Teal blue graphic

Is value irrelevant to interim payments?

The importance of payment and pay-less notices following the changes to the "Construction Act" is widely understood. If there had been any room for doubt, the decision last week of the Technology and Construction Court in ISG Construction Ltd v Seevic College emphasises just how crucial it is to issue the right notices at the right time.

In what many consider a surprising decision, the court ruled that the contractor's only entitlement to interim payments was to be paid the amount stated in its application or the lesser amount stated in the employer's payment or pay less notice. Where the employer's notices are served out of time "the employer has no right to seek a repayment of money paid to the contractor on the ground that either at the date of the last interim application or some subsequent date, the true value of the contractor's work was less than the gross amount stated in that application."

This has potentially far reaching implications where deadlines for payment notices are missed, particularly in the latter stages of a project.

The facts

ISG made an interim application to Seevic College for just over £1 million. The college failed to issue a payment notice and its pay-less notice, being late, was ineffective. Accordingly, ISG referred its application to adjudication and was awarded the full amount claimed. There are differing views in the industry on the merits of such claims, but the result is not surprising.

Predictably, perhaps, the college commenced its own adjudication relating to the value of the works at the time of the interim payment application. This time, the same adjudicator concluded that the amount due was just over £315,000 and that ISG should repay the balance awarded under his first decision.

As the college did not pay, ISG applied to the court to enforce the first decision, arguing that the second adjudication was void for want of jurisdiction.  

The decision

The Judge held that the second adjudication was indeed void, as the value of works for the purposes of the interim application was decided in the first adjudication. He also made clear that:

  • "if the employer fails to serve any notices in time, it must be taken as agreeing the value stated in the application, right or wrong."
  • Aside from the obligation to pay the notified sum "There is no other entitlement to payment under the contract… It follows that the contractor has no entitlement to be paid the value of his works at any arbitrary date during the course of the contract."
  • "The statutory regime would be completely undermined if an employer, having failed to issue the necessary payment or pay less notice, could refer to adjudication the question of the value of the contractor's work at the time of the interim application (or some later date)…"

The implications

Firstly, and most importantly, contractors and employers must ensure that they issue the right notices at the right times. According to the Judge, it is these notices, and not the value of the works executed, that will ultimately determine the amount of interim payments under a JCT DB 2011 form.

It is not clear whether the college would have been able to recover any overpayment in a subsequent interim payment (it is perhaps relevant here that the interim payment in question followed practical completion, albeit that it was before the final account). This should not present a problem in cases where the value of work done in the intervening period exceeds the overpayment. However, it will be more difficult where this is not the case.

The judgment appears to leave open the possibility of recovering any overpayment through the final account process. We suggest that this should be possible. To decide otherwise would be to place too much emphasis on the importance of notices over value.

Some commentators have said that this result will be welcomed by contractors. Whilst we can see their point, if the logic of the judgment is extended to its ultimate conclusion, what we may see is not a contractors' charter, but an employers' charter, at least where the correct notices are served. We will have to wait and see how the logic is applied in subsequent cases, and hope that a sensible view is taken.

The decision relates to the JCT DB 2011 form. However, its application could be far reaching. The reasoning will apply to any contract with similar terms and, given the wording of section 111 of the Construction Act it has the potential to apply to any contract subject to the Act.

To conclude, whilst this case raises more questions than it answers, the importance of complying with the payment regime under your contracts cannot be overemphasised. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2014. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.

Insights & events View all