An extract of this article appeared on Practical Law.

1. Judgment in the case of Kersfield Developments (Bridge Road) Ltd v Bray & Slaughter Ltd, handed down on 19 January 2017, is a new authority in the line of case law providing guidance on the provisions governing interim payments in Construction Contracts in the Housing Grants, Construction and Regeneration Act 1996, as amended (“the Act”).

2. While a wide number of arguments were deployed in the case, perhaps the most interesting point for construction practitioners is that it offered the first judicial guidance on the meaning and effect of sections 111(8) and (9) of the Act.

Adjudication decision and background facts

3. The case concerned an adjudicator’s decision that Kersfield pay Bray a sum in excess of £1 million in accordance with the payment provisions of an amended JCT Design and Build Contract (2011 edition) between the parties; specifically, he decided that while Bray’s application for payment did not meet the employer’s requirements as set out in the Contract, Kersfield were estopped through a course of dealing from relying on that to invalidate the application. The adjudicator decided that there had been no valid payment notice or pay less notice by Kersfield. The application for payment thereby became a default payment notice, and the sums notified within it were due.

4. The facts relevant to these findings on validity of the payment application were:

i) The Employer’s Requirements under the Contract stated that payment applications must be “detailed” and supported by “all necessary information”. This included an elemental breakdown of the Contract Sum Analysis, which itself was to contain various detailed requirements.

ii) Application No.19 (the payment application in question) included a breakdown of the works, materials and variations, and a loss and expense claim supported by a spreadsheet, narrative, sage records, and cost reports.

iii) The Application included two items (128 and 112) which were the subject of dispute. Item 128 was a claim for “disruption – groundworks, brickwork and following trades”, which was not further explained. Item 112 was for additional labour to carry out additional works to the main contract, again not supported by detailed information. The two items totalled some £450,000.

5. The facts relevant to the finding on validity of the payment notice and pay less notice were as follows:

i) Kersfield issued a payment notice on 12 August 2016. The final date for the issuing of this notice was 10 August 2016.

ii) Kersfield issued a pay less notice by email at 9.50pm on Friday 12 August 2016. The Contract required that this be served by 14 August 2016. The Contract further stated that any notice sent by email would take effect as being served on that day if sent by 4.00pm on a business day, or otherwise on the next business day.

The proceedings

6. Kersfield issued a Part 8 claim seeking a final determination of the notice validity and estoppel points, and alternatively a declaration that Kersfield was entitled to dispute the valuation of the payment application and to refer such dispute to further adjudication. Bray sought enforcement of this adjudication decision by way of summary judgment.

7. Kersfield deployed a number of arguments: that the application for payment was invalid due to not meeting the Employer’s Requirements; that Bray treated the payment notice as valid and so could not resile from this position, in accordance with the principle of approbation and reprobation; that the Act provides mandatory provisions for how time is to be calculated which the parties cannot evade by contractual provisions, and that the pay less notice was therefore in time; that the award should not be enforced due to procedural unfairness; that summary judgment should be stayed due to the financial position of the parties.

8. Bray meanwhile argued that the adjudicator had been correct in his decision, countering the various arguments put forward by Kersfield.

9. O’Farrell J found as follows:

i) That the payment application was valid. It was not invalidated by any lack of particularity in items 128 and 112. There is a distinction between validity of an application, and validity of the claims within an application. Inadequate substantiation may justify the rejection of a claim, but does not of itself invalidate the claim.

ii) Had the application been invalid, O’Farrell J would have rejected the argument that Kersfield were estopped from relying on its invalidity by course of dealing.

iii) O’Farrell J also rejected Kersfield’s submission that Bray were prevented from treating the payment notice as invalid on the principle of approbation and reprobation.

iv) On the timing of the pay less notice she found that the contractual requirement concerning the effect and timing of service by email did not offend the requirements of the Act, but was a valid process clause.

v) The submissions concerning stay of the enforcement proceedings and procedural unfairness were also rejected.

Sections 111(8) and (9)

10. In addition to the above findings, O’Farrell J offered guidance on the meaning and effect of Sections 111(8) and (9) of the Act when considering Kersfield’s alternative argument that it was entitled to dispute the valuation of the payment application and to refer such dispute to further adjudication.

Statute and previous case law

11. These provisions of the Act state as follows:

“111(8)

Subsection (9) applies where in respect of a payment –

(a) a notice complying with section 110A(2) has been given pursuant to and in accordance with a requirement of the contract (and no notice under subsection (3) is given), or

(b) a notice under subsection (3) is given in accordance with this section, but on the matter being referred to adjudication the adjudicator decides that more than the sum specified in the notice should be paid.

111(9)

In a case where this subsection applies, the decision of the adjudicator referred to in subsection (8) shall be construed as requiring payment of the additional amount not later than –

(c) seven days from the date of the decision, or

(d) the date which apart from the notice would have been the final date for payment, whichever is the later.”

12. The final part of section 111(8) appears to envisage a scenario in which a valid payment or payless notice has been given, but an adjudicator decides that more than the notified sum should be paid.

13. There seems to be a tension between this provision and section 111(1) which requires payment of the notified sum. How does the adjudicator decide that more than the notified sum should be paid, if that is all that is contractually due? This tension had been exacerbated by case law on this area, which had found that in the situation of a default notice it was the notified sum that was to be paid – this could not be challenged by way of a second adjudication as to the true value of the works at that date. This appeared to support the position that as far as interim payments were concerned it was the contents of the notices that mattered, and not the value of the works.

14. In ISG Construction Limited v Seevic College [2014] EWHC 4007 (TCC) an adjudicator decided that the contractor was entitled to be paid the sum stated in a default payment notice, as the employer had failed to serve a payment notice or pay less notice. The employer started a second adjudication as to the value of the sums due under the payment application. The court found that the second adjudicator had no jurisdiction as the question had already been decided. In the absence of payment or pay less notices the sum in the payment application was deemed to be the value of those works so that the employer must pay the sum applied for. The employer was deemed to have agreed this. The employer could defend itself by use of payment and pay less notices. On this point, the court concluded at [32]:

“Accordingly, if either the contractor or the employer asserts that the contractor's right to payment at any particular time in the contract is a sum equal to the value of the work properly executed up to that time, less any sums already paid, that in my view would be to assert an entitlement that does not arise under the contract. In fact, it does not arise at all.”

15. This quotation appears to assert the primary role of the notices under the contract, over the true value of the works, in determining what is contractually due.

16. This position was clarified in Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC), in which the Court stated that the value to be paid could be challenged at a future interim payment, a final account, or by Part 8 proceedings; it was merely for the interim payment itself that the notified sum was final. Again, this was a default notice situation, where no payment notice or pay less notice has been given.

17. The High Court considered the case law on this topic and summarised it in the case of Kilker Projects Ltd v Rob Purton [2016] EWHC 2616 (TCC) at [25] as follows:

“Subject always to the express terms of the contract, where the “notified sum” is in respect of an interim payment, usually there is no contractual basis on which the contractor's entitlement to that payment can be re-opened. Any errors can be corrected in subsequent interim or final valuations. Therefore, an adjudication decision as to the “notified sum” payable precludes a challenge to the interim payment on grounds of valuation in a subsequent adjudication”

18. Again, this quotation appears to support the position that it is the notified sum that determines what is contractually due, rather than any reference to the true value of works carried out.

19. What was perhaps not explicitly apparent until the decision in Kersfield is that the rationale for these restrictions is the default notice situation itself.

The decision in Kersfield

20. Kersfield argued (see [85]) that the effect of sections 111(8) and (9) was that an adjudicator was entitled to open up any payment notice or pay less notice. Bray meanwhile argued (see [87]) that sections 111(8) and (9) could only be operated by the contractor – the notices referred to in the sections are those given by an employer, and so it is only a contractor who will be disputing that greater sums should be paid.

21. O’Farrell J rejected both these submissions. She stated as follows (at [93]-[95]):

“Wherever there is a dispute under the contract, either party is entitled to refer such dispute to adjudication as provided in section 108 of the Act. There is nothing to stop an employer serving a payment and/or pay less notice and referring the dispute to adjudication so as to obtain a temporarily binding decision on it. […] In the absence of a valid payment notice or pay less notice, there is no dispute as to the sum to be paid in respect of the relevant application because the default notice mechanism provides that the “notified sum” must be paid and there is no provision for that sum to be revised

[…]

The notice sets out the sum that the employer considers is due and payable to the contractor in response to the contractor’s application. Section 111(8) empowers an adjudicator to determine what sum is due and payable in the event that competing valuations are asserted by the parties. The notice is not revised by the adjudicator if a different sum is determined to be due. Section 111(9) simply provides for the payment of any additional sum determined by the adjudicator. Any right to additional payment arises under section 111(9), based on the adjudicator’s decision, and not under a revised payment notice.

[…]

where a particular interim payment has been fixed by the default notice mechanism under the contract, as in this case, there is no contractual basis on which to revise that payment by reference to a proper valuation of the works and therefore there is no relevant dispute that can be referred to adjudication.”

22. This quotation explains that in the default notice situation there is no dispute over the value of the works – it is deemed to be agreed. If the matter is referred to adjudication, the adjudicator can look only to the validity of the notices and establish the notified sum, which must be paid. There can be no second adjudication on the value of the works, which is deemed to be agreed. This plainly follows the reasoning in the Seevic line of cases.

23. However, this ‘deeming’ analysis is only expressed as holding true for default payment notices. Where a payment notice (or pay less notice) has been given, then it would seem that an adjudicator can look to the value of the works (if there are “competing valuations”), and can decide that more than the notified sum is to be paid. This would also appear to leave open the option that if an adjudicator decided only the validity of the notices, there could be a second adjudication on the value of the works.

24. At first glance such an outcome would appear directly contradictory to the passage from Seevic quoted at paragraph 14 above. This first glance, however, would fail to give the word “accordingly” its due. The preceding passage in Seevic had read: “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 the notices provided for by the contractual provisions.” (emphasis added)

25. In light of the decision in Kersfield, the “accordingly” must relate back to the default notice situation set out in the previous paragraph. Seevic would then be saying that it is only in the default notice situation that the parties cannot assert an entitlement based on valuation. It is not entirely clear how the contractual entitlement to more than the notified sum can arise where a notice has been served. The argument appears to be that it arises under section 111(9), specifically by way of the words “the decision of the adjudicator […] shall be construed as requiring payment”. Adjudication itself is a contractual mechanism of dispute resolution. An adjudicator’s decision is therefore contractual, and this provision appears to say that in these specific circumstances that decision shall be construed as requiring payment under the contract.

26. If this interpretation is correct, the decision in Kersfield would appear to provide a rather neat means of giving effect to sections 111(8) and (9) of the Act in a way which avoids contradicting existing case law. The notices do indeed determine the notified sum, but section 111(9) permits an adjudicator to require payment of something more. It would also appear that construction practitioners will need to ensure that any adjudication on interim payments considers the value of the works, so that they do not leave themselves open to subsequent adjudications.

27. However, there remain a number of practical questions the judgment does not answer: what, for example, constitutes a “competing valuation”? How is an adjudicator to determine what sums more than the notified sum are to be paid? In the context of the JCT contracts, which expressly state that the sum due under interim payments is the amount specified in the relevant notice, what is the contractual basis by which more than the notified sum can be due? Is this term ousted by the wording of section 111(9)?

28. Given that Kersfield was granted permission to appeal on the second adjudication point, it may be that answers to these questions will be forthcoming.