CONSTRUCTION LAW UPDATE ISG CONSTRUCTION LTD v SEEVIC COLLEGE

A Review of the High Court Decision in

ISG Construction Ltd –v- Seevic College

[2014] EWHC 4007 (TCC)

In deciding this case Mr Justice Edwards-Stuart added clarity to an application for summary judgement by ISG. The employer, Seevic, failed to serve a payment or pay less notice, thus the contractor, ISG, was entitled to treat its payment application as a default payment notice. After Seevic failed to pay, ISG initiated adjudication proceedings claiming payment of the notified sum in its application. In a cynical move, four days before the decision was due in this adjudication, Seevic initiated its own adjudication proceedings to determine the sum due to ISG on the date ISG's application was received.

Mr Justice Edwards-Stuart reminds us that a contractor's right to payment for work carried out depends on the terms of the contract. Prior to the passing of the Housing Grants, Construction and Regeneration Act 1996 ("the Act"), a builder who agreed to construct the building on the employer's land was not entitled to any payment if the work was abandoned before completion: Sumpter v Hedges [1898] 1 QB 673.

In order to alleviate this position and to provide the contractor with adequate cash flow standard forms of building contract make provision for the contractor to receive payment by instalments. There is now a statutory right to payment by instalments under section 109 of the Act (as now amended by Part 8 of the Local Democracy, Economic Development and Construction Act 2009). 

The contract particulars provided that interim applications for payment were to be at monthly intervals from the date of possession, in this case the 11th February 2013. By clause 4.7.2 of the JCT D&B Contract 2011, the sum due as an interim payment was the amount equal to the gross valuation of the work properly executed, as assessed by the contractor, less the sums already paid (and one or two other items, such as retention). The application by the contractor has to state the amount that the contractor considers to be due to him, and the basis on which that sum has been calculated. Following practical completion, applications are to be made at intervals of two months until the expiry of the rectification period. 

The final date for payment of an interim payment is 14 days from its due date (which is the later of the specified date and the date of receipt by the employer of the interim application). If the employer disagrees with the amount of the contractor's interim application, it can serve a payment notice stating the amount that it considers to be due and the basis on which that sum has been calculated. That payment notice has to be served not later than five days after the due date. 

The sum due to the contractor on an interim application is either the amount stated in the application or the lesser amount stated in the employer's payment notice, if one has been served. If the employer intends to pay less than the sum stated in the payment notice or interim application, because it claims to be entitled to withhold money on other grounds, it may give the contractor notice of that intention by serving a pay less notice no later than five days before the final date for payment. So, if the employer either does not agree with the sum claimed by the contractor in an interim application, or in any event does not intend to pay it, they must serve either a payment notice or a pay less notice, or both. 

Having explained the right to payment under statute and contract, ISG sought summary judgement to enforce the decision in the first adjudication and a declaration that the adjudication started by Seevic, was basically the same as the first and as such the adjudicator did not have the jurisdiction to decide this matter. 

The Court ruled that ISG was entitled to a declaration that the decision of Mr Juniper in the adjudication by Seevic was invalid for want of jurisdiction, one note here is that Mr Juniper was also the adjudicator in the first adjudication and it seems strange that he did not rule that he did not have jurisdiction himself? 

“He decided a question that, as between the parties, must be taken to have been decided by him in the first adjudication” 

In the context of adjudication it may be said that the position in relation to policy is quite different. The policy of the legislation is to provide the parties with a swift and possibly rough, but effective, mechanism for enforcing their entitlements under a contract on a provisional basis. To this end the courts tend to uphold adjudicators' decisions save in limited situations, such as where there has been a breach of natural justice or a want of jurisdiction. 

In David McLean Housing Ltd v Swansea Housing Association Ltd [2002] BLR 125, His Honour Judge Humphrey LLoyd QC said, at paragraph 15, “that the Scheme did not confer on an adjudicator a right to adapt, vary or otherwise modify the contract. That, I think, is a reference to jurisdiction, not to the exercise of a power”. He then said, at paragraph 17 

"If, for example, proceedings are necessary to enforce the award the defendant cannot be allowed to allege that the decision was incorrect, i.e. that the claimant has not got a right or cause of action as some necessary fact or aspect of the law is missing, and is in effect temporarily estopped by its agreement from doing so. But ultimately the claimant will, if necessary, have to establish its right and cause of action." 

Therefore in relation to the first adjudication, it is no longer disputed that ISG is entitled to summary judgment to enforce the decision. Since the only issue referred to the adjudicator in adjudication by Seevic was the value of ISG's works at the date of Application No 13. This question was decided in the original adjudication, and this disposes of the dispute referred in the second adjudication. Accordingly, ISG is entitled to a declaration to that effect. 

As for the right to payment, the adjudicator has decided correctly and as explained by Jackson J in Interserve v Cleveland Bridge [2006] EWHC 741 (QB), 

"Where the parties to a construction contract engage in successive adjudications, each focused upon the parties' current rights and remedies, in my view the correct approach is as follows. At the end of each adjudication, absent special circumstances, the losing party must comply with the adjudicator's decision. He cannot withhold payment on the ground of his anticipated recovery in a future adjudication based upon different issues. I reach this conclusion both from the express terms of the Act, and also from the line of authority referred to earlier in this judgment ..." 

There is no freestanding entitlement to payment under this form of contract outside the framework of interim applications and the final application. The contractor's only entitlement to payment during the course of the project is by way of an interim application. Absent fraud, in the absence of a payment or pay less notice issued in time by the employer, the contractor becomes entitled to the amount stated in the interim application irrespective of the true value of the work actually carried out. The employer can defend itself by serving the notices provided for by the contractual provisions.