Background

The “Notified Sum” regime in the Local Democracy, Economic Development and Construction Act 2009 (“the Act”) has been with us for some time. But, despite much blood, sweat and tears over the same, there has been little judicial clarification of many of its more opaque points, particularly with how work should be valued where no certificate has been provided.

However, three recent cases have now cast some light on this issue: • Harding v Paice and Springall • ISG Construction Limited v Seevic College • Galliford Try Building Limited v Estura Limited

Galliford Try Building Limited v Estura Limited [2015] EWHC 412 (TCC)

The last decision, again by Edwards-Stuart J, related to an interim application at the very end of a project.

Estura Limited (“Estura”) instructed Galliford Try Building Limited (“Galliford Try”) to carry out design and building works on a hotel in Devon. Works were carried out pursuant to a JCT Design and Build Contract 2011 under which Galliford Try issued an interim application requesting a further £4m. This interim application was described as an “indicative final account and valuation summary” and was effectively the full projected final account.

Estura argued that the sum due under the application was only £147,000 plus VAT. But it failed to serve a valid Payment Notice or Pay Less Notice, crystallising the amount specified in the application. Galliford Try commenced an adjudication for payment of the Notified Sum which Estura was ordered to pay.

Estura launched a second adjudication, challenging the amount claimed in the application and requesting a declaration as to the true amount owed. However, the second adjudicator resigned due to a lack of jurisdiction, saying that, in line with ISG v Seevic, it was not possible to "open up the question of what the proper value of works actually was” under an interim application.

However, Estura continued to refuse to make payment and the matter was referred to Court.

The decision

On considering the matter, Edwards-Stuart J clarified has judgement in ISG v Seevic, and in particular his decision that if an employer failed to serve the relevant notices under the contract then they must be deemed to have “…agreed the valuation in the relevant interim application, right or wrong.”

Edwards-Stuart J confirmed that, in order to avoid any confusion, any implied agreement as to the amount stated in a particular interim application did not constitute any agreement as to the value of the work at some other date.

While an employer can’t bring an adjudication to determine the value of the works at a valuation date of an interim application, that did not mean that the employer could not challenge the value of the work on the next application, even if he was contending for a figure that was lower than the (unchallenged) amount in the previous application.

That meant that Estura had the right to certify a new Notified Sum on receipt of the next interim application. However, they were not entitled to challenge the value of this interim application. On that basis, there was no defence to the application for summary judgment, and Galliford Try were awarded the sum claimed.

It should be noted that in this particular case, Galliford Try had effectively recovered everything they wanted by way of an interim application and had no need (or inclination) to issue a further application or submit a final account, which therefore prevented Estura from carrying out a proper valuation on the final account.

Accordingly, a proportion of the sums payable were stayed, partly to ensure that Galliford Try did, in fact, submit a final account to allow the works to be properly valued.

Implications

While the usual rule about “paying now, arguing later” still applies, the above decisions have confirmed that an Employer can still correct a failure to serve a Payment Notice or Pay Less Notice at the next application date. He can also properly value the works under the final certificate.

However, this will not necessarily resolve all of the issues which flow from a failure to serve a Notice. A speedy contractor with an overvalued application for payment could still force the employer to have to make a substantially inflated interim payment. Most contracts (including the JCT suite) don’t include a right to a repayment of an overpayment until the final certificate. So while a ‘negative’ payment notice could be issued, this may still leave the Employer out of pocket for some time, with a particular risk should there be an insolvency.

If nothing else, this case should act as a clear reminder to ensure compliance with a statutory and contractual payment regime. Project Managers and contract administrators will need to be on their mettle if they want to preserve their right to pay a different amount to that claimed.

What these decisions mean for you

Edwards-Stuart J’s judgment reminds Employers of the need to have strict procedures in place to ensure Payment Notices and Pay Less Notices are served on time, and in the correct format. It’s imperative that Employers put in place and maintain strict processes to ensure these are served.

It would also be wise for Employers to seek legal advice on having their contracts amended. Most standard form contracts don’t include a right to receive payment of any ‘overpayment’ until the final certificate. While a ‘negative’ payment notice could be issued, this may not result in a payment being due back to the Employer.

This judgment also emphasises the importance for Contractors to make sure that they submit valid Applications for Payment. The payments to ISG and Galliford Try would not have arisen had they not made Applications for Payment. The tactical advantage and potential benefit to a Contractor of making an Application shouldn’t be ignored.

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