A recent decision in the TCC has maintained the status quo position on payment notices.  That is, an employer who fails to serve a valid payment/pay less notice can look to rectify the error on the valuation of a later interim payment, or in the final account process, but in the meantime must pay the contractor the “notified sum” (i.e. the amount of the interim application/default payment notice). The employer cannot commence a subsequent adjudication in an attempt to re-open the issue. Solicitor Mark Lennon explores the details.

Background

Kersfield engaged Bray to carry out the refurbishment and conversion of a mansion house and stable block, as well as to construct new build homes on the site, pursuant to an amended JCT Design and Build Contract (2011 edition) (the “Contract”).

Bray issued its interim application 19 for £1.2m. In response, Kersfield served a pay less notice by email. That email was sent after 4pm. An amendment to the Contract provided that emails sent after 4pm would be deemed to be served on the next “Business Day”. As such, Kersfield’s pay less notice was out of time. On this basis, Bray commenced a ‘smash and grab’ adjudication and obtained a decision that Kersfield pay £1.2m.

No doubt feeling aggrieved at having to pay an arbitrary amount to Bray, Kersfield commenced TCC proceedings seeking a declaration that it could refer the dispute to adjudication (amongst other things).

Kersfield argued that the Scheme, which was incorporated into the Contract, empowered the adjudicator to open up, revise and review any decision or certificate. Kersfield’s position was that this meant that it should be allowed to commence a further adjudication in which the adjudicator could open up and revise the pay less notice.

The Issues and the Court’s Decision

In rejecting this submission, the court reasoned that a pay less notice is not a decision taken or certificate given. The role of the adjudicator is to determine what sum is due and payable “in the event that competing values are asserted by the parties”, but the power does not extend to an adjudicator being able to open up or revise a notice when a different sum has already been determined as falling due.

It is not open to a party to revise an interim payment by reference to a proper valuation of the works and as there is no contractual entitlement to do so, there is no dispute that can be referred to adjudication.

Conclusion

Whilst acknowledging that the operation of the payment process can often result in an unfair windfall to a contractor, as a result of an employer’s procedural slip-up, the judge noted that the process serves to regulate the cash flow between parties, without affecting their substantive rights.

This decision reinforces the established position, set out in a long line of recent cases, that a paying party who fails to submit a valid payment / pay less notice is free to correct any errors in later interim applications, or on a final account exercise, but must pay the sum due, i.e. the “notified sum“, as set out in an interim application for payment / default payment notice.

Whilst the paying party can try to make up for any mistake in a later application or at final account, they cannot avoid paying the notified sum by commencing a separate adjudication on the value of the interim application.

The moral of the story remains clear: as the paying party (employer to contractor or main contractor to sub-contractor), ensure that payment and pay less notices are validly issued both in terms of format (content) and time. At the commencement of each new project, check that whoever has responsibility for issuing the payment and pay less notices is aware of and has fully understood the contractual payment terms. If possible, put in place a diary reminder system for each payment cycle, so that key dates aren’t missed, to avoid becoming another victim of the pay now argue later culture that leads to smash and grab adjudications.

For further information, please contact:

Mark Lennon, solicitor, Construction

T: 0121 234 0208

E: Mark.Lennon@gateleyplc.com  


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.