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Employers miss payment notices at their peril

Three recent judgments by the head of the Technology and Construction Court have all confirmed the fundamental importance of employers serving payment notices within time.

Harding v. Paice & Springall (2014), ISG v. Seevic (2014), and Galliford Try v. Estura Ltd (2015), all concerned situations where a contractor application had not been followed up by service of an employer payment or pay less notice.

In such circumstances, the contractor application takes effect as the default payment notice, and the amount specified in it becomes the ‘notified sum’ which must be paid.

Where it is not paid, contractors can bring a claim for the full application value.

In some of the cases, the difference between the contractor application and the employer’s view of correct valuation (or a subsequent adjudicators view) was dramatically different.

In ISG, the contractor application was for £1.1m, but a subsequent adjudicator determined it as £0.3m.

The judge determined that the contractor was, in the absence of any employer payment notices, fully entitled to enforce the initial adjudication that had determined its interim payment entitlement at £1.1m.

He was fully aware that the adjudicator had expressly stated he had not considered whether ISG’s application at £1.1m represented the correct valuation.

Such situations are pejoratively described by some as “smash and grab” adjudications.

“The position these unlucky employers found themselves in is entirely avoidable”

However, the law is clear, and the position these unlucky employers found themselves in is entirely avoidable by timely service of their own payment, or pay less, notices.

The judge suggested that the statutory payment regime would be completely undermined if an employer, having failed to issue the requisite notices, could then refer the value of the contractor’s work to adjudication.

Such an approach would lead to parties engaging in successive adjudications about the value of interim applications.

In normal circumstances, any temporary “injustice” to an employer can be rectified in subsequent interim payment cycles.

But what happens if the interim payment application is so close to completion of the job, that the employer will not get the opportunity to recover the “over payment”?

In Galliford, the contractor got an adjudication for interim application number 60 in the sum of £3.9m, some £3.75m more than the employer’s view of the correct valuation.

The judge held that the employer could not challenge the validity of the adjudicator’s decision and had no defence to Galliford’s summary judgment application.

However, on the facts of this case, the judge recognised that Interim Application 60 was for an extraordinarily high amount – almost equal to the anticipated final account – which would lead to an early ‘windfall’.

He concluded it would be unfair to enforce the adjudicator’s award in full, but equally did not consider it was fair to stay the entire amount that had been awarded.

He ordered that payment of £1.5m be enforced immediately, with the balance stayed until further order.

In doing so, he appears to have been encouraging sensible further final account negotiations.

David Savage is a partner at Charles Russell Speechlys

Readers' comments (1)

  • What happens is that the employer should have produced a Payless Notice within the correct time period as required under the Act.

    At the same time, trying to get my head around an Application being valued at approx £3 million pounds more than the employer has valued it at.

    However, surely the correct procedure would have been for the employer to pay it all as the Act requires and go to litigation to recover any possible overpayment?

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