What’s The Commercial Issue With Payment Notices And Pay Less Notices?

Year Published: 2016

In the construction industry, it is normal to obtain monthly or regular payments as work progresses. So that contractors are not starved of cash during the construction phase of a project, Parliament decided that cash flow must be guaranteed. Since the case of ISG Construction Limited v Seevic College [2014] it has become accepted as the norm that when a paying party fails to issue payment notices or a pay less notice, the paying party must pay the amount originally stated in the payment application. They must pay it even if they consider the application to be for an excessive amount of money. Worse still, there is no right to rectify any overpayment through adjudication proceedings.

The issue is that the administrative failure to serve a notice can lead to a party paying more than the contract price for the work. Following the Court of Appeal’s decision in MJ Harding Contractors v Paice & Springall in December 2015, there has been little over the past 10 months to clarify the law on what sorely needs clarification. It has real practical and commercial importance that no-one should pay more than the value of the work carried out. That would contradict common sense. In this case, the Court decided that, through a termination account (a final account after the contract had been terminated), the works could be revalued despite the earlier adjudication ordering a greater payment.

You can read more about this case in my previous blog “New Court of Appeal Common Sense On Pay Less Notices.

What has changed with payment notices and pay less notices?

In a key court decision, Kilker Projects Limited v Purton (Richmond Projects) [2016], the Technology and Construction Court has confirmed that when it comes to the final account (an account when the works are completed in accordance with the contract), the law will not permit that a paying party must pay more than the sum properly due under the contract. Having previously lost an adjudication for failing to serve the requisite payment notice and/or pay less notice, the Court said that Kilker projects may nonetheless adjudicate to establish the true valuation of the final account at the final payment stage. The result was that Kilker recovered part of the final payment previously made.

Background to Kilker Projects Limited v Purton (Richmond Projects) [2016]

The contract was a purely oral contract for specialist joinery works at the Dorchester Hotel in Park Lane, London. Purton carried out the works and put in his final account application. Kilker failed to serve either a payment notice or a pay less notice and did not make payment of the sum applied for in the application (“the notified sum”) by the final date for payment. Purton referred the dispute to adjudication and the adjudicator decided that, because no valid payment notice or pay less notice had been served, Kilker had to pay Purton its £147,223 final account application in full. Kilker paid after Purton enforced the decision at Court.

Kilker subsequently referred the true valuation of the final account to adjudication. Purton said the previous adjudication had already decided the same or substantially the same issue in the first adjudication and the second adjudication therefore had no jurisdiction to deal with the issue again. Purton said the principle in the ISG Construction case (see above) applied equally to interim and final payments. Kilker was therefore deemed to have agreed the valuation of the final account by not serving a payment notice or pay less notice. The Adjudicator did not agree with Purton and valued the final account, which was not done in the first adjudication. The Adjudicator decided that the final account was overvalued by £55,676.84 plus VAT and he ordered Purton to pay that sum to Kilker, plus the adjudicator’s costs. Kilker asked the Court to enforce the decision.

In the Court, Kilker and Purton employed the same arguments that had run before the Adjudicator. Purton said the first adjudication was the end of the matter and it could not be re-opened. Kilker said that the legislation was only concerned with cash flow, not with the true value of the account and that it was entitled to a decision on what was the sum due under the contract it had entered into with Purton.

The Decision of the Court in September 2016

The Judge reviewed all of the case law and found that there was clear authority which confirmed that:

1. The legislation deals only with cash flow for periodic interim payments, but this does not affect the final value of the contract sum that must be paid. This is because there are no clear words in the statute that say that the cash flow provisions of the legislation interfere with the commercial value of the agreement freely negotiated by the parties.
2. For interim payments, the position is different and there is usually no contractual basis on which the entitlement to the interim payment can be re-opened if (a) there has been no payment notice or pay less notice served and (b) there has been an adjudication decision in favour of the party entitled to the money. However, future interim applications could correct the error if there has been no adjudication commenced before the next periodic payment application.
3. However, unless the contract states that a payment made in default of a payment notice or pay less notice is conclusive of the sum due under the contract, it is always possible to have an overall final account revaluation of the sum due under the contract at the final account stage.

Final thoughts

This is a correct judgment by the Court in my opinion, because no person should have to pay more than he bargains to pay for under a contract. This only applies at the final account and termination account stages – not for an interim payment.

However, if the legislation is accepted by the Courts as being about cash flow, not the value of the work, it would appear logical that it can be corrected in later interim payment applications. Notwithstanding logic, this does not seem to be the current state of the law. Therefore to have a secure right to revalue an account in a later interim valuation, a contract needs to include an express right to such a revaluation and to include a right to issue a negative valuation 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 payment notices or pay less notices, please contact our Construction & Engineering team on 0161 475 7676 or email [email protected].

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