Give 'em their due

This is the seventh Court of Appeal case regarding the Construction Act. Rupert Morgan Building Services (LLC) Ltd vs David Jervis and Harriett Jervis is a brand new case about an old, old story. The architect scrutinised the interim account of the builder Rupert Morgan and issued his certificate for payment. But the client, David and Harriett Jervis, refused to pay.

Ruefully, Lord Justice Sedley reflected on the history of such cash flow problems. Indeed, he said, the very building in which this trial was being heard, the Royal Courts of Justice, got into dreadful problems in 1880 when the contractor, a modest, undercapitalised enterprise, stopped paying the stonecarvers because the employer was dilatory in honouring the architect's payments certificates. But if the statutory position we now have in the Construction Act about "withholding notices" had existed then, said the judge, it would have done something to protect the stonecarvers from acting as unpaid bankers to the main contractor.

Now then, in the Rupert Morgan case, I don't know why Jervis wouldn't honour the architect's certificate. The contract says: "Payments shall be made to the contractor only in accordance with the architect's certificate." And it says as well: "The employer shall pay to the contractor the amount certified within 14 days of the date of the certificate" … but adds "… subject to any deductions and set-offs due under the contract."

So the certificate can be elbowed out of the game or reduced if Jervis has a claim, say, in damages, or if Jervis thinks the architect has gone wrong in the amount. The contract, by the way, was the ASI Standard Form. The Construction Act says that if an employer wishes to keep its hands on money otherwise due, then it has to send a "withholding notice". This must always be served before the date payment should have been made. And, before I forget, the notice has to explain the reasons why the payer intends to withhold.

The debate now begins to get clever. The notice is absolutely necessary to stop or reduce payment of the sum due. So what makes a sum due? If work has simply not been done or done badly, there is no sum due or a reduced sum is due.

And, if no sum is due, no withholding notice is required. Do you follow? My guess is that in Jervis the adjudicator decided what sum was due, then asked how much Jervis had paid, then asked if it was less than the sum due, then asked if a "withholding notice" was sent, and if so, if it was sent on time and properly composed. He then ordered Jervis to pay what had been withheld.

What makes a sum due? It is the architect’s certificate. The contract blesses, canonises and beatifies this mere slip of paper as ‘the sum due’

Whether Jervis' reason for withholding was sound or not is irrelevant. A failure to send the notice is enough to make the payer pay. That goes even if there was a good reason to withhold.

Earlier I asked: "What makes a sum due?" The answer in the ASI Standard Form and some other standard forms is that the architect's certificate becomes the sum due. The contract blesses, canonises and beatifies this slip of paper as "the sum due". Can you now see how easy it is to know when the payer should send the withholding notice? He looks at the certificate sum and asks himself if he intends to challenge it. He has but a few days to make his challenge.

However, there are many contracts when no certificate is issued. This frequently occurs between main contractor and subcontractor. Usually there is no independent third party such as an architect issuing a sacred piece of paper. So the debate about what is the sum due becomes an argument in itself. Can you see the complication in that camp? It is tempting to suggest that the subcontractor's application for payment becomes the sum due – that is, the deemed sum due – but this would require very plain and clear wording in the contract documents. In those circumstances, an adjudicator may have to decide the true sum due, then decide if a withholding notice was necessary.