Default Payee Notices which are found to be wrong

Update – 12 December 2023 This article was originally published on 26 October 2023. Since then, and very recently, the Court of Appeal has given FK Construction Ltd permission to appeal both decisions, in respect of the Shawyer and the Adjudication 2 proceedings. These are due to be listed for a 1.5 day hearing. We will continue to monitor the proceedings.

ISG Retail Ltd (ISG) and FK Construction Ltd (FK) have been involved in a recent series of proceedings as a result of ISG terminating FK’s retainer to undertake roofing and envelope cladding works which has culminated in this claim.

This case, heard in the Technology and Construction Court (TCC), concerns a default payee notice under section 110B (4) of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) and the restitution of sums later found by the court to be wrong.

This case is important as it has wider implications for default payee notices routinely used in the construction industry.

Background

For clarity, we set out a chronology of the relevant events and decisions referred to in this article:

• Adjudication 1 dated 27 February 2023: AFP 16 was a valid default payee notice and £1.69 million due to FK from ISG.
• The Smith Order on 5 May 2023: agrees with Adjudication 1.
• Adjudication 2 dated 14 April 2023: FK’s works valued at £3.7 million and extension of time granted.
• Adjudication 2 Proceedings issued on 5 May 2023: ISG sought declaration in respect of Adjudication 2.
• Shawyer Judgment dated 13 June 2023: separate proceedings between the parties where the court decides that AFP 14 was not a default payee notice because it had not been “notified in accordance with the contract”.
• Adjudication 2 Proceedings hearing dated 14 July 2023 to determine sums due in respect of Adjudication 1 and 2 (this judgment is the subject of this article).

FK commenced adjudication proceedings in January 2023, claiming that ISG had issued an invalid payment and/or pay less notice in respect of Payment Application (AFP) Nr 16. FK sought payment of £1,691,679.94 + VAT (Adjudication 1).

The sub-contract (Contract) allowed for applications for interim payments to be made with each payment cycle. The Contract also stipulated that an application for interim payment had to be served not less than nine days before the due date. FK’s application had been submitted late. However, the Contract also included a provision that treated late payment applications as “valid”.

FK argued that as there was no payment notice, ISG’s AFP 16 was to be regarded as a default payee notice, to establish the notified sum. The notified sum was therefore the amount stated as due on AFP 16 and ISG were required to pay it. The Adjudicator agreed with FK, who then issued enforcement proceedings. ISG paid the amount to FK pursuant to an Order from Judge Joanna Smith also determining that the AFP 16 was valid under the Contract (Smith Order).

Subsequently, ISG commenced further adjudication proceedings against FK. The Adjudicator decided that the gross value of FK’s works was £3.7 million and FK were entitled to an extension of time (Adjudication 2).

ISG then issued Part 8 enforcement proceedings against FK seeking a declaration in respect of Adjudication 2 (the Adjudication 2 Proceedings).

Consequently, two separate Part 8 proceedings followed. One of these proceedings, the Shawyer Proceedings, involved a notified sum dispute in relation to a AFP 14, similar to the Adjudication 1.

In the Shawyer Proceedings, the judge decided that AFP 14 was not a default payee notice (Shawyer Judgment) because it had not been “notified in accordance with the contract”. The implication of this Judgment indicated that the Smith Order was invalid as AFP 14 in the Shawyer Judgment was declared as not forming a default payee notice under the Contract which was in contrast to what was decided in respect of AFP 16 in relation to the Smith Order.

Following the Shawyer Judgment, ISG were given permission by the court to amend its claim for enforcement in respect of Adjudication 2 Proceedings to seek a declaration that that the sums awarded in the Smith Order in respect of Adjudication 1 were to be repaid.

Legal arguments

In the Adjudication 2 Proceedings, ISG argued that the Smith Order could not be relied upon in accordance with the Shawyer Judgment. Further, the Shawyer Judgment was a final determination of the Smith Order and AFP 16.

Relying on Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc [2015], ISG argued that restitutionary considerations applied where the basis of the decision to order payment was incorrect. Hence, those sums were required to be repaid plus interest.

FK argued that ISG should seek to apply for a repayment in a future payment cycle and the matters in the Smith Order were not affected by the decision ordered in Adjudication 1. Further, the Adjudication 1 decision had not been declared unenforceable.

Judgment

The judge decided in favour of ISG and ordered that ISG was entitled to summary judgment for the repayment of the Smith Order award. ISG was entitled to recover this because the temporarily binding effect of the incorrect Smith Order must be rectified to the final effect of the correct judgment in the Adjudication 2 Proceedings.

All the other disputes, including the true value of FK’s works and any defences by FK, fell outside the present proceedings.

Comment

Therefore, a late application for payment cannot operate as a default payee notice where the paying party has not served an effective payment or pay less notice.

In accordance with TCC authorities, a failure to serve effective payment or pay less notices has the consequence of a paying party having to pay a notified sum without being able to interrogate the sums.

Similarly, the court has decided the same standard applies to the party making the application. It cannot rely on its application as a default payee notice if the application did not strictly comply with the contract. As such, the applicant has to issue a further default payee notice under section 110B of the Construction Act.

FK are seeking permission to appeal to the Court of Appeal.