Against the backdrop of Carillion, parties need to keep in mind issues of payment upon termination of a construction contract.
A recent Court of Appeal decision has confirmed that section 111 of the Construction Act applies to payments due after termination of a contract.
A party must give a pay less notice if it wants to pay less than the claimed amount, even if the underlying contract has been terminated.
Adam Architecture v Halsbury Homes
In October 2015 Halsbury Homes accepted Adam Architecture’s fee proposal for architectural design services on a development in Norfolk.
Following a number of weeks of work by Adam, Halsbury emailed the firm at the start of December 2015 to state that it would proceed with an alternative architect, though Adam would still be used for house styles.
As its fee proposal was based on providing a full service, Adam stopped work and emailed an invoice for the work it had already carried out. Halsbury served no pay less notice and did not pay the invoice.
Adjudication was commenced; the adjudicator found in Adam’s favour due to the lack of a pay less notice and awarded £45,490 plus interest.
The parties then embarked on further proceedings: Halsbury for a declaration that the pay less regime did not apply to the post-termination invoice, and Adam to enforce the adjudicator’s decision.
The court found in favour of Halsbury, as Adam had accepted Halsbury’s repudiatory breach of contract. As the contract had been discharged the parties were not required to perform their obligations under the contract. Adam appealed the decision.
The Court of Appeal found that Adam had not accepted the repudiatory breach of contract but had treated the communication from Halsbury as termination without notice, stopped work and submitted an invoice for work up to termination (an account following termination pursuant to clause 5.17 of the RIBA Conditions, which Adam’s contract was subject to).
Adam was not claiming damages for breach of contract but for sums due under a contract for work actually done (the Court of Appeal stated that Adam was “scrupulous” in claiming sums).
The Court of Appeal confirmed that section 111 of the Construction Act applied to interim payments and to payments following completion of the works or termination of the contract.
“Contractors should be aware of their options and act if their employer fails to serve a pay less notice”
The Court of Appeal determined in its judgement that it seemed “clear that section 111 relates to all payments which are ‘provided for by a construction contract’, not just interim payments”.
Halsbury was therefore under an obligation to pay the amount claimed in the absence of any pay less notice and to therefore pay what was ordered by the adjudicator as, in the words of the Court of Appeal, “the adjudicator’s decision was plainly correct and enforceable”.
In its judgement, the Court of Appeal stated that it “would do a disservice to the construction industry” to “give a judgement which disregards the relevant statutory provisions”.
Carillion’s collapse and terminating contracts
With the collapse of Carillion and potential resultant terminations, parties need to keep in mind issues of payment upon termination of a construction contract.
Employers need to issue a pay less notice in response to sums claimed if they do not wish to pay such sums and contractors.
Even with JCT contracts where it is stated that no further sums are due following termination, it is advisable to issue a pay less notice on that basis in the event of any application made by the contractor.
Contractors should be aware of their options and act if their employer fails to serve a pay less notice.
Termination does not bring all matters to a close with no further action required, and parties should be aware of actions that may occur following termination so they can act or respond appropriately.
Ian Smith is an Associate at Fladgate