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Construction Law: Pay Less Notices and Interim Payments

Following on from our recent article regarding the failure to serve a Pay Less Notice in respect of a final account (“Failure to serve a “Pay Less Notice” not fatal”), the Technology & Construction Court last week clarified that such notices are essential in respect of interim valuations, as opposed to the final account.  The court also clarified that an employer generally was not allowed to launch a subsequent adjudication seeking a “true” valuation of the interim application in respect of which it failed to serve a Pay Less Notice.

In Kersfield Developments (Bridge Road) Ltd v Bray and Slaughter Ltd [2017] EWHC 15 (TCC), the claimant employer appointed the defendant contractor under an amended JCT Design & Build Contract 2011 Edition, to carry out construction works in respect of a housing development in Bristol.  The contract sum was £4.9 million.

Bray issued its interim application 19 for payment in the sum of £1.2 million, but Kersfield failed to serve a Pay Less Notice within the agreed timeframe.  Kersfield failed to pay in full by the final date for payment, so Bray suspended the works and issued adjudication proceedings.  The adjudicator awarded the contractor £1.1 million on the basis that its interim application was valid and that no valid Payment or Pay Less Notice had been served.

When the contractor sought to enforce the adjudicator’s award, Kersfield issued court proceedings seeking, amongst other things, a declaration that it was entitled to refer the matter to adjudication for a determination of the true valuation of interim application 19.

The court found for Bray, and rejected the arguments of Kersfield:

  • Consistent with a series of decisions form the TCC, the court confirmed that, certainly in respect of a JCT Design & Build 2011 Edition contracts, an employer is usually precluded from subsequently challenging the value of an interim application if no Payment or Pay Less Notice has been served in accordance with the contract.
  • Notwithstanding the right to refer a dispute to adjudication “at any time”, the court said at paragraph 95 of its judgment that:
    “…where a particular interim payment has been fixed by the default notice mechanism under the contract, there is no contractual basis on which to revise that payment by reference to a proper valuation of the works and therefore there is no relevant dispute that can be referred to adjudication”.
  • Accordingly, in the circumstances there was no “dispute” for the employer to refer to adjudication.
  •  The appropriate way to deal with overpayments in interim applications is to deal with these in subsequent interim payments or at final account stage.

Accordingly, judgment enforcing the adjudicator’s award was granted to the contractor Bray.

It is worth observing that the dispute, and the subsequent adjudication and High Court proceedings which it created, appears to have been caused primarily by the employer missing by a matter of hours the deadline to serve a Pay Less Notice.  To be valid the notice had to be served on or before Friday 12 August 2016.  The employer’s agent, apparently working late into the night on Friday 12 August, emailed the notice to the contractor at 9.50pm.  The contract however provided that notices delivered by email after 4pm on a business day were deemed served on the next business day.  Accordingly, because it wasn’t emailed earlier on the Friday, before 4pm, Kersfield’s Pay Less Notice was deemed served on Monday 15 August 2016, and therefore was late.

This is a timely reminder of the strict requirement, particularly in respect of construction contracts, to ensure that notices and certificates are served in time and in accordance with the contract provisions.  The failure to do so can lead to complex and  expensive legal proceedings.

It should be noted that this case related to a JCT Design & Build contracts, and most of the cases in recent times decided by the TCC have involved this suite of standard form agreements.  It may be the case that other forms of standard contract, or indeed bespoke construction agreements, would be decided differently in respect of some aspects of the issues in Kersfield v Bray.

You can read the full Judgment here.

If you would like to discuss further, please contact Desmond.Carr@tughans.com or any member of our construction team.

While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.