A stark reminder of the importance of serving notices and the underlying principles of the Construction Act

• United Kingdom

• Construction and engineering

18-10-2022

In the recent case of AM Construction Ltd v The Darul Amaan Trust [2022] EWHC 1478 (TCC) the Court decided that:

• an adjudicator had no jurisdiction where the employer failed to effectively serve a notice of adjudication
• an employer’s failure to pay the “notified sum” is a bar to launching a “true value” adjudication, regardless of whether that notified sum had been determined as due by an adjudicator

Background

The Claimant, AM Construction Limited (“AMC”), had been appointed by the Defendant, The Darul Amaan Trust (“DAT”), to construct a new mosque. The works were delayed and there were disputes regarding the value of the works and payment. 

The contract was a “construction contract” under the Housing Grants, Construction and Regeneration Act 1996 as amended by the  Local Democracy Economic Development Act 2009 (“the Act”) and it included relevant provisions regarding interim applications for payment  and payment/payless notice requirements. It is also contained specific provisions regarding service of notices.

AMC sent an email to DAT in March 2020 valuing the works in the sum of £809,259.97 (plus VAT). DAT did not respond to that email. AMC sent further correspondence in July 2020 setting out the sum which it considered to be due and payable (£206,825.33 exc. VAT) attaching a breakdown headed “Interim Payment Notice Pursuant to Cl 4.11.2.2 of the Contract”. DAT did not serve a payless notice in response.

AMC suspended its works due to non-payment and DAT launched an adjudication to determine the true valuation of AMC’s works.  The adjudicator determined that DAT did not have to pay any further sums to AMC and that AMC was therefore not entitled to suspend its works.

AMC sought a declaration from the Court that the adjudicator’s decision was unenforceable on the basis that the adjudicator had no jurisdiction and, therefore, the amount AMC applied for remained payable.

Issues before the TCC

The Judge considered two main points:

1. service: had the notice of adjudication been validly served in accordance with the contract?
2. payment notices: did AMC serve a valid default payment notice, such that there was a “notified sum” that was due and payable by DAT?

Service of the notice of adjudication

DAT used a process server to serve the notice of adjudication on AMC at their registered office.  The notice of adjudication and supporting documentation had been sent by email from DAT’s solicitors to the process server for printing and delivery.  The process server put the envelope through AMC’s letterbox.

AMC received the envelope, but claimed that it did not contain the actual notice (only a covering letter and supporting documents).  The process server was adamant that he had printed all of the documents and placed them in the envelope that he delivered.

The Judge decided this factual issue using detailed witness evidence and testimony (including footage from a “Ring” video doorbell).  He ultimately preferred the witness statement evidence of AMC, noting that the process server’s evidence regarding the timing of his (alleged) two visits appeared inconsistent with the video footage and, therefore, less reliable overall.    

The Judge concluded that, because the notice had not been included in the envelope, the adjudicator had no jurisdiction and his decision was therefore invalid and unenforceable.  

Contractual notice provisions

The Judge went on to consider whether, if the notice had been included in the envelope, the use of a process server was a valid method of service in accordance with the contract.

The contract provided that: “any notice, communication or document may be given or served by any effective means and shall be duly given or served if delivered by hand or sent by pre-paid post.”  This differed from the wording at section 115 of the Act which refers to service being effective if it was “pre-paid and delivered by post”. 

In short, the Judge decided that the clause meant that in these circumstances effective service was either sending the notice by delivering it (which had to be by hand) or physically sending it by pre-paid post, which he concluded meant using one of Royal Mail’s pre-paid postal services. 

DAT was therefore attempting delivery by hand using a process server to post the envelope through AMC’s letterbox (and it would have been effective, had the notice been included), but this method did not amount to sending or delivering by post.

Did AMC serve a valid payment notice?

AMC also challenged jurisdiction on the basis that there was a notified sum that DAT had not paid before launching the adjudication, relying upon the rule established in S&T (UK) Ltd v Grove Developments Ltd¹(the “S&T Rule”).

AMC relied (in the alternative) on the documents that it issued to DAT in 2020 being valid payment notices in default (because DAT had failed to serve a payment notice or subsequent payless notice), despite them being for very different sums.

The Judge gave detailed consideration as to whether either of the documents could be considered to be valid payment notices and summarised the well-established legal principles, as follows:

• a payment notice must set out the sum claimed and basis upon which it was calculated²;
• be unambiguous and clear in form, substance and intent³;
• comply with the requirements of the contract

On this basis, the Judge concluded that the first notice was invalid as it was more akin to a final account assessment for use in negotiation.  The second notice, however, was valid as it would have been clear to the reasonable recipient⁴ that it was intended to be a formal payment notice under the contract.  As DAT did not serve a payless notice, the sum of £206,825.33 became the notified sum.

Although the Judge noted that the statutory regime did not permit more than one payment application and payment notice per period (section 110B(4) of Act), he concluded that because the first notice was invalid, this did not preclude AMC from serving a second notice. 

The impact of not paying the notified sum

The Judge reinforced and expanded upon the S&T Rule, concluding that DAT was not able to commence a “true value” adjudication until the notified sum had been paid, regardless of whether the notified sum had been determined by an adjudicator.

Counsel for DAT sought to argue that in the relevant case law (Bexheat Ltd v Essex Services Group Ltd [2022] EWHC 936 (TCC), M Davenport Builders Ltd v Greer [2019] EWHC 318 (TCC) and the Court of Appeal in S&T) the prohibition on commencing a true value adjudication only arises where there is an unsatisfied adjudication decision confirming the obligation to pay the notified sum.   This was dismissed by the Judge, who emphasised the comments of O’Farrell J in Bexheat that:

1. the entitlement to commence a ‘true value’ adjudication under section 108 is subjugated to the immediate payment obligation in section 111;
2. unless and until an employer has complied with its immediate payment obligation under section 111, it is not entitled to commence or rely on a ‘true value’ adjudication under section 108.

The Judge also considered the matter to be a policy decision, with the underlying purpose of the statutory machinery being the contractor’s right to payment where the employer has served no payless notice, rather than the employer’s right to adjudicate.

Summary

1. the Courts will not rescue a party who has not served a notice of adjudication strictly in accordance with the contract; this will render the adjudication process void and any decision unenforceable;
2. the obligation to pay a notified sum is an immediate one and must be fulfilled before an adjudication regarding the true value of the works can be commenced;
3. elaborating upon the S&T rule and citing the recent case of Bexheat, the obligation to pay the notified sum arises regardless of whether the obligation has been confirmed by an adjudicator.  The primary purpose of the Act was to ensure payment and this was more important than the right to adjudicate;
4. serving an invalid default payment notice does not preclude a contractor serving a second notice. However, this outcome seems quite fortuitous for AMC and contractors must still ensure any second notice is validly served.

Industry impact

The over-arching impact of this case remains to be seen, but there may be an increase in “true value” adjudications because employers have had to pay a disputed notified sum first and are seeking repayment of any alleged overpayment later. It could be that, where large sums are involved, employers resort to litigation or arbitration to resolve any disputes regarding the notified sum and seek declarations as to value at the same time.

Some take away points

1. check your contract notice provisions carefully. If they are unclear or poorly drafted, agree an appropriate method of service and vary the contract accordingly. It may be that service by email becomes a more popular and preferable method, given the pitfalls shown with printing hard copies and proving that the hard copies have been sent or delivered
2. there is a risk that more parties seek to argue that a hard copy notice has not been received by hand or post and so it may be appropriate to obtain clear evidence as to the contents of an envelope that is being sent by post or hand, such as photos or videos
3. if you are an employer or main contractor, ensure that supply chain applications or requests for payment are responded to (even where they do not appear to be compliant notices) in the form of a payment or payless notice 
4. a true value adjudication can be de-railed by an allegation that there is an unpaid notified sum.  In this case the payee did not need to commence a notified sum adjudication at all.  Therefore, if a payer has failed to serve a valid payment or payless notice it cannot rescue the situation (and avoid paying the notified sum) by commencing a true value adjudication before the payee commences an adjudication regarding the notified sum.
5. take legal advice before commencing a true value adjudication to limit the risk of jurisdictional challenges.

Written by Jennifer Fitzmaurice.

1. [2018] EWCA Civ 2448
2. Section 110A (2) of the Act
3. Token Construction Ltd v Charlton Estates Ltd [1973] 1 BLR 48
4. Mannai Investment Co. Ltd. v Eagle Star Assurance Co. Ltd [1997] AC 749