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Pay less notices; smash and grab adjudications; the payment regime under the Housing Grants, Construction and Regeneration Act 1996

By David Sears KC

In Adam Architecture v Halsbury Homes [2017] EWCA Civ 1735, the Court of Appeal has ruled that section 111 of the Housing Grants, Construction and Regeneration Act 1996 (and the requirement to serve pay less notices) applies to payments due following completion or termination of a contract as well as interim payments.

Section 111(1) of the Act provides that: ‘Subject as follows, where a payment is provided for by a construction contract, the payer must pay the notified sum (to the extent not already paid) on or before the final date for payment’. Subsection (3) provides that: ‘The payer may in accordance with this section give to the payee a notice of the payer’s intention to pay less than the notified sum’.

In this case, Adam Architecture (‘Adam’) was retained by Halsbury Homes (‘Halsbury’) to carry out architectural design services for a new development at Loddon in Norfolk. However, after a number of weeks, Halsbury sent an email on 2 December 2015 to Adam saying that it had decided to proceed on the project with another architect. On 3 December 2015 Adam wrote to Halsbury saying that their ‘original scope of work was void and their agreed fee was no longer relevant and they needed to draw a line under their work to date’. They enclosed an invoice for work done up to 2 December 2015.

Halsbury served no pay less notice and did not pay the invoice. Adam commenced an adjudication. The Adjudicator found in favour of Adam essentially because Halsbury had failed to serve any pay less notice.

Halsbury then issued Part 8 proceedings for a declaration that the pay less regime did not apply to the December invoice and Halsbury was therefore not liable to pay. Adam issued Part 7 proceedings to enforce the Adjudicator’s decision.

Both claims were heard at first instance by Edwards-Stuart J who held that:

  • Halsbury’s email dated 2 December 2015 was a repudiatory breach of contract which Adam accepted in two emails of the same day and the letter of 3 December 2015 mentioned above;
  • Halsbury was not required to serve a pay less notice because (a) the contract had been discharged so that neither party was required to perform its primary obligations under the contract and (b) as a matter of contract construction, there was no requirement under the RIBA Conditions for Halsbury to serve any pay less notice in response to a termination account.

The Judge therefore held that Halsbury was entitled to the declaration sought and dismissed Adam’s application for summary judgment.

It is to be noted that Adam did not take the point at first instance that, whatever the contract provided, the payment notice regime contained in sections 110 and 111 of the Act obliged Halsbury to serve a pay less notice if it wished to avoid paying the invoice.

On Adam’s appeal, Halsbury therefore took the preliminary point that Adam should not be permitted to rely upon section 111 of the Act having failed to argue the point in the court below. However, the Court of Appeal said that it would be unrealistic to decide the appeal ignoring the relevant provisions of the Act and that it would be doing a disservice to the construction industry if it gave a judgment which disregarded the relevant statutory provisions.

The Court of Appeal made almost equally short shrift of the repudiation point. Contrary to the conclusion reached by the Judge, Jackson LJ (with whom Lindblom and Thirlwall LLJ agreed) said that he did not think that Adam accepted any repudiatory breach. His reasons are not easy to discern. He merely said that Adam treated the email dated 2 December 2015 as a termination of the engagement without the appropriate notice and hence it stopped work and notified Halsbury that it was doing so. Some might think that, by doing so, Adam was clearly accepting the breach but the Court of Appeal disagreed.

Of course, if the Court of Appeal had upheld the Judge on the repudiation point, then that would have been an end of the appeal because both parties would have been discharged from their primary obligations under the contract, including any obligations imposed by the Act.

The Court of Appeal was, however, understandably keen to pronounce upon what it saw as the central issue raised by the appeal, namely whether section 111 of the Act applies only to interim payments or whether it also applies to payments due following completion of the works or termination of the contract. On that question the Court came to the firm conclusion that it does. It reached that conclusion on the basis of the wording of the Act and in the light of the authorities cited to it.

Those authorities included the decision of the House of Lords in Melville Dundas Ltd (IN Receivership) v George Wimpey UK Ltd [2007] UKHL 18 which was a case in which Lord Hoffman expressed the view that ‘the concept of the “final date for payment” only applied to interim payments’ and Lord Hope said that section 111(1) was concerned only with the entitlement to stage payments referred to in section 109. The Court of Appeal decided that neither comment formed part of the ratio of the decision and was therefore not binding upon them.

The conclusion is clear, namely that the payment notice regime contained in sections 110 and 111 of the Act applies as much to final or termination accounts as it does to interim payments. Employers (and their agents) therefore need to be alive to the need to serve a pay less notice in response to any such account if they wish to avoid the prospect of an adjudicator’s decision against them for the full amount claimed.

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