Laws are like sausages: It’s best not to see them being made

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Laws are like sausages: It’s best not to see them being made

December, 2018
John Riches

To retain respect for sausages and laws, one must not watch them in the making. Otto Von Bismark (1869)

Roughly speaking we make laws in two ways, we legislate and then there is judge made law.

Often judge made law (what we call case law) appears to conflict with what the legislation says. That becomes what is sometimes called established law.  It follows the principle of stare decisis   - “to stand by things decided”.

It is always the case that it is the law for now.  

We keep going back to ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) (03 December 2014), that smash and grab case. Reports of its death are much exaggerated.

It has a new lease of life, but before going to that, let’s see why smash and grab was exactly what Parliament always intended. 

In March 2004 Gordon Brown, the then Chancellor of the Exchequer, in his March statement said: "Following concerns expressed by the construction industry on unreasonable delays in payment, the government will review the operation of the adjudication and payment provisions in the Construction Act to identify what improvement can be made."

That was the start of the process which took us through interminable consultations until eventually we reached the point of the LDEDCA 2009. Part 8 of that Act, which is the bit that affects construction and gives us our present but problematic payment provisions came into force on 1 October 2011.

What is interesting as part of the process that led to that Act there were briefing papers given to Parliament. When the Bill proceeded in the House of Lords there was one such briefing in November 2011 which gave the briefing note on Part 8. This became the amendments which became our current Adjudication and Payment provisions. 

What the Part 8 briefing note deals with in some detail is the territory that we are all currently familiar with, the regime of payment notices and what happens when there is failure to issue the requisite payment notice.

The interesting section says this

324.     Subsection (1) of new section 111 provides that the payer must pay the “notified sum” - i.e. the sum set out in such notice - on or before the final date for payment of such sum, (to the extent that it is unpaid). Subsection (2) has the effect of explaining what is meant by “the notified sum”. In relation to a payment, it is (as appropriate):

  • the sum set out in a “payment notice” given by a payer (whether such notice is given pursuant to an express term or one implied into the contract pursuant to the relevant Scheme for Construction Contracts) or by a “specified person” (subsection (2)(a));
  • the sum set out in a “payment notice” given by a payee (subsection (2)(b));
  • the sum set out in a payee’s “payment notice” in default of one given by the payer or “specified person” (see paragraph 319 above) (subsection (2)(c));or 
  • the sum set out in a payee’s “application”, where such notification is deemed to be a notice given in default of one given by the payer (see paragraph 321 above) (subsection (2)(c)). 

325.     This requirement to pay the "notified sum" is intended further to facilitate "cash flow" by determining what is provisionally payable. What is properly and ultimately payable as a matter of the parties' contract is unaffected (see the decision of the Court of Appeal in Rupert Morgan Building Services (LLC) Limited v Jervis [2003] EWCA Civ 1563).

So, it was all about cashflow. The oft quoted part of the Rupert Morgan case is the pay now litigate later bit.

Even that was not original to that case. The original remark was made by Sheriff J.A. Taylor in Clark Contracts v The Burrell Co. [2002] SLT 103.  

What was said was ‘The structure and intent of the Act, as I understand it, and accepted by Mr Cormack, is to pay now and litigate later.’ That was adopted in the Rupert Morgan case.

All that comes from the reliance on Rupert Morgan in the briefing notes to the House of Lords.

It all sounds a bit smash and grabby to me. Maybe that is exactly what Parliament intended. Pay now, that improves cashflow and then sort it all out on the Final Account.

There is nothing in all of that that prevents adjustment in the next interim payment. It only becomes uncomfortable when the adjustment made in the next interim is not enough to cover a sum overpaid.

Of course, there is an easy remedy, not one in fact two, where the Payer can either issue a Payment Notice or a Pay Less Notice or both (that’s three remedies isn’t it?). In most of the cases we have had there has been some sort of fault with the Notices issued or not issued as the case may be.  

So, what is the law for now? The appeal has just been published in S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448. Where does smash and grab now sit? What of pay now and argue later?

They both still exist but they are somewhat modified. 

The primary purpose of the Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 1996 is to modify construction contracts, so they contain those features on Adjudication and Payment as required by the Act. If they don’t comply, the Scheme for Construction Contracts (England and Wales) Regulations 1998 as amended by the Scheme for Construction Contracts (England and Wales) Regulations (Amendment) (England) Regulations 2011 applies. 

There was no question in S&T and Grove that the contract did not comply. The contract was the JCT Design and Build Contract 2011, so the Scheme did not apply in respect of payment. 

The case deals with the interrelationship between the contract provisions and the legislation.

Providing the necessary notices are in place the notified sum must be paid. That is the payment bargain. That is unassailable because s111 (1) is a statutory right to be paid. It does not require anything in nor does it modify contracts. The Court at first instance and at Appeal made clear that there was a Statutory right to be paid the notified sum. 

That right has existed since the Local Democracy Economic Development and Construction Act 2009 amendments, but this is the first case that has actually identified that this right is the only part of the Construction Act that has overriding statutory force.

The other provisions in the Construction Act are subsidiary, they primarily deal with administration and tinkering with contracts. 

There is nothing here that ISG v Seevic offended. The smash and grab still prevails in terms of the obligation to pay and importantly the right to be paid. 

Provided a party can satisfy all the other rules the Courts have created on form, substance and intent and importantly timings with an Application for Payment or a Default Notice, they are within the rules that satisfy the Statutory right to be paid. The smash and grab exists that far. 

The second bargain is the Valuation bargain. That is a creature of contract and not of statute. The analysis of both at first instance and on Appeal concentrated on the payment provisions in the JCT contract. It must follow that although a Valuation bargain now exists in principle it must vary from contract to contract depending on the express words in the valuation provisions (not payment provisions) in the particular contract. 

The particular analysis of the contract distinguished the ‘sum due’ and the ‘sum stated as due’. I dealt with this in my previous article on this case at first instance.

I still have difficulty with this distinction. The contract here was a JCT 2011 Design & Build. It is the only contract in the JCT suite where the payment system is payer led, all the others are payee led. 

The payment process starts with the Interim Application. That can only be based on clause 4.7 in the contract which must be as a starting point the ‘True Value’. 

In any event we are stuck with how the Court of Appeal dealt with the whole matter, but it must present a dilemma to parties who are trying to administer these terms.

Part of the judgment at paragraph 102 said ‘We are all trying to hack out a pathway through a dense thicket of amended legislation, burgeoning case law and ever-changing standard form contracts.’

I agree, but the trouble with this is the poor old advance party, the users in the industry who have to do this on a day to day basis and the Adjudicators who pick up the pieces with the industry. None of us know whether or not we have hacked the right pathway until we are in the Courts system and then it is all too late.

The current government consultation on all this stuff, take note, please tell us where the pathway is yet again.  

The Court of Appeal went further in its analysis of ISG v Seevic. 

What ISG had done was take the notified sum as the sum due, they were one and the same thing, it was ‘either or’ in a single dispute. Whichever got there first that was the dispute decided and there was no second bite of the cherry.  We now have two disputes, the Payment bargain dispute and the True value disputes, which are entirely separate under this judgment. 

The part of ISG v Seevic that has become the unacceptable face of the payment system is; 

18        In relation to Adjudication No 2, ISG submits that, as between ISG and Seevic, the value of ISG’s works as at the date of Application No 13 has been agreed because, in the absence of any notices served by Seevic, the value must be taken to be that stated in the application. Alternatively, ISG submits that, for essentially the same reason, there can be no dispute between the parties forming the subject matter of Adjudication No 2.

The Courts simply find it abhorrent that failure to issue a valid Payment Notice or a Pay Less Notice means that the amount applied for becomes the agreed sum due.  They also cannot accept that the amount to be paid is for default purpose also the True value.

The current position is that there are two clearly discernible disputes, the payment dispute which turns on notices and the true value dispute which turns on the valuation of the works through the valuation mechanisms in the contract.

This case both at first instance and in the Court of Appeal must be viewed as fact sensitive. The phrase ‘on these particular facts’ must spring to mind.

The particular and peculiar facts rely on the distinction in the contract between the sum thought to be due as opposed to the sum due. The ratio of the case as regards the valuation dispute relies entirely on the wording of the contract.

So, what happens if the next set of disputes is not on this contract?

For example, does the Scheme for Construction Contracts (England and Wales) Regulations 1998 as amended by the Scheme for Construction Contracts (England and Wales) Regulations (Amendment) (England) Regulations 2011 deal with a set of rules that would permit a True value dispute as being separate from the Payment dispute?

At this juncture why should I try to hack out a new pathway through a dense thicket? I might have to one day but for the present you can all speculate in comfort eating those sausages that you have quite correctly chosen to avoid seeing their manufacture! 

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