A recent Court of Appeal decision has provided clarity regarding an employer’s right to adjudicate on the amount payable after the final payment application – even if they failed to issue a pay less notice.
The Court of Appeal has provided welcome guidance regarding an employer’s right to adjudicate on the amount payable in response to a contractor’s final payment application, despite failing to issue a payment or pay less notice.
The issue has been a topic of recent debate, following three controversial decisions of the Technology and Construction Court over the course of the past year or so.
Court of Appeal decision
The Court of Appeal held that a failure to issue a payment or pay less notice in response to a contractor’s final payment application will not prevent the employer from disputing the amount, but did not extend the same ruling to interim payments (Harding t/a M J Harding Contractors v Paice & Anor ).
Lord Justice Jackson considered the issue in the context of an appeal from the first instance decision of Mr Justice Edwards-Stuart in 2014, which concerned a contractor’s final application for payment following termination for default under the JCT Intermediate form.
The employers failed to issue a payment or pay less notice within the requisite timeframe, and the contractor successfully commenced an adjudication seeking payment of the full amount identified in the payment application.
“The amount payable had not been interrogated during the first adjudication and therefore it was open to adjustment in light of the court’s ruling that the employers were entitled to adjudicate its true value”
The court at first instance held that the employers were entitled to adjudicate the true value of the payment application, despite an earlier adjudication ruling that the employer was required to pay the specified amount.
The amount payable had not been interrogated during the first adjudication, therefore it was open to adjustment in light of the court’s ruling that the employers were entitled to adjudicate its true value.
Effect on other cases
Two subsequent decisions of Mr Justice Edwards-Stuart in ISG Construction Ltd v Seevic College  and Galliford Try Building v Estura Ltd  appeared not to accord with the Harding decision.
In both cases, the court considered the employer’s failure to serve a payment or pay less notice as required under the JCT form of contract in response to the contractor’s application for interim payment (rather than final payment).
The judge held that under the applicable JCT conditions, the failure to serve a pay less notice had the effect of fixing the amount of the interim payment, such that it could not be contested.
Mr Justice Edwards-Stuart was of the opinion that the decisions did not conflict because Seevic and Estura dealt with interim payments and Harding concerned payment on termination, both of which are addressed differently under the JCT contract form.
The Court of Appeal observed that the decisions in Seevic and Estura had taken a “somewhat different line” to earlier decisions of the court.
However, Lord Justice Jackson did not go as far as ruling that the decisions in Seevic and Estura were wrong, noting that construction contracts often contain special provisions for interim payments and therefore each must be examined in light of the applicable contractual terms.
The Court of Appeal’s decision provides greater certainty for employers that a failure to issue a payment notice or pay less notice will not bar subsequent adjudication of the true value of a final payment application.
For now, however, the opposite position remains applicable for interim payments, at least under the JCT Design and Build form – though we may expect that the Court of Appeal will give further consideration to that question in due course.
Eve Ormond is a senior associate at CMS London