Failure to issue payment notices on time
Contractors and sub-contractors should be familiar with the principle that if they apply for payment, then the employer or contractor must issue a payment certificate setting out their own valuation. If they do not do this properly or on time, then the party applying for payment can become entitled to payment of their application in full.
This article looks at a recent development in this area, in which Alu-Fix (UK) (represented by CCC in the adjudications) successfully resisted adjudication enforcement proceedings.
Background
A party that has not issued the right notices at the right time is obliged to pay up thanks to the various payment provisions of the Housing Grants, Construction and Regeneration Act 1996.
‘Smash and grab’ adjudication
If the paying party does not pay up, then the other party can adjudicate to force them to. This is known colloquially as a ‘smash and grab’ adjudication because it requires the paying party to pay in full, even if the valuation is not correct.
This does not prevent the paying party from starting their own adjudication to find out the ‘true value’ of the account, but the key principle is that if they want to do this, they must pay the application first. This ‘pay now, argue later’ principle has been developed in a string of well-known cases: Grove Developments Ltd v S&T, Bexheat v Essex Services Group and AM Construction v The Darul Amaan Trust.
Henry Construction Projects Limited v Alu-Fix (UK) Limited
Alu-Fix had commenced a ‘smash and grab’ adjudication against Henry claiming a payment of £257,004.50 because Henry had failed to issue a payment notice or pay less notice in time (Adjudication 1). Henry denied that they had any payment obligation to Alu-Fix because Henry said 1) Alu-Fix had not correctly applied for payment, and 2) they had issued a pay less notice anyway.
Before the outcome of Adjudication 1 was known, Henry started their own Adjudication in front of a different Adjudicator to determine the true value of the account (Adjudication 2). Alu-Fix asked the new Adjudicator to resign because they said Henry needed to pay first.
Unlike in earlier cases, the issue was that it was still an open question whether Henry had to pay Alu-Fix first or not. After all, answering this question was what Adjudication 1 was for. The new Adjudicator decided to wait until the outcome of Adjudication 1 was known before proceeding.
Not long after, the first Adjudicator decided that Alu-Fix was entitled to payment in full (i.e. Alu-Fix had won the smash and grab Adjudication). Henry then paid Alu-Fix for Adjudication 1 and the second Adjudicator decided to proceed with Adjudication 2, eventually deciding that Henry was entitled to a repayment of £191,753.88.
Henry started proceedings in the High Court to enforce the repayment of that sum. Alu-Fix argued that the second Adjudicator did not have jurisdiction to make their decision, so their decision should not be enforced.
The Court’s Decision
The Judge decided that it was clear from the earlier cases Grove and Bexheat that Henry had to settle any pre-existing payment obligation they had before they could start Adjudication 2. In this case, the question was whether the payment obligation arose before or after Henry started Adjudication 2.
- Henry argued that because they initially disputed that they had a payment obligation, the obligation arose only after the first Adjudicator made their decision.
- Alu-Fix argued that the payment obligation existed all along and the first Adjudicator simply agreed that this was the case.
The Court held that the payment obligation had existed since Alu-Fix’s original payment application became finally due for payment, long before Henry commenced Adjudication 2 and long before they paid Alu-Fix. Accordingly, Henry was not entitled to have commenced Adjudication 2 and the second adjudicator lacked jurisdiction as a result. The Court dismissed Henry’s application for enforcement so the Adjudication 2 decision was of no effect.
What does this mean in practical terms?
This decision continues the theme that the courts will take a robust approach in defending the policy of preserving cashflow that underpins the payment obligations in the Housing Grants, Construction and Regeneration Act 1996, even if that means refusing to enforce Adjudicators’ decisions.
However, the Court did not shut the door on claims of this type altogether, commenting that if Alu-Fix had lost the smash and grab Adjudication 1, Henry might have been entitled to rely on the Adjudication 2 decision.
Generally though, parties must be careful not to jump the gun by starting a true valuation adjudication too early, where there is a ‘smash and grab’ adjudication available. Had Henry waited until after the outcome of the smash and grab was known (on the facts, only a few days), they could have made the payment and then started their own adjudication on the true value of the account without these jurisdictional issues arising.
How can I protect myself from smash and grab adjudications?
Check your contract carefully to make sure you know when you must give payment notices and pay less notices. Make sure that these are given in the right format and are issued in accordance with the contract. At a minimum, they must set out the sum due, and provide the basis for that calculation (i.e. a full buildup to it).
How can CCC help?
CCC has decades of specialist experience helping contractors and sub-contractors understand their payment obligations and entitlements. We also have extensive experience in helping parties obtain overdue or undervalued payments.
