Payments: Fair dues

What is the worst thing you can do (or not do) when managing a construction project? Not serving a pay less notice when deductions are appropriate must be high on the list. This observation follows a string of cases in 2014 and 2015 on the consequences of failure to observe contractual procedures imposed by the Construction Act 1996. Broadly speaking, the act requires that a construction contract where the works are likely to last more than 45 days shall provide an “adequate mechanism” for payment (interim and final) to determine how much should be paid to a contractor, as well as a final date for when such payments should be made.

If an employer wishes to deduct money from an amount otherwise due to the contractor, they must serve a pay less or withholding notice, setting out the reasons for the proposed deduction. No payment may be withheld after the final date for payment unless an effective notice has been given.

Bearing in mind that the intention behind the act was to improve notoriously bad payment practices in an industry dependent on cash-flow, such a provision makes perfect sense. But is it fair that a momentary lapse by a busy employer faced with multiple applications for payment should have such serious consequences?

Is it fair that a momentary lapse by a busy employer faced with multiple applications for payment should have such serious consequences?

ISG Construction Limited vs Seevic College and Galliford Try Limited vs Estura Limited (on nearly identical facts) have established that failure to serve pay less notices in respect of interim payment applications means that employers are deemed to have agreed the value of the contractor’s works as set out in the relevant application. In these cases, the employers had tried to remedy the situation by issuing separate adjudication proceedings to determine the value of the contractor’s works to the date of the interim applications, but the court said that the second adjudicators did not have jurisdiction to hear the matters, as the act prohibits adjudication of the same dispute on more than one occasion.

The employers were not permitted a second bite at the cherry and the interim payments had to be made in full.

A Court of Appeal decision (supporting the judge in the lower court) which related to a final account, however, had a very different outcome.  In Harding (t/a M J Harding Contractors) vs Paice the contractor applied for payment following termination of its contract. The employer did not serve a pay less notice and the contractor obtained an award by an adjudicator that the entire amount of the final application was payable.

The employer argued that on a proper evaluation of the facts, he should have received a net payment from the contractor. The employer started further adjudication proceedings to ascertain the true value of the contractor’s works. So far, so good.

If no pay less notice is served following an application for final payment, the courts may be persuaded to allow an adjudication to consider the actual value of the works

The contractor applied for an injunction to restrain the further adjudication proceedings. The Court of Appeal chose not to refer to ISG vs Seevic mentioned above and decided the matter on different principles. It looked instead at exactly what the adjudicator in the earlier proceedings had been asked to decide.

Two issues had been referred to the earlier adjudicator – the effect of the failure to serve a pay less notice and consideration of the amount properly due. The adjudicator had only ruled on the first issue and therefore the employer was free to pursue the second, ie the amount properly due.

The court did not acknowledge any possible contradiction with the findings in ISG vs Seevic. In particular, there remains the view that ISG vs Seevic is still authority for the proposition that failure to serve a pay less notice means that the employer is deemed to have agreed the amount of the payment application. Whether this relates only to interim (and not final) applications is not clear.

So how can an employer be certain that it only pays its dues and no more? Keep the paperwork in order and serve correctly drafted notices when the contract (or statute) requires you to do so.

If you don’t, you will be obliged to pay up initially, but an interim overpayment should be correctable later in the contractual process. If no pay less notice is served following an application for final payment, the courts may be persuaded to allow an adjudication to consider the actual value of the works. Reliance on this to avoid overpaying is a risk. The better option when administering payments under a construction contract is to follows its terms strictly and to remain vigilant.

Stephanie Canham is head of construction at law firm Trowers & Hamlins