Pay less notices and termination

Words:
Alistair McGrigor

Once your contract is terminated must the client, which is loth to pay for work to date, serve pay less notices?

Should an architectural practice which has had its engagement terminated be entitled to the protection of the Construction Act for unpaid invoices?

That was the question recently decided by the Court of Appeal, in a case which clarifies how far the statutory protection of the Construction Act continues after termination.

The practice, Adam Architecture Ltd, had been engaged by Halsbury Homes Ltd to produce designs for a new housing development in Norfolk. After agreeing a fee proposal for the project, Adam set to work on the design. However, about six weeks later Halsbury informed Adam that Halsbury would continue with Adam for the house designs but intended to use another firm of architects for much of the other work on the scheme, including its overall layout.

Adam replied that it had previously understood the other firm would only be carrying out elements involving engineering input, and that the design of the layout was such an essential part of Adam’s design that if it had no input on the layout there was no place for Adam on the project. As such, Adam took Halsbury’s decision to use the other firm as a termination of its engagement.

Adam ceased work that day, submitting an invoice the next day for its fees for the services it had carried out to date. Crucially, Adam did not seek any damages for the termination, it only sought payment of its fees to date. Halsbury did not pay that invoice, nor did it serve any 'pay less' notice under the Construction Act. 

The question that Adam and Halsbury found themselves arguing over was whether Halsbury was required by the Construction Act to serve a pay less notice if Adam's engagement had been terminated

‘Pay less’ notices are required by the Construction Act where a paying party wishes to pay less than the sum notified to or from the payee. In the case of payments made during the course of a project, it is absolutely critical for the paying party to serve a pay less notice where it is not paying the full amount notified, and a failure to serve a pay less notice will entitle the payee to payment of the notified sum.

The question that Adam and Halsbury found themselves arguing over was whether Halsbury was required by the Construction Act to serve a pay less notice if Adam’s engagement had been terminated.

In the first hearing of the case, the judge decided that no pay less notice was needed, because the contract had been discharged by the termination, and the nature of the invoice (being a final invoice not an interim invoice) did not require a pay less invoice under the terms of Adam’s engagement.

However, the Court of Appeal’s recent judgment took a different view. On its interpretation of the Construction Act, the relevant section obliging pay less notices (s.111) is not limited to interim payments only (unlike some other sections of the Act dealing with payment matters) but instead applies to all payments provided for by a construction contract. It should not be 'permissible to read into that perfectly sensible and workable provision words which are not there' so as to try to limit it to interim payments only.

The fact that Adam was not claiming damages (but only fees for services carried out) also allowed the Court of Appeal to decide that Adam had not accepted a repudiation of its contract, but rather had merely submitted an invoice on termination under the terms of its appointment. That meant that Adam could rely on the Construction Act and the protection it offered.This case very usefully clarifies that, if your appointment document contains provisions for payment upon termination (and Adam was engaged under the RIBA conditions, which do), then even if your appointment has been terminated, your client must serve a pay less notice if it intends to pay only some or none of the amounts you have claimed.


In Plain English: Consideration

One of the key requirements for a contract to come into force is that each party must give ‘consideration’ – that is, each one must, in very broad terms, give something to the other party in exchange for what it receives from the other.

That consideration does not have to be money or goods or services, it can be rights or benefits. Equally, if a party agrees to incur a responsibility, that can be the consideration that it gives.

Putting this into the context of a contract for architectural services, the architect’s consideration is the carrying out of the services, whereas the client’s is the fee that is paid.

An important exception to the need for consideration is where a document is executed as a deed. Deeds (because of their more formally binding nature) do not need consideration to be given. So collateral warranties that you may be asked to sign will often only have the architect warranting its services to the beneficiary, with the beneficiary not giving any consideration. Just to be on the safe side, often warranties will also allow for a nominal £1 to be paid by the beneficiary, to make sure that the consideration requirement has been satisfied. 


Alistair McGrigor is a partner with CMS

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