Construction & Engineering: New Court of Appeal Common Sense On Pay Less Notices

Year Published: 2016

In December 2015, by its decision in the case of MJ Harding Contractors v Paice & Springall, the Court of Appeal offered some common sense on pay less notices after a series of perhaps surprising decisions by the Technology and Construction Court. Over the last year it has become normal that contractors can take advantage of employers that fail to serve a timely payment or pay less notice in response to a contractor’s monthly application for payment. The result has been that, in the absence of a timely payment notice, the full amount applied for by the contractor has to be paid even if this is a sum significantly higher than the employer’s valuation of the account. This legal situation also works in favour of sub-contractors where the main contractor has not served a ‘timely pay less’ notice.

An example of this comes from the ISG v Seevic, December 2014, case where the contractor’s £1m payment application had to be paid in full, even though a third party adjudicator valued the same work at £315,000. There was no further interim application due from the contractor and (perhaps not surprisingly) they did not submit a final account so there was no opportunity for the employer to put right what it saw as a substantial overpayment.

The courts perhaps had little choice but to make the decisions they did in the cases before Harding v Paice & Springall. This is because, one, the legislation says that when it comes to interim payments, if no payment notice is served the full amount applied for by the contractor/sub-contractor is the sum due provided that all the right information was available. And two, the contracts before the courts in these cases only permitted a revaluation if the contractor put in a further valuation (they had not) and they did not permit a negative valuation to be given.

One way out for employers, suggested by the courts, is to put it right (if the contract permits that) at the next interim valuation. However, if there is no further interim valuation, it can lead to a serious overpayment to the contractor.

What happened with pay less notices in the case of MJ Harding v Paice and Springall?

In MJ Harding Contractors v Paice & Springall, the project concerned the renovation of two residential properties in Surrey by the contractor for Mr Paice and Ms Springall. The contract used was the JCT Intermediate Form, but the same issue can arise under many building and engineering forms of contract used within the construction industry.

Within weeks of the work starting on site, the parties were in dispute and Paice & Springall had replaced the contract administrator. The contractor refused to recognise the authority of the new contract administrator. Just six months into the project, Paice & Springall terminated the contract because (they said) the contractor was not making regular progress with the work (a valid reason to terminate under this contract). The contractor said he couldn’t make progress because the contract administrator was not giving him the instructions and design information he needed. The contractor served its final account seeking £397,912. Paice & Springall failed to respond with timely payment notices to provide their own view of the proper value of the works done by the contractor. The first of many adjudication proceedings was the result, followed by a hearing in the Technology and Construction Court (where the contractor lost) and an appeal to the Court of Appeal.

The Court of Appeal decided that because the dispute concerned the final account it was possible to overlook the employer’s failure to serve payment and pay less notices. As a consequence, the court did not agree with the adjudicator’s decision that the full £397,912 applied for by MJ Harding had to be paid.

The court said that the real dispute between the parties was the sum “properly due” to MJ Harding because that was the language of the final account provisions in the contract. The adjudicator had not decided that dispute, but merely a technicality that payment notices had not been served by Paice & Springall. Therefore Paice & Springall could ask another adjudicator to decide the true value of the final account.

It is hard to see how the decisions on interim payments can stand as the correct legal position when the contractor is obliged to put in its final account (but does not) and it is fundamental to the agreement that the employer is only bound to pay the sums properly due for the work. Unless there is a new court decision from the Court of Appeal on the position with interim payments, we have to deal with the different rules for interim payments. The Court of Appeal did not have to deal with the rules for interim payments because that was not the issue on which it had to make a decision. The issue arises most often at the final interim payment application, when it is not possible to correct it in the next interim application.

How can you avoid a dispute over pay less notices?

Where does the new Court of Appeal decision leave the construction industry? We have two different legal rules, one that applies to interim payments (where most contracts do not permit a negative valuation) and another to final accounts (where most contracts permit a revaluation exercise). It does not make any sense to have two different rules when the fundamental agreement is fair and proper payment for the work done. But, we have the legislation that was brought in so that contractors and sub-contractors are paid regularly during the progress of the works and contracts with different rules for interim payment applications than for final accounts. That legislation permits this situation to arise.

In my view, the steps to take to deal with the different rules for interim payments are:

  1. Payment notices and pay less notices should be served on time and the different rules for interim payments would never arise;
  2. If payment notices are not served one month, make sure that timely notices are served after receiving the next interim payment application that corrects the earlier valuation. If there is a dispute about the entitlement to do that, contact your solicitor so that you can gain advice on whether your contract permits it;
  3. At the very least, a payment notice and pay less notice should be served when there is still enough value in the project to make it worthwhile for the contractor to put in further interim payment applications;
  4. Contracts should be amended to permit a revaluation (and this should permit a negative valuation for a sum due to be paid back by the contractor) even if the contractor does not put in a further interim valuation or final account. Agreeing this contract change with contractors may be challenging, but it would be hard for a contractor to say he wants to be paid more than he is due if the employer forgets to serve the correct payment notices.

If you would like further information on pay less notices or any other Construction and Engineering matters, please contact our Construction & Engineering team on 0161 475 7676 or email [email protected].

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