Where next for ‘Smash and Grab’?
Most of you will be aware of the relevant paragraphs of the Construction Act that came into force in 2011, which enhanced the position of contractors and subcontractors in qualifying construction contracts (payees) by providing that should the employer or main contractor (payers) fail, within 5 days of the due date for payment following a relevant period, to state what they consider to be the sum which is due for payment, then the payee’s assessment (the default payment notice) would be treated as the sum due. In the absence of a pay-less notice, then the payee’s assessment is also the sum due at the final date for payment.
The amendments had been considered desirable because previously, even if a payer had failed to serve a withholding notice (as was), they could still deploy defences to contend that the sum claimed by the payee was not necessarily the sum due, and the intent behind the Construction Act, of getting cash moving, was not being fully realised. The amendments met with mild concern but little resistance; the correct sum due could still be assessed in the next iteration of the payment cycle, or even determined in a further adjudication, thus any windfall gained by the payee could be recovered without having to resort to court.
ISG Construction Limited v Seevic College [2014] EWHC 4007 decided that, where a default payment notice contained the sum due at the final date for payment, then this was the contractually ‘deemed value’ of the work done at the due date. Moreover, the Construction Act would be undermined if the actual value of the relevant application for payment were to be the subject of a subsequent adjudication. Therefore, a payee could neither resist payment of the adjudicator’s award, but nor could the actual value of the interim application be ascertained without court proceedings or arbitration, at significant cost. Where there are no further interim valuations to occur, this could result in a windfall to the payee until such time as the final account is determined – a moveable feast in reality.
The judges then took the view that this position could not stand without safeguards for payers, and in a series of decisions in 2015 and 2016, the courts sought to define what would amount to a valid default payment notice with greater precision. So, a notice is likely to be invalid if it is served on the payer early (Leeds City Council v Waco UK Ltd [2015] EWHC 1400), or late (Henia v Beck [2015] EWHC 2433). Also, if its status is ambiguous such that a payer may not have objectively understood it to be a payment notice in the first place, it will not be valid (Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855; Henia v Beck). Any doubt about which figure is the sum the payee considers due will invalidate it (Jawaby Property Investment Ltd v Interiors Group Ltd [2016] EWHC 557).
However, the courts went further. Not content to direct the industry that these criteria should be followed, they embraced a greater willingness to allow the validity of the relevant default payment notices to be challenged, whether in response to adjudication enforcement proceedings under Part 7 (as in Caledonian Modular), or in Part 8 applications for declaratory relief (Leeds City Council and Jawaby). If a default payment notice wrongly formed the basis of an adjudicator’s award in favour of a payee, that award would not be enforced.
This was in contrast to the approach which had prevailed since Macob Civil Engineering Ltd v Morrison Construction Ltd [1999] BLR 93, from February 1999, which said that a decision of an adjudicator whose validity is challenged as to its factual or legal conclusions or a minor procedural error remains a decision that is both enforceable and should be enforced. Consistent with that, a decision that is erroneous, even if the error is disclosed by its reasons, will still not ordinarily be capable of being challenged and should, ordinarily, still be enforced (Bouygues (UK) Limited v. Dahl-Jensen (UK) Limited [2000] B.L.R. 522). However, the upshot of such cases as Caledonian Modular and Leeds City Council is that in future, adjudicators’ mistaken views concerning the validity of default payment notices may well render their decisions unenforceable.
In MJ Harding Contractors v Paice and Springall [2015] EWCA 1231, the Court of Appeal held - without explicitly qualifying ISG v Seevic - that the determination of the true value of a contract’s final account was a different issue to the value of an interim application, and therefore even if a previous adjudicator’s decision determined that a ‘deemed value’ had arisen on a default payment notice and that a significant interim payment was due, the payer could still refer the determination of the true value of the final account to adjudication. Of course, the sum due to a payee on the approach to practical completion could be the majority of the value of their work, but final accounts involve reckoning the sums due to and from each party and could result in the payer being entitled to claw money back from the payee via adjudication.
This brings us to this year’s Imperial Chemical Industries Limited v Merit Merrell Technology Limited [2017] EWHC 1763, which brought a hard fought series of adjudications and court appearances to an end. ICI had been found to have wrongly brought MMT’s contract – on form NEC3 Engineering and Construction Contract, Third Edition (June 2005) with amendments June 2006 and September 2011 - to an end, because its justification – that MMT had repudiated the contract – was actually false. ICI nevertheless sought to recover from MMT what it contended were overpayments amounting to c. £10 million, partly attributable to adjudicators’ decisions in MMT’s favour. MMT resisted this by contending that ISG v Seevic meant that those decisions were final and binding and so the sums were irrecoverable after termination. In his judgment, Mr Justice Fraser said that he found the TCC judgment in ISG v Seevic and the Court of Appeal Judgment in Harding v Paice (along with a further Court of Appeal judgment in Brown v Complete Building Solutions [2016] EWCA 1) “…difficult to reconcile”, and then said that in his view both those Court of Appeal judgments “…cast some real doubt on whether [ISG v Seevic] would be decided in the same way now”. As it was, Fraser J reminded us that ISG v Seevic was a case concerned with a deemed value arising on an interim payment application only, not the parties’ substantive underlying rights, and that adjudicator’s decisions are only binding until the dispute is resolved in court or arbitration. Now that the parties were in the TCC, regardless of any adjudicators’ decisions, ICI was able to seek to recover any overpayments (which the judgment suggests will be less than ICI hope, since it was found that defects afflicted just 5% of MMT’s work).
It can therefore be seen that in all likelihood, ISG v Seevic will in time be recognised as the high point in ‘temporary finality’, and due to Court of Appeal decisions like Harding v Paice and Brown v Complete Building Solutions (and indeed Fraser J’s comments in ICI v MMT), it does not take a great leap of the imagination to predict that its days are numbered. Its demise will look something like this; a payee gets a favourable adjudicator’s award on its penultimate application for payment, which embraces 95% + of the work, and for some reason the contract is terminated before a final account is agreed. The payer will commence a second adjudication to have the true value of the payee’s work determined, and in response the payee will seek a declaration that the second adjudicator lacks jurisdiction to decide that because the last adjudicator did that and ISG v Seevic applies. The Court of Appeal will go just a little further than the above cases and decree that ISG v Seevic was wrongly decided, and the door will be open for follow-on adjudications. The position on adjudicators jurisdiction which applied prior to 2014 will be resurrected, but challenges to adjudication enforcement proceedings under Part 7 (see Caledonian Modular), or in Part 8 applications for declaratory relief (see Leeds City Council and Jawaby) based on the validity of default payment notices will remain available to payers.
What does this mean for you or your business?
The legal climate is moving in favour of payers. If you are a subcontractor or main contractor, this prediction will not be welcome, since a payer who considers they have overpaid you may more readily refer a dispute over the value of the work to adjudication than litigation. Commercially, the payer wants a quick assessment, by an industry insider, without exposure to the risk of paying your legal costs, and adjudication delivers that. Such adjudications will probably be preceded by the payer attacking the validity of your payment notices as a means of resisting enforcement of any adjudicator’s decision which favours the payee.
What should you be doing now?
If you are a payee, ensure that your team know exactly when due dates fall and when you must serve your payment notices. Ensure that it is clear that an application for payment is exactly that, so there can be no doubt about its purpose, and that the sum you consider due is writ large. This will reduce the risk of a payer challenging their validity in order to avoid paying an adjudicator’s award in your favour. When you get a favourable adjudicators decision and successfully enforce it, do not relax, because the final account timing is uncertain; ensure your records mean that you can fully justify the sums contained in your interim applications for payment from the word ‘go’, in case it is your dispute that sees the end of ISG v Seevic.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.