Is a pay less notice really necessary to contend payment following termination of a contract?

30 / 01 / 2018

Is a pay less notice really necessary to contend payment following termination of a contract? Yes says the Court of Appeal

In Adam Architecture Ltd v Halsbury Homes Ltd [2017] EWA Civ 1735 the Court of Appeal gave useful guidance on the application of s111 of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”) following completion and/or termination of a contract.

Background

Adam Architecture Ltd (“AAL”) were appointed to carry out architectural design services for a new housing development in Norfolk by Halsbury Homes Ltd (“Halsbury”). Halsbury had accepted AAL’s fee proposal in October 2015 which included the RIBA Conditions of Appointment of an Architect.

In December 2015, Halsbury emailed AAL indicating that it intended to appoint another firm of architects to prepare the planning application and design the layout of the development but that they would retain AAL to assist with the house styles. AAL replied to that email explaining that their understanding was that they were designing the layout of the development and consequently there was no longer a place for them on the project. They promptly submitted an invoice for payment of their fees to date (approximately £46,000).

Halsbury did not serve a pay less notice and did not pay the invoice. AAL commenced an adjudication and the adjudicator found in its favour in light of Halsbury failing to serve a pay less notice.

Proceedings

Both parties issued proceedings, Halsbury disputing the payments and the adjudicator’s decision and AAL seeking to enforce the adjudicator’s decision.

At first instance the judge found in favour of Halsbury on the basis that Halsbury’s email had been a repudiatory breach of contract which AAL had accepted, and Halsbury was not contractually required to serve a pay less notice because the contract had been discharged and there was no requirement to serve a pay less notice in respect of a final account invoice under the RIBA terms.

Court of Appeal decision

On appeal by AAL, the principal issue was whether s111 of the Act applies to payment following completion and termination or solely to interim payments. The Court of Appeal came to the firm conclusion that s111 of the Act does apply in those circumstances. It was noted that while s109 of the Act is expressly limited to interim payments, sections 110-111 are wider in scope and relate to any payments which were provided for by a construction contract, not just interim payments.

Therefore Halsbury had been required to serve a pay less notice (under s111(3)) if it wished to resist paying AAL’s final account. The Act operates to prevent the payer withholding sums due if it does not serve a pay less notice. The Court of Appeal held that Halsbury had been required to pay the full invoice amount.

As to whether AAL had accepted a repudiatory breach, the Court of Appeal held that they had not. The invoice submitted by AAL had been for sums due for work done prior to the termination and was not a claim for damages for breach of contract. Therefore AAL had the benefit of the statutory scheme and was entitled to adjudicate and recover payment of its outstanding invoice.

Practical Considerations

  • The conclusion by the Court of Appeal is clear, that s110-111 of the Act apply to final accounts or accounts following termination as well as interim accounts.
  • It is important that employers (and their agents) are aware that if they wish to contend a final account or accounts following termination, a pay less notice must be served. Failure to do so by the required deadline could result in an adjudication decision against them requiring payment of the full amount applied for.
  • Payment mechanisms under the contract and the Act must be followed throughout the life cycle of the contract including the final account or upon termination.
  • Termination should be considered at the outset of any contract, including where consultants are appointed for early stage pre-planning permission services. Provisions should be included in the contract to deal with payment of fees incurred in the event of termination.
  • When terminating a contract it is important to carefully follow the procedure for termination prescribed by the contract, in order to avoid any argument that there has been a repudiatory breach of contract which, if accepted, could result in discharge of all obligations under the contract.

Katherine Keenan, Solicitor, Wedlake Bell LLP