The Importance of Pay Less Notices - DAC Beachcroft

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The Importance of Pay Less Notices

Published On: 30 March 2015

In the courts' first scrutiny of the "new" payment regime under the updated Construction Act, the Technology and Construction Court ("TCC") held that the lack of a payment notice meant that the employer had agreed the value of the works claimed in the interim certificate. Employers must take note!

The Facts

ISG Construction Ltd (the contractor) and Seevic College (the employer) entered into a JCT Design and Build Contract, 2011 Edition. The parties agreed that the contractor's interim applications for payment would be made at monthly intervals.

The contractor submitted interim application 13 for £1,097,696. The employer did not serve a payment or a pay less notice in response, but did not pay anything either.

The First and Second Adjudications

The contractor referred the dispute over interim application 13 to adjudication. The adjudicator (Mr Juniper) decided that the contractor was entitled to £1,097,696 plus interest.

The employer served a second notice of adjudication, four days before the decision from the first adjudication. The employer asked the second adjudicator (also Mr Juniper) to value the contractor's works as at the date of interim application 13. The adjudicator decided the value of the works was £315,450. Assuming the employer had paid the sums awarded in the first adjudication, he awarded a repayment from the contractor to the employer of £768,525.

Decision

The TCC held that in the absence of a payment, or pay less notice issued in time by the employer the contractor becomes entitled to the amount stated in the interim application irrespective of the value of the works actually carried out.

As the first adjudicator had decided the sum claimed was the sum due to the contractor (and so had decided the value of the works), the second adjudicator was asked to decide the same dispute, which meant he lacked jurisdiction. The contractor's summary judgment application (in respect of the first adjudicator's decision) and the declaratory relief application (relating to the second adjudicator's decision) were both successful.

Comment

This judgement reinforces the importance that employers or their advisers closely follow the payment requirements set out in the contract (or if such requirements do not exist to follow the requirements set out in the Act), especially if they disagree with the amounts sought in any payment notice.

Had Seevic issued a Payment Notice disputing the sum claimed by ISG it may have been the case that Seevic would only have had to pay circa £300,000 to ISG. As it was, Seevic did not issue the requisite notice and, as a direct result, they had to pay the full amount to ISG as well as ISG’s costs of the application for summary judgment.

An employer should always have in mind the dates by which Payment Notices and Pay Less Notices must be served to avoid being bound by the sum specified in the contractor’s application for payment.

Prior to this decision, an adjudication brought by a contractor solely upon a technicality (e.g. failure to serve a notice) in many cases prompted the employer to launch an immediate counter-adjudication, seeking a valuation of the relevant application on its merits.

The TCC felt that this practice completely undermined the Act's payment regime, and has put a stop to it by finding that a failure to serve a pay less notice was an agreement by the employer of the value of the application.

If the employer wishes to try to redress the position, it must now wait until the next interim application or final certificate. Of course, by that stage, the earlier adjudication award may have been enforced and the relevant monies paid out to the contractor.

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