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Failure to serve payment notices...

12 January 2015

Failure to serve payment notices means an employer is deemed to have agreed a contractors interim application.

The Technology and Construction Court has confirmed that the lack of a payment or pay less notice means an employer is deemed to have agreed the value of the works claimed in an interim certificate, effectively entitling a contractor to the amount stated in its interim application - irrespective of the true value of the work actually carried out (ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC)). Further, the employer cannot have the relevant interim application re-valued at a later date.


The Construction Act requires parties to provide for all construction contracts what is called an adequate payment mechanism to determine what payments become due. Typically, the mechanism will provide that one party (usually the contractor) will issue an application for payment and the payer (usually the employer) must then issue either a payment notice or a pay less notice (disputing the sum claimed) in respect of the interim sum due. If the employer fails to issue such a notice, the contractor may be entitled to the sum it claimed in its interim application as the value of the works - irrespective of the actual value of the works. Many contractors refer a dispute regarding the lack of employers notices to adjudication, requesting full payment of the interim sum claimed in the application for payment (commonly called a smash and grab adjudication).

If an employer has to overpay an interim payment as a result of failing to issue the relevant notices, it can seek to correct the position in the next interim payment or the final account. However, this is not always straightforward (for example, the JCT standard forms of contract do not entitle the employer to repayment of any overpayment until the final payment - which could be some time away) and in the interim period, the employer may have to pay much larger sums to the contractor than it considers are properly due. Accordingly, many employers have in the past sought to counter smash and grab adjudications by commencing an adjudication of their own requesting a valuation of the work claimed for in the relevant interim application, seeking to set off that valuation against the full claimed interim sum.

The facts

Seevic College (Seevic) employed ISG Construction Ltd (ISG) under a JCT Design and Build Contract, 2011 Edition and ISG made interim applications for payment at monthly intervals. Seevic failed to issue a payment notice or pay less notice in respect of ISGs interim application 13 for £1,097,696 and ISG commenced an adjudication for payment (the first adjudication). The adjudicator decided that Seevics lack of notices meant ISG was entitled to payment of the full sum plus interest.

Seemingly anticipating that it would lose the first adjudication, four days before the decision was due Seevic commenced a second adjudication, asking the adjudicator to value the works done by ISG at the date of interim application 13. In the second adjudication, the same adjudicator decided that the value of the works was £315,450. Assuming that Seevic had complied with the decision in the first adjudication, he awarded a repayment from ISG to Seevic of £768,525.

Seevic did not comply with the first adjudicators decision. ISG issued enforcement proceedings, seeking a declaration that the adjudicator had no jurisdiction in the second adjudication because the matters before him were the same or substantially the same as those decided in the first adjudication. ISG also argued that the value of the works in interim application 13 had been agreed because Seevic had not served any notices. Seevic issued ISG with a cheque for £315,450.

The decision

The court held that "if the employer fails to serve any notices in time it must be taken to be agreeing the value stated in the application, right or wrong". Accordingly, Seevic was deemed to have agreed the value of the works claimed by ISG in interim application 13. It also found that since the first adjudicator had decided the sum claimed was due to ISG, he had decided the value of the works. Accordingly, in the second adjudication, the adjudicator had been asked to decide the same question as in the first, which meant he lacked jurisdiction. As a result, ISGs summary judgment and the declaratory relief applications were both successful.


From a practical perspective, the decision highlights the importance of parties serving payment and pay less notices as required by their contract and/or the Construction Act. The decision makes clear that absent fraud the lack of such notices mean that the contractor becomes entitled to the amount stated in its interim application, irrespective of the true value of the work.

The decision also effectively deprives employers of a mechanism to seek to counter smash and grab adjudications. It therefore seems likely more contractors will adopt such tactics, leaving employers to seek to correct the position in subsequent interim payments (or the final payment). Given the problem that this presents for employers, we expect that they will seek to amend where necessary standard form contracts to give themselves the contractual right to seek repayment of any overpaid interim sums instead of having to wait until the final certificate. (Similarly, contractors will seek to amend their sub-contracts accordingly.)

Employers might also be concerned regarding the nature of the courts comments in respect of the effect of failing to serve notices, in particular that "if the employer fails to serve any notices in time it must be taken to be agreeing the value stated in the application, right or wrong". It is one thing for a party to be required to pay a sum it does not consider is due, another thing for it to be deemed to have agreed that sum. Elsewhere, the court put this in slightly different terms, stating that: "in the absence of any notices the amount stated in the contractors application as the value of the works executed is deemed to be the value of those works so that the employer must pay the sum applied for"; it seems to us that this more accurately states the position under the Construction Act (and in this matter, the parties contract).

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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