Since ISG Construction Ltd v Seevic College [2014] (ISG) it has been established that a party who loses an adjudication for failing to serve a payment notice and/or pay less notice must pay the contractor the notified sum as per the interim application and may not further adjudicate the substantive valuation of that application.

However, the scope of the ISG principle has remained unclear, prompting debate as to whether the principle would apply equally to final payments where no valid payment notice or pay less notice has been issued. The position has been particularly unclear in relation to final payments under the Scheme for Construction Contracts 1998 as amended (the Scheme), which makes no distinction between interim and final payments.

In this key judgment, Kilker Projects Ltd v Purton [2016], the TCC has confirmed that there is a difference between final and interim payments under the Scheme in this regard. Therefore a paying party, having previously lost an adjudication for failing to serve the requisite payment notice and/or pay less notice, may nonetheless adjudicate to determine the true valuation of the final account with a view to recovering all or part of the final payment previously made.

Background

This dispute arose out of an oral contract between Kilker, the main contractor, and Purton, a joinery subcontractor. The contract was for the provision of specialist joinery works at the Dorchester Hotel in Park Lane. No payment terms were agreed, and the Scheme therefore applied.

Purton carried out the agreed works and served his final account application on 8 December 2014. Kilker failed to serve either a payment notice or a pay less notice and did not make payment of the notified sum by the final date for payment.

Purton referred the dispute to adjudication, claiming entitlement to the notified sum in the final account application. The adjudicator determined that no valid payment notice or pay less notice had been served and so ordered Kilker to pay £147,223 to Purton in respect of the final account application. The awarded sum was then paid by Kilker following enforcement proceedings in the TCC.

Kilker subsequently referred the substantive valuation of the final account to adjudication. Purton argued that the previous adjudicator had already decided the same or substantially the same issue in the first adjudication and the second adjudicator therefore had no jurisdiction to decide this dispute. Purton's position was that the ISG principle applied equally to interim and final payments. Kilker was therefore deemed to have agreed the valuation of the final account by not serving a payment notice or pay less notice.

The adjudicator disagreed with Purton's arguments and proceeded to value the final account, which had not been carried out by the previous adjudicator. On a proper valuation of the account, the adjudicator decided that the account was worth less than claimed by Purton in the payment application and ordered Purton to (re)pay £55,676.84 plus VAT to Kilker. Purton was also ordered to pay the adjudicator's fees and expenses.

Kilker sought enforcement of the decision in the TCC.

The main issue - submissions

Kilker's key submissions were:

  • That the Housing Grants, Construction and Regeneration Act 1996 (as amended) and the Scheme regulate payment and cash flow, but do not decide the true substantive entitlement to payment under the contract or determine entitlement to payment on a conclusive basis.
  • Accordingly, a party who has failed to serve a valid payment notice and/or pay less notice must pay the amount stated on the application by the final date for payment. However, having paid, that party is entitled to seek a determination of any dispute about the valuation of the contractor's entitlement. In the case of interim payments, this valuation is to take place following the contractor's subsequent application for payment in accordance with ISG. Where the disputed valuation relates to a final account, the paying party is entitled to seek determination of the dispute in adjudication.

Purton's key submissions were:

  • That the effect of a failure to issue a valid payment notice and/or pay less notice is that the payer has agreed the contractor's valuation and must pay the application in full. This (it was argued) is irrespective of whether the dispute relates to an application for interim payment or final payment, as the Scheme does not differentiate between interim and final payments.
  • In respect of applications for final payments, the effect of the ISG principle is therefore that a party who fails to issue a payment notice and/or pay less notice is deemed to agree the value of the final account. The paying party cannot re-open the valuation in a subsequent adjudication, but may challenge the valuation in litigation or arbitration.

The decision

In her analysis, the Judge, Ms Finola O'Farrell QC sitting as a Deputy High Court Judge, considered the parties' submissions, the statutory payment provisions and the relevant case law.

On interpretation of the statutory payment provisions the Court agreed with Kilker's submission, concluding that:

"The statutory payment provisions in the 1996 Act and the Scheme... do not affect the ultimate value of the contract sum that the parties have agreed is the price for the works and/or services provided. ...The statutory provisions are concerned only with cash flow and not the contract sum..."

In respect of Purton's submissions regarding ISG, the Court considered the clarification of the ISG judgment provided by Mr Justice Edwards-Stuart in the subsequent case of Galliford Try Building Ltd v Estura Ltd [2015] (Estura) and concluded that:

"Subject always to the express terms of the contract, ............an adjudication decision as to the "notified sum" payable precludes a challenge to the interim payment on grounds of valuation in a subsequent adjudication... However, where the "notified sum" determined in adjudication is in respect of a final payment, ... either party is entitled to have the ultimate value of the contract sum determined in a subsequent adjudication, litigation or other form of dispute resolution... "

The Court's decision was therefore that the first adjudicator had determined the notified sum payable under the final account application, but had not determined the proper value of the final account. Therefore, as there was no agreement between the parties that the final account would be conclusive as to the final sum due under the contract, Kilker was entitled to refer the final account to the second adjudicator for valuation.

Kilker was accordingly granted summary judgment on the terms awarded by the adjudicator.

So what do you need to do to avoid exposure to such claims?

  1. Know the contract

There is no substitute for knowing the contract. As identified by this judgment, common law principles and statutory payment provisions are subject to the express terms of the contract in question.

It is therefore essential to check whether the contract contains a clause to the effect that the final account would be conclusive as to the final sum due under the contract. If it does, the paying party may be unable to adjudicate the value of the final account if it has failed to issue a valid payment notice and/or pay less notice. In these circumstances, it is therefore particularly important to be aware of the contractual deadlines for serving payment notices and pay less notices.

  1. Serve the notices you wish to rely on

If you intend to pay less than the sum stated in a final account application, ensure that you serve a payment notice and pay less notice within the timescale set out in the contract or the Scheme, as appropriate. By serving notices correctly you are ensuring that, should a dispute arise, you do not start on the back foot.

  1. Bear in mind the possible extra layer of protection for the paying party

If payment notices and/or pay less notices are not properly served and a contractor adjudicates to determine the sum payable for the final account pursuant to its application, this does not necessarily determine the true valuation of the final account, nor does it prevent the paying party from commencing a second, valuation adjudication in respect of the final account.