Legal blog: how not to meet a sticky end

It is an all too familiar failing for a prospective payer to forget to issue a payless notice following an application for payment from the payee. The consequences of such a blunder are well known: the contractor gets the full amount claimed, regardless of how “optimistic” the application may have been, and the employer is forced to argue later that it has overpaid, with the disputed sum sat in the contractor’s bank account. All of this is uncontroversial, at least as far as interim payments are concerned. 

This well-known trap is a less common occurrence between an employer and its professional team, but the Court of Appeal did recently consider such a case, in Adams Architecture Ltd vs Halsbury Homes Ltd. The question was whether the same consequences – the employer ending up paying the full amount claimed if no payless notice has been given in advance – would arise in respect of a final payment application. 

The proceedings

Adam Architecture Ltd had been appointed by Halsbury Homes Ltd to design a 200-home development. Fees were agreed and had been split into four stages. Adam was appointed on a RIBA standard conditions basis. Work commenced on 19 October 2015, but on 2 December 2015 Halsbury sent an email informing Adam that a substantial part of the works originally within its scope would be placed with another architect. Adam responded by informing Halsbury that it had stopped work on the project, and submitted an invoice for work carried out up to 2 December. Halsbury issued no payless notice, and did not pay Adam the invoiced amount.

Adam successfully adjudicated for the fees on the basis that as no payless notice had been given it was entitled to the full amount invoiced. Perhaps surprisingly, the Technology and Construction Court declined to enforce this decision and found:

• As a result of Halsbury’s email of 2 December, the contract was discharged and therefore the obligation to comply with the applicable payment provisions fell away
• In any case, the 2 December invoice did not comprise notified sums that necessitated the issuance of a payless notice.

Adam appealed to the Court of Appeal.

If the innocent party wishes to rely upon a ‘smash and grab’ type of application, then it needs to do so under the contract

The decision

Adam’s appeal covered various points, but the two key issues identified by the court were: 

• Does section 111 (as amended) of the Construction Act – stating that an employer must issue a payless notice if it intends to pay a reduced amount – apply to final payments?
• Was the contract actually terminated?

Halsbury’s argument was that section 111 was all about cash flow and therefore had no applicability to final payment but merely to interim payments. 

The Court of Appeal was having none of this, and not only by dint of analysing the statute. The court also referred to previous cases to support this view.  The “highlight” (of what appears to have been an uphill struggle) for Halsbury’s counsel was the comments of Lord Hope in Melville Dundas Ltd (in receivership) vs George Wimpey, to the effect that section 111 only applied to interim payments. However, Lord Justice Jackson dismissed this as “one swallow does not make a summer”. Further, in Harding vs Paice – in which, coincidentally, counsel for Halsbury had appeared – the case had proceeded on the basis that section 111 applied to final certificates as well as interim ones.

The point on the repudiatory breach is more subtle. Halsbury argued that Adam, by purporting to accept a repudiatory breach, shot itself in the foot by not then being able to rely upon the payment regime set out in the contract. If Adam had accepted that the contract was terminated, then, so the argument goes, it would not be able to rely upon a failure by Halsbury to serve a payless notice – as what it was now claiming was damages for breach of contract. 

The court got around this point by finding that even if Halsbury’s email of 2 December was a repudiatory breach of contract, Adam had not accepted any termination of the contract. It was relevant that Halsbury was entitled to terminate Adam’s engagement on notice – as this meant that the contract could end without any acceptance of repudiatory breach. The court found that the invoice Adam dispatched to Halsbury was for the sum contractually due to it under the contract rather than for damages for breach of contract.

Conclusion

Two issues arise from this case.

Firstly, section 111 of the Construction Act is concerned with what the parties to a construction contract must do, and not what the contract must say. This has applicability to final payments as well as interim payments. If the employer wishes to pay less than the sum claimed in the final invoice, it must give an appropriate payless notice within the prescribed time limit. Of course, this does not mean failure to do so makes the final payment conclusive.

Secondly, faced with situations in which one party may be able to argue that the other is in repudiatory breach, care must be taken. If the innocent party wishes to rely upon a “smash and grab” type of application, then it needs to do so under the contract. Any acceptance of the repudiatory breach will scupper the chances of success in this regard.