Payment Principles

By Victoria Russell, Fenwick Elliott

Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 3352 (TCC) (24 November 2015)

Although this was not an adjudication enforcement case, it raised a number of issues, some of them described by Mr Justice Coulson as “novel”, concerning the HGCRA 1996.

The Judge said:

“In particular, it highlights the potential difficulty of payment provisions under a contract concerned with both construction operations and operations which are excluded by the 1996 Act (sometimes referred to as a hybrid contract), and the particular consequences for such a contract of the notice provisions in Sections 110, 110A, 110B and 111 of the Act, and the recent line of authorities spelling out the consequences for an Employer of failing to serve the notices required by those provisions.”

The claimant sought £1.4m by way of summary judgment. The project involved the construction of two power generation plants, each comprising several different structures. It was common ground that some of this work comprised construction operations (as defined) but that some of the works were not construction operations, because they related to power generation and were therefore excluded from the provisions of the 1996 Act.

The Judge noted that “it is plain that the parties were unaware of this distinction at the time that they entered into the Contract. Accordingly, they agreed a payment regime which, although entirely understandable, was not in accordance with Part 2 of the 1996 Act”.

He set out the express terms relating to payment which the parties had agreed, and the relevant provisions of the 1996 Act (as amended). He then provided a very useful summary of the recent case law in cases where there had been an absence of notices. He said as follows:

“23. Over the course of the last year there has been a flurry of cases in which Edwards-Stuart J has considered the situation in which a contractor has notified the sum due in a Payment Notice, and the Employer has failed to serve either its own Payment Notice or a Pay Less Notice … in essence, these three cases are authority for the proposition that, if there is a valid Payment Notice from the contractor, and no employer’s payment notice and/or pay less notice, then the employer is liable to the contractor for the amount notified and the employer is not entitled to start a second adjudication to deal with the interim valuation itself…

24.  All of these cases concern the situation where the contractor is seeking to take advantage of the absence of any notices from the employer to claim, as of right, the sum originally notified. That approach is in accordance with the amended provisions of the 1996 Act. But because of the potentially draconian consequences, the TCC has made it plain that the contractor’s original payment notice, from which its entitlement springs, must be clear and unambiguous.”

The Judge then reminded the parties of the words of Mr Justice Akenhead in the Henia Investments v Beck Interiors Ltd case earlier in the year, when he said:

“If there are to be potentially serious consequences flowing from it being an Interim Application, it must be clear that it is what it purports to be so that the parties know what to do about it and when.”

Mr Justice Coulson rejected the suggestion that the provisions of the 1996 Act ought to be incorporated wholesale, even in a hybrid contract, to apply to all the works. Although it was “uncommercial, unsatisfactory and a recipe for confusion”, the result of Parliament excluding certain construction operations from the 1996 Act was that in situations such as this case, there would be two very different payment regimes.

The payment notice relied upon was for £3.7m, of which £1.4m related to works under the HGCRA element of the Contract. However, the payment notice identified the sum due as £3.7m and the £1.4m now claimed was not said to be the sum due, and was not the notified sum. There was no reference in the payment notice to the sum of £1.4m and it was held therefore not to be a payment notice in respect of that claim. The sum notified could not be “converted … by refining it later on”.

After refusing the application for summary judgment, the Judge said as follows:

“62. I should add this. All of the difficulties here, in both the old and the new proceedings, can be traced back to section 105 of the 1996 Act and the legislators desire to exclude certain industries from adjudication. A review of the debates in Hansard reveal that Parliament was aware of the difficulties that these exceptions would cause, but justified them on the grounds that (1) adjudication was seen as some form of “punishment” for the construction industry from which (2) the power generation and some other industries should be exempt, because “they had managed their affairs reasonably well in the past”.

63. I consider that both of these underlying assumptions were, and remain, misconceived. Adjudication, both as proposed in the Bill and as something that has now been in operation for almost 20 years, is an effective and efficient dispute resolution process. Far from being a “punishment”, it has been generally regarded as a blessing by the construction industry. Furthermore, it is a blessing which needed then – and certainly needs now – to be conferred on all those industries (such as power generation) which are currently exempt. As this case demonstrates only too well, they too would benefit from the clarity and certainty brought by the 1996 Act.”

Back to the previous page | Next article