v Paice, Seevic hoped that the true value of work decided in the second adjudication would be less than the sum payable in the first. The adjudicator issued his decision for the first adjudication on 5 September 2014, holding that the full amount of £1,097,696.29 plus interest was owed by Seevic to ISG. Wrongly, Seevic did not pay. Second Adjudication The second adjudication held that the true value of the works in Application No.13 was in fact the lesser amount of £315,450.47. Subsequently, Seevic issued ISG with a cheque for the same amount of £315,450.47. The Court ISG made an application to the court for summary judgment and requested the court to enforce the decision of the first adjudication and a declaration that the second adjudication was invalid. The judge held in favour of ISG and concluded that: i.

ii.

By failing to serve a payment notice or pay less notice, Seevic had effectively agreed with the value stated in ISG’s application. Therefore, in principle, the question as to the value of ISG’s works had already been decided in the first adjudication. ISG was entitled to a declaration that the adjudicator’s decision in the second adjudication was invalid because the question was already decided in the first adjudication.

Therefore, Seevic still had to pay the total sum of £1,097,696.29. Ultimately, Seevic’s failure to serve a valid pay less notice cost them around £700K!

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Conclusion The first thing to consider is, that in the above adjudications, the payers were ordered to pay the full amount claimed in the contractor’s applications due to the absence of a valid pay less notice. The true value of works undertaken was not considered in the adjudicator’s decision. The difference between the two cases is that the payment applications were subject to different payment provisions which had different consequences. i.

ii.

In Harding v Paice, the application was submitted as a consequence of termination, which provided that the employer must pay “the amount properly due in respect of the account”. In the first adjudication, the adjudicator decided that Paice must pay the amount stated in Harding’s account due to the absence of a valid pay less notice. The court found, however, that Paice was entitled to a determination on the question of what sum is “properly due” in respect of Harding’s account. In ISG v Seevic, the application was subject to interim payment provisions which provided that, in the absence of a valid payment notice and pay less notice, Seevic must pay the amount stated in the application. There was no provision in the contract for interim payments to be subject to further review.

In the cut and thrust world of construction, a pay less notice could easily be overlooked or lacking detail if the payer is not careful. Time is precious and the payer often feels the strain when wrestling with time consuming tasks such as:    

Inflated and poorly presented claims and variations - sorting the wheat from the chaff Preparing the final account whilst assessing interim applications Pressure from multiple projects Pressure from multiple subcontractors And so on…

Whilst all of these issues may be a genuine fact of life, none of them will be considered by an adjudicator if a payment notice or pay less notice has not been served. The payee will be delighted by its potential windfall. ISG hit the jackpot to the tune of £700K. However, if an overpayment is ordered by an adjudicator due to an invalid pay less notice, it may be possible for the payer to retrieve the position by way of a second adjudication. This will hang on the material circumstances and the contract in question. Nonetheless, the payer must always pay the amount ordered in the first adjudication and hope that the other party is still around and able to repay his windfall later. Unfortunately, in the current climate, it is not uncommon for a contractor to suddenly sink into administration. In light of these cases, don’t be surprised to see a tidal wave of smash and grab adjudications whilst payers get to grips with the new payment regime.

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Advice for Payers The following advice for payers in construction contracts must be adhered to. 1. 2. 3. 4.

Always issue a payment notice. Always reconsider the need for a pay less notice in every application. Always issue your notices on time. Always specify the basis on which the sums set out are calculated - do not be the test case on this issue.

If you do not follow these simple yet essential guidelines, you may run the risk of paying the full amount of an application, irrespective of its true value. Mike Lynn Senior Consultant [email protected]

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