Adjudication Update: Jackson Casts Doubt on ISG v Seevic

In the last year there have been a number of cases decided by Edwards-Stuart J in the TCC concerning the issue of whether an employer is taken to have agreed the valuation of a contractor’s interim application by failing to serve a payment notice or pay less notice.

In the recent case of Matthew Harding (T/A MJ Harding Contractors v Paice & Anor [2015] EWCA Civ 1231, judgment handed down last week, Lord Justice Jackson appears to be casting doubt on these decisions.

ISG and Galliford

In ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) and Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC), Edwards-Stuart J decided that if an employer has failed to serve the required payment notice and/or pay less notice, then the employer is taken to have agreed the valuation in the contractor’s interim application for payment.  If the employer then fails to make payment, and the dispute is referred to adjudication on the basis of the lack of the required notices, and a decision is reached by an adjudicator, the adjudicator has then decided what is properly due to the contractor as at the date of the interim application.

Consequently, Edwards-Stuart J’s decisions were that the employer cannot then start a second adjudication over the same interim application to determine what is properly due to the contractor, because that issue has already been decided in the first adjudication.

Edwards-Stuart J was understandably concerned that if the green light was given to employers to start counter adjudications based on what was actually due pursuant to the interim application in question, that would drive a coach and horses through the Construction Act, and deprive the pay less notice of its teeth brought about by the LDEDCA 2009.  These changes were rightly made to further improve cash flow down the supply chain.

His judgement made clear that an employer was not allowed to launch a second adjudication over the same interim application so as to try to reverse the effect of having failed to serve a pay less notice.  The proper route for the employer was to wait to challenge the valuation in the next interim application.

However, the reasoning of Edwards-Stuart J does appear strained, because:

• The consequence of not serving a pay less notice is simply that the notified sum is payable. It does not say in the Construction Act that, if the employer does not serve a payment or pay less notice, the employer is taken to have agreed the contractor’s valuation of what is due pursuant to its application for payment.  Having to pay a sum of money because an employer has not followed a procedural requirement, and having to pay because the employer has agreed the valuation is correct, are two very different things conceptually.  One is a contractual issue, and one is a matter of valuation.
• Edwards-Stuart J appears to be suggesting that an employer can agree the value stated in the application for payment by mere silence and inactivity. This seems wrong.
• Many standard form contracts do not allow for negative interim valuations, and therefore there would be no opportunity to make good any overpayment until final account.

Harding

In the more recent decision of Matthew Harding (T/A MJ Harding Contractors v Paice & Anor [2015] EWCA Civ 1231, Lord Justice Jackson sitting in the Court of Appeal appears to be casting doubt on the decision of Edwards-Stuart J in ISG.

In this case, which concerned a JCT Intermediate Form of Building Contract 2011, the contractor terminated its own employment, and submitted its final account.  It was found in one of the adjudications that the employer had not served a valid pay less notice in response to the account, and therefore the sum applied for by the contractor had become payable.

The employer subsequently started another adjudication to have the value of the contractor’s final account determined.  The contractor sought an injunction to restrain the employer from proceeding with that adjudication on the basis that the dispute over the amount properly due in respect of the final account had already been determined in the preceding adjudication.

This time, Edwards-Stuart J decided at first instance that:

“The adjudicator [in the first adjudication] has not determined what is “properly due”. He has determined that, in the absence of a valid Pay Less notice, the employer must pay the amount stated in the contractor’s account within 28 days. The effect of this, according to the submissions of Mr. Scott Holland, is that the absence of a compliant Pay Less notice converts a sum that may not be properly due into one that is properly due, and does so for all time.

I do not accept this argument.”

At first glance, Edwards-Stuart J seems to have completely forgotten his earlier decisions in ISG and Galliford.

Interim v Final Account

However, it was key for Edwards-Stuart J that Harding concerned a final account, and not an interim application, as it did in ISG.  The consequence of following his line of reasoning in ISG was that the employer would have been precluded from arguing about the correct valuation of the final account for all time (in adjudication).  Litigation would still have been available.

The contractor appealed to the Court of Appeal, and Lord Justice Jackson rejected the appeal on the ground that he felt Edwards-Stuart J’s reasoning in ISG/Galliford was correct as far as final accounts were concerned.

However, and this is the interesting point, Lord Justice Jackson refused to expressly endorse the reasoning of Edwards-Stuart J in ISG and Galliford as far as interim applications were concerned, despite having had the opportunity to do so.  He appears to have discretely avoided the issue on the basis that because Harding concerned a final account:

“I do not need to decide whether or [ISG/Galliford] is correct in relation to interim valuations and interim payments.

The important point for present purposes is that [ISG/Galliford] (whether right or wrong in relation to interim valuations) does not apply to final accounts.” [emphasis added]

Comment

This is hardly a ringing endorsement of ISG and Galliford.

Watch this space.  I suspect that if Harding had concerned an interim application, then ISG/Galliford may have been overturned by Lord Justice Jackson.

For more information on this, please contact a member of the construction team.