Does an employer have to serve a pay less notice against an invoice that is served after termination of the contract? Does the statutory scheme of the Housing Grants, Construction and Regeneration Act 1996 apply after termination of the contract which includes it? The Court of Appeal has recently given useful guidance on the application of the act, and the requirements of pay less notices.

The case concerned the entitlement of a company of architects (‘the Claimant) to recover its fees against a property developer (‘the Defendant’) following termination of its engagement. The issue in the case was whether s. 111 of the Housing Grants, Construction and Regeneration Act 1996 (‘the 1996 Act’) applies only to interim payments of whether it also applies to payments following completion or termination.

The company of architects, Adam Architecture Limited, were the original claimants in proceedings to enforce an adjudicator’s award. The Claimant was initially invited by the Defendant to submit a fee proposal, which they duly submitted. The Defendant accepted the proposal, and the Claimant set to work on the project. Subsequently the Defendant contacted the Architects to say they would use the services of another firm of architects for the layout of the houses on the development. The Claimant wrote back saying this would leave them with no place in the project, and ten minutes later the architect working on the project at the Claimant company wrote to the Defendant to say he had been instructed to stop work. The next day the Claimant sent an invoice with their work to date.

The defendant did not serve a pay less notice, but did not pay the invoice. The Claimant referred the dispute to an adjudicator, who found in their favour. Both the Defendant and the Claimant issued proceedings in the TCC, the former disputing the payments and the adjudicator’s jurisdiction, and the latter seeking to enforce the decision.

The Defendant argued the contract had come to an end before the invoice was sent, and alternatively that it did not require the service of a pay less notice because the invoice was a final account. The judge found in favour of the Defendant. The Claimant appealed.

The Claimant argued, inter alia, that s.111 of the 1996 act required pay less notices in respect of both interim applications and any final account or termination account. As a preliminary point, the Defendant sought to argue that this argument had not been raised in earlier proceedings and that s. 111 should therefore be ignored, but Jackson LJ swiftly dealt with that point by saying that the court must decide in accordance with the law, and both sides clearly understand the case which they have to meet.

In analysing the main argument, Jackson LJ noted that while s. 109 is expressly limited to interim payments, the other sections only refer to ‘payment’. S. 109(4) also made it clear that ss. 110 to 111 are wider than s.109. Jackson LJ found that just by looking at the language of the statute, it is clear than s. 111 relates to all payments which are ‘provided for by a construction contract’, not just interim payments (at para 48). The provision is perfectly workable and sensible, so no words need be read into it.

In discussing relevant authorities relied on by the Defendant, Jackson LJ found that Melville Dundas Ltd v George Wimpey UK Ltd [2007] UKHL 18 did not concern final certificates or termination certificates, and any statements by Lord Hoffman that might have an impact on such certificates was obiter. Lord Hope was more explicit in saying s.111 did not apply to final certificates, but this was obiter as well. Both parties had accepted that s.111 applied to final certificates, and the House of Lords did not question that concession.

The first ground of appeal was therefore granted, meaning the Defendant should have served a pay less notice. As the invoice for money due for work done was not a claim for damages for breach of contract, the Claimant had not accepted any repudiatory breach. Therefore the Claimant had the benefit of the statutory scheme, and was entitled to rely on it at the adjudication.

The case provides clarity to the construction industry, in that employers and contractors know that a payment notice cannot be resisted without a pay less notice, even if the construction contract has been terminated, at least if it included terms as to how money was to be claimed following termination. In that sense, the case could really be said to be authority to suggest that the statutory scheme stays in force despite the contract being terminated, at least in those parts that refer to the secondary obligations of the parties (the primary obligations having been terminated).