Cornerstone - Payment disputes – when is the final word?

26 January 2017

More and more cases are being heard in relation to the intricacies of interim payments since the controversial case of ISG Construction Ltd v. Seevic College [2014] EWHC 4007 (TCC).

One issue which had remained unresolved, however, is the extent to which ISG v. Seevic relates to final payment applications.

To recap, ISG v. Seevic established that where a paying party has failed to serve a proper payment or pay less notice, they are deemed to have agreed with the valuation contained within an interim application for payment (or other default payment notice). The payer will be unable to refer a dispute over the valuation of the payee’s default payment notice to adjudication because, as a result of being taken to have agreed the valuation, there is no dispute to refer.

At around the same time as ISG v. Seevic was decided, however, the TCC determined in Matthew Harding (t/a MJ Harding Contractors v. Paice and anor [2014] EWHC 3825 (TCC) that a failure to serve a proper payment or pay less notice did not preclude a valuation dispute in relation to a final account triggered by termination for insolvency. That decision was upheld by the Court of Appeal, which caused some doubt as to whether the principles in ISG v. Seevic applied to final payments not triggered by termination.

This brings us to the most recent case of Kilker Projects Limited v. Rob Purton (t/a Richwood Interiors) [2016] EWHC 2616 (TCC). Purton carried out works at the Dorchester Hotel under an oral construction contract. Purton submitted his final account application, and Kilker failed to submit a payment or pay less notice. Purton referred the matter to adjudication where the adjudicator made the decision that Kilker would have to pay Purton the full sum from the final payment application which was in the region of £147,000 for the final account application (plus fees and expenses).

Having paid the sum that was ordered, Kilker referred the dispute to a second adjudicator to determine the true valuation of the works. The adjudicator decided that Kilker had overpaid, and ordered Purton to repay Kilker a sum in the region of £55,000 (plus fees and expenses). Purton resisted enforcement, arguing that the second adjudicator did not have the jurisdiction to determine the dispute as it had already been determined by the first adjudicator.

Having considered the previous cases mentioned, the court decided that where an adjudicator has determined the notified sum, and ordered a payer to pay the payee in full in respect of their final account application, the payer is still entitled to refer the dispute as to the true value of the works to a subsequent adjudicator.

The judge explained that “where the ‘notified sum’ determined in adjudication is in respect of a final payment, unless the contract provides that such payment is conclusive as to the contract sum due, although the ‘notified sum’ must be paid, either party is entitled to have the ultimate value of the contract sum determined in a subsequent adjudication”. This decision meant that Kilker was able to enforce the second adjudicator’s decision for repayment of £55,000 (plus fees and expenses).

One common question in the industry has been as to why the position in respect of final accounts should be different to that for interim payments. The court clarified that “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”. Whether this truly puts the issue to bed will remain to be seen, particularly as this related to an oral contract with the Scheme for Construction Contracts applying, rather than one of the standard forms in common use.

For the time being at least, employers and main contractors will breathe something of a sigh of relief that they appear to have the right to have the true value of the works determined in a second adjudication. However, these cases should act as a lesson that the employer should issue their payment and/or payless notices correctly in the first place to avoid the need to pay out sums in the meantime, the cost of multiple adjudications, and the uncertainty of a potential court hearing.

The content of this article is for general information only. For further information regarding payment disputes, please contact a member of our Construction Team. Law covered as at January 2017.