Recent case law developments highlighting the risk of failing to issue proper notices when they are due are examined by Vijay Bange of Trowers & Hamlins. The courts are firmly upholding the principle of ‘pay now argue later’, he says.
KEY POINTS
- Consequences of failure to serve requisite
payment and payless notices - Failure to serve notice may be taken as
agreement to the value stated in application - Cross-adjudicating on value of an application
in circumstances where there is a failure to
serve a notice (or it’s invalid) may amount to
an attempt to re-adjudicate same dispute
Most of us will be aware of the concept of a ‘smash and grab’ adjudication. By that, I mean the referral of a dispute, based on a strict technicality, to adjudication. Probably the most obvious of these is where a contractor asserts that the employer’s failure to issue a proper payment or pay less notice means that the employer accepts that the amount applied for is due.
Contractors frequently say:
‘I made an application. The Employer did not issue any payment or pay less notice. The amount I applied for stands and I’m going to adjudicate to get it.’
Absent the proper notice, the contractor gets what he applied for regardless of whether the sum claimed in the application is justified or correct.
Where an employer refuses to pay up on that basis, it is not uncommon for a contractor to ask an adjudicator for a declaration along those lines. That is what the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996) says and more often than not, that is what an adjudicator will give. It’s rough justice. If the employer was meant to do something (in this case, issue a notice) and he fails to do that, then he should deal with the consequences.
However, frequently the failure to issue the notice is not because the employer accepts that the amount applied for is correct, but because of an administrative oversight.
Where this is the case, employers may try to commence their own adjudication referring the issue of the valuation of the works and asking the adjudicator to decide how much is properly due. This counteradjudication is being used as an attempt to rectify the employer’s mistake in failing to give the notice. However, given recent case law developments, this is a risky strategy.
Recent developments
The Harding decision
The first of three important recent cases on this issue was Harding (t/a MJ Harding Contractors) v Paice [2015] EWHC 661 (TCC). Harding terminated its contract with Paice (the employer) and, in accordance with the contract, submitted a final account.
Under that final account, a sum of almost £400,000 was unpaid. Paice failed to issue a valid pay less notice and also failed to make payment by the due date.
Harding commenced an adjudication and asked the adjudicator to decide that as a result of Paice’s failure to issue the relevant notice, the amount Harding applied for is due and payable.
In the alternative, Harding asked the adjudicator to determine what amount he was entitled to. The adjudicator decided that Paice had failed to issue a valid pay less notice because the notice did not set out the basis on which the sum had been calculated and that therefore Harding was entitled to the amount it had claimed.
The adjudicator did not begin to examine the true value of the work because, absent the employer’s notice, the amount applied for automatically became due. Paice counter-adjudicated and commenced a separate adjudication against Harding under which the adjudicator was asked to determine the true value of the works. However, Paice did not pay the amount previously awarded by the adjudicator as a default sum and Harding commenced enforcement proceedings. Harding also asked the court to grant an injunction to prevent Paice pursuing its own adjudication. The court refused.
The reasoning behind this was that on termination, the employer is not obliged to pay the amount in the final account. The employer must just pay what is ‘properly due’. The amount properly due may differ to the amount applied for.
An employer’s failure to issue a notice in these circumstances did not therefore automatically mean that the amount applied for by the contractor must be paid. The adjudicator had not decided the amount properly due. What the adjudicator had decided was that absent the employer’s notice, the amount applied for was due.
The judge decided that to accept the contractor’s propositions here would have the effect of binding the parties forever to the contractor’s final account and that, as a matter of principle, could not be right. This would have far more serious consequences than those intended under the usual final account process where the employer has a period for challenge. The purpose of the HGCRA 1996 is to provide access to quick payment and the absence of a notice should not have the effect of preventing an employer from being able to challenge an application forever.
The ISG ruling
ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) again concerned similar issues. ISG issued an interim application. Seevic failed to issue a payment or pay less notice and failed to make any payment.
ISG referred the dispute to adjudication and the adjudicator decided that ISG were entitled to the amount applied for. Unsurprisingly, Seevic then commenced its own adjudication and asked the adjudicator to value ISG’s work under that interim application.
The adjudicator decided that the value of the works was only a third of the amount ISG applied for. He awarded a repayment to Seevic of the extra over amount. The court did not agree.
Edwards-Stuart J said that if the employer fails to serve its notice on time:
‘it must be taken to be agreeing the value stated in the application, right or wrong.’
The judge then went one step further and decided:
‘in that situation the first adjudicator must be in principle taken to have decided the question of the value of the work carried out by the contractor for the purposes of the interim application in question.’
The first adjudicator decided that the amount applied for became the amount due – he decided that was the value of the work.
The court said that the second adjudicator therefore lacked the jurisdiction to decide the value. That had already been decided. It was the same dispute.
Some may think that this judgment conflicts with that handed down in the Harding case but the judge was careful to draw a distinction between the payment provisions on termination (such as in Harding) and the payment provisions at interim application stage.
The Galliford Try case
The facts in the more recent case of Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC), were very similar. The adjudicator decided that absent a notice from Estura, Galliford Try were entitled to the amount they applied for. Estura commenced a crossadjudication. However this time, perhaps in light of the preceding two judgments, the second adjudicator resigned for lack of jurisdiction.
Estura argued in court that it was not possible to put right the over payment in a subsequent application or final certificate for a number of reasons.
- First, under the contract Estura could not issue a negative valuation.
- Second, the interim application was the last interim application and Estura did not have the opportunity to put it right in the next one.
- Third, there would be no incentive for Galliford Try to submit a final account with such a favourable adjudicator’s decision.
- Further, Estura did not have suffi cient funds to pay the amount awarded by the adjudicator. Estura asked the court for a stay on enforcement of the adjudicator’s decision on the grounds that having being prevented the right to the second adjudication, there was a breach of natural justice.
Nonetheless, the court again adopted a robust approach. Edwards-Stuart J confi rmed that the adjudicator had properly answered what had been referred to him. Th ere had been no breach of natural justice.
This case differed to Harding as there was a fundamental diff erence between interim payment obligations and those that come into play on termination.
Changing the legal landscape?
Perhaps most interestingly from a legal perspective are the assertions made by Estura that the ISG case had, in preventing an employer from rectifying a failure to serve a notice by a second adjudication, ‘changed the legal landscape’.
Estura seemed to say that if employers were prevented from starting that second adjudication they were prevented from challenging an application that could be very seriously wrong or overstated. Edwards-Stuart J did not buy this argument and instead reminded Estura that in cases such as these, an employer party could bring Pt 8 proceedings for declaratory relief under which they could ask the court to decide the real sum due under the interim application. Alternatively, litigation to determine the fi nal account could be commenced. The judge gave Estura options. A second adjudication was not one of them.
The reality
The reality as a consequence of the authorities discussed above is that eff ective, valid notices must be served and any failure to do so is likely to result in a decision by an adjudicator to pay what was applied for.
Th e courts have indicated that they will in such instances take it that the adjudicator agrees with the valuation as applied for, this notwithstanding even if the adjudicator has not really undertaken a process to ascertain the value of works. As such, the tactic deployed to cross-adjudicate and get an adjudicator to carry out an ascertainment of true value of works may not be possible as this would be seeking to adjudicate the same point.
A stark warning
These judgments should serve as a stark warning to employers that the court is more than willing to uphold the underlying ‘pay now argue later’ spirit of the HGCRA 1996. Based on the authorities discussed above it would seem that it is now not so easy for an employer to seek to address its mistakes in failing to issue a notice by commencing a cross-adjudication. To allow him to do so would, in the court’s view, completely undermine the payment regime under the HGCRA 1996 by allowing the employer to rely upon the adjudicator’s valuation.
A clear message
The message is clear. Issue your notices properly and on time. And if you don’t, you’ll have to sit it out until the next interim application or final certificate or to get final determination by court proceedings or arbitration.