Pay less notices and maintaining the right to challenge the contractor’s account
It is perhaps surprising that there has been very little case law on the payment provisions that came into effect as a result of the amendments to the Construction Act 1996 in 2009. However, a recent decision from the TCC (Harding v Paice  EWHC 3824 (TCC)) provides some valuable insight into the operation of pay less notices and their status in relation to the sum “properly due” under the contract.
The contractor agreed to construct two houses for his developer client. The parties entered into a JCT Intermediate Building Contract, 2011 Edition (IC11) in March 2013.
Work started in April 2013 but by September 2013 the employer attempted to terminate the contract, alleging that the contractor had failed to proceed regularly and diligently with the works. The contractor disputed the employer’s right to terminate the contract.
On 30 November 2013, the contractor served notice that work had been suspended (under clause 22.214.171.124). The contractor subsequently terminated the contract pursuant to clause 8.9.3 on 3 January 2014. On 8 August 2014, the contractor submitted an account valuing the work at £797,859, with £397,912 (plus VAT) unpaid, due for payment by 6 September 2014.
Prior to September 2014, the parties had engaged in two unrelated adjudications. The contractor started the third on 1 September 2014. The contractor argued that as the employer had failed to serve a pay less notice by 30 August 2014, it was entitled to the sum claimed. The adjudicator decided that as the employer had not issued a valid pay less notice (it had been served late and it had not set out the basis on which the sum was calculated), the contractor was entitled to the £397,912 plus VAT claimed.
The employer started a fourth adjudication in October 2014, asking the adjudicator to decide what sum the contractor was entitled to in respect of its final account (but didn’t pay the sum awarded in the third adjudication).
The contractor subsequently brought injunction proceedings, arguing that the third adjudication had already determined the amount properly due in respect of the contractor’s account.
Edwards-Stuart J refused to grant the injunction sought by the contractor. The court concluded that if the employer wished to pay less than the sum claimed in the contractor’s account, it needed to serve a pay less notice. In the absence of a notice, the employer had to pay the amount claimed. However, the adjudicator had not determined that the amount claimed was the amount “properly due”, he had simply found that the lack of a notice meant that the sum claimed had to be paid. The absence of a pay less notice could not convert a sum that may not be “properly due” into one that is “properly due” for all time.
In this respect, the fourth adjudicator had not been asked to decide an issue that had already been decided in the third adjudication. The court emphasised that that an adjudicator need only resign (under para 9(2) of the Scheme for Construction Contracts 1998) when the issue is one that has already been decided upon. Therefore there was no need for the fourth adjudicator to resign.
This case appears to be quite clear; if an employer fails to serve a valid pay less notice, the contractor is entitled to be paid the sum claimed. This is arguably nothing new and is simply the correct interpretation of the Construction Act (as amended). However, the judge went on to say that it does not mean that the employer is deprived forever of the right to challenge the contractor’s account. On the facts of this case the judge decided that the third adjudication did not decide what was “properly due in respect of the account”. The judge stated that the consequences of a finding to the contrary would create a “draconian regime” in that if a contractor seriously overvalues his works and the employer fails to serve a pay less notice, the contractor would obtain a windfall that the employer could never recover.
Finally, one of the reasons that the third adjudicator deemed that the pay less notice served by the employer was invalid was that it failed to set out the “basis on which that sum is calculated”. The judge did not comment on whether he agreed that the adjudicator was correct in this analysis. Given the little guidance on this issue from the courts it is perhaps an opportunity missed by the current head of the TCC to give some much needed guidance.