Are Default Notices Cast in Stone?

Ever since ISG Construction Ltd v Seevic College in late 2014, and the similar cases which followed such as Galliford Try Building Ltd v Estura Ltd, Harding v Paice and Brown & Anr v Complete Building Solutions Ltd, it has been widely accepted that following a payee submitting an interim application for payment, and a subsequent failure by a payer to respond to that application with the requisite notice or notices (those notices being a payment and/or pay less notice), then the notified sum had been decided by way of the sum stated as due in the application (such application becoming known as a 'default notice') and the payer had to pay that sum stated as due to the payee (subject to the application for payment being a valid one under the contract as per the guidance given in cases such as Henia Investments Inc v Beck Interiors Ltd, Caledonian Modular Ltd v Mar City Developments Ltd, Leeds City Council v Waco UK Ltd, and Jawaby Property Investment Ltd v The Interiors Group Ltd & Anor).

Thus it was that if the payer failed to pay the sum stated as due in the default notice then the payee could refer the dispute to adjudication seeking payment of that sum and, upon the adjudicator deciding the dispute in the payees favour on the basis of the default notice, the payer could not subsequently refer a dispute to adjudication regarding the value of the default notice 'on the merits' or 'on a proper valuation of the works' as to do so would amount to referring the same dispute to adjudication for a second time and so the adjudicator would not have the required jurisdiction to decide the dispute i.e. once an application for payment had become a default notice, and an adjudicator had decided that payment was due pursuant to it, then the value of the works had been decided and had to be paid by the payer - it was not open to the payer to have the value of the works decided on another basis in a subsequent adjudication.

So far so good (well, at least if you are the payee anyway!).

However, it was noteworthy that this was only the situation where a dispute had first been referred to adjudication by the payee on the basis of a default notice. What if a payer quickly realised that they had failed to issue the requisite notice(s) in response to an application for payment and thus it had become a default notice, they considered that the sum contained in the default notice was overstated, and they wanted to avoid paying the sum stated as due in the default notice - could they refer a dispute regarding the value of the default notice 'on the merits' or 'on a proper valuation of the works' to adjudication before the payee had taken the opportunity to itself refer a dispute to adjudication on the basis of the default notice? i.e. where a payee had not previously referred a dispute to adjudication on the basis of a default notice, then would an adjudicator have jurisdiction to decide the dispute 'on the merits' or 'on a proper valuation of the works' given the fact that the dispute had not previously been decided by an adjudicator and so could not be 'the same dispute'?

Until recently there had been no guidance from the courts as to the correct answer to the question posed in the paragraph above (or at least no guidance of which the author of this article is aware in any event). However, the general industry consensus appeared to be that this option - to refer a dispute over valuation 'on the merits' or 'on a proper valuation of the works' - was not open to the payer; but it was by no means certain that this was in fact the correct legal position. This industry consensus appeared to be founded on the basis of Section 111 of the Local Democracy, Economic Development and Construction Act 2009 (the "Act") which states:

"(8) Subsection (9) applies where in respect of a payment –

(a) a notice complying with section 110A(2) has been given pursuant to and in accordance with a requirement of the contract (and no notice under subsection (3) is given), or

(b) a notice under subsection (3) is given in accordance with this section,

but on the matter being referred to adjudication the adjudicator decides that more than the sum specified in the notice should be paid." [emphasis added]

Did this mean that the only certificates relating to payment which could be challenged in adjudication were payer notices (payment and/or pay less notices), that the adjudicator only had jurisdiction to increase them in value, and that it was only a payee who could bring such a challenge in any event (great news if you are a payee; not so good if you are a payer!)? Surely Paragraph 20 of Part I of the Scheme for Construction Contracts (the "Scheme"), which permits an adjudicator to "open up, revise and review any decision taken or any certificate given by any person referred to in the contract....." [emphasis added], gives an adjudicator jurisdiction to open up revise and review the value of works included in a default notice 'on the merits' or 'on a proper valuation of the works'?

The questions posed above in this article have very recently been answered by the Technology and Construction Court in Kersfield Developments (Bridge Road) Ltd v Bray and Slaughter Ltd.

In this case Bray was a contractor who agreed to carry out the refurbishment and conversion of a mansion house and stable block, and construction of detached houses, for Kersfield. The contract incorporated the conditions of the JCT Design and Build Contract (2011 edition) as further amended by the parties. On 5 August 2016 Bray issued an interim application for payment ("Application No.19") in the sum of ￡1,208,279.39 exclusive of VAT. Kersfield failed to pay the sum claimed by Bray by 19 August 2016 (that being the final date for payment pursuant to the contract). On 23 September 2016 Bray commenced adjudication proceedings in respect of the unpaid sum. In his adjudication decision dated 31 October 2016, Mr Gracia determined that the application for payment by Bray was valid and that no valid payment notice or pay less notice was given by Kersfield. He ordered Kersfield to pay Bray the sum of ￡1,131,751.96 (the value of the interim application less the sum already paid by Kersfield) plus VAT and interest, and to pay the adjudicator's fees and expenses in the sum of ￡17,836.50. Bray sought to enforce the adjudicator's decision, whereas Kersfield sought a declaration that the adjudicator's decision was wrong and that it was entitled to have the underlying valuation dispute in respect of Application No.19 referred to and determined in a further adjudication.

On the face of it, when considering the cases such as ISG Construction Ltd and the others set out in the opening paragraph of this article, Kersfield's refusal to comply with the adjudicator's decision and to seek the declarations it did was probably futile and had little chance of success. Indeed, the court ultimately decided in Bray's favour and the adjudicator's decision was enforced. However, what is of great interest in the judgement are the observations of O'Farrell J in relation to the status of a default notice, which party can challenge a notice or notices, and the adjudicator's powers in relation to opening up, revising and reviewing notices. The details are as follows:

1) Kersfield submitted that the Scheme rules [at Part I Paragraph 20] empowered the adjudicator to open up, revise and review any decision or certificate; this includes any payment notice or pay less notice, as evidenced by sections 111(8) and (9) of the Act. Presumably Kersfield was submitting that this also empowered the adjudicator to open up, revise and review a default notice (even if it was not submitting as so, the judgement answers the question in any event).

Notwithstanding the fact that an adjudication had already taken place regarding a dispute as to Kersfield's failure to pay Bray pursuant to the default notice, and so Kersfield was always likely to fail in this case, its submission raised the interesting question of whether or not a default notice could be captured by the provisions of the Act and/or the Scheme as set out in the paragraph above i.e. could an adjudicator open us, revise and review a default notice?

In deciding the answer to this question, O'Farrell J held that:

"In the absence of a valid payment notice or pay less notice, there is no dispute as to the sum to be paid in respect of the relevant application because the default notice mechanism provides that the "notified sum" must be paid and there is no provision for that sum to be revised"; and,

"......where a particular interim payment has been fixed by the default notice mechanism under the contract, as in this case, there is no contractual basis on which to revise that payment by reference to a proper valuation of the works and therefore there is no relevant dispute that can be referred to adjudication." [emphasis added]

2) Bray submitted that section 111(8) of the Act can be invoked only by a contractor (payee) and not an employer (payer). On this point O'Farrell J held that:

"Wherever there is a dispute under the contract, either party is entitled to refer such dispute to adjudication as provided in section 108 of the Act. There is nothing to stop an employer serving a payment and/or pay less notice and referring the dispute to adjudication so as to obtain a temporarily binding decision on it. However.......section 111(8) only applies where a valid payment notice or pay less notice has been issued, identifying a dispute between the parties as to the proper sum due in respect of an application for payment. " [emphasis added]

3) On the matter of an adjudicator opening up, revising and reviewing notices, O'Farrell J had this to say:

"I reject Mr Mort's submission that section 111(8) and the scheme empower an adjudicator to open up and revise a payment notice or pay less notice. A payment or pay less notice is not a decision taken or a certificate given by any person referred to in the contract. The notice sets out the sum that the employer considers is due and payable to the contractor in response to the contractor's application. Section 111(8) empowers an adjudicator to determine what sum is due and payable in the event that competing valuations are asserted by the parties. The notice is not revised by the adjudicator if a different sum is determined to be due. Section 111(9) simply provides for the payment of any additional sum determined by the adjudicator. Any right to additional payment arises under section 111(9), based on the adjudicator's decision, and not under a revised payment notice." [emphasis added]

So there we have it. A default notice simply cannot be challenged or trumped. Once the sum stated as due in a default notice becomes finally due then, absent fraud or insolvency perhaps, the payer must pay it and it has no way of challenging it at that time (but it can redress the matter in later interim valuations and/or the final account if the default notice has resulted in an over payment). Additionally, subject to the requisite notices having been issued, either party can invoke section 111 (8) of the Act; and, when an adjudicator decides that an additional sum is payable pursuant section 111 (8) of Act then (s)he is not actually revising any notice at all but is simply deciding that a further sum is due to that stated in the notice.

If it is of any consolation to paying parties in the construction industry, O'Farrell J was not completely oblivious to the problems this may cause for them. Indeed, she said:

"I acknowledge that the default notice mechanism under the Act might result in unfairness or hardship to an employer in circumstances where the contractor received a windfall from the employer's procedural failure. However, it simply regulates the cash flow as between the parties and does not affect their substantive rights. The employer could protect its cash flow by serving one or both of the notices that could put in dispute the sum claimed by the contractor. This finding does not preclude a challenge to the valuation of the works and/or any claims and cross-claims for the purpose of subsequent interim payments or for the purpose of determining the sums due on a final and conclusive assessment."

The judgement also addresses a ‘manifest injustice’ defence when faced with a valid default notice (an argument which has had some success in the past in Galliford Try Building Ltd v Estura Ltd but which failed here), but that is a separate issue for discussion another time.

The moral of the story? Go forth and notify!

Copyright ? 2017 Dean Sayers, Sayers Commercial Ltd