LEGAL: No payment notices? Time to pay up

Barrister Professor Rudi Klein, considers the extent to which a recent court decision has helped contractors.

THE SCENARIO

You have submitted an interim application for payment in the sum of £100k. The payment due date is 1 July and the final date for payment is 30 July. Your paying party is required under the contract to issue a payment notice setting out the amount he proposes to pay and how it was calculated. By law the notice must be issued no later than five days after the due payment date.

You have not received a notice and 30 July arrives – still no payment notice. Furthermore a pay less notice has not been issued. The amended Construction Act requires that the amount stated in your application becomes the due amount.

This scenario arose in the recent court case of ISG Construction Ltd v Seevic College.

THE FACTS IN THE ISG CASE

ISG had applied to the court to enforce an adjudicator’s decision so that ISG was entitled to almost £1.1m (plus interest). This was the amount claimed in Application No. 13 from ISG. The client, Seevic College (a further education college based in Essex), had not served a payment notice or pay less notice in accordance with the contract.

But Seevic College had acted quickly in a vain attempt to frustrate the adjudicator’s decision. It had started its own adjudication using the same adjudicator!

Notice of adjudication No. 2 was served four days before the decision in the adjudication No.1.

In adjudication No. 2 Seevic College had asked the adjudicator to value ISG’s work up to the date of application No. 13. This, the adjudicator did.

The adjudicator’s valuation of ISG’s application was a lot lower – £315,450 to be precise. The difference was primarily due to the value ISG placed on a loss and expense claim – not the  value of the measured works. Seevic College then issued a cheque for £315,450 and ignored the amount awarded in the first adjudication.

THE CONTRACT

The contract in this case was the JCT Design and Build Contract 2011. Under this contract, interim applications for payment are to be made at monthly intervals from the date of possession. The sum due to the contractor on an interim application is either the amount applied for or a lesser amount stated in the employer’s payment notice (if one has been served).

If the employer wishes to pay less than the amount applied for (or that in a payment notice, if issued) he is required to serve a pay less notice no later than five days before the final date for payment.

THE PARTIES’ ARGUMENTS

ISG argued that, in the absence of any notices from Seevic College, the value of ISG’s works (as at the date of Application No.13) was the amount stated in its application. Seevic College responded that the proper valuation of the works had not been dealt with in the Adjudication No.1.

ISG retorted that its notice of adjudication in Adjudication No.1 stated that the dispute concerned “the value of the works carried out by ISG under the Contract” and, more specifically, the contractual value of its works as at the date of Application No.13.

WHAT DID THE COURT DECIDE?

Not surprisingly the court decided that the adjudicator – insofar as the decision in Adjudication No.2 was concerned – had acted outside his powers or jurisdiction. The value of ISG’s works (as at the date of Application No.13) had already been decided in Adjudication No.1. Therefore ISG was entitled to enforce that decision which had stated that, in the absence of payment notices from the college, the sum due was the amount in the application.

THE JUDGE’S OBSERVATIONS

The judge made clear that the employer could not seek a re-valuation of the work at any time he pleased. The process for valuing interim payments commenced on the issue of an application and the sum applied for could be amended by subsequent payment notices.

“The statutory regime would be completely undermined if an employer, having failed to issue the necessary payment or pay less notice, could refer to adjudication the question of the value of the contractor’s work at the time of the interim application (or some later date) and then seek a decision requiring … repayment by the contractor based on the difference between the value of the work as determined by the Adjudicator and the sums already paid under the contract.”

COMMENT

This is exactly what we tried to achieve in amending the Construction Act. The payment notice procedure is aimed at crystallising the amount due for payment at the final date for payment. The paying party must, at least, serve a pay less notice if he wishes to pay less than the amount applied for or less than the amount in any initial payment notice.

So, we go back to our scenario at the beginning.

If the amount in your interim application has not been paid you can issue a notice to suspend any or all of your contractual obligations. Alternatively you can recover the debt either by issuing court proceedings or issuing a statutory demand (which requires payment within 21 days, failing which a winding-up petition can be issued).