A legal anomaly that has been open to challenge since the coming into force of the amendment’s to the Housing Grants, Construction and Regeneration Act  brought about with the amendments in the Local Democracy, Economic Development and Construction Act  around the issue of Interim and Final Payment Notices, their timing and effect appears to have been settled in a High Court ruling in October 2016.
In effect the High Court has confirmed there is a clear distinction in law between interim and final payments.
The High Court ruled in 2014 that Seevic College was liable for the full interim sum notified by the Contractor, ISG Construction because it had not provided either a “Payment Notice” or ”Pay Less Notice” within the required timescale as laid down in the legislation. This was in effect confirming a decision made in Adjudication, where a second Adjudication was planned to be commenced in effect in relation to the same Interim Application. The courts ruled a second Adjudication could not be undertaken as in effect it was Adjudicating the same issue.
Kilker Project Limited (Contractor) had employed Rob Purton (Sub Contractor) to carry out specialist joinery work on its behalf at the Dorchester Hotel on Park Lane, London.
In 2014 the matter was subject to Adjudication and Kilker Project Limited lost on a final payment claim by Purton because it failed to give a “Payment Notice” or “Pay Less Notice.” In subsequent enforcement proceedings, the High Court found that there had been an oral contract between the parties into which the payment terms set out in the Scheme for Construction Contracts were implied. This was as a result of the amendment that recognises oral contracts in the 2009 amendment brought about by the Local Democracy, Economic Development and Construction Act .
Where Kilker Project Limited wanted to have the matter settled by a second Adjudication, Rob Purton argued that Kilker Projects Ltd was not entitled to a second Adjudication, as the sum due had been adjudicated in accordance with the Scheme for Construction Contracts. However Mrs Justice O’Farrell did not agree and ruled that a second Adjudication could be undertaken. This was as this Adjudication would be in relation to a Final Payment and crucially not an Interim Payment as in the 2014 case that had established a precedent.
This result of this landmark ruling is that although the payment ruled in favour of Rob Purton in the first Adjudication, which was paid in full (as ordered) by Kilker,Project Limited was a “notified sum” for the purposes of the Scheme for Construction Contracts; crucially it was not the Final Account value. It was further ruled that despite Kilker Project Limited being ordered to pay the sum, this did not see them lose their entitlement to challenge that sum in a second Adjudication in order to ascertain the actual final contract sum, particularly where this could jeopardise fair value being paid.
The judge further ruled that there was “no agreement by the parties that the final account would be conclusive as to the final sum due under the contract and the statutory payment provisions do not have such effect.”
The judgment appears to have settled the debate in the industry over whether there was a distinction between interim and final payments for the purposes of the application of the payment provisions under the legislation and the Scheme for Construction Contracts.
Where this case differs with the earlier ruling in 2014 was that the ISG Construction case revolved around an Interim Payment, which would be superseded by further Interim Payments whereas in the Kilker Projects Limited case this concerned a final payment application at the end of the contract.
As this was a loophole that had been identified but not tested, this type of case was always going to see the matter resolved one way or the other, to provide clarity.
The Construction Act payment provisions had been criticised as while they introduced a regime of “Payment Notice” and “Pay Less Notice” in reality they were toothless provisions as they failed to provide any serious and enforceable sanction for the payer not serving valid notices.
The 2009 amendments introduced a sanction, this being that if they payer failed to serve the valid notices that the sum contained in the contractor’s application becomes the notified sum which the payer has no choice but to pay.
This decision shows there is a clear and unambiguous distinction between interim and final payment applications although Mrs Justice O’Farrell could not point to a distinction between interim and final payment under either the 2009 legislation or the Scheme for Construction Contracts. However the decision appears to rest on the distinction drawn between the “final account” (final payment) and the “final contract sum” justified by reference to the presumed intention of parliament.
If such a distinction actually exists is questionable, however it is clearly a common sense decision to draw a distinction between the two.
Following the Determination in the first Adjudication, Kilker Projects Limited made payment in accordance with the judgment. However it then commenced its own Adjudication on the substantive value of the final account. In this Adjudication the Adjudicator found that Rob Purton’s payment claim overvalued the work by approximately £66,000 and by consequence that Kilker Projects Limited had overpaid.
Rob Purton challenged the validity of this Adjudication, on the grounds the previous Adjudicator had determined the same or substantially the same claim and Kilker Projects Limited should be deemed to have agreed the valuation of the final account as it had not given a “Payment Notice” or “Pay Less Notice”, as in the ISG Construction case.
Mrs Justice O’Farrell disagreed and found that the legislation and the Scheme for Construction Contracts “establish a regime for determining stage or periodic payments throughout a relevant construction contract.” The consequence of this was that it does not affect the ultimate value of the sum due under the contract. Justice O’Farrell went on to state that “very clear words would be required if parliament intended to impose a scheme that would interfere with the commercial value of the bargain freely negotiated by the parties”.
In validating her judgement, Mrs Justice O’Farrell stated that “subject always to the express terms of the contract, where the “notified sum” is in respect of an interim payment, usually there is no contractual basis on which the contractor’s entitlement to that payment can be re-opened. However, 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, Litigation or other form of Dispute Resolution.”
Mrs Justice O’Farrell concluded that it was not necessary for the contract to set out “any specific mechanism” for that final accounting exercise, as the payment of the final sum was based on “enforcement of the contractual bargain.”
It is clear that this well balanced and sensible solution that has been handed down certainly ensure this.
As payment is such a subjective issue and will always be subject to contention, this ruling at least gives significant clarity and direction over this two similar but significantly different stages of the payment process.