Pay now, litigate later

Conflicting interpretations of Section 111 of the Construction Act have led to confusion over the circumstances in which payment can be withheld. A welcome decision by the Court of Appeal has clarified the issues, writes Daniel Atkinson.

REGULAR readers of this page will know about Section 110 and Section 111. It is no accident that these two sections of the Construction Act have generated a lot of discussion, since they deal with the vital issue of payment.

One of the main purposes of the Act was to introduce transparent payment procedures and thus protect cashflow. These procedures, set out in Section 110 and Section 111, require notices to be issued: the notice under Section 110 shows the basis of the sum due to be paid; the notice under Section 111 is required to state how much is being withheld from the sum due, together with the grounds for withholding payment.

Since a Section 111 notice goes to the heart of the payment procedures in the Act by possibly preventing payment, it was inevitable that there would be considerable caselaw. And unsurprisingly, there have been conflicting interpretations of the meaning of Section 111 in the courts. We should be grateful to the Court of Appeal in providing some welcome simplification and clarification in the very recent case of Rupert Morgan Building Services-v-David Jervis.

Mr Jervis was having building works done on his cottage by Morgan under the terms of a written contract in standard form provided by the Architecture and Surveying Institute (ASI). Mr Jervis was using the services of an architect and Morgan was being paid on an interim basis.

Under the contract, the architect was required to issue an interim certificate based on his scrutiny of a bill presented by Morgan. One of these interim certificates was for the sum of £44,000 plus VAT and, while Mr Jervis accepted that part of that sum was payable, he disputed the balance of some £27,000.

Mr Jervis did not give notice of his intention to withhold payment as required under Section 111 of the Construction Act and Morgan sought summary judgment for the full amount. Mr Jervis argued that he could withhold payment by proving the items he was being billed for had already been paid, or were charged as extras when they were within the original contract, or represented "snagging" for works done and paid for.

The Court of Appeal examined the numerous court decisions and learned writings on the subject and identified what it called the wide and the narrow interpretations of Section 111.

The wide interpretation is that once it is shown that there was a payment certificate but no Section 111 withholding notice, the certified sum must be paid and cannot be withheld. The narrow construction is that if work has not been done, there can be no "sum due under the contract" and that accordingly Section 111 simply does not apply… you cannot withhold what is not due.

There have been variations on the narrow interpretation, such as whether the absence of a Section 111 notice merely prevents the raising of counterclaims or whether it also covers matters of abatement and set off. So the status of a counterclaim based on work allegedly done badly was not clear.

But the Court of Appeal dismissed these narrow interpretations and examined the provisions of the contract to find how the sum to be paid was determined and when it was due to be paid.

In the contract between Morgan and Mr Jervis the sum was determined by the architect's certificate.

Crucially the contract required Mr Jervis to pay Morgan the amount certified by the architect. So in that contract it was not the actual work done that defined the sum or when it was due, but the amount in the certificate. And the due date was 14 days from the certificate date.

Of course, the certificate might be wrong: the architect might have missed out work done, or included items not done or items already paid for. But the absence of a Section 111 withholding notice prevented Mr Jervis from withholding the sum due: Morgan was entitled to the money right away, since Section 111 has a cash flow provision.

The Court of Appeal confirmed and supported the analysis leading to the judgement in last year's case of Clark Contracts-v-The Burrel Co.

The point was essentially that although a payment certificate is not conclusive evidence that the works have been done in accordance with the contract, the sum in an interim certificate is nevertheless a sum due under the contract and must be paid. The structure and intent of the Act is to pay now and litigate later.

Accordingly, the Court of Appeal held that there is nothing irrevocable about the Section 111 process.

It was designed to ensure that once a certificate is issued, payment follows unless proper notice of withholding has been given.

The main benefit of this decision is that it makes irrelevant the complex and fuzzy line between sums due and any counterclaims, set-off, claims for breach of contract or abatement. What it requires is that the paying party must raise an early withholding notice if he does not wish to pay the full sum due.

The main disadvantage of the Section 111 procedure from the client's point of view is that if he has overpaid he risks losing that money in the event of the contractor's insolvency. But the risk is avoidable by checking the certificate and issuing an early withholding notice.

The Court of Appeal observed that if a client has overpaid he can raise the matter by way of adjudication or through arbitration or legal proceedings.

Accordingly Mr Jervis was required to pay the full amount. No doubt he wasn't very pleased, but the industry at large should welcome the decision - it brings clarity and simplicity to what was becoming a complex area of law.

Key points

Sections 110 and 111 of the Construction Act were introduced to help make payment procedures more transparent.

Conflicting interpretations of the requirements of Section 111 in particular have created confusion.

Interim certificates are not conclusive evidence that work has been done in accordance with the contract, but unless a valid withholding notice has been issued, the certificate must be paid.

The principle is 'pay now, litigate later'.