Facts

By an amended JCT Design and Build contract (2011 edition) made between Kersfield Developments (‘Kersfield’) and Bray and Slaughter (‘Bray’), Bray agreed to refurbish a mansion house and construct a series of detached houses in North Somerset. The parties agreed a contract sum of just under £5 million.

The contract provided that Bray receive monthly interim payments, due on the fifth of each month (starting in February 2015). On 5 August 2016, Bray issued interim payment application No. 19 (‘IPA No. 19’) in the sum of approximately £1.2 million, the final date for payment being two weeks later on 19 August. Kersfield failed to pay by the deadline.

On 23 September 2016 Bray commenced adjudication proceedings in respect of the unpaid sum, in which it successfully argued that it was entitled to payment in full on the basis that Kersfield had not served a valid payment or pay less notice in respect of the works which comprised IPA No. 19.

Kersfield refused to comply with the adjudicator’s decision and issued Part 8 proceedings in the TCC seeking a declaration that it was entitled to launch a second adjudication in order to independently value the works comprising IPA No. 19. In response, Bray sought summary judgment to enforce the adjudicator’s decision.

The two key issues facing the Court were:

  1. whether IPA No. 19 was a valid application for payment under the contract and/or whether Kersfield was estopped from challenging its validity; and
  2. whether Kersfield was entitled to a valuation of the works in IPA No. 19 by way of a (second) adjudication.

Judgment

O’Farrell J held that IPA No. 19 was valid because Kersfield had failed to serve a valid payment or pay less notice. Accordingly, it was not necessary to consider whether an estoppel by convention arose in respect of the employer’s payment of previous invalid applications. Further, and in line with other authorities as to the effect of non-service of a payment/pay less notice, the adjudicator’s decision was to be enforced.

In response, Kersfield argued that the judgment should be stayed on the basis that it could not afford to pay the sums awarded and that to force it to do so would amount to manifest injustice. It also argued that should Bray be ordered to repay the judgment to Kersfield, it would not be in the financial position to do so. Both arguments were rejected by the Court.

Significance and Commentary

O’Farrell’s judgment can broadly be seen as an affirmation of existing authorities concerning interim payment applications, and particularly, the courts’ reluctance to disturb a contractor’s entitlement to payment in the absence of any payment or pay less notice issued by its employer. Rather less predictable was the learned judge’s analysis of when, if ever, an adjudication can be carried out to value the works underpinning an interim payment application.

Paragraph 95 of the judgment refers to section 108 of the Housing Grants, Construction and Regeneration Act 1996 (‘1996 Act’), which entitles the parties to refer a dispute to adjudication ‘at any time’. Even so, the right to refer a dispute to adjudication did not arise ‘where a particular interim payment has been fixed by the default notice mechanism under the contract, as in this case’. In other words, Kersfield was not entitled to bring a second adjudication on the basis of its failure to comply with the payment notice provisions set out in the JCT contract.

In coming to this view, the Court provided the first guidance on the meaning of sections 111(8) and 111(9) of the 1996 Act. It concluded that s 111(8) only applied where a valid payment or pay less notice had been served and which disputed the sum owed by the paying party. Where no such payment/pay less notice had been served, then the paying party was obliged to pay the ‘notified sum’ set out in the default payment notice issued by the unpaid party, applying ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) and Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC).

The learned judge concluded that despite the wording of s 111(8)(b), which empowers an adjudicator to award ‘more than the sum specified in the notice’, this did not entitle him to open up and revise the payment/pay less notice itself. Section 111(9) provides for the speedy payment of any additional sum by the adjudicator, although this right arises from this freestanding statutory provision rather than any jurisdiction on the part of the adjudicator to revise payment notices.

Interestingly, this analysis seems to be at odds with section 111(1), which requires payment of the notified sum (and presumably, nothing more). In particular, it leaves unanswered the questions: (a) on what basis can an adjudicator award more than the notified sum; and (b) how does he determine this additional sum? This uncertainty is magnified in light of recent decisions such as ISG v Seevic where it was held that in the absence of a payment notice the value of the works is determined by reference to the payment application. Although it was confined to the context of interim (as opposed to final) payments, the contractor’s strict entitlement to be paid for the works as valued in his payment applications was subsequently upheld in Galliford Try v Estura and Kilker Projects Ltd v Rob Purton [2016] EWHC 2616 (TCC), the latter judgment also from O’Farrell J (when sitting as a deputy High Court judge).

Accordingly, there appears to be a lacuna between the operation of sections 111(8) and (9) which the Court acknowledged did allow the adjudicator to award sums over and above the notified sum, and when in fact this power may be used. One interpretation is that the unpaid party may avail itself of these provisions only where there are ‘competing valuations…asserted by the parties’ (at [94]). Although the judge did not clarify what a situation involving competing valuations would look like, one sensible interpretation would be where the employer has served a payment or pay less notice in response to the contractor’s IPA.

The judgment in Kersfield should be welcome to practitioners in that it confirms the courts’ orthodox approach to enforcing adjudication decisions and only disturbing those findings in exceptional circumstances such as procedural unfairness (which, despite Kersfield arguing as much, was swiftly rejected). It does, however, also raise a few questions. In what circumstances can an adjudicator award more than the notified sum? How should such an additional sum be calculated? What exactly is meant by ‘competing valuations’? Does section 111 oust any term in a JCT contract which limits the contractor’s entitlement to the stated value of its payment application?

Many of these issues may soon be resolved as leave to appeal has been granted to the Court of Appeal. It is hoped that the Court will take this opportunity to help clarify the relationship between JCT provisions and the Construction Act 1996 in the context of adjudications, and in particular, whether they can still be quite so confidently described as ‘smash and grab’.