13th January 2017
The judgments in ISG Construction Ltd v Seevic College  EWHC 4007 (TCC) and Galliford Try Building Ltd v Estura Ltd  EWHC 412 (TCC), confirmed that where a paying party fails to serve a valid payment notice and/or pay less notice, that paying party is deemed to have agreed the value of an application for payment and may not subsequently adjudicate on the substantive value of that application.
The paying party must pay the full sum applied for in the application for payment irrespective of merit.
The Court confirmed in Harding (t/a M J Harding Contractors) v Paice and another  EWCA Civ 1231 that the above principle from ISG and Galliford (that failure to serve a valid payment notice or a pay less notice means that the full sum applied for is due) does not apply to the final account following a contract being terminated.
This left uncertainty as to whether this principle would apply to ‘normal’ final account valuations under the contract. This point has now been answered in this recent case of Kilker Projects Ltd v Purton (t/a Richwood Interiors)  EWHC 2616 (TCC).
This was the second adjudication enforcement proceedings between these parties. We discussed the first enforcement proceedings here.
There was an oral contract between Kilker Projects Limited (Kilker), the main contractor, and Mr Purton t/a Richwood Interiors (Purton) for specialist joinery works to be carried out at the Dorchester Hotel.
A dispute arose regarding Purton’s final account application. Purton argued that he was entitled to the full amount set out in the application as the ‘notified sum’ under the Construction Act. The issue was referred to an adjudicator who agreed that Purton was entitled to payment of the sum claimed as a result of Kilker’s failure to serve a valid payment or pay less notice.
Kilker paid this sum to Purton and then referred the matter to a second adjudicator for determination of the true value of the final account. Kilker argued that Purton had been overpaid for his works and requested repayment of the overpaid sums.
Purton argued that the second adjudicator did not have jurisdiction as the first adjudicator had already decided the same dispute. Purton said that by failing to issue a valid payment notice or pay less notice, Kilker had agreed the valuation of the final account and this valuation could not now be re-decided by another adjudicator.
The second adjudicator disagreed with Purton. The second adjudicator decided that the first adjudicator had only considered whether a valid payment or pay less notice had been served. The true value of the final account had not yet been considered. The second adjudicator therefore ordered Purton to repay £55,676.84 plus VAT to Kilker as a refund of overpayment.
Purton refused to pay and Kilker commenced enforcement proceedings.
The Court agreed with Kilker and concluded that the paying party could refer the valuation of the final account to a second adjudication. The Court said:
The Court agreed that the first adjudicator had decided the notified sum, not the true value of the final account. Therefore the second adjudicator had jurisdiction with regards to the final account.
This decision is encouraging news for paying parties. A failure to serve valid payment notices and/or pay less notices in respect of the final account does not necessarily entitle a subcontractor/contractor to full payment of their application through a ‘smash and grab’ adjudication.
Paying parties must still pay the notified sum, but after making payment they can now commence a second adjudication to determine the true value of the final account and seek a refund of any overpayments. This is in line with the ‘pay now, argue later’ ethos of adjudication, so that cash continues to flow down the supply chain, whilst the parties dispute the true value of the works.