No notices served - then pay on demand!!

11 December 2014

In ISG Construction Ltd v Seevic College [2014], Mr Justice Edwards-Stuart found that the employer could not successfully have a second bite of the cherry by commencing its own adjudication on an application for the true value of the works, where it had been decided in a previous adjudication that it must pay the full amount applied for, due to its failure to serve payment and pay less notices.

The contract and the facts

ISG Construction Ltd (ISG) was engaged by Seevic College (the College). The form of contract was the JCT Design and Build Contract 2011 (the Contract).

Under the Contract, the sum due to the contractor on an interim application is either the amount stated in the application or the lesser amount stated in the employer's payment notice, if it has served one.

If the employer intends to pay less than the sum stated in the payment notice or interim application, as appropriate, because it claims to be entitled to withhold money on other grounds, it may give the contractor notice of that intention by serving a pay less notice no later than five days before the final date for payment.

So, if the employer either does not agree with the sum claimed by the contractor in an interim application, or in any event does not intend to pay, it must serve either a payment notice or a pay less notice, or both.

There were two adjudications. The first adjudication (Adjudication No1) was commenced by ISG requesting payment of the amount applied for under Application No13 plus interest in the sum of £1,097,696.29. This adjudication was based on the fact that the College had not served its payment and pay less notices in accordance with the provisions of the Contract.

Just prior to the decision in Adjudication No1 (four days prior in fact), the College (presumably on the basis that the College was of the view that the decision in Adjudication No1 was likely to be unfavourable) commenced a second adjudication (Adjudication No2) in an attempt to frustrate or reduce the impact of the likely decision in Adjudication No1.

The adjudicator appointed was the same for both adjudications. The College's aim was to obtain a decision in Adjudication No2 that the value of ISG's works up to the date of Application No 13 was less than the amount claimed by ISG in Adjudication No1.

The College was successful in its aim, in that on 5 September 2014, as predicted, the adjudicator awarded ISG the sum of £1,097,696.29 (Adjudication No1). However, the adjudicator decided in Adjudication No2 (on 10 October 2014) that ISG's works, as at Application No13, should be valued in the sum of £315,450.47. On the (incorrect) assumption that the College had already paid ISG the sum awarded in Adjudication No1, the adjudicator decided that ISG should repay the difference, this being £768,525.36.

As the College had not in fact paid the sum awarded in Adjudication No1, on 15 October 2014, it issued a cheque to ISG in the sum of £315,450.47 - the equivalent amount to that decided in Adjudication No2.

ISG then made an application to the court for summary judgment to enforce the adjudicator's decision in Adjudication No1 and for a declaration that the decision in Adjudication No2 was invalid for want of jurisdiction.

The main issue

Were the matters decided in Adjudication No2 the same or substantially the same as those decided in Adjudication No1? In other words had the value of Application No13 already been determined?

The value of Application No13 had already been determined?

The submissions

ISG's key submission was:

  • The question of the value of the works - which the adjudicator had decided in Adjudication No2, had already been decided in Adjudication No1, as the effect of the payment notice regime meant that there could be no dispute about the value of the work, the subject of Application No13.

The College's key submission was:

  • That the value of ISG's works had been specifically excluded from Adjudication No1 as the adjudicator stated:

    "For the avoidance of doubt I record that I have made no decision as to whether or not that is the correct value of work undertaken by ISG."

The decision

The court rejected the College's submissions on the following basis:

  • That as between contractor and employer, in the absence of any notices, the amount stated in the contractor's application as the value of the works executed is deemed to be the value of those works so that the employer must pay the sum applied for.
  • The starting point must be the notice of adjudication (the Notice). The dispute set out in the Notice for Adjudication No2 was stated to be "... the value of the works carried out by ISG under the Contract." In addition, that Notice then made clear that the decision sought was: "A declaration as to the contractual value of ISG's works as at 13 May 2014 (being the date of ISG's Application No13)".
  • That the detail set out in the Notice could only be read as requiring the adjudicator to determine the true value of ISG's works as at the date of Application No13.
  • If the employer fails to serve any notices in time it must be taken to be agreeing the value stated in the application, right or wrong. Therefore, 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.

Mr Justice Edwards-Stuart therefore decided that ISG was entitled to summary judgment to enforce the decision from Adjudication No1 and further to a declaration that the decision of the adjudicator in Adjudication No2 was invalid for want of jurisdiction.

Conclusion

The crux of the case is succinctly summarised by Mr Justice Edwards-Stuart in the following paragraphs:

"47. The statutory regime would be completely undermined if an employer, having failed to issue the necessary payment or pay less notice, could refer to adjudication the question of the value of the contractor's work at the time of the interim application (or some later date) and then seek a decision requiring either a payment to the contractor or a repayment by the contractor based on the difference between the value of the work as determined by the adjudicator and the sums already paid under the contract.

52. ...Absent fraud, 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 true value of the work actually carried out. The employer can defend itself by serving notices provided for by the contractual provisions."

In very simple terms - unless the employer serves its payment or pay less notices it should expect to pay the amount applied for - irrespective of the true value of the work actually carried out.


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