In a judgment that will be widely appreciated by the construction industry, Mrs Justice O’Farrell has clarified a question that has been the subject of debate for some months: is it possible to refer the question of the ‘true valuation’ of final account valuation to adjudication following an adjudicator’s decision requiring the paying party to pay the full amount of a final account application in the absence of a ‘payment notice’ or a ‘pay less notice’?

The facts

Kilker Projects Limited (“Kilker”) was appointed to carry out works to the Dorchester Grill as the main contactor. Mr Purton, trading as Richwood Interiors (“Purton”), provided joinery services as a subcontractor to Kilker.

The first adjudication

Following completion of the works in about September 2014, Kilker and Purton exchanged correspondence regarding the value of the subcontract work completed. Purton submitted his final application on 8 December 2014. Kilker did not respond to this application with a payment notice or a pay less notice. In the absence of a valid payment notice, or payless notice, Purton commenced an adjudication to recover the sum claimed in his final account application. The adjudicator decided that Mr Purton was entitled to the sum claimed.

In enforcement proceedings, Kilker argued that there was no concluded contract. Accordingly, the payment regimes under the Housing Grants construction and Regeneration Act 1996 (as amended) (“the Act”) and the Scheme for Construction Contracts Regulations 1998 (as amended) (“the Scheme”) did not apply. The TCC found that there was an oral contract that had been performed and the Scheme’s payment terms applied. This decision was accordingly enforced (Rob Purton v Kilker Projects Limited [2015] EWHC 2624 (TCC). Kilker paid the final account sum that Mr Purton had applied for in accordance with the Judgment.

The second adjudication

Kilker held the view it had paid Mr Purton more than he was entitled to receive under the subcontract agreement for the works carried. Mr Purton disagreed. Accordingly, Kilker commenced a second adjudication in which it asked the adjudicator, Mr Molloy, to decide the ‘true value’ of the final account and repayment of any sums found to have been overpaid.

Purton argued that the adjudicator had no jurisdiction to decide the dispute under the Scheme because the previous adjudicator had already decided the same, or substantially the same, dispute in respect of the final payment. Purton sought to rely upon the principle in ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) such that Kilker was deemed to have agreed the valuation of the final account by not issuing a payment notice or payless notice.

Kilker argued that the adjudicator did have jurisdiction on the basis that the true value of the final account had not been decided in adjudication. Rather it had been decided on the basis of a technical default relating to notice requirements.

The adjudicator did not accept that he should resign. He proceeded on the basis that the value the final account had not been valued by the previous adjudicator.  By a decision dated 13 May 2016, the adjudicator decided that, on the basis of a proper valuation the final account was worth less than the amount that Purton had claimed had been paid. Accordingly, he decided:

(i)   that the true value of the final account for the works was £745,709.16;

(ii)  that Mr Purton should pay Kilker £55,676.84 plus VAT; and

(iii) that Mr Purton was primarily liable for the adjudicator’s fees and expenses in the sum of £13,140.00.

Mr Purton declined to comply with the Decision on the basis that the dispute as to the value and payment of the final account had been decided in the first adjudication. It was therefore argued it was not open to Kilker to re-adjudicate the value and/or payment of the final account. Accordingly Mr Molloy had no jurisdiction to decide the dispute referred and his decision was aid to be a nullity.

The adjudication enforcement proceedings

In the enforcement proceedings Mr Purton relied upon the judgment in ISG.  In that case it had been held that a party who fails to give a payment notice or a Pay Less notice in relation to an interim application it is deemed to agree the valuation for the purposes of that interim payment and must pay the notified sum. In those circumstances the paying party was not entitled to refer the valuation of the interim payment to adjudication.

Mr Purton argued that as neither the Act nor the Scheme differentiate between interim and final payments, a final account should be viewed in the same way as a interim valuation.

Mr Purton argued that the Court of Appeal’s judgment in Harding v Paice [2015] EWCA Civ 1231, which touched upon the issue, could be distinguished because on the facts there was a supervening event in that termination had taken place and so the value of the works had to be determined for that purpose.

Kilker argued that the Act and the Scheme regulate payment and cash flow, but do not decide the true substantive entitlement to payment under the contract and do not determine entitlement to payment on a conclusive basis.

Kilker accepted that in the absence of valid payee notices, the notified sum had to be paid. However, it was submitted that having paid, the paying party is entitled to seek a determination of any dispute about the valuation of the contractual entitlement in adjudication, or otherwise. It argued there was a difference between the position of interim payments and a final payment because the valuation of a final sum payable is a matter of substantive entitlement under the contract. This was not so with interim payments which were simply on account payments until the final valuation.

Mrs Justice O’Farrell held at paragraph 24-26 as follows:

“24. The statutory payment provisions in the 1996 Act and the Scheme establish a regime for determining stage or periodic payments throughout a relevant construction contract. They do not affect the ultimate value of the contract sum that the parties have agreed is the price for the works and/or services provided. 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. As explained in above authorities, the statutory provisions are concerned only with cash flow and not the contract sum.

25.  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. Any errors can be corrected in subsequent interim or final valuations. Therefore, an adjudication decision as to the “notified sum” payable precludes a challenge to the interim payment on grounds of valuation in a subsequent adjudication – see: ISG and Galliford.

26. 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 – see: Rupert Morgan and Matthew Harding. It is not necessary for the contract to set out any specific mechanism for that final accounting exercise; payment of any final sum due to either party is based on enforcement of the contractual bargain.”

Accordingly the decision of Mr Molloy was enforced and Kilker was entitled to recover the overpayment that had been made to Purton.

It is important to note that Kilker had made payment of the notified before the second, valuation adjudication, had been commenced. The dispute referred concerned reclaiming the overpayment. The judgment was not one that in anyway supported the notion that a paying party may resist payment of a notified sum by commencing a valuation adjudication.