The Court of Appeal has issued its judgment in an appeal which has big implications for the construction industry payment rules.
In February this year, the Technology and Construction Court (TCC) ruled in Grove Developments Limited v S&T (UK) Limited that ISG v Seevic had been wrongly decided. ISG v Seevic was the case from late 2015 that had turned payment rules on their head by determining that once an employer (or its representatives) had failed to serve a payment notice or pay less notice, it had to pay the notified sum by default and could not (usually) seek a repayment of that sum until the final payment. In some cases that could be years away, and where the contractor had gone into insolvency in the meantime, it meant that overpayments might never be recovered.
Our article on the TCC's original decision can be read here. In today’s Court of Appeal judgment, that decision was upheld. Retired judge Sir Rupert Jackson was invited back to the bench to consider the appeal and gave the leading judgment – somewhat unusual but necessary because the TCC’s judgment was given by The Honourable Mr Justice Coulson, who himself is now on the Court of Appeal and would normally lead on construction appeals.
The judgment is lengthy and considered. It addresses various points of interest to the construction industry, and no doubt many column inches will be devoted to its dissection. It is also likely to become regularly referenced in construction disputes given the variety of topics covered. In summary though, the following issues were decided.
- It is open to a party that has failed to serve a payment notice and pay less notice to commence an adjudication to have the true value of the payment assessed. The logic in ISG v. Seevic that the paying party was ‘taken to agree’ the valuation and, therefore, there could be no dispute was, therefore, wrong.
- However, before a valuation dispute can be referred to adjudication in these circumstances, the paying party must actually pay the sum that had become due as a result of the failure to serve a valid payment notice and pay less notice. The court said this was because the mandatory payment provisions of the (as it is colloquially known) Construction Act trump the statutory right to adjudicate. This will mean a paying party must part with money and attempt to claw it back, rather than to hold on to it in the hope of getting a valuation decision before having to make payment.
- The test to be applied to the validity of payment notices is that of a ‘reasonable recipient’. As such if a reasonable recipient would have understood references to other documents that were referenced in a notice but not provided with it again would have understood what was meant, the failure to re-attach old documents will not invalidate a notice.
- Under the JCT Design and Build 2011 edition, certain notices have to be served before LADs for delay can be deducted/claimed (as is true of other JCT forms). It was confirmed that these must be served in the correct order – but there was no need that there was any particular time period to elapse provided that order was followed. Although a gap of only seven seconds (as in this case) robbed the notice provisions of any particular use, that was what the contract required and the court could not imply any particular period because it was uncertain what that period could or should be.
Perhaps the biggest lesson from this decision - or perhaps reminder - is that contract administrators, employers, and indeed all parties to a contract should ensure they understand the provisions of those contracts and, in particular, serve notices when they should in compliant form. If that is done - simple though it sounds - many of these issues will never arise.
As further analysis of the Court of Appeal’s detailed judgment will be carried out and we will provide further updates on other issues raised.