This recent court decision provides welcome protection to construction clients through the ability of an adjudicator to consider the value (in the absence of the appropriate notices) of final payment applications.
Cases such as ISG v Seevic and Galliford Try v Estura illustrate the problems that can occur when a payer fails to issue the required payment or payless notices. The aforementioned cases established the principle that where, in respect of interim payment applications, there is an absence of the appropriate notices, an adjudicator cannot deal with the issue of the ‘true valuation’. The rationale being that any such issue can be corrected at the next payment application or as part of the final account valuation. The ability of an adjudicator to consider the value (in the absence of the appropriate notices) of final payment applications as opposed to interim applications, has to date not always been clear. The Court has now provided further guidance as to an adjudicator’s jurisdiction in such a scenario.
Rob Purton (t/a Richwood Interiors) (“Purton”) a joinery subcontractor, was engaged by Kilker Projects Limited (“Kilker”) to carry out specialist joinery works at the Dorchester Hotel in Park Lane. After carrying out the works, Purton submitted his final payment application. Kilker failed to serve either a payment notice or a pay less notice by the required date and failed to pay Purton by the last date for payment. Based on the ISG and Galliford cases, the sum in Purton’s application for payment became the sum due and Kilker was therefore bound to pay it.
After Kilker failed to make payment, Purton referred the dispute to adjudication, stating that Kilker had failed to serve the relevant payment and pay less notices in time and therefore had to pay the “notified sum” identified in their final payment application. The adjudicator agreed with Purton and ordered Kilker to pay £147,223 in respect of the final account, being the full amount claimed by Purton. Kilker paid this sum following the decision of the TCC in the enforcement proceedings.
Kilker commenced a second adjudication, in which it requested that the adjudicator value the final account , on the basis that it had not yet been properly valued and direct the repayment of any overpayment.
Purton disputed the adjudicator’s jurisdiction on the basis that a previous adjudicator had already decided the same, or substantially the same, dispute in respect of the final payment. On the substantive issue, Purton again sought to rely upon the principle in the ISG case that the valuation of the final account was deemed to be agreed in the absence of the requisite payment or payless notice.
With regards jurisdiction Kilker argued that the adjudicator did have jurisdiction as the true value of the final account had not been the subject of the previous adjudication. Kilker submitted that the Housing Grants, Construction and Regeneration Act 1996 (as amended) and the Scheme regulated payment and cash flow within the construction industry, but was not designed to decide the ultimate or ‘true’ value of the contract sum under a contract. Kilker distinguished this dispute from those dealt with in ISG and Galliford on the basis that it related to a final payment application and therefore it was entitled to seek determination via adjudication as there would be no further opportunity under the contract to rectify any valuation issues.
The second adjudicator did not agree that he should resign and proceeded to consider the issue of the value of the final account. The adjudicator, following a review of the valuation, ordered Purton to repay £55,678.84 plus VAT of the £147,223 originally paid by Kilker.
The issue of jurisdiction was considered in the enforcement proceedings. The Court found in favour of Kilker’s submissions, with Ms Finola O’Farrell QC sitting as Deputy High Court Judge holding the view that a party could seek the determination of a second adjudicator in relation to the valuation of a final payment account.
Ms Finola QC stated that the first adjudicator “did not determine the proper value of the final account”, instead they considered the notified sum payable pursuant to the final account application. It was, therefore, within the second adjudicator’s jurisdiction to determine “the proper value of that final account”. Ms Finola QC followed the judgement given in Harding v Paice, in which Mr Justice Edwards-Stuart stated that “we are concerned with a final account” which “requires an assessment of the amount which is “properly due in respect of the account“”.
In line with his comments, Ms Finola QC went on to mention that “where the “notified sum” determined in adjudication is in respect of a final payment, unless the contract provides that such payment is conclusive as to the contract sum due, although the “notified sum” must be paid, either party is entitled to have the ultimate value of the contract sum determined in a subsequent adjudication”.
As there was no such agreement between both parties to the contrary, Kilker was granted the right to have the final account referred to a second adjudicator for valuation.
This case confirms that there is a fundamental difference between the treatment of interim and final applications. The lack of a payment or payless notice, should not be a bar to the final and proper determination of the final account value.
A party attempting to bring a smash and grab style adjudication following a payer’s failure to submit a payment or pay less notice, will do well to appraise itself of the exact terms of the contract before issuing its referral notice. Only when it has been agreed that the final account will be conclusive as to the final sum due under the contract, will a payer be prevented from having the final account properly valued by an adjudicator.
The Court’s recent decision confirms that employers have the opportunity to have the final account sum valued, without entering into the costly process of litigation. This extra layer of protection provides welcome relief for many employers. Of course, it goes without saying that this decision does not remove the obligation nor diminish the overwhelming benefit and protection of serving timely payment and pay less notices.
  EWHC 4007 (TCC). Herein also referred to as ISG case.
  EWHC 412 (TCC). Herein also referred to as Galliford case.
 Scheme for Construction Contracts Regulations 1998 (as amended)
  EWHC 3824 (TCC)