In March 2013 Mr Paice and Ms Springall ("P&S") entered into a Contract with Matthew Harding ("Harding") based on a JCT IC 2011 (with amendments) for certain construction works. Under the Contract P&S were the Employer and Harding was the Contractor. Matters did not progress smoothly and in January 2014 Harding terminated his employment under the Contract and later submitted his termination account pursuant to clause 8.12. Clause 8.12.5 obliged P&S to pay "…..the amount properly due in respect of the account within 28 days of its submission". P&S failed to pay the amount claimed by Harding nor issued a valid Pay Less notice. Harding commenced adjudication (adjudication no.3). The adjudicator found in Harding’s favour and decided that in the absence of a valid Pay Less notice, P&S must pay the sum claimed as due in Harding’s termination account. The adjudicator however noted in his decision that he had not decided upon the proper value of the account.
P&S then brought a further adjudication (no. 4) based on the proper valuation of the account. Harding sought an injunction from the Technology and Construction Court ("TCC") to stop these adjudication proceedings. The TCC found against Harding who then appealed to the Court of Appeal ("CA"). In a nutshell Harding’s appeal was that i) the previous adjudicator had already decided and determined the sum properly due in respect of the termination account, ii) consequently the current adjudicator did not have jurisdiction to proceed.
Court of Appeal’s finding:
The CA held that P&S could still adjudicate on the proper value of the termination account. The adjudicator (adjudication no. 3) had only decided the dispute based on the contractual position related to the lack of a Pay Less notice. He had not decided on the actual valuation of the account (and made this expressly clear). Accordingly, there could be a further adjudication to determine the proper value of the account, and the adjudicator would have jurisdiction to decide the proper valuation of the termination account. Paragraph 71 of the judgment is reproduced below:
"In the present case we are concerned with a final account following termination of the construction contract. Clause 8.12.5 of the contract conditions requires an assessment of the amount which is "properly due in respect of the account". The clause expressly permits a negative valuation. Mr Linnett did not carry out any such valuation exercise in the third adjudication. Therefore PS were entitled to refer that dispute for resolution in the abortive fourth adjudication. They will be entitled to do so again in the proposed fifth adjudication."
As noted above the CA (and TCC) appears to have been influenced by the fact that this was a ‘final account following termination’ (i.e. effectively the last application to be issued) and hence did not consider that P&S’s failure to issue a Pay Less notice should "deprive P&S for ever the right to challenge the contractor’s account".
However the CA declined to deal with the position regarding interim payments. Accordingly ISG Construction Ltd v Seevic College  EWHC 4007 (TCC) remains the current authority for interim payments and a failure to issue a Pay Less notice in respect of interim payments will still be applied very strictly. Indeed the week before the CA’s judgment, Coulson J stated at paragraph 23 of his judgment in Severfield (UK) v Duro Felguera UK 2015] EWHC 3352 (TCC) "…..if there is a valid payment notice from the contractor, and no employer's payment notice and/or payless notice, then the employer is liable to the contractor for the amount notified and the employer is not entitled to start a second adjudication to deal with the interim valuation itself. Harding v Paice was in some ways a slightly different case because, amongst other things, it was concerned with contractual provisions on termination. It is also the subject of an imminent appeal."
In Harding v Paice the Court appears to be indicating that it may apply a different approach between final account cases and interim payments cases. However: 1) such an approach may not rest easy with Contract terms and/or the Construction Act; 2) it must be remembered that Harding v Paice related to a termination account claim made under the termination payment rules in JCT IFC 2011 which required payment of the "sum properly due". The Courts may (or may not) apply a different approach in relation to a final account claim related to the final payment terms in a Contract (for example clause 4.14 of JCT IFC 2011). This whole area is unclear and likely to be developed by further case law in 2016.
The consequences of failing to serve a payment notice and/or a Pay Less notice still remains a draconian and high risk area to those responsible for payment (i.e. Employers under main contracts; Contractors under sub-contracts). Get it wrong at your peril! Even in Harding v Paice situations payment may still have to be made in the interim i.e. paragraph 73 of the judgment notes that adjudication no 3 resulted in a payment to the Harding, which Harding is entitled to retain unless and until a subsequent adjudicator (or a judge in litigation) arrives at a different valuation of the termination account. Obviously, it is far safer and simpler to seek to avoid all of this risk by correctly issuing payment and Pay Less notices!
Remember different contracts have different payment rules. It is important that those who administer the payment of Contractors (or Sub-Contractors) to read, understand and meticulously follow and apply the payment terms of their relevant contract and ensure that they issue the relevant notices in the correct manner and on time. Any failure here and the potential consequences can be quite extreme. You have been warned!
If you have any queries regarding the above, please do not hesitate to contact our office on 01992 715 813.
If you are interested in attending our next free breakfast seminar on this subject in January 2016 please visit our website for details www.blueskyadr.com.
15 January 2016
The information & opinions expressed in this article are not necessarily comprehensive nor do they represent the trenchant view of the author; in any event this article does not purport to offer professional advice. This article has been prepared as a summary and is intended for general guidance only. In the case of a specific problem, it is recommended that professional advice be sought.