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A Payment Lifeline For Contractors and Employers Worth Taking Notice Of?

March 13, 2015 | Adjudication, Construction Contracts, JCT Contracts

Last month we commented on the “give notice or pay on demand” legacy seemingly established in the case of ISG Construction Limited v Seevic College. This case took a pointed stance on the effect of the failure to serve a Payment Notice and a Pay Less Notice in response to an application for payment.

However, has the court in the recent case of Galliford Try Building Limited v Estura Limited already blunted this potential thorn in the side of paying parties?

ISG v Seevic

In this case, the court held that an employer who disputes the sum in a contractor’s interim payment application, but fails to issue the relevant Payment Notice or Pay Less Notice, will be deemed to have agreed to the contractor’s valuation in any adjudication. The employer is thus prevented from bringing a second adjudication to determine the value of the work at the valuation date of the same interim application.

It harshly highlighted the need for paying parties to comply with the payment provisions of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Act”) and the terms of their contract. As well as costing the employer, Seevic, circa £1.1 million, it also suggested that paying parties who fail to issue the relevant Payment Notice and/or Pay Less Notice would be unable to recover their money until the final account stage.

However, the same judge appears to have cast paying parties a lifeline in Galliford Try Building Limited v Estura Limited.

Background

Galliford Try Building Limited (“GTB”) was engaged as a contractor by Estura Limited (“Estura”) in 2012 under an amended JCT Design and Build Contract 2011 (the “Contract”) to carry out design and build works at a Devon hotel. The Contract contained payment terms that complied with the Act and provided for interim payments to be made to GTB.

Under the payment terms of the Contract, GTB issued Interim Application 60 (“IA 60”) for the sum it believed was due. This amounted to circa £4 million, which was effectively the full amount of the projected final account.

Estura failed to serve either a Payment Notice or a Pay Less Notice in response to IA 60 within the required timescales. Consequently, the amount payable to GTB crystallised at the value claimed in the IA 60. GTB commenced an adjudication to recover the value of IA 60 and Estura was ordered to pay GTB circa £4 million. Estura failed to pay.

In an echo of ISG v Seevic, Estura commenced a second adjudication a week after GTB’s adjudication, challenging the amount claimed in IA 60 and seeking a declaration as to the true amount owing in respect of IA 60.

In this instance, the adjudicator declined to proceed on the basis that he lacked jurisdiction and stated that because Estura had not challenged IA 60 by serving either a Payment Notice or a Pay Less Notice, the amount claimed in IA60 had crystallised.

The adjudicator adopted the approach of the court in ISG v Seevic, and decided that neither party could revisit the question of the value of the works at the time of IA 60.

GTB made an application for summary judgment to enforce the first adjudication decision.

The Judgment

Despite giving summary judgment for the full sum of £3,928,227.04 plus VAT awarded by the adjudicator in the first adjudication, the judge concluded that it would not be fair to Estura to enforce the judgment in full. He therefore ordered a stay of enforcement of the judgment above the sum of £1.5 million.

Estura had submitted that the judge’s decision in ISG v Seevic had unjustly prevented them from challenging the first adjudicator’s decision. They claimed it prevented a second adjudicator from accurately determining the value of GTB’s works as at the valuation date for IA 60, even though the first adjudicator had expressly refrained from deciding this issue.

The judge attempted to clarify his recent decision in ISG v Seevic.

He confirmed that if an employer fails to serve the relevant notices under the contract then they must be deemed to have “…agreed the valuation in the relevant interim application, right or wrong”. The employer cannot then bring a second adjudication to determine the value of the works at the valuation date of the same interim application.

However, the judge went on to stress that there is “…nothing to prevent the employer challenging the value of the work on the next application…”, even if the employer is arguing for a sum which is lower than the amount applied for in the previous (unchallenged) application.

This means that the employer can attempt to pay the contractor less at the next interim payment in order to correct their previous overpayment.  The employer can then adjudicate on that interim payment over the value of the works.

The judge also referred to his earlier ruling in Harding v Paice, where he noted that a failure to serve a valid Pay Less Notice in time did not deprive the employer forever of the right to challenge the contractor’s account.

Assuming such a challenge could be levied in adjudication, this seems in conflict with ISG v Seevic. Nonetheless, the judge differentiated the Harding case on the basis that it was concerned with payment obligations on termination, not on interim payments, which he considered to be dealt with differently under the JCT Design and Build Contract.

The courts’ stance is clear then? The only method for an employer to put right failing to issue the relevant notices and overpaying in an interim payment is through submitting revised valuations of the works in future interim applications and then adjudicating on them or, alternatively, when the final account is determined.

So why was Estura thrown a lifeline and enforcement of the judgment stayed?

It was decided that a partial stay was justified due to the “exceptional” and “rare” circumstances of the case, which created a risk of manifest injustice because:

  1. The wording of the Contract did not provide for a negative valuation in future interim payments and IA 60 was in effect one of the last interim applications for payment that was likely to be made. Thus Estura had no realistic opportunity of correcting the position in a subsequent interim payment.
  2. The adjudication in GTB’s favour was almost equal to the anticipated claim in their final account. This created a “real possibility” that if GTB were to be paid this sum in full, it would have little or no incentive to remain on site and achieve practical completion of the works or present a final account. Thus, Estura would be left unable to enter into a dispute about the total payment.
  3. Enforcing the judgement in full would risk manifest injustice as Estura could evidence that it would be unable to pay the full amount ordered by the adjudicator and would subsequently be unable to fund the litigation proceedings that it considered necessary to ensure a proper valuation of GTB’s final account.

Analysis

The decision in this case may have aided Estura, but the judge stressed it has by no means “changed the legal landscape” or created a general lifeline for all paying parties under the Act. However, it remains to be seen how often paying parties will deploy similar arguments about “exceptional circumstances” and being unable to fund litigation in the future.

The decision does, though, inflict a deep wound into the degree of certainty contained within the Act. To stem this uncertainty, paying parties must ensure that their contracts contain payment clauses permitting negative valuations in interim payments.

What paying parties must take notice of more than anything else is serving their Payment Notices and a Pay Less Notices on time and by the correct method as established in the contract.

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This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please contact one of our specialist construction lawyers.