Project costs: certainty through certification

Clearly costed

20 September 2018

Some recent cases provide more certainty on determining project costs through the use of certificates, writes Shy Jackson

The Housing Grants, Construction and Regeneration Act 1996 came into force a little more than 20 years ago with the aim of increasing certainty on costs and payment. As the recent court decisions discussed below demonstrate, though, there is still scope for clarification.

Termination and certificates

In Adam Architecture Ltd v Halsbury Homes Ltd [2017] EWCA Civ 1735, a firm of architects was appointed under an agreement incorporating the RIBA Conditions of Appointment for an Architect of 2012. When the architects wrote to end their involvement and then invoiced for the work done, the employer failed to pay. An adjudicator found in the architects’ favour, essentially because a ‘pay less’ notice had not been served.

In the High Court, the judge did not enforce this decision, finding that the employer was not obliged to serve a ‘pay less’ notice under the 1996 act. The Court of Appeal, however, decided otherwise on the basis that section 111 of the 1996 act, as a matter of interpretation, applied to all payments under a construction contract even after it has ended.

Termination was also an issue in Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd [2017] EWHC 1763 (TCC), but here the contractor won an adjudication before termination because the employer had not issued the required notices, and was also successful in enforcement proceedings. At trial, the employer sought to recover an alleged overpayment, while the contractor relied on ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) to argue that the employer was bound by the adjudicator’s decision and could not challenge the works’ value.

The judge did not apply ISG, holding that NEC contract provisions meant that the project manager could correct any wrongly assessed amount under clause 50.5, and that the contract also made clear that payment relieved a contractor of its obligations.

Smash and grab adjudication

The ISG decision was subsequently considered in Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC). The contractor won an adjudication due to a lack of a valid ‘pay less’ notice in respect of its interim application 22, and 1 of the issues before the court was whether the employer could start a new adjudication to determine the true value of this application.

The judge began by looking at 1st principles, finding that a court, and an adjudicator under the 1996 act, could determine the true value of any certificate. The employer could therefore commence an adjudication to determine the true value following payment, and this was not unfair because a contractor could challenge the value of works certified by the employer. He also found that interim and final payments should be treated the same.

The judge went on to consider whether his decision would go against the aim of ensuring the contractor’s cash flow, but did not think this an issue because the contractor would be paid; if there were repayment following the 2nd adjudication based on the true value that would not be unfair. In his view, cash flow must not be confused with the contractor retaining monies to which it has no right.

Finally, he suggested that his decision will strengthen the adjudication system by reducing the number of ‘smash and grab’ claims – where a payee claims payment based only on the lack of a valid notice without addressing the value of the works – which he thought brought adjudication into some disrepute.

Accordingly, he found that the employer was entitled to start an adjudication about the true value of interim application 22 and that the decision in ISG was erroneous or incomplete.

Conclusions

These decisions add clarity to the position after the works have ended, but Grove Developments is likely to have the bigger impact by potentially reducing the number of ‘smash and grab’ adjudications.

While the court did not think this was a problem and considered that such adjudications do not prevent the need for establishing the true value, the decision does reduce the impact of a party failing to serve a notice as required under the 1996 act. How this operates in practice may well depend on the circumstances in each case.

Shy Jackson is Partner at Pinsent Masons

Further information

Download a complete “Project costs: certainty through certification” PDF