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Court of Appeal guidance on failure to serve payment and payless notices
Matthew Harding (t/a MJ Harding Contractors) v Paice and another 
Over the course of the past year, three cases1 have come before Mr Justice Edwards-Stuart presenting the all too familiar scenario whereby the contractor notified the sum due in a payment notice, and the employer failed to serve either a payment notice of its own, or a payless notice.
On 1 December 2015, the Court of Appeal provided for the first time authoritative guidance on the practical effect of any failure to serve payment notices and payless notices in response to applications for payment in the context of contractor’s termination accounts in its decision in Matthew Harding (t/a MJ Harding Contractors) v Paice and another  EWCA Civ 1231.
The purpose of this 54th (and final) issue of Insight of 2015 is to consider the new guidance that has been provided by the Court of Appeal in relation to final accounts, and the practice points arising.
Harding v Paice
Mr Paice and Ms Springall (together “Paice”) were property developers who engaged MJ Harding (“Harding”) to carry out residential works to two properties in Surrey under a JCT Intermediate Building Contract 2011 (with amendments) (“the Contract”) in March 2013.
Work commenced the following month, but the relationship between the parties quickly deteriorated and Harding gave notice to terminate the Contract in January 2014. The contractual termination provisions provided that
(i) Harding was required to submit a final account in respect of work it had carried out, including the total value of the work properly executed up to the date of termination (under clause 8.12.3);
(ii) Paice was to pay the amount that was “properly due” in respect of the account within 28 days of submission of its final account (under clause 8.12.5); and
(iii) Paice had the option to commence adjudication or litigation proceedings within 28 days of the issue of the Final Certificate, in which event the Final Certificate would cease to be conclusive (under clause 1.9).
Paice failed to pay Harding’s final account, and Harding commenced adjudication proceedings. Harding claimed it was entitled to the sum due in its final account, which became the sum “properly due” under clause 8.12.5 of the Contract as Paice had not served a payless notice.
Paice issued counter-adjudication proceedings in an attempt to re-value Harding’s final account, and Harding applied for an injunction in an attempt to prevent Paice’s counter-adjudication proceeding. In its injunction proceedings, Harding argued the failure by Paice to serve a valid payless notice made the sum in its final account the sum that was “properly due” under clause 8.12.5 of the Contract. In the alternative, Harding asserted that the substance of its final account had already been referred to adjudication and could not therefore be revisited.
Decision at first instance
Briefly,2 Mr Justice Edwards-Stuart noted the adjudicator had proceeded on the basis that if Paice wished to pay less than the sum of Harding’s final account, it was obliged to serve a valid payment notice, in default of which, Paice was committed to the amount stated in Harding’s final account.3
In the instant case, Mr Justice Edwards-Stuart highlighted that clause 8.12.5 was slightly unusual, because unlike the interim payment machinery in the Contract, it required the employer to pay the amount “properly due” in respect of the final account; it did not require the employer to pay the amount stated in the final account, as this would operate to prevent the reckoning process that is inherent in final accounts taking place.
Mr Justice Edwards-Stuart found the adjudicator’s decision in the context of the final account to be incorrect, as it would deprive the employer of the right forever to challenge the contractor’s final account. Taking the worst case scenario, if the contractor had overvalued its final account, the contractor would receive a windfall to which he was not in fact entitled, and more importantly, which the employer could never recover.
Applying this finding to the facts, Mr Justice Edwards-Stuart held that the adjudicator had not, as a matter of fact, determined the amount that was “properly due” to Harding under clause 8.12.3, as a result of which Harding’s case failed at first instance on the facts.
Issues on the appeal
Harding appealed to the Court of Appeal on two issues. The first was whether the adjudicator had jurisdiction to decide the dispute because it was the “same or substantially the same” as that which had already been decided, as the adjudicator had already decided the “amount properly due” in respect of the final account. In the event the adjudicator had not decided the “amount properly due” (because his finding centered on the absence of a payless notice), whether he had still been asked to (and did) decide that issue.
The second issue before the Court of Appeal was whether paragraph 9(2) of the Scheme was engaged, which provides an adjudicator must resign when the dispute is the same or substantially the same as one which has been referred to adjudication, and in respect of which a decision has already been made.
Decision of the Court of Appeal
Taking the latter issue first, Lord Justice Jackson, delivering a unanimous judgement, commented that it was quite clear from the authorities that the dispute (or disputes) that are referred to a first adjudicator should not be looked at in isolation: what the first adjudicator decided also has to be considered. Once this aspect has been examined, it can be determined how much (or how little) remains available for consideration by a later adjudicator. Applying this to the facts, Lord Justice Jackson found that as a matter of construction, the word “decision” in paragraph 9(2) of the Scheme means “decision in relation to that dispute”.
As for the first issue, although the adjudicator had reached a decision in relation to the failure to serve a payless notice (which was a contractual issue), he had not reached any decision in relation to the value of the final account, (which was a separate valuation issue). Accordingly, the valuation issue could properly be dealt with by a later adjudicator. In practical terms therefore, the employer’s failure to serve a valid payless notice meant the employer had to pay the full amount shown in the contractor’s account, and (in the words of Lord Justice Jackson) “argue about the figures later”.
In his judgment, His Lordship emphasised it was not necessary to undertake a detailed analysis of the decision of Mr Justice Edwards-Stuart in ISG Construction Ltd v Seevic College (which concerned a failure to serve a payless notice in the context of an interim account), but there were a few pertinent points that were worthy of mention. It was Mr Justice Edwards-Stuart’s finding that if an employer fails to serve the relevant notices, it must be deemed to have agreed the valuation stated in the relevant interim application, and that accordingly, the adjudicator must be taken to have decided the question of the value of the work carried out by the contractor for the purposes of the interim application in question.
What is crucial to note is that Mr Justice Edwards-Stuart made clear that the agreement as to the amount stated in an interim application (and therefore, the value of the work on the relevant valuation date) could not constitute any agreement as to the value of the work at some other date. In practice therefore, it is not open to an employer to bring a second adjudication to determine the value of the work at the valuation date of the interim application in question, but there is nothing preventing the employer challenging the value of the work at the next application, even if he is arguing for a figure that is lower than the unchallenged amount stated in the previous application.
Lord Justice Jackson emphasised that there is a crucial difference between ISG Construction Ltd v Seevic College (which relates to interim accounts) and Matthew Harding (t/a MJ Harding Contractors) v Paice and another (which relates to final accounts). In the case of final account following termination of the Contract, clause 8.12.5 requires an assessment of the amount which is “properly due in respect of the account”, and expressly permits a negative valuation. Notably, Lord Justice Jackson declined to comment on the position in relation to interim applications on the basis that special conditions apply to interim payments. He was not specific on this point, but commented that mistakes can be put right at the next payment application.
Practice points arising
- Following the decision of Lord Justice Jackson in the Court of Appeal in Matthew Harding (t/a MJ Harding Contractors) v Paice and another, in the case of final accounts, the payment amount is the sum which is “properly due” in respect of the final account, irrespective of the service of any payless notice.
- Following the decision of Mr Justice Edwards-Stuart at first instance in ISG Construction Ltd v Seevic College  EWHC 4007 (TCC) (as clarified by Mr Justice Edwards-Stuart in Galliford Try Building Ltd v Estura Ltd  EWHC 412 (TCC))4, the position currently in the case of interim accounts is that the amount of the interim payment is the sum which is stated to be due in the interim payment application, and any necessary adjustments can be dealt with at the next interim payment application.
The judgment of the Court of Appeal in Matthew Harding (t/a MJ Harding Contractors) v Paice and another is notable not only for what it decided, but also for what it declined to decide.
Although Lord Justice Jackson provided authoritative guidance in relation to final termination accounts, he stopped short of providing any additional guidance in relation to the position in relation to interim payments. Interim payments are currently dealt with by the first instance authority of Mr Justice Edwards-Stuart in ISG Construction Ltd v Seevic College  EWHC 4007 (TCC) in which the court held an employer’s failure to serve a payless notice in relation to an interim account would not prevent it from commencing later adjudication proceedings to determine the value of the works as at the date of the interim payment application.
Whether the Court of Appeal would follow the same reasoning as Mr Justice Edwards-Stuart in ISG Construction Ltd v Seevic College EWHC 4007 (TCC) if it is called upon to revisit the position in relation to interim accounts remains to be seen. For the time being at least, the position regarding interim payments and final accounts is inconsistent in regard to compliance with notice provisions.
In the case of interim payments, there is a very strict requirement to comply with the contractual obligation to serve a payless notice. In the case of final accounts, the failure to serve a payless notice (in breach of contract) is not fatal on the basis that termination is a valuation issue, not a contractual issue, albeit this does not rest easily with the contractual notice provisions. Whether the courts will again be troubled by the distinction between interim payments and final termination accounts next year, and if so, the approach that will be taken, remains to be seen.
In the meantime, we wish the readers of Insight a Merry Christmas and a prosperous 2016.
1. ISG Construction Ltd v Seevic College  EWHC 4007 (TCC), Harding (t/a M J Harding Contractors) v Gary George Leslie Paice Kim Springall  EWHC 3824 (TCC), and Galliford Try Building Ltd v Estura Ltd  EWHC 412 (TCC).
2. The decision of the court at first instance is dealt with in detail in the 42nd issue of Insight.
3. Incidentally, Mr Justice Edwards-Stuart followed the same line of reasoning in his judgment in ISG Construction Ltd v Seevic College EWHC 4007, albeit that decision concerned an interim account, not a final account. See further the 42nd issue of Insight, supra.
This article was published by Fenwick Elliot on 17/12/15.
How do I use the County Court to recover money owed?
If it is necessary for your company to issue court proceedings to recover money owed to it, then a claim can be issued in the County Court. This article outlines the procedure.
Letter of Claim and Pre-action protocol
Before a claim is issued in the County Court, the company making the claim (called the “claimant”) will need to write a letter to the company which owes the money (the “defendant”) asking for payment and giving details of why it is claimed the money is owed. This is not only a matter of common sense but is required by the Pre-Action Protocol Practice Direction under the Civil Procedure Rules: if a claim is issued in the County Court before the appropriate “pre-action protocol” has been followed then the party responsible for not following the protocol may be penalised by being ordered to pay some of the legal costs of the other party. The Practice Direction (available at http://www.justice.gov.uk) defines a number of protocols for different situations (construction and engineering disputes, personal injury, etc.) and also contains guidelines to be followed in cases (such as disputes involving IT) where no specific pre-action protocol applies.
The first step in every case is the sending by the claimant of a Letter of Claim which gives sufficient concise details of the basis of the claim and encloses essential documents such as the contract under which money is due, and the purpose of the protocols and guidance is to ensure that both parties understand each other’s positions and to ensure that the defendant has the opportunity to investigate the matter and pay the amount claimed before court proceedings are issued by the claimant.
When Pre-Action Protocols were introduced in 1999 it was hoped that they would lead to many more cases settling before court proceedings were issued. However in practice many defendants do not seriously consider settling until court proceedings are issued. This is because in most cases where the claim is for a fixed sum of money, up until 14 days after court proceedings are issued and the defendant receives the Particulars of Claim, the defendant has the option of paying the money claimed plus a relatively small amount of “fixed costs”; it is only after 14 days have expired that the defendant may become liable to pay more substantial costs.
So given that statistically a substantial proportion of claimants who threaten court proceedings do not actually go on to issue proceedings, most defendants will wait and see whether the claimant issues proceedings and will seriously consider paying up only after they receive the Claim Form and Particulars of Claim from the court.
Nevertheless correspondence under the Pre-Action Protocol is still of value, even if it does not avoid the necessity of issuing proceedings, because it should reveal what the defendant’s defence (if any) is likely to be, thus enabling the claimant to reassess, in the light of the likely defence, the likelihood of the claim succeeding, before the final decision to issue proceedings is made.
If correspondence between the parties under the pre-action protocol fails to resolve the matter then the next step is for the claimant to send a Claim Form to the appropriate court.
Which court is appropriate depends on whether or not the dispute involves issues or questions which are technically complex. For example if the defendant’s reason for not paying is that the defendant claims that the claimant was late in delivering IT equipment and there is a dispute over the contractual date for delivery, then no technically complex issues are likely to arise.
But, to take another example, if the defendant’s reason for not paying is that the defendant alleges that the IT software development services provided by the claimant were not carried out with reasonable skill and care, and the defendant relies, as evidence of the lack of care and skill, on the fact that the result is software which does not perform satisfactorily, and if the claimant’s case is that the poor performance of the software was due to the fact that the defendant insisted, against the claimant’s advice, on a particular design option, then technically complex issues are likely to be involved.
Where the case is technically complex, the Claim Form is addressed to the Technology and Construction Court at the nearest Court centre which has a TCC court (Birmingham, Bristol, Cardiff, Chester, Exeter, Leeds, Leicester, Liverpool, London, Mold, Newcastle, Nottingham, or Salford, Sheffield, or Winchester). Otherwise the Claim Form will generally be sent to any County Court which is convenient for the claimant.
Claim Form and Particulars of Claim
The Claim form sent to the court is accompanied by a document known as the Particulars of Claim together with the court fee (Issue Fee) which ranges from £30 for claims under £300 to £1,530 for claims over £300,000.
The Claim Form sets out some basic information about the claim such as the names and addresses of the parties, the amount claimed and briefly what the claim is about. The accompanying Particulars of Claim sets out the claim in greater detail.
It must comply with the requirements of Part 16 of the Civil Procedure Rules and it must contain assertions of each essential element of the rule of law under which the claim is made. This is most important as if any element is lacking the defendant can apply to the court to have the claim “struck out” before the claim goes to trial. Because of the critical nature of the Particulars of Claim, it is usually drafted by a barrister.
The County Court will send a copy of the Claim Form and Particulars of Claim to the defendant and the defendant then has a limited time (usually between 14 and 28 days) to decide whether to admit the claim (i.e. agree that the money claimed is owing) or else to send a document known as a Defence to the court. Similar strict rules apply to the drafting of the Defence and, again, it is usually drafted by a barrister.
In the case of a claim for money owed under a contract for services, the Defence might be that the claimant has breached the contract (e.g. by providing sub-standard services) so that the loss which the defendant has suffered as a result of the claimant’s breach should be “set off” against the amount which would otherwise be owed by the defendant to the claimant.
Sometimes the defendant will go further than simply defending the claim and make a Counterclaim against the claimant alleging that the claimant should pay money to the defendant. An example of when this might apply is where the defendant claims that the loss caused by the claimant’s breach exceeds the amount otherwise owed to the claimant. If there is a counterclaim then the Claimant will send a document named “Defence to Counterclaim” (or “Reply and Defence to Counterclaim”) in response.
The purpose of the exchange of these legal documents (collectively known as Statements of Case) is to ensure that both parties, and the court, know the precise nature of the legal claims of the parties, which basic facts are agreed, and which are disputed.
The next step is the Allocation Questionnaire which the court sends to each party. Every case in the County Court is allocated to one of three tracks:
The Small Claims Track
The Fast Track
Generally claims up to £5,000 are allocated to the Small Claims Track, claims of between £5,001 and £25,000, where the trial is unlikely to last more than one day, are allocated to the Fast Track, and claims of more than £25,000 (or where the trial is likely to last more than one day) are allocated to the Multi-Track.
The Court does, however, sometimes allocate cases to a different track to the one normally appropriate (for example a case which raises difficult questions of law may be allocated to the Fast Track even if the amount claimed is less than £5,000) and one of the purposes of the Allocation Questionnaire is to give the parties the opportunity to indicate which track they think the case should be allocated to.
The main practical difference between the tracks is in the amount of court involvement in preparation for the trial. In cases on the Multi-Track the court will as a matter of course require the parties to attend a Case Management Conference at which a judge will review the steps taken by the parties in preparation for the trial and decide what further steps need to be taken, and there will often be other hearings such as a pre-trial review before the trial itself takes place. Such hearings are designed to save time at the trial itself.
In the case of the Fast Track where the trial itself will last no more than a day, it would be disproportionately costly to hold pre-trial hearings in every case, and often the court’s involvement in pre-trial preparation is limited to giving directions in writing when the Allocation Questionnaire is returned by the parties, and later in response to the Pre-Trial Checklist.
In the case of the Small Claims track, less preparation is required of the parties (for example normally each party will only be required to provide the other party with copies of documents that the first party intends to use at trial and, unlike in the Fast Track and Multi-Track, not with every relevant document which the first party has) and the court’s pre-trial intervention is normally limited to giving written standard directions when the Allocation Questionnaire is returned by the parties.
Cases allocated to the Small Claims Track are tried by a District Judge. Multi-Track cases are tried by a more senior judge (Circuit Judge). Fast Track cases can be tried by either level of judge but are usually tried by District Judges.
When making a decision as to which Track the case should be allocated to the court will also give “directions” as to how the parties should prepare for trial. Most directions are standard (e.g. the parties will be directed to exchange witness statements by a specified date) but the Allocation Questionnaire gives the parties the opportunity to ask for additional special directions (e.g. that one party provide a copy of a specified document to the other party – an important direction if the claim is likely to be allocated to the Small Claims Track where disclosure of all relevant documents is not automatic). An Allocation Fee of £200 is payable to the court by the claimant when the Allocation Questionnaire is returned.
Claims in the Technology and Construction Court are automatically on the Multi-Track (even if the claim is for less than £25,000) and are heard by a specialist TCC judge. In a TCC case therefore there is no “Allocation Questionnaire” as such but instead a Case Management Information sheet is completed by the parties before the Case Management Conference.
At any point in the proceedings (or even before proceedings have been issued) either party may make an offer to the other party. For example, if the claimant is claiming £75,000, the defendant might make an offer to settle the case for £60,000. If the claimant accepts the offer then that is the end of the case; if not it will proceed to trial in the normal way. A claimant can also make an offer so that, for example a claimant claiming £100,000 can make an offer to accept £90,000. Most offers are headed “without prejudice save as to costs”.
Without Prejudice offers, if not accepted, cannot be referred to in the court proceedings. The rationale for this is that if a party knew that the offers it made could be shown to the judge hearing the case, the party would be less likely to make the offers in the first place. It is considered to be in the public interest for parties to settle their differences out of court if possible and the ability to make Without Prejudice offers helps to facilitate settlement.
An offer which is “without prejudice save as to costs” cannot be shown to the judge before he pronounces judgment, but once judgment has been given, the “without prejudice save as to costs” offers, which are normally drafted in the form set out in Part 36 of the Civil Procedure Rules, are shown to the judge and can be taken into account by the judge in deciding whether to order one party to pay the other’s costs in Fast Track and Multi-Track cases.
Normally in such cases the party which loses will be ordered to pay all or most of the costs of the party which wins. However, if, for example, the claimant is claiming £200,000 and, fairly early on in the proceedings, the defendant offers to settle for £150,000 but the claimant rejects this offer, and if, at trial, the claimant only obtains judgment for £140,000, the claimant may be ordered to pay most of the legal costs which the defendant has incurred after the date that the claimant rejected the £150,000 offer. This is because, although the claimant company has won, it has recovered less than it was offered and so the costs incurred after the rejection of the offer are seen, with hindsight, as being unnecessarily incurred.
About 3 months before the time set for the trial in a Fast Track or Multi-Track case (but not in a Small Claims Track case) the court will send the parties a Pre-trial Checklist the purpose of which is to confirm that the parties are ready for trial. A Listing Fee of between £25 and £1,000 (depending on the amount of the claim and which track it is allocated to) is payable to the court by the claimant when returning the Pre-trial Checklist.
On the date set for the trial, the parties, their barristers and their witnesses attend the court and, after hearing the evidence of the witnesses and their cross-examination by the other side’s barrister, reading the documentary evidence, and hearing the arguments presented by each party’s barrister, the judge will give a reasoned judgment explaining which party he finds for and why. In cases lasting one day the judge will often give judgment the same day but in longer cases it is common for judgment to be “reserved” – i.e. the judge will take some days to consider his judgment and the parties are then notified of a later date on which the judgment will be delivered.
Once the claimant has judgment in his favour, the defendant will, in the great majority of cases, pay up within the time specified for payment (normally 14 days from the date of judgment). However if the defendant fails to pay the claimant can then seek a variety of court orders to recover the money. A Warrant of Execution is a common means of enforcement and results in court bailiffs seizing the defendant’s goods and selling them to realise the amount owed. Alternatives include a Third Party Debt Order (under which a third party owing money to the defendant – e.g. the defendant’s bank – is ordered to pay money direct to the claimant) and a Charging Order (placing a charge on land – e.g. office buildings – owned by the defendant).
The costs of legal advice and representation.
In Fast Track and Multi-Track cases it is usual to be legally represented. Lawyers cost money but in general you are more likely to succeed in your case if you are legally represented rather than representing yourself. As a general rule if you are successful and are awarded a sum greater than any offers previously made by your opponent, then the court will normally order your opponent to pay most of your legal costs (i.e. the court fees you have had to pay, the fees of your lawyers, any fees for expert witnesses, witness expenses etc.)
Conversely if you lose on the Fast Track or Multi-track you would normally be ordered to pay your opponent’s legal costs. It is important therefore to get the best legal advice, before commencing proceedings, as to the likely prospects of success.
For claims allocated to the Small Claims Track, however, although the unsuccessful party will normally be ordered to pay the successful party’s court fees and witness expenses, generally each party bears its own lawyer’s costs irrespective of which party wins. This rule creates a dilemma for claimants seeking to recover sums less than £5,000. If lawyers are engaged in the usual way their fees may eat a long way into (if not entirely wipe out) the amount eventually recovered. On the other hand if the claimant does everything himself without the benefit of any legal advice, that may reduce the chances of success as even apparently “open and shut” cases can have complications – not always easy to spot – for which legal advice is needed. Points to bear in mind, in small claims cases, include the following:
1. Going to a lawyer just for initial advice is much less expensive than being represented by a lawyer throughout the case, so it is normally justified even for a “small” claim.
2. As well as getting advice from a lawyer about how good your case is, it is important to get advice about how much the claim is worth. It may turn out that it is actually worth considerably more than £5,000 and so would be allocated to the Fast Track or Multi-track in any event.
3. It is also important to get advice from a lawyer as to whether there might be a counter-claim, what the risk of a counter-claim succeeding is, and how much might be claimed in the counterclaim. For example, if you have a claim for an unpaid invoice for goods you have sold, and the customer has been complaining about the goods and says that they are defective and that he has suffered loss as a result, before your issue a court claim for, say, £3,000 you want to know what the risk is of the customer succeeding on a counter-claim. If the customer has a good case, he could take the initiative and bring a claim against you anyway, but in practice they are far more likely to do that if you bring a case against them. There is a natural reluctance to go to court in the first place but if someone has already been taken to court, they may well then make a counter-claim, particularly as the form they will be sent by the court with your claim will specifically ask them whether they wish to make a counter-claim.
Barrister only or Barrister and solicitor?
If you are to be represented by a lawyer, should it be a solicitor or barrister or both? Up until 2004, barristers would only accept instructions via a solicitor so you had to have both a solicitor and barrister. Since 2004, however, it has been possible to go direct to a barrister without going through a solicitor. Going direct to a barrister means paying for one lawyer rather than two (or more than two because a solicitor’s firm will typically engage more than one fee-earner on the case) and can result in cost savings of up to 50%.
The essential difference between barristers and solicitors is this. Barristers represent clients in court, and draft the court documents (statements of case). The barrister’s experience in arguing cases in court enables him to give specialist advice on how likely a case is to succeed, and what amount of money is likely to be awarded by the court.
Although there may be a degree of overlap in practice, solicitors spend most time, on correspondence, telephone calls, collecting evidence and processing documents.
Part of the reason why there are cost savings in using a barrister directly, rather than a solicitor and barrister, is that, if engaged direct, a barrister will expect the client to carry out work (such as scanning in documents into files with a specific naming convention) which would normally be part of the work of a solicitor, so in return for saving money you would have to do a bit more work yourself.
Adjudicating On The Same Dispute
Section 108(iii) of the Housing Grants Construction and Regeneration Act (HGCRA 1996) is deceptively clear, it reads: ‘The contract shall provide that the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings by arbitration (if the contract provides for it) or by agreement’.
This would suggest that once an adjudicator has decided something then that is binding.
Section 9(ii) of the scheme reads: ‘An adjudicator must resign where the dispute is the same or substantially the same as one which has previously been referred to adjudication, and a decision has been taken in that adjudication’.
The nature of adjudication, its relatively short duration (when compared to litigation or arbitration) has led to parties cherry picking particular issues to be referred to adjudication, and then following up with further adjudications on other issues. One example might be an initial adjudication on the issue of extensions of time, followed by a subsequent adjudication on the issue of loss and expense arising from the extensions granted by the initial adjudicator.
In Sherwood & Casson Limited v McKenzie  Cill 1577 there was an initial adjudication relating to interim payments at the time of practical completion. Sherwood was successful. Sherwood then submitted a further referral which included very many of the same issues but also included a claim for loss and expense.
The respondents challenged the adjudicator and requested that he resign pursuant to section 9(ii) of the scheme (see above).
The adjudicator did not resign and rendered a decision in favour of Sherwood. This was resisted on enforcement but the judge upheld the decision, finding that whilst the first decision related to interim payments, the second concerned the final account and thus they were therefore different disputes.
Skanska Construction UK Limited v The ERDC Group Limited 2003 SCLR 296, the first adjudication had failed because the adjudicator considered that there was insufficient information to support the claims.
In a second adjudication relating to the final account in which further information was available, although the issue rejected in the first adjudication had reappeared in the second adjudication, the court ruled that by the time of the second adjudication a different stage of the contract had been reached, and different contractual provisions applied, more information was available and as a consequence ‘the fundamental nature and parameters of the dispute’ were different and the second adjudication decision was upheld.
In Lanes Group Plc v Galliford Try Infrastructure Limited trading as Galliford Try Rail2011 EWCA Civ 1617, the Court of Appeal was faced with the situation where Galliford Try had initiated an adjudication in March 2011, and the ICE had appointed a Mr Howard Klein.
Galliford’s solicitors then did not take the next step of serving the referral documents on the adjudicator, giving as their reason a robust clash that they had previously had with Mr Klein in an earlier case.
It is the service of the referral which vests an adjudicator with jurisdiction to proceed, and as Mr Klein did not receive such a referral that adjudication lapsed.
Galliford Try then proceeded to reapply to the ICE and a different adjudicator was appointed.
Although the Court of Appeal found this approach unattractive it concluded that there was no authority to suggest that where an adjudication lapses, the claimant as a consequence loses its right to adjudicate that particular dispute for all time, in effect because no referral was actually served. The dispute had not been referred to Mr Klein and as a consequence the prohibition in section 108 of the 1996 Act against multiple adjudications on the same point had been avoided.
Lastly, to return to the issue of serial adjudications, Carillion Construction Limited v Stephen Andrew Smith 2011 EWHC 2910 before Mr Justice Akenhead provides the most recent and authoritative guidance on how the courts, and adjudicators should examine disputes which are ostensibly separate claims but on closer analysis turn out to be the same dispute which has been resubmitted to a second or third adjudicator having already been decided by a first.
Akenhead J quoted from Benfield Construction Limited v Trudson (Hatton Limited)2008 EWHC 233.
The parties cannot seek a further decision by an adjudicator on a dispute or difference if that dispute or difference has already been the subject of a decision by an adjudicator.
The extent to which the decision is binding will depend on an analysis of the terms, scope and extent of the dispute or difference referred to adjudication, and the term, scope and extent of the decision made by the adjudicator. In order to do this, the approach has to be to ask whether the dispute or difference is the same or substantially the same as a relevant dispute or difference and whether the adjudicator has decided the dispute or difference (which is the same or fundamentally the same) as the relevant dispute or difference.
There does not have to be complete identity of factual and legal issues, the approach must be to determine whether they are substantially the same dispute or difference.
It is also important to decide what is the material part of an adjudicator’s decision, and what may be contained in his decision but which is not jurisdictionally part of the decision, in other words were obiter dicta.
This was the position in Redwing Construction Limited v Wishart 2010 EWHC 3366.
In the first adjudication between the parties there were two elements in dispute, the first was an extension of time claim, and the second was a consequential entitlement to the contract fee at the rate of £3,500 a week.
In the decision in the first adjudication, the adjudicator had expressed a view on an adjustment to the contract fee, however, there was, on close analysis, no referral to him by the parties of any issue to regarding such an adjustment.
As a consequence the issue of the adjustment of the contract fee could be raised in the second adjudication, and would not preclude a second adjudication on that issue proceeding.
Although serial adjudications have always been a characteristic of the process, if in reality they are attempts to adjudicate the same dispute, this is something that was clearly envisaged by and precluded by the wording of the Construction Act. Differences in quantum and the sheer size and complexity of documentation presented, should not prevent a respondent to a second adjudication from challenging the adjudicator’s jurisdiction if the reality is an attempt to re-adjudicate a dispute that has already been decided.
Partner Berrymans Lace Mawer
This article first appeared in the Confederation of Construction Specialists’ February 2012 newsletter
KNOW YOUR ENEMY… (Sun-Tzu)
I spent thirteen years working for a Specialist Contractor, and about 90% of my job was to do with valuing our works and making claims. We worked with nearly all the Big Builders, and I gained a lot of knowledge about how to and how not to make a claim, if I wanted us to get paid.
When it comes to getting paid, there’s not a lot of point in thrashing about mindlessly, or trying to impose your own invoicing methods on your client. You are wasting your energy and you still won’t get paid.
“The general, unable to control his irritation, will launch his men to the assault like swarming ants, with the result that one-third of his men are slain, while the town still remains untaken” (Sun-Tzu)
You’ll be ringing up Accounts Departments who are never there, and if they are, they will tell you they can’t send you any money because you didn’t follow procedure.
“The rule is, not to besiege walled cities if it can be avoided” (Sun-Tzu)
The way to avoid it is to know your client’s procedures better than they do and follow them exactly. Each client will have a different procedure so make sure you get to know each one individually.
“Supreme excellence consists in breaking the enemy’s resistance without fighting”
Provide the QS with solutions not problems. Make him want to look at your claim, because it tells him what he wants to know, in a way he can understand, in a format he can translate into his own claim to his own client. Make life easier for him and you make it easier for yourself.
“By holding out advantages to him, he can cause the enemy to approach of his own accord” (Sun-Tzu)
I’m picking up on one particular type of claim which I know causes a lot of confusion, and I’d like some feedback please: do you find this article helpful, and would you like more? Have you any questions. Any QS’s got any comments? That sort of thing.
OK there are a number of ways to make a claim:
- Send a VAT Invoice
- Send an Application for Payment
When you make an Application for Payment there are several different procedures that your client will use:
- Authenticated Receipt
VAC is my own abbreviation for Valuation Awaiting Certification. You can call it what you like because this third procedure has never been christened, but I call it VAC. It is the type of claim most likely to cause you problems so you need to make a special note if a client uses this method.
It usually goes like this:
- You apply for payment
- The QS sends you a payment certificate
- You send a VAT invoice conforming exactly to the certificate, attaching a copy of the payment certificate and sending it to the appointed place, often the Accounts Department at a different address
There are a lot of things to watch out for:
You may have claimed gross with discount showing, and they have certified an amount net of discount
They may switch discount and retention – don’t correct it or you’ll get the invoice back again
They may have permutations of this method, eg Ardmore won’t send you a payment certificate, because the QS sends it to their Accounts Department instead, who send you a payment with VAT. If you don’t then send them a VAT invoice matching the payment, you won’t get paid next time because the current payment is dependent on having received the invoice for the previous payment.
isg always use this method, except for a one and only time I know of, when they used the self-billing method for a particular project. So you need to be on your toes and talk to the QS before the job starts.
There are many main contractors who are thought to be bad payers, but when you familiarise yourself thoroughly with their methods and follow them, they pay like a dream.
It follows that unlike applying for payment with a client who uses a self-billing or authenticated receipt procedure, where you can send off the application and sit back and wait for the money (if you are lucky!), you need to actively be on the lookout for that payment certificate. I’ve known Accounts Departments receive VAC payment certificates and sit on them for months, not realising that an invoice needs to be sent back to the client. You need a robust system to follow up this type of application in a timely manner.
“The general who wins a battle makes many calculations in his temple before the battle is fought” (Sun-Tzu)
Remedies for Delay
“What can be done if a contractor is proceeding slowly but the contractual time for completion has not yet arrived? This question arose in the case of Leander v Mulalley decided by the TCC on 21st December 2011. The court held that it could not imply into the contract a duty to progress regularly and diligently even though there was an express right to terminate on those grounds.
The sub-contract in question permitted the main contractor to claim from the sub-contractor in respect of his breach of the sub-contract or if his actions interfered with the regular progress of the main contract works. Pursuant to this clause the main contractor had served withholding notices on the sub-contractor in respect of his alleged claims for damages for delay in his progress on the main contract works.
The sub-contract did not contain an obligation to proceed regularly and diligently but there was an express power to terminate the contract if progress was not being made in this way. The main contractor pointed as evidence of breach to failure to comply with the Activity Schedule annexed to the sub-contract in relation to which the sub-contractor was in delay.
The main contractor maintained that the sub-contract contained an implied obligation to proceed regularly and diligently and pointed to the power to terminate for this reason. However, the court disagreed and held that the termination clause did not assist the sub-contractor; by contrast, it indicated that the parties had chosen to make termination the only remedy for delay in the progress of the works prior to the completion date.
Further, if the sub-contractor did not complete by the completion date then damages for delay could be claimed. There was authority in the case of GLC v Cleveland Bridge (1984) that “In the absence of any indication to the contrary, a contractor is entitled to plan and perform the work as he pleases, provided always that he finishes by the time fixed in the contract”. There was no need to imply the term into the contract to give it business efficacy as remedies for delay were expressly provided elsewhere.
Had the main contractor wished to exercise greater control over the sub-contractor’s progress, an express duty to proceed regularly and diligently ought to have been inserted into the sub-contract. Some standard forms (for example, JCT Standard with Quantities) make such provision.
It is also noteworthy that the court found that if the withholding notices had properly related to a breach of the sub-contract, the main contractor could validly rely on the failure to comply with the Activity Schedule as evidence of lack of progress. Whilst the Schedule was not contractually binding, it was a useful tool to measure regular and diligent performance of the sub-contract works.
The sub-contractor could have taken his claims to adjudication but chose to issue in the High Court. This avoided the effect of a “Tolent” clause in the sub-contract requiring the sub-contractor to bear the parties’ costs regardless of the outcome. Although such clauses are now prohibited by the Construction Act 1996 as amended from 1st October 2010, they may still be found in contracts executed before that date.
Reproduced from their January 2012 e bulletin with kind permission of Herbert Smith
The NEC form — is it all it’s cracked up to be?
Roger Knowles reports on industry thinking about the New Engineering Contract.
March 2010 (BSEE First Published: 17 September, 2001)
The New Engineering Contract (NEC) was first published in 1991 by the Institution of Civil Engineers and revised in 1995. From slow beginnings it has become widely used and received a major boost when it was cited as the preferred form of contract by Sir Michael Latham in his report ‘Constructing the team’.
Now that this form of contract has a track record, it is an appropriate time for a review. A series of ten one-day seminars has recently been undertaken in the UK dealing with the NEC form. Many of the delegates had first-hand experience of using the form.
In workshop sessions, those who had used the form were asked to give their views in some detail of how successful they considered it to be. The views expressed are given under the following 10 individual headings.
Tender form and agreement
The NEC form does not come with a standard form of tender or agreement unlike the FIDIC forms of contract usually used for overseas work. This would seem to be something of a disadvantage, as it is necessary to draft these documents specially. The general consensus of opinion was that this was slightly inconvenient but did not prove in any way to be an obstacle.
The form provides for employer design with lump-sum agreements based on an activity schedule or bill of quantities; target contract with a shared risk using an activity schedule or bill of quantities; cost reimbursement and a management option.
There is also provision for full or partial contractor design. All those who had made use of the form appreciated this flexibility.
The forms do not specifically state what are to be regarded as the contract documents. It is clearly stated what constitutes the conditions of contract. There is, however, no reference to the tender or agreement being contract documents or, for that matter, where the specification, bill of quantities or activity schedule fit into the picture. Difficulties could arise where discrepancies between various documents occur. Which takes precedence and what is the contractor deemed to have priced? Those who had used the form were not aware of the potential problem, and it may be concluded, therefore, that there is no problem — unless, of course, a dispute arises.
A key feature of the form claimed by its authors is that it provides a stimulus to good management. The production of an up-to-date and realistic programme is a major item in the conditions. A programme must be submitted by the contractor within the timescale laid down in the contract, which begins to run from the date the contract is entered into. The programme must include such matters as the order and timing of each operation, provision for float, time-risk allowance and health-and-safety requirements. For each operation, the programme must include a method statement, which identifies the equipment and other resources the contractor intends to use. The project manager has two weeks to accept or reject the programme.
It was the unanimous view of all who had used the form that it is impossible to comply with these requirements. In most cases, the majority of the work was to be undertaken by subcontractors who had not been appointed by the time the programme was due to be submitted. The procedure which has, therefore, developed is for the programme to be submitted on a piecemeal basis.
The most popular clause with the delegates is the early-warning clause. Either the project manager or the contractor can require the other to attend a meeting following the service of an early-warning notice. The express purpose of the meeting is to discuss any matter which could increase the price or delay completion. It seems that this clause is being used frequently, and is most definitely helping to head off problems.
Unlike FIDIC conditions, there is no separate clause for extensions of time with the additional cost-recovery clauses spread throughout the form. There is one clause only, which deals with matters that entitle the contractor to both additional time and more money, referred to as ‘compensation events’. The number of compensation events runs to 18, with provision for optional additional ones. With the intention of keeping cost and time overruns under control, the contract requires the contractor to submit a quotation in respect of each compensation event, which includes, of course, variations to the works by the employer. If the programme is affected, the contractor is required to submit a revised programme.
The timescales laid down in the contract stipulate that the contractor must submit the quote and revised programme within three weeks of a request from the project manager, who has only two weeks to reply. It was the general view of those who had used the form that this clause is totally impractical. One delegate described it as a nightmare. The time scales in nearly every case went out through the window, and the parties did the best they could to reach agreement as soon as possible.
Increased contractors’ risk in the event of bad ground
The unforeseen adverse physical conditions clause in the FIDIC form is a notorious spawning ground for bad-ground claims. The test is whether the conditions encountered were reasonably foreseeable by an experienced contractor. If they are not, then the contractor is entitled to levy a claim. The NEC form is more onerous for contractors in that they must include in their price the risk of bad ground; only if adverse conditions arise which an experienced contractor would have judged to have a small chance of occurring, does an entitlement arise. It would seem that on most civil-engineering projects, the project manager is the old-school engineer who operates the clause as if it were the FIDIC contract.
Bonus for early completion
The provision for an early completion was popular with both those who represented employers and also contractors and subcontractors.
The core conditions make no provision for retention. If the employer intends to deduct retention, it is essential that the optional clause, which allows for the deduction of retention, is used. Needless to say, the absence of retention was popular with contractors, but unacceptable to all those who represented employers.
The NEC contract requires the employer, contractor, project manager and supervisor to act in a spirit of mutual trust and co-operation. It was felt that the presence of this clause made a difference for the better to the attitudes of the personalities involved with the project.
The generally expressed view was that, despite the shortcomings of the form, it was in most cases working well. The drawback is that due to the onerous aspects of the programming requirements and the time consuming nature of the compensation events clause, there is a need for an extra planner and quantity surveyor on projects where the NEC form is used.
If you are having a problem with the NEC contract or being asked to sign up to an NEC contract and simply haven’t got time to look for what you need, then why not use theAsk Streetwise feature on this site to ask our Virtual Team of experts for help with any question relating to the NEC contract?
Onerous Indemnity Clauses in Subcontracts
This a little article by an American lawyer so don’t get all excited about us changing the UK law any time soon. But it does serve to illustrate the dangers of indemnity clauses;
“Possible reprieve from the ever expanding indemnity clause…
Have you ever had a construction subcontract with an indemnity clause like this:
“Subcontractor shall indemnify, defend and hold harmless the Contractor, and its officers…from and against all liability, loss, cost or expense (including attorney’s fees) by reason of liability imposed upon the Contractor, arising out of or related to Subcontractor’s work or, whether caused by or contributed to by the Contractor, any third parties, or any other party indemnified herein.”
You can find yourself liable for property damage caused by others, OSHA fines caused by others environmental fines or damage.
You are on the hook for everyone.
All my construction clients are proud folks who will stand behind their work. A clause like this makes you assume the risk of parties beyond your control. Worse, the “arising out of the work” moves the standard from negligence to perfection. So if anything goes wrong (and in construction something will) and it arises out of or is related to your work you get to indemnify and defend.
Owners and developers often approach these clauses with a take it or leave it attitude. Let’s be honest these clauses are cooked up by bowtie wearing lawyers who want to reduce or eliminate their client’s liability. That’s why you get a lawyer to draft your contracts.
But on the other side subcontractors are caught between signing the contract and hoping that insurance will cover anything or fighting the clause and probably losing the job.
Well in the midst of all the hoopla in Austin there is a bill pending that we hope will pass. SB555 makes these clauses void as against public policy.
Sec. 502.002. AGREEMENT VOID AND UNENFORCEABLE. A provision in a construction contract is void and unenforceable as against public policy if it requires an indemnitor to indemnify, hold harmless, or defend another party to the construction contract, or a third party, against a claim to the extent that the claim is caused by the negligence, fault, breach or violation of a statute, ordinance, or governmental regulation or rule, or contractual breach of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor, its agent, employee, or subcontractor of any tier, and the claim arises from:
(1) bodily injury or death, except for the bodily injury or death of an employee of the indemnitor, its agent, or subcontractor of any tier;
(2) damage to property;
(3) any other type of damage; or
(4) a fine, penalty, administrative action, or other action assessed by a governmental entity directly against the indemnitee.
Each party would be liable for its own negligence and could not transfer liability by contract or other means. Good news for my construction clients and I hope it passes.”
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