New construction case finally clears up uncertainty in payment disputes

New construction case finally clears up uncertainty in payment disputes

Following a plethora of somewhat contradictory and complex case law, Abigail Milner, one of our specialist construction solicitors, takes a look at the current state of play in relation to payment in construction contracts.

Previous case law

After some uncertainty as to whether the payer could adjudicate on the value of an interim application when it had failed to serve a payment or pay less notice, in 2014 the case of ISG Construction Ltd v Seevic College came along.

This case confirmed that if the payer fails to serve a payment or payless notice, it will be deemed to have agreed the value of that interim application and can’t adjudicate on this issue successfully.

However, the question this case didn’t answer was whether that principle applied equally on final account.

Now, after a further couple of years of uncertainty, we finally have an answer.

Kilker Projects Ltd v Purton

The case of Kilker Projects Ltd v Purton has provided the long awaited confirmation that if the payer fails to serve a payment or payless notice on final account, it can still adjudicate the value of the same.

Kilker confirmed that there is a difference between an interim and final account.

The facts​

In this case, a dispute arose between the parties on final account. Purton had applied for payment but no payment or pay less notice had been served.

Purton referred the dispute to adjudication and in view of the above Kilker was ordered to pay the amount in Purton’s application for payment in full, which it eventually did.

Disgruntled, Kilker commenced a second adjudication claiming that they had overpaid Purton and now wanted the “true value” of the final account to be determined with any overpayment to be refunded.

In response, Purton tried to rely on the principles in ISG v Seevic and argued that Kilker should be deemed to have agreed the value of the final account by failing to serve any notices.

However, Kilker was successful and Purton was ordered to repay the overpayment.

The Court decided that a party can adjudicate the value of the final payment under the Scheme for Construction Contracts for determination even where no payment or pay less notice has been issued.

Ultimately, the purpose for the purpose of the final account was to decide the true value of the works.

What this means for you

A failure to serve a payment or payless notice at an interim account stage will mean that the payer will be deemed to have agreed the value of the works at that date and cannot adjudicate it.

However, the payer could potentially rectify any overpayment in the next interim account.

This is not the case at final account stage. If the payer fails to issue notices, they will still be able to refer the value of the works to adjudication.

The amount paid on an interim application is on account until the final sum is determined but the final sum should be the ultimate and actual value of the works.

Although, while we now know that any overpayment in relation to the valuation of the works can be reclaimed at final account stage, the notified sum still had to be paid in the first instance should you fail to serve a notice.

This case does not permit avoiding payment of the notified sum through commencement of a valuation adjudication if the notified sum has become due. 

It remains vitally important to issue payment and pay less notices in time at both interim and final account stage to avoid the risk of having to overpay for the works. This would be especially problematic if the payee is at risk of insolvency.

Make sure you fully understand the payment mechanism in your construction contract and comply with it fully to avoid having to pay more than the actual value of the works.

If in doubt, get advice at the earliest opportunity.

Need advice? Get in touch today

Please call Abigail Milner on 01482 324252 for a no-obligation chat.

Or email Abigail here.

You can find out more about our Construction Law services here.

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