Payment in practice under Part 8 of the Local Democracy, Economic Development and Construction Act 2009

This final issue of Insight of 2014 focuses on an important subject that has been out of the limelight for some time, but which has come back into focus in time for the Christmas break: the payment regime under the Local Democracy, Economic Development and Construction Act 2009 (“LDEDCA”).

We last wrote about the “new” (as it then was) payment regime in issue 18 of Insight, two years ago this month.1 The payment regime was preceded by eight years of debate and months of delay before finally being implemented on 1 October 2011, and a flurry of case law was expected to follow in its wake. To the surprise of many, there has been no reported case law on the payment regime until very recently, when the decisions in ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) (“ISG v Seevic”) and Harding (t/a MJ Harding Contractors) v Paice and another [2014] EWHC 3824 (TCC) (“Harding v Paice”) were handed down by the Judge in Charge of the Technology and Construction Court, Mr Justice Edwards-Stuart, within two weeks of each other earlier this month.

This 42nd issue of Insight (i) provides a reminder of the key principles of the payment regime; (ii) reviews the decisions in ISG v Seevic and Harding v Paice; and (iii) provides practice points in relation to both payment and adjudication going forward in light of Mr Justice Edwards-Stuart’s judgments in ISG v Seevic and Harding v Paice.

Last (but by no means least) we are ending 2014 with a festive quiz which has been designed to test your knowledge of the topics covered in earlier issues of Insight this year. The winner will be announced in the January 2015 issue of Insight and (most importantly!) will be rewarded with a case of bubbly.

A reminder of the key principles of the payment regime

The starting point for the payment regime is the payment due date. The payment due date is either prescribed by the contract, or, in default of contractual provision, the Scheme for Construction Contracts (England and Wales) Regulations 1998 (as amended) (“the Scheme”) will apply. Under the Scheme, the payment due date is whichever is the later of (a) the expiry of 30 days following the completion of the work, or (b) the making of a claim by the payee.

The payment process is as follows:

1. The Payment Notice is due from the Employer/Main Contractor or Employer’s agent (such as the Architect, QS, Engineer or contract administrator (“Payer”), or, if the contract so provides, Contractor or Subcontractor (“Payee”) within five days of the due date for payment (under the Scheme), or as otherwise provided by the contract. The Payment Notice must state the sum which is considered due and the basis on which that sum is calculated. A Payment Notice must be issued even if the sum due is zero, which will most commonly be the case during the defects liability period.
    
2. If no Payment Notice is served, any preceding payment application issued by the Payee will stand as the Payment Notice, provided the payment application meets the requirements of a valid Payment Notice in that it states the sum which is considered due and the basis on which that sum is calculated.
    
3. If no Payment Notice is issued, or the Payment Notice served is invalid, the Payee must immediately issue a Default Payment Notice stating the sum which is considered due and the basis upon which that sum is calculated. The service of a Default Payment Notice will extend the final date for payment by the number of days between the date on which the Payment Notice should have been served and the date of service of the Default Payment Notice.
    
4. If the Payer wishes to dispute the sum that is stated to be due in the Payment Application, Payment Notice or Default Payment Notice, the Payer may serve a Pay Less Notice stating the sum which is considered to be due and the basis on which that sum is calculated. The Payless Notice is due seven days before the final date for payment under the Scheme, or as otherwise provided by the contract. The effect of the Pay Less Notice is to revalue the contractor’s work as at the date of service of the Pay Less Notice, and the revaluation can take account of any LADs, set-offs or abatements.

ISG v Seevic

The facts

The Employer, Seevic College (“Seevic”) retained ISG Construction Limited (“ISG”) to carry out work under the terms of a JCT Design and Build Contract 2011 (“the Contract”).

Under the terms of the Contract, ISG was required to submit monthly interim payment applications stating the sum it considered to be due and the basis upon which that sum was calculated. The final date for payment was fourteen days from the due date. The Contract further contained the usual procedure whereby Seevic was to serve a Payment Notice not later than five days after the due date stating the amount it considered to be due. If Seevic intended to pay less than the amount stated in the Payment Notice or interim application, it was to serve a Pay Less Notice no later than five days before the final date for payment.

ISG duly submitted its payment application and Seevic failed to either make payment or issue a Pay Less Notice, as a result of which ISG referred the dispute to adjudication (“the first adjudication”). In its Notice of Adjudication, ISG asked the adjudicator to determine the contractual value of its work as at the date of the payment application. The adjudicator found that ISG was entitled to the full amount it said was due in its interim payment application (which also stood as the Payment Notice) because Seevic had failed to comply with the notice procedure set out in the Contract and serve a Pay Less Notice.

Four days before the decision was issued in the first adjudication, in an attempt to circumvent its failure to serve a Pay Less Notice, and concerned that it might lose the first adjudication, Seevic issued a Notice of Adjudication (“the second adjudication”). Seevic’s Notice of Adjudication asked the adjudicator to determine the value of ISG’s works as at the date of ISG’s payment application.

Seevic argued that, notwithstanding the first adjudication, there was a separate dispute in relation to the value of ISG’s works that could be referred to adjudication. This separate dispute provided the adjudicator with jurisdiction to decide the value of ISG’s works and, accordingly, the amount that was due to ISG. The second adjudicator (who incidentally also decided the first adjudication) found that the value of the works was lower than that stated in ISG’s payment application, and ordered ISG to repay the difference between the sum it had received in the first adjudication and the true value of the interim payment application as determined by the second adjudication.

Following the two adjudications, ISG made an application for (i) summary judgment to enforce the first adjudicator’s decision (on the basis that its interim payment application was agreed in the absence of a valid Pay Less Notice to the contrary under the Contract) and (ii) a declaration that the second adjudicator’s decision was unenforceable (on the basis that the second adjudicator lacked jurisdiction).

The decision

Mr Justice Edwards-Stuart noted that ISG v Seevic was very similar to Watkin Jones & Sons Ltd v Lidl UK Gmbh [2001] EWHC 453 (TCC) which was concerned with the payment regime under the JCT Standard Building Contract with Contractor’s Design, 1998 edition. In that case, the employer had also failed to comply with the notice provisions under the contract, and had used adjudication proceedings as a means of revaluing the contractor’s payment application.

Mr Justice Edwards-Stuart followed the decision in Watkin Jones & Sons Ltd v Lidl UK Gmbh and held that, in the absence of fraud, contractors are entitled to the amount stated in their payment application regardless of the true value of that work in circumstances where the employer does not serve a valid Pay Less Notice. The first adjudicator had decided that the sum claimed in the payment application was the sum that was due to ISG, that sum had been agreed by Seevic in the absence of a valid Pay Less Notice, and the contractual notice regime prevented any argument to the contrary. Any decision otherwise would have the effect of completely undermining the statutory regime.

The judge pointed out that the contractor’s only entitlement to payment is through the interim application machinery, or at the final account stage at the end of the project: the contractor has no entitlement to be paid the value of his work during the course of the works. Equally, Seevic had no contractual entitlement to a revaluation, let alone a financial award in consequence of it.

As regards the second adjudication, Mr Justice Edwards-Stuart found that the second adjudicator lacked jurisdiction as he had decided the same or substantially the same dispute as that which was decided in the first adjudication, and his second decision was therefore unenforceable.

Harding v Paice

The facts

Mr Paice and Ms Springall (together “Paice”) were property developers who engaged MJ Harding (“Harding”) to carry out residential works to two properties in Surrey under the terms of a JCT Intermediate Building Contract 2011 (with amendments) (“the Contract”) in March 2013.

Work commenced in April 2013, but the relationship between the parties deteriorated and Harding gave notice to terminate the Contract in January 2014. The termination provisions provided that (i) Harding was required to submit a final account in respect of the work it had carried out, including the total value of the work properly executed, up to the date of termination (under Clause 8.12.3); (ii) Paice was to pay the amount that was “properly due” in respect of the account within 28 days of submission of its final account (under Clause 8.12.5); and (iii) Paice had the option to commence adjudication or litigation within 28 days of the issue of the Final Certificate, in which case the Final Certificate ceased to be conclusive (Clause 1.9).

Paice did not make payment, and the scenario was almost identical to that in ISG v Seevic in that Harding commenced adjudication proceedings claiming it was due the sum in its final account on the basis that Paice had failed to serve a valid Pay Less Notice, and Paice issued counter-adjudication proceedings in an attempt to revalue Harding’s final account.

Rather than let Paice’s counter-adjudication go ahead, Harding applied for an injunction to prevent it from proceeding. Harding argued that the failure by Paice to serve a valid Pay Less Notice meant that the sum in its final account became the amount that was “properly due” under Clause 8.12.3 of the Contract. Harding further argued (in identical terms to ISG) in the alternative, that the substance of its account had already been referred to adjudication and it could therefore not be revisited.

The decision

Mr Justice Edwards-Stuart noted that Clause 8.12.5 was curious because, unlike the interim payment machinery in the Contract, it did not require the employer to pay the amount stated in the contractor’s interim account. Instead, the employer was to pay the amount “properly due” in respect of the account, in order to reflect the reckoning process that is inherent in final accounts.

The judge further noted that the adjudicator appeared to have proceeded on the basis that if Paice wished to pay less than the sum in Harding’s account, it had to serve a valid Pay Less Notice. In the absence of a valid Pay Less Notice, the adjudicator concluded that Paice had to pay the amount stated in Harding’s account (incidentally, Mr Justice Edwards-Stuart came to the same conclusion in relation to Seevic’s failure to serve a Pay Less Notice in ISG v Seevic, albeit the crucial point to note is that ISG v Seevic concerned an interim account, not a final account).

Mr Justice Edwards-Stuart disagreed with the adjudicator’s conclusion in relation to Paice’s failure to serve a valid Pay Less Notice. He pointed out that if the adjudicator’s conclusion was correct, it would deprive the employer of the right to challenge the contractor’s account forever, and in some cases (for example, if the contractor had considerably overvalued its account), the contractor would be permitted to receive a windfall to which he would otherwise not be entitled, and which the employer could never recover.

In terms of the jurisdiction argument (i.e. that the substance of Harding’s account had already been referred to adjudication and could therefore not be revisited), Mr Justice Edwards-Stuart held that, as a matter of fact, the adjudicator had not determined the amount “properly due” to Harding under Clause 8.12.3. Instead, the adjudicator had reached the conclusion that the absence of a valid Pay Less Notice automatically meant that the sum claimed in the final account was due and had to be paid.

Some practice points

• As yet, there is no reported case law as to the level of detail that might be necessary for the breakdown of the sum due and the basis on which the sum is calculated. You should therefore err on the side of caution and include a detailed breakdown with reference to the contractual matrix, rather than provide insufficient detail and risk your Notice being rendered invalid.
   
• If the employer fails to serve a Payment Notice and the contractor serves (i) a valid payment application that qualifies as a Payment Notice or (ii) a Default Payment Notice, and the employer does not serve a valid Pay Less Notice, then the contractor’s payment application/Payment Notice or Default Payment Notice will stand. The amount due to the contractor will be the sum which is set out in the payment application/Payment Notice or Default Payment Notice. The Notices are in practical terms a “battle of the forms” in that the last served valid Notice will trump all previous Notices, and be determinative of the sum due.
   
• If the employer fails to serve a Pay Less Notice, it is taken to be agreeing to the value stated in the payment application/Payment Notice, other than where the final account falls to be considered.
   
• If the employer fails to serve a valid Pay Less Notice, it is no longer entitled to seek a repayment of money paid to the contractor in subsequent adjudication proceedings by seeking a revaluation of the contractor’s interim account.
   
• As a matter of contractual entitlement, employers can only revalue the contractor’s work on (i) the valuation dates for interim applications as determined by the contract upon service of a valid Pay Less Notice, or (ii) at the final account stage. This is so irrespective of the true value of any work that might be carried out by the contractor at any given stage during the course of the project.
   
• It is likely, following the decision in Paice v Harding, that Pay Less Notices will not apply to final accounts as this would have the effect of preventing the employer from challenging the contractor’s final account.

Conclusion

The decision in ISG v Seevic on interim accounts is entirely in keeping with the “pay, now, argue later” ethos of the LDEDCA, and it ought to improve cash flow for contractors. It should also put an end to the current practice regarding interim accounts, whereby some employers who fail to serve a Pay Less Notice commence separate adjudication proceedings in order to argue that there is a separate adjudicable dispute in relation to the value of the contractor’s works. Such tactics are a throwback to the previous regime that was concerned with the “amount due”,2 as opposed to the amount that is said to be due on the face of the Payment Notice or Default Payment.

As for final accounts, following Harding v Paice, it is unlikely going forward that a failure by the employer to serve a Pay Less Notice will be critical to its ability to challenge the contractor’s final account, as this would create a very unfair situation whereby the employer would be prevented from challenging the contractor’s final account for all time.

Back to the previous page [1]

• 1. See http://www.fenwickelliott.com/files/insight_issue_18.pdf [2].
• 2. The old system was mired with problems, including how abatements should be dealt with, and it often presented difficulties where the contract provided for payment against certificates but no certificates were ever issued.