The Court of Appeal has decided an important issue in relation to payments withheld by clients under construction contracts.
In a dispute between David and Harriet Jervis and a builder that they had hired to work on their cottage, Rupert Morgan Building Services (LLC) Ltd, the court held that a client cannot withhold payment where he has failed to issue an effective notice of his intention to do so, even in a situation where, for example, he has been billed a second time for work for which he has previously paid.
While Jacob LJ acknowledged that this could leave clients who have overpaid at risk in the event of the builder’s insolvency, he stated that such a risk could be avoided by the prompt checking of interim certificates requiring payment and the timely issue of a withholding notice.
Under the parties’ standard Architecture and Surveying Institute (ASI) contract, Rupert Morgan was to be paid on an interim basis following the issue of interim certificates by the project’s architect, who was the brother of one of Rupert Morgan’s directors. The seventh interim certificate amounted to £44,000, plus VAT, £27,000 of which was disputed by the Jervises.
Under a narrow interpretation of section 111 of the Housing, Grants (Construction and Regeneration) Act 1996, the Jervises claimed that they could withhold payment and seek to prove that the items of work that made up the outstanding balance: (i) had not been completed; (ii) were duplicates of items that had previously been paid for; or (iii) had been charged as extras when they were within the original contract. The couple argued that, if the work had not been completed, no sum could be due under the contract, and section 111 would therefore not apply.
Rupert Morgan, however, contended that a wide construction of section 111 should apply. It maintained that, once it was shown that a certificate had been issued and that a withholding notice had not, the certified sum must be paid.
Agreeing, the judge said: “In this ASI contract, the sum is determined by the certificate. So it is not the actual work done that defines either the sum or when it is due. The sum is the amount in the certificate.
“The contractor is entitled to the money right away. The fundamental thing to understand is that section 111 is a provision about cash flow. It is not a provision that seeks to make any certificate conclusive.”
He held that, although a client would be required to pay, any overpayment could be remedied when the accurate final certificate was issued by the architect.
He added that a good architect would inform a client about the possibility of serving a withholding notice, and that an architect may even have a duty to do so. Although he expressed no final opinion either way, he said that a client may have a claim against the architect if the latter negligently issued a certificate that overstated the costs.
Rupert Morgan Building Services (LLC) Ltd v Jervis and another Court of Appeal (Schiemann, Sedley and Jacob LLJ) 12 November 2003.
Simon Hughes (instructed by Stitt & Co) appeared for the appellants; Julian Horne (instructed by Dutton Gregory, of Winchester) appeared for the respondent.
References: EGi Legal News 13/11/03
