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Update: ISG & your
right to payment

Update: ISG & your right to payment

June 2, 2015
Update: ISG & your right to payment

We recently commented on the case ISG Construction Ltd v Seevic College [2014] EWHC 4007 (ISG). (Find our article here)

The decision in ISG was confirmed in Galliford Try Building Ltd v Estura [2015] EWHC 412 (TCC) where the Defender sought to rely on the decision in ISG, to show that in the circumstances it had been deprived of a remedy.

The adjudications

Estura had entered into a design and build contract with Galliford. Galliford submitted an interim application for payment, and a dispute arose as to the sum due on this application. It was referred to adjudication.

The interim application stated that the anticipated final sum was £12.66 million. This was almost £5 million more than the contract provided. If paid in full, Galliford could only hope to obtain about an additional £4,000 on final payment. Estura claimed that sum actually due upon this application was only £147,00 plus VAT.

The contract provided that if Estura did not agree with the sum due under any interim payment application, it should serve a payment notice. If it did not, the sum stated in the application would become due. If Estura considered that it had a right of set-off, it could also serve a pay less notice. The contract made no provision for negative valuations.

No notices were served on Galliford. On this basis, the adjudicator applied the decision in ISG and found that the Pursuer was entitled to the sum applied for: £3,928,227 plus VAT.

Estura then brought a second adjudication seeking to declare that the value of the interim application should have been much lower. The adjudicator refused to act on the basis that he did not have jurisdiction to open up the question regarding the value of the works at the date of the interim application which had already been determined by another adjudication.

The court case

Galliford sought an action for summary judgment, seeking to enforce the first adjudicators award.

In the course of this action, Estura claimed that the decision in ISG effectively prevented it from seeking to reduce the value of the interim application. Estura’s argument may be boiled down to two main assertions:

(1) not having issued any payment notice or pay less notice, Estura could not bring a second adjudication to determine the value of the same interim application; and

(2) if Estura paid Galliford the entire sum due on the application, Galliford would have obtained payment of almost everything which it could have hoped to receive for the entire project.

On this basis, it was argued that Galliford would have no incentive to submit a final account to Estura, and if no final account was submitted, Estura would not be able to challenge the sum due.

In dealing with the first part of this argument the court emphasised that the employer cannot be denied the opportunity of challenging the value of the work on the next payment application. The effect of ISG was that any issue of potential overpayment could be dealt with in later application or upon final account.

Considering the second part of Estura’s argument, the judge explained that until the adjudicator’s decision had been resolved by the courts and become final, Estura could seek to challenge the adjudicator’s award in the courts. Indeed, Estura could even start proceedings seeking to determine the final account. The ISG judgment did not prevent this course of action.

Therefore, Estura’s argument was rejected and the judge found in Galliford’s favour. But, in consideration of the particular circumstances regarding the parties financial situations, the judge only allowed payment of £1,500,000 immediately and ordered that payment of the remainder of the award should be stayed until certain conditions had been fulfilled.

Conclusion

Basically, this judgement explains what the judgment in ISG did NOT do.

It did NOT prevent an employer from challenging the value of the work carried out by the contractors in any later interim payment applications or the final account.

It did NOT prevent the employer from seeking a reduction of an adjudicator’s award in the courts.

What it did do, was simply to provide that where the employer has not issued any relevant notices, and the contract does not provide for the negative valuation, it cannot bring a second adjudication to challenge the value of the interim application in question.

In this case, the judge followed ISG but took the view that as a result of the exceptional circumstances it would not be fair to allow immediate enforcement of the judgment in full, which provided Estura with some relief. If the judge had not reached this conclusion, and if for whatever reason a final account was not produced or delayed, Estura’s only way to address the actual value of the work would be to seek to adjudicate on the value of the work carried out by Galliford. Considering the contractual provisions on final accounts and practical completion, this is not a remedy which would have been immediately available to Estura.

It appears therefore that, just as in ISG, the lesson to be learned from this case is to get your contract right and know its provisions. By keeping on top of the payment mechanisms and serving valid and effective notices, an employer may avoid disputes about the value of payment applications.

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