Payment notices: new Court of Appeal guidance

In a decision published yesterday, the Court of Appeal has provided important guidance as to the effect of failures to serve payment and pay-less notices in response to applications for payment. The decision considers three recent cases from the TCC dealing with the issue, but stops short of providing authoritative guidance in relation to the position applicable to interim payments.

The TCC decisions

The proceedings before the Court of Appeal concerned a decision of Mr Justice Edwards-Stuart in Harding v Paice, the first of three controversial TCC decisions over the course of the past year to consider the impact of failures to serve payment and pay-less notices (for our original Law-Now on the Harding v Paice decision, please click here). Harding v Paice concerned the submission of a final application for payment by a contractor following its termination for default under the JCT Intermediate form. The employers failed to serve a payment or payless notice in time and the contractor obtained an adjudication decision requiring full payment of its application in default of such notices. The employers reluctantly made payment, but brought a further adjudication for a decision as to the amount properly due in relation to the contractor’s application. The contractor argued that the employer was precluded from doing so by the previous adjudication decision and its failure to serve a payment or pay less notice.

Mr Justice Edwards-Stuart rejected the contractor’s argument and found that the employers were able to challenge the true valuation of the final payment in a subsequent adjudication. A different conclusion was reached in two subsequent TCC decisions (ISG v Seevic and Galliford Try Building v Estura) dealing with similar scenarios in an interim payment context (for our Law-Nows on these two decisions, please click here and here). These decisions both concerned interim applications for payment made by a contractor under the JCT Design and Build form of contract. The employer in each case failed to serve a payment or pay less notice, was required by an adjudication decision to pay the full amount of the contractor’s payment application, and subsequently sought to establish the true value of the contractor’s application by a further adjudication. The court in both cases found that the employers were unable to challenge the true value of the applications in the absence of a payment or pay less notice.

Harding v Paice before the Court of Appeal

The Court of Appeal has upheld the TCC’s decision in Harding v Paice, finding that the employers in that case were entitled to challenge the proper valuation of the contractor’s final payment application by a further adjudication despite their failure to issue a valid payment or pay less notice. The Court described its decision as being consistent with previous authority (decided prior to the 2011 amendments to the Construction Act) which had emphasised the cash-flow consequences of an employer failing to issue relevant notices and the ability of an employer in such circumstances to subsequently challenge the true value of any payment due in a subsequent adjudication or court proceedings.

The court noted that the decisions in ISG v Seevic and Galliford Try Building v Estura had taken a “somewhat different line” but stopped short of deciding whether the comments made in those cases were correct. In this regard, the court noted that, “[i]n almost all construction contracts special contractual provisions apply to interim payments.”

Conclusions and implications

This decision provides important guidance from the Court of Appeal that, in relation to final account payments at least, a failure to serve payment or pay less notice will not ordinarily preclude an employer from subsequently challenging the true value of the payment through adjudication or court proceedings.

The position with regard to interim payments remains less clear. In our previous Law-Nows on this topic, we noted that the Seevic and Estura decisions appeared to flow from the specific terms of the JCT Design and Build form of contract in relation to interim payments and may not reflect the position under other forms of contract such as the NEC.

The Court of Appeal’s comments in relation to these two decisions may give support to this conclusion. The court commented that the judge in Seevic and Estura had taken a “somewhat different line” to the earlier authorities favoured by the court and cited the fact that construction contracts frequently contain special provisions in relation to interim payments as a reason for not needing to consider those decisions further. The care taken by the Court of Appeal to state that it was not deciding the correctness of these decisions also leaves open the prospect that parties may in the future argue that they were not correctly decided even under the terms of the JCT Design and Build form.

For present purposes, it appears that the debate in relation to interim payments is likely to continue and in due course require further consideration from the Court of Appeal. In a decision issued last week (in Severfield (UK) v Duro Felguera UK), Mr Justice Coulson in the TCC commented that the Harding, Seevic and Estura cases were:

“… authority for the proposition that, 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.”

The contract before the TCC in that case did not contain any Construction Act compliant provisions in relation to payment and the Scheme for Construction Contracts had applied. As such, the court’s comments may indicate a view that the findings in Seevic and Estura are not to be confined to the specific provisions of the JCT Design and Build form and are of general application in relation to all interim payments under construction contracts. The Court of Appeal’s comments noted above are now likely to bring this issue into sharp focus.

References:

Harding (t/a M J Harding Contractors) v Gary George Leslie Paice Kim Springall [2014] EWHC 3824 (TCC)

ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC)

Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC)

Harding (t/a M J Harding Contractors) v Paice & Anor [2015] EWCA Civ 1231

Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 3352 (TCC)