The Court of Appeal recently handed down a judgment that confirms the reach of section 111 of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”) and provides increased certainty in relation to the applicability of pay less notices post-completion and even post-termination.

Background

The case concerned a professional services appointment. Adam Architecture Limited (“Adam”) had been engaged by Halsbury Homes Limited (“Halsbury”) to carry out design works under an appointment subject to RIBA Conditions.  Adam commenced work in October 2015 but on 2 December 2015 Halsbury terminated the engagement without prior notice, opting instead to proceed with a local architect. Adam submitted a final invoice for work done. Halsbury did not provide a pay less notice and did not pay Adam’s invoice.

Adam commenced an adjudication to recover payment of its final invoice and an earlier unpaid invoice. The adjudicator found in favour of Adam, essentially because Halsbury had failed to serve a pay less notice in respect of either invoice. Halsbury did not comply with the adjudicator’s decision.

TCC proceedings

Halsbury issued part 8 proceedings, seeking, amongst other things, a declaration that the pay less regime did not apply to the December 2015 invoice and so Halsbury was not liable to pay it. Adam also issued its own adjudication enforcement proceedings.

The Judge found in favour of Halsbury, dismissing Adam’s claims because:

1. Halsbury had repudiated the contract by email.
2. Adam accepted the repudiation by: its emails of 2 December 2015; stopping work on 2 December 2015; and issuing its invoice.
3. Halsbury was not required to serve a pay less notice as the contract had been discharged and, as such, neither party was required to perform its primary obligations under the contract. The invoiced sum was also not “the notified sum” under the RIBA Conditions as it was a final account or a termination account.

Adam did not accept this judgment and appealed.

" Pay less notices are required not only in relation to interim payments but also in relation to payments after completion of the works and even post-termination. "

The Appeal

The principal issue in the appeal was whether section 111 of the Act applies only to interim payments or whether it also applies to payments due following completion of the works or termination of the contract. Adam asked the Court to consider the following:

Ground 1: Whether section 111 of the Act required pay less notices in respect of both interim applications and any final account or termination account; and

Ground 2: Whether the Judge erred in his decision on repudiation.

Ground 1: The effect of section 111

Halsbury said sections 110 to 111 of the Act are limited in their scope, relying upon the wording of section 109 of the Act, which is limited to interim or stage payments, and the principal objective of the Act being to maintain cash flow to contractors and subcontractors during the course of a project.

However, Jackson LJ in the Court of Appeal concluded that by reference to the wording of the Act it seemed clear that “section 111 relates to all payments which are ‘provided for by a construction contract’, not just interim payments”. 

Jackson LJ concluded that:

“Section 111 of the 1996 Act applies to both interim and final applications for payment. I reach this conclusion on the basis of the clear words of the Act and also in the light of the authorities cited. Therefore if Halsbury wished to resist paying Adam’s final account or termination account, then (subject to the repudiation issue) it was obliged to serve a pay less notice. I therefore uphold the first ground of appeal.”

Ground 2: Repudiation

Jackson LJ took a different approach to the Judge at first instance in dealing with the issue of repudiation.  Even on the assumption that Halsbury had repudiated the contract, Jackson LJ was not persuaded that Adam had accepted any repudiatory breach. Adam treated the email dated 2 December 2015 as a termination without appropriate notice. Adam accordingly stopped work and sent an invoice for work actually done, and no more.

The invoice submitted was not a claim for damages for breach of contract. It was regarded by Jackson LJ as either an account following termination pursuant to clause 5.15 of the RIBA Conditions, or alternatively simply a bill for work done. Accordingly, in the absence of any pay less notice, “Adam had a cast iron case to recover payment on both outstanding invoices”. Accordingly Adam’s appeal was allowed unanimously.

The implication

This case clarifies that pay less notices are required not only in relation to interim payments but also in relation to payments after completion of the works and even post-termination. It seems there is a difference where there has been repudiation but, if a payer is in any doubt about the repudiation, a pay less notice should be served.