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CONSTRUCTION LAW UPDATE: Interim and Final Accounts: The Muddy Waters of Harding v Paice

This article considers the application of notice requirements under s.111(1) of the Housing, Grants, Construction and Regeneration Act 1996. In particular, how the Court of Appeal has interpreted the application in respect of both Interim and Final Accounts in Harding (t/a MJ Harding Contractors) v Paice [2015] EWCA Civ 1231.

It is worth mentioning at the outset, for reasons that will become

clear later, the distinction between Interim and Final Accounts.

Where an employer fails to serve a payless notice in respect of an

interim application, he is “deemed to have agreed” the valuation

put forward by the contractor in the application. Importantly, that

does not stop the Employer recovering any over-payment at

the next interim application or the Final Account (where he can

properly value/revalue the works).

The same principles, however, do not apply where the matter in

question is the Final Account itself. In that scenario the distinction

between the “true value” of the work and the amount applied for

by the Contractor is of greater relevance since there will be no

further opportunity for the Employer to recover any overpayment.

This is a matter which the Court of Appeal has recently touched

upon, with implications for construction professionals and lawyers

alike.

Background

The instant case concerned a contractual relationship between

Harding, a building contractor and Paice, property developers.

During the course of the construction and fit out of two residential

properties in Surrey, the relationship deteriorated and resulted

in Paice terminating the contract owing to an alleged failure to

proceed diligently with the works.

Harding subsequently submitted his own notice of termination

and submitted the account to Paice, valuating the owed

balance at £397,912.48. Paice failed to issue a pay less notice

and the adjudicator accordingly found in favour of Harding. A

subsequent adjudication was sought by Paice to reduce the

value of the contract works to £340,032.60, however, Harding

applied for an injunction restraining the proceedings on the

basis that 1) the adjudicator in first instance had determined the

amount falling properly due and therefore the matter could not

be revisited; and 2) pursuant to paragraph 9(2) of the Scheme

the Adjudicator should resign owing to the overlay in disputed

issues (“the adjudicator must resign where the dispute is the

same or substantially the same as one which has previously been

referred to adjudication, and a decision has been taken in that

adjudication”).

Mr Justice Edwards Stuart dismissed Harding’s application,

maintaining Paice’s entitlement to determine what amount was

“properly due in respect of the account” rather than what had

previously been awarded i.e. the Final Account balance. However,

this did not detract from Paice’s obligation to comply with the

adjudicator’s original decision in the meantime by paying the

sum ordered. The position accords with the key notion that an

Adjudicators’ decision is “interim binding”.

Similarly, Harding’s second ground for an injunction was

You should read this Construction Law Update if:

• You are an Employer / Client under a construction contract;

• You are a Main Contractor to a construction contract;

• You are involved in any current or forthcoming construction projects in the UK.

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dismissed. It was held that the adjudicator had not made a

decision on the true value of the account and as such it remained

open for determination by a further adjudicator.

Harding Appealed.

The Court of Appeal

Harding appealed on two grounds:

1. Failure to serve a pay less notice is tantamount to the

employer having agreed the value of the relevant payment.

Accordingly, a second Adjudicator would be acting outside

their jurisdiction in reducing the determined amount. Ironically,

the contractor relied upon the dictum of Edward-Stuart J

in ISG Construction Ltd v Seevic College in advancing this

argument.

2. Regardless of whether the adjudicator had determined the

amount properly due, by reference to the absence of a pay

less notice or otherwise, he had been asked that issue so as

to arrive at a decision. It follows that paragraph 9(2) and the

resignation of the adjudicator must be borne out.

Taking the points in reverse order, Lord Justice Jackson dealt

swiftly with the terminology of the word “decision” in paragraph

9(2), endorsing the explanation of the lower court to mean

“decision in relation to that dispute”. The first Adjudicator had

made no decision in relation to the true value of the account, but

rather the principle issue of the pay less notice i.e. his decision

related solely to the failure of the Employer to comply with a

technicality.

In relation to the first ground of appeal, his Lordship suggested

the contractor’s position could be split into two separate issues,

contractual and valuation. The first relating to the employer’s failure

to issue a pay less notice and the other relating to the appropriate

amount due on account. It was held that the first Adjudicator had

only dealt with the former of these two issues, leaving the matter

of valuation open to further scrutiny.

His Lordship held it was unnecessary to consider the case of ISG

v Seevic owing to Edward-Stuart J’s focus in that case centring

on interim payments. Indeed, the passage Harding sought to rely

on states: “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 works actually carried out”. Accordingly, Jackson LJ

held that the principle could not apply by way of analogy given

the distinguishing characteristics of Interim and Final Accounts.

Interim payments having no relevance in the instant case, it

was unnecessary to consider whether what the judge had said

previously was correct.

Appeal dismissed.

Commentary

The decision of the Court in respect of Harding’s second

submission is certainly welcome. By interpreting the word

“decision” in paragraph 9(2) to mean “decision in relation to that

dispute”, Jackson LJ brings clarity to what would have been a

manifestly unjust position proposed by the contractor. It would

be inequitable to utilise Paragraph 9(2) to preclude further

adjudication of contemporaneous issues, particularly in respect

of Final Accounts where the potential for permanent overpayment

would leave the system open to abuse.

In respect of Harding’s first submission, it follows that failure to

issue a pay less notice, as applicable to Final Accounts, has

only limited consequences. Whilst the full amount awarded in the

adjudication must be paid, the employer has scope to adjudicate

the matter of what is “properly due” at a later date. Whilst this

appeals in principle as a means of avoiding overpayment, in

practice we are left with a convoluted and somewhat clumsy two-

tier dispute process.

The failure of the Court of Appeal to fully examine the case of ISG

v Seevic was perhaps, on reflection, short-sighted. His Lordship

touches upon the notion that failure to serve a pay less notice

on a contractor bears the consequence of having “deemed

to agreed” the interim application, yet fails to explore why this

position should be different for Interim and Final Accounts. One

assumes the distinction arises owing to the logistical ability to vary

subsequent interim valuations when juxtaposed with the finality

of the Final Account. However, this was not fully explored by his

Lordship.

A perhaps more satisfactory outcome would have been for

the court to clarify the position in ISG. It is of course correct to

conclude that the amount sought is owed in the absence of a

pay less notice, however, it may be better to view this simply as

a contractual consequence of a technical failure by the employer

rather than a ‘deemed agreement’. The semantics of the lower

Court does nothing more than muddy the waters.

Of course, if the court were to address this point the matter would

be treated as obiter. For the time being the debate may continue

in respect of interim payments and will likely warrant further

consideration by the Court of Appeal in future.

The tiny print

No action should be taken on the matters covered by this leaflet without taking specific legal advice.

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