A recent Court of Appeal decision has confirmed that the requirements for the service of pay less notices and the payment of “notified sums” contained in section 111 of the Housing Grants, Construction and Regeneration Act 1999 (as amended) (the “Construction Act”) apply equally to interim and final payments. The decision also touches upon the extent to which these requirements may fall away upon termination.

Adam Architecture Limited v Halsbury Homes Limited

Halsbury, a property developer, engaged Adam, an architectural practice, to undertake the design of a large residential development in Norfolk pursuant to the RIBA terms and conditions. These conditions required, among other things, that if Halsbury intended to pay less than a notified sum, it must provide a pay less notice not later than five days before the date for payment. Failure to provide a pay less notice would result in Halsbury being obliged to make payment without delay. The terms also included provision for either party to terminate the retainer, after giving reasonable notice. Following termination, Adams was to issue an account with the sums due, being a fair and reasonable assessment up to the conclusion of the services.

Approximately 6 weeks into the appointment, a significant portion of Adam’s scope of work was withdrawn. Following this change and a subsequent email exchange, Adam concluded that there remained no place for it on the project. Adam ceased work and issued an invoice for the services it had carried out to date. No payment was made nor any pay less notice issued by Halsbury under section 111 of the Construction Act.

Adam received an adjudicator’s decision that it was entitled to the invoiced amount on the basis that no pay less notice had been issued. However, the TCC refused enforcement on the basis that either (i) Adam’s invoice amounted to an acceptance of Halsbury’s repudiatory conduct in reducing the scope, bringing the contract to an end and eliminating any requirement for Halsbury to serve a pay less notice; or (ii) the invoice was in respect of a final / termination payment in respect of which there was no requirement to serve a pay less notice.

Did section 111 apply?

Before the Court of Appeal, Halsbury argued that section 111 did not apply to final payments under a construction contract. Halsbury relied on obiter comments to this effect made in a previous House of Lords decision (Melville Dundas). The Court of Appeal refused to adopt these comments, preferring to rely on the general wording of the section and previous Court of Appeal decisions to confirm that both interim and final payments fell within the section.

Having found that a pay less notice was required, the court turned to consider the repudiation issue. The court disagreed that Adam’s invoice was sufficient to accept any repudiation by Halsbury and that Adam had not therefore “shot itself in the foot by putting an end to the very contractual provisions upon which it was relying”.

Conclusion and implications

This decision provides helpful clarification that the requirements of section 111 apply to all payments under a construction contract. Short of any appeal to the Supreme Court, the suggestions to the contrary made in Melville Dundas appear now to have been laid to rest.

An issue of potentially greater practical significance is whether the requirements of section 111 continue to apply after termination of a construction contract. Although not dealt with expressly in the decision, the Court of Appeal appears to have assumed that these requirements would not apply had Adam accepted a repudiation by Halsbury in the present case. Parties seeking to terminate should consider carefully the effect that any termination may have on the payment provisions under their contract. Those seeking to resist payment in such circumstances would be best advised to serve a pay less notice regardless.