If you fail to serve a payment notice on time there’s no quick fix
Claims against architects for failing to advise clients to serve payment notices and pay less notices on time have become more likely as a result of the recent case of ISG Construction Ltd v Seevic College.
The rather complex Housing Grants, Construction and Regeneration Act 1996 (the Act) (which applies to most building contracts) have four central provisions.
First, building contracts must require either the client or the contractor to give a payment notice to the other not less than five days after each stage payment becomes due, stating the sum considered to have been due on that date and the basis on which that sum is calculated.
Secondly, the application for payment is deemed to be the payment notice if the client fails to serve a payment notice and, before the date on which it was required to issue it, the contractor has made an application for payment in accordance with the building contract which sets out the information required in a notice.
Thirdly, if the client fails to serve a payment notice in any other circumstances, the contractor may serve one instead.
Finally, the client must pay the sum specified in any payment notice unless it serves a pay less notice on the contractor an agreed time before the final date for the stage payment, setting out its intention to pay less than the sum in the notice, the amount it considers due, and the basis on which that is calculated.
In the ISG case, ISG’s application for a stage payment of £1,097,696.29 was deemed to be a payment notice because Seevic failed to serve its own payment notice. Seevic also failed to serve a pay less notice meaning that it was contractually required to pay the entire sum claimed by ISG. Seevic nevertheless refused to pay the sum claimed on the ground that the value of the works carried out by ISG was far lower than £1,097,696.29
Seevic’s failure to serve a payment notice or a pay less notice meant it could not dispute the value of the work
ISG referred its claim that Seevic must pay £1,097,696.29 to the adjudicator, who ordered it to pay the full sum claimed plus interest.
Seevic separately referred its claim against ISG to another adjudicator, who decided that the value of the work at the relevant date had been around £300,000.
ISG applied to the court for an order that Seevic be required to pay it the sum of £1,097,696.29 plus interest laid down by the first adjudicator, and also that the second adjudicator did not have jurisdiction to determine the value of ISG’s work at the relevant date because Seevic’s failure to serve a payment notice or a pay less notice meant it could not dispute the value of the work.
The judge granted the orders requested by ISG meaning that Seevic will have to pay £1,097,696.29 plus interest to ISG and seek to recover any overpayment through subsequent valuations, the final account process and/or court or adjudication proceedings.
The problems for a client in these circumstances are that: the loss of cash may unnecessarily affect its ability to fund its business and make other investments, and the contractor might become insolvent – making it impossible to recover the cash.
A client might well try to recover any losses it suffers from its architect if the architect is acting as the employer’s agent or contract administrator and has failed properly to advise on the service of the relevant notices. Architects should take care to ensure that they fully understand the complicated notice regime if they are taking on this sort of work.
Douglas Wass is a partner at Macfarlanes
Fit for habitation
The Defective Premises Act 1972 requires a person taking on work for, or in connection with, the provision of a dwelling to see that the work is done in a workmanlike and/or professional manner with proper materials, so that the dwelling will be fit for habitation when completed.
In Rendlesham Estates Plc & Others v Barr Ltd it was decided that:
- Whether or not a dwelling is fit for habitation must be judged by reference to the standards current at the time when it was built
- The dwelling must be fit for habitation by all types of person who may reasonably be expected to occupy it, including babies and those who suffer from common conditions such as asthma
- A dwelling is fit for habitation if it is capable of occupation for a reasonable time without risk to the health or safety of the occupants and undue inconvenience or discomfort to the occupants.