Construction Act 'pay less' notice requirements apply equally to termination payments, appeal court rules

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Construction Act 'pay less' notice requirements apply equally to termination payments, appeal court rules

The Construction Act requirement to give notice of intention to pay less than the sum set out in a demand for payment applies to payments due when a contract is completed or terminated, in the same way as it applies to interim payments, the Court of Appeal has ruled.10 Nov 2017

Adam Architecture was seeking to recover fees due from a housing developer, Halsbury Homes, after the parties had terminated their contract due to a disagreement over Adam's role. Halsbury disputed the total amount due but had not served a 'pay less' notice or made any payment, so an adjudicator had ruled in Adam's favour.

In 2016, the High Court ruled that the pay less regime did not apply in the case, on the grounds that a termination payment is not a 'notified sum' as defined by the Construction Act. The Court of Appeal has now overturned this judgment, finding that the relevant section 111 of the Act contains no such restriction.

Giving the judgment of the appeal court, Lord Justice Jackson said that this conclusion was based on "the language of the statute".

"Section 109 is expressly limited to interim payments," he said. "The same is not true of sections 110, 110A, 100B and 111."

"If I look at the language of the statute, both as it was and in the current version, it seems to me clear that section 111 relates to all payments which are 'provided for by a construction contract', not just interim payments. I do not think that it is permissible to read into that perfectly sensible and workable provision words which are not there," he said.

Halsbury was therefore required to "pay whatever the adjudicator orders, but can argue about it later and claw back any overpayment" via a binding dispute resolution procedure, such as arbitration or litigation, the judge said.

The Court of Appeal declined to rule on whether Halsbury's email informing Adam that it was working with another architect on the project was a repudiation of the contract between the two. However, even if it had been, Adam had not accepted the repudiatory breach, it ruled.

Construction disputes expert Lawrence Davies of Pinsent Masons, the law firm behind Out-Law.com, described the decision by the Court of Appeal as "surprising and rather disappointing". The court had "confirmed what we had always assumed to be the case", without addressing more significant questions the construction industry was still grappling with about the scope of section 111, he said.

"We had always assumed that section 111 applies to all payments under a construction contract, not just interim payments," he said. "It matters not whether the application for payment is an interim account, or a final account at the end of a project, or an account following termination. If the payer has an objection to the account he must serve a pay less notice or he will be required to make full payment and then seek recovery: 'pay now, argue later'."

"However, we still don't know whether the Court of Appeal considers the High Court's 2014 decision in ISG v Seevic to be correct. Lord Justice Jackson's judgment makes reference to his previous decision in Harding v Paice, which had proceeded on the basis that section 111 applied to a termination account. In that case, the Court of Appeal confirmed that a payer who fails to serve a pay less notice in respect of a termination account can still challenge its underlying value in adjudication," he said.

"In doing so, the Court of Appeal cast considerable doubt on the important ISG v Seevic decision, which precludes such a challenge in respect of an interim account, but it failed to confirm whether ISG v Seevic was right or wrong. Despite a further Court of Appeal decision on the application of section 111, we still do not know the answer to that vital question," Davies said.