The Court of Appeal has revisited the authorities dealing with failure to issue a pay less notice in respect of a final account application in the case of Harding (t/a MJ Harding Contractors) v Paice [2015] EWCA Civ 1231. The Court of Appeal's judgment suggests a narrowing of the principles and therefore, perhaps, a return to the traditional "Pay Now; Argue Later" approach to interim payments. If the employer is to pay now and argue later: when is later?

This month, Lord Justice Jackson handed down judgment on the appeal by a contractor, Matthew Harding t/a MJ Harding Contractors, against a judgment of the Technology and Construction Court. The claim concerned whether or not an adjudicator had jurisdiction to decide what sum was properly due to Harding under the contract between the parties. Harding, who had received payment of the sum applied for following an adjudicator's decision that its employer, Paice, had failed to issue a valid pay less notice, unsurprisingly did not want the sum properly due to him to be reconsidered. Harding deployed two arguments:

  1. that the judge erred in his construction of the Scheme for Construction Contracts (contained in the Schedule to The Scheme for Construction Contracts (England and Wales) Regulations 1998 as amended from time to time) which requires an adjudicator to resign where the dispute is "the same or substantially the same" as one in which "a decision has been taken" in an adjudication; and
  2. that the judge erred in his analysis of the scope and effect of the adjudicator's decision (that actually, the adjudicator had, by determining the amount payable, already determined the value of the account).

It is Court of Appeal's decision on the second argument that is of most interest.

Before turning to the authorities on the matter, Lord Justice Jackson reviewed Harding's notice of adjudication, referral notice and the decision of the Adjudicator. In doing so he gave a clear view as to the distinction between the two issues that arise in disputes of this nature where there is a post-termination final account: 

  1. the technical failure to provide a pay less notice: "the first issue is a contractual one"; and
  2. the amount properly due in respect of the account: "the second issue is one of valuation";

This is interesting because it appears to limit the impact of the failure to provide a pay less notice and thereby reversing the recent trend set in ISG Construction Limited v Seevic College [2014] EWHC 4007 (TCC). In ISG, Edwards-Stuart J stated that:

"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". [emphasis added]

The "deemed value" principle set out in ISG blurred the lines between the "contractual" issue and the "valuation" issue as set out by the Court of Appeal and this restatement of the distinction between the two issues may prove to be significant.

Turning to the authorities, the Court of Appeal cited its earlier decision in Rupert Morgan Building Services (LLC) Ltd v Jervis [2003] EWCA Civ 1536 which provides that a failure to provide a withholding notice gives rise to an entitlement to "prompt payment" but that it "did not prevent the employer from subsequently challenging the valuation underlying that certificate" provided it paid first. Despite recognising that Edwards-Stuart J took a "somewhat different line" in ISG and Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC) to Rupert Jackson, the Court of Appeal decided not to embark on an analysis of these cases, satisfied that it did not need to do so in order to decide the appeal. Tellingly, Lord Justice Jackson reminded us of a particular passage from the judgment of Edwards-Stuart J inGalliford stating that he did not intend to depart from Rupert Morgan:  

"18. I held that if an employer fails to serve the relevant notices under this form of contract it must be deemed to have agreed the valuation stated in the relevant interim application, right or wrong. Accordingly, the adjudicator must be 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.

19. However, I made it clear that this agreement as to the amount stated in a particular interim application (and hence as to the value of the work on the relevant valuation date) could not constitute any agreement as to the value of the work at some other date (see paragraph 31).

20. This means that the employer cannot bring a second adjudication to determine the value of the work at the valuation date of the interim application in question. But it does not mean any more. There is nothing to prevent the employer challenging the value of the work on the next application, even if he is contending for a figure that is lower than the (unchallenged) amount stated in the previous application. If this was not made clear by my judgment, then it should have been, and it is certainly made clear by the decision of the Court of Appeal in Rupert Morgan Building Services (LLC) Ltd v Jervis [2004] 1 WLR 1867… My judgment in ISG v Seevic was not intended to go behind that."

Clearly the Edwards-Stuart J cases did broaden the scope of the Rupert Morgan principle. As a minimum, the "deemed valuation" principle prevents an Employer from challenging the valuation of the account at the relevant valuation date of the interim payment in question in adjudication. This was expressly envisaged by the Court of Appeal in Rupert Morgan. Certainly the Court of Appeal appreciated the difference and, arguably, had it considered the recent TCC cases to be an appropriate, or correct, development of Rupert Morgan, it would have said so. (ISG also had permission to appeal but was settled).

It seems that there is momentum for a return to the traditional pay now, argue later concept; preserving both the contractor's cash flow and the employer's entitlement to challenge the valuation of the account. Might it mean that if the sum is first paid an adjudication on value might be undertaken even in the context of interim payments? The issue with this of course is that the matter would have gone full circle. The paying party would be able to frustrate an unfavourable adjudicator's decision based on a technical breach with a counter-adjudication on the matter of valuation; what Edwards-Stuart J was trying to eradicate.

Given the reluctance of the Court of Appeal to grapple with the interim payment context, the current position is preserved: in the absence of a valid pay less notice the Employer is deemed to have accepted the amount in the application as the proper valuation of the account as at the valuation date of the interim application in question.

Pending further scrutiny from the Court, an Employer is left with the uncertainty as to when it is entitled to challenge the valuation of the account. It must pay now, but when is "later"? Must it wait until the next interim payment cycle, by which point it may be too late, or is it entitled to adjudicate on the value of the account, say, one day later than the valuation date of the interim application in question? Given the emphasis in this Court of Appeal judgment, there may be more appetite to argue the latter. This can, of course, be avoided by ensuring that a valid pay less notice is served in the first place… so perhaps it will be some time before this question is answered!