"The Golden Rule is that there are no Rules"

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"The Golden Rule is that there are no Rules"

October, 2020
John Riches

George Bernard Shaw was a bit of a rebel. His quote in the title above was one of his codes of life. He also did much to support the abolition of the apostrophe, publishing his plays without them.

He failed on the apostrophe front (without them it would be too easy to learn the quirks of punctuation) but maybe he had some success on the rules front.

The problem with law is it is all about rules. But there are times when those rules are inexplicably broken, ignored or changed at will and that becomes the new rule.

Let’s start with the rule. Tucked away in the Construction Act are sections 111(8) and (9). What they say is this;

“(8) Subsection (9) applies where in respect of a payment—

(a)        a notice complying with section 110A(2) has been given pursuant to and in accordance with a requirement of the contract (and no notice under subsection (3) is given), or

(b)        a notice under subsection (3) is given in accordance with this section,

but on the matter being referred to adjudication the adjudicator decides that more than the sum specified in the notice should be paid.

(9) In a case where this subsection applies, the decision of the adjudicator referred to in subsection (8) shall be construed as requiring payment of the additional amount not later than—

(a)        seven days from the date of the decision, or

(b)        the date which apart from the notice would have been the final date for payment,

whichever is the later.”

What is this all about? Sub-section 8 sets the scene with some unhelpful cross referencing. A notice under section 110A (2) is a Payment Notice. A notice under section 111(3) is a Pay Less Notice.

So, for Sub-section (9) to apply there must be either a Payment Notice or a Pay Less Notice in place. 

This is the means of disputing either of those notices. If you do and succeed payment can only move in one direction: a further sum to be paid. If you fail to increase the amounts in either notice the amount in the Payment Notice or Pay Less Notice (whichever is the later) prevails.

I am confident that this is what sub-sections (8) and (9) mean because that is exactly what they say.

In addressing the mischiefs on payment there were some explanatory notes (not binding) which explain what Parliament was trying to do. What those notes say is as follows;

331. Subsection (8) states that subsection (9) applies where the payment notice provisions have been complied with but there is a dispute about the amount owing and the adjudicator decides that more money is owed than that set out in the relevant notice.

332. In such a case, subsection (9) provides that any such additional amount must be paid by the date which is the later of seven days from the date of the adjudicator's decision or the date which, but for the notice, would have been the final date for payment.”

So I was confident in all of this and particularly the point that payment is one way traffic, additional amounts above those in the Payment Notice or Pay Less Notice become due following an adjudication disputing the amounts and the Adjudicator can award further sums.

What he cannot say is the sums in the Payment Notice or Pay Less Notice were too high and what was due was a lesser sum.

But then the rule changed. In Grove v S&T what the Hon Justice Coulson said was 

84.      can refer the dispute about the true valuation to adjudication, once he has paid the sum stated to be due, arises from considerations of equality and fairness.  It is not controversial that, if an employer serves a payment notice or a pay less notice which is in a lower sum than that for which the contractor has applied, the contractor can refer the dispute about the ‘true’ value to adjudication.  Sections 111(8) and (9) of the 1996 Act expressly envisage that situation: although they are concerned with when any additional sum is to be paid, they assume that the contractor has the right to make such a claim in the first place.  It has never been argued that a contractor cannot do this, and Mr Speaight did not suggest otherwise.

85.       If a contractor can launch an immediate attack on the “sum stated to be due” in the pay less notice, because they say that it is too low, there would need to be clear words in the 1996 Act and/or the Scheme and/or the particular contract in question which would prohibit the employer from being able to do the same.  There are no such words anywhere.  In my view, there is nothing in the 1996 Act or the Scheme or the JCT form which envisages such a one-way street. Accordingly, it would be wrong in principle to prohibit the employer from doing that which the contractor can do: there can be no justification for such radically different treatment.”

So, no one-way street? Sorry I always thought that the words in the Act were clear in terms of 111 (8) and (9) only dealing with an additional sum. Additional sum means the payer cannot adjust the position stated in a Payment Notice or a Pay Less Notice to get money back. 

The Court of Appeal, other than picking up that paragraph 20 of the Scheme incorporates 111 (9) did not go down the one-way street in either direction.

The great thing about these little dilemmas, the Act says one thing and the judgment says another it always begs the ‘what if’ question. Along comes Flexidig v M&M Contractors (Europe) Ltd [2020] EWHC 847 (TCC) (11 March 2020), which touches on s.111(8) and (9).

Basically M&M alleged the works carried out by Flexidig were defective, and that the cost of remedying them would exceed any sum due to Flexidig. But Flexidig got in first. They were awarded £184,000 by an Adjudicator in August 2018.

M&M were somewhat ‘miffed’ and issued a writ in Northern Ireland seeking that the Decision of the Adjudicator be set aside because it had been made in breach of natural justice. 

In the second adjudication M&M were awarded £462,456. Flexidig did not pay and further proceedings were issued in Northern Ireland, which were stayed whilst the parties tried to settle their differences. 

There was another adjudication. Flexidig had sought £2,507,481 and M&M paid the lesser sum of £1.72m leaving a balance of £673,374.

M&M sought to justify its position in a letter 9 October 2019, which it later relied on as a Pay Less Notice, saying that not only was a balance not due to Flexidig but that the cost of making good defects in Flexidig’s work amounted to £1,504,598. Their arguments in the adjudication about the validity or indeed the existence at all of M&M’s Payment Notice or Pay Less Notice or whether there was a valid breakdown of M&M’s figures. 

The adjudicator awarded Flexidig £223,000 and he did so by reducing the amount that M&M could set-off from the £647k down to £449k odd. M&M would not pay Flexidig the sum awarded. There was an argument on whether or not the dispute was solely about the technical adequacy of M&M’s Pay Less Notice.

Why was the Adjudicator able to do what he did? He adopted section 111 (8) and (9). But what about the Pay Less Notice remaining untouched. In this instance whilst the Pay Less Notice got home technically the amount set-off was too high. By reducing that sum that resulted in a positive payment to Flexidig.

The judge was satisfied that this application of section 111 (8) and (9) was within jurisdiction. That decision was also aided by that phrase or such other sum in the Notice of Adjudication. 

I expect we have not heard the last of section 111 (8) and (9). If this case is not a new rule it is at least a new twist.

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