Failure to serve “Pay Less Notice” not fatal

Those who administer payment under construction contracts have had to be very much on their toes since the Construction Contracts (NI) Order 1997 came into force.

The legislation introduced a statutory scheme designed to speed up the flow of cash in the construction industry by introducing a regime for determining stage or periodic payments.

One of the rules regarding payment is that if you are the paying party and you receive an application for payment you need to serve a “Pay Less Notice” if you think the amount claimed is too much.  Otherwise you have to pay the amount claimed.

The recent case of Kilker Projects Ltd v Purton [2016] EWHC 2616 (TCC) however has clarified that this should not allow the contractor to receive a windfall.

The facts were that Kilker had employed Purton to do specialist joinery work at the Dorchester Hotel in London and a dispute arose between the parties over the amount due under the Final Account.  Purton commenced Adjudication proceedings claiming it was entitled to payment in full of the “notified sum” claimed because Kilker had not served a valid “Pay Less Notice”.  The Adjudicator agreed and ordered payment of £147,223 to Purton.  The Court ordered enforcement of this award which Kilker then paid.

Kilker then started a second Adjudication seeking a Declaration as to the true value of the Final Account and repayment of any sums found to have been overpaid.  The second Adjudicator awarded £55,676 be paid back to Kilker.  However Purton said the second Adjudicator had no jurisdiction to determine this dispute as it had already been determined by the first Adjudicator.  Kilker started Court proceedings to enforce the second Adjudicator’s Award.

The Court found that while the statutory payment provisions established a regime for determining stage or periodic payments throughout a construction contract they did not affect the ultimate value of the contract sum that the parties had agreed was the price for the works.  Very clear words would be required if Parliament intended to impose a scheme that would interfere with the commercial value of the bargain freely negotiated by the parties.  The statutory provisions were concerned only with cash flow and not the contract sum.

Subject always to the express terms of the contract, where the “notified sum” was in respect of an interim payment, usually there was no contractual basis on which the contractor’s entitlement to that payment could be reopened.  Any errors could be corrected in subsequent interim or final valuations.  Therefore, an adjudication decision as to the “notified sum” payable precluded a challenge to the interim payment on grounds of valuation in a subsequent adjudication.  However, where the “notified sum” determined in adjudication was in respect of a final payment, unless the contract provided that such payment was conclusive as to the contract sum due, although the “notified sum” had to be paid, either party was entitled to have the ultimate value of the contract sum determined in a subsequent adjudication, litigation or other form of dispute resolution.

In the first Adjudication the Adjudicator determined the “notified sum” payable in respect of the contractor’s Final Account application but did not determine the proper value of the Final Account.  Kilker was obliged to pay the sum in full as determined by the Court on enforcement.  However, there was no agreement by the parties that the Final Account would be conclusive as to the final sum due under the contract and the statutory payment provisions did not have such effect.  Therefore Kilker was entitled to refer the Final Account valuation to a second Adjudication.  The second Adjudicator had jurisdiction to determine the dispute referred by Kilker and his decision was also valid.

This means you still need to serve a valid “Pay Less Notice” if you want to avoid paying a sum claimed.  But there usually still has to be a proper measurement of the Final Account.  The contractor cannot generally get a windfall.

The best approach, of course, is to carefully monitor payment applications when received and serve a valid “Pay Less Notice” if necessary.

You can read the full judgment here

If you would like to discuss further, please contact Michael.McCord@tughans.comor any member of our construction team, who will be happy to assist you.

While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.