English Construction Adjudication Case Law – ‘Pay Now, Argue Later’ – Time for Reform?

English Construction Adjudication Case Law Pay Now Argue Later Time for Reform

The Housing Grants, Construction and Regeneration Act 1996 (HGCRA) came into force on 1 May 1998. This Act implemented recommendations regarding Adjudication for the English construction industry as set out in the Latham Report[1].

The recommendations from the Latham report aimed to resolve project disputes quickly, allow projects to continue without delay and facilitate cash flow.

Sir Michael Latham stated that one regrettable possibility concerning the use of Adjudication is ‘if a party to an adjudication refused to honour the award of the adjudicator immediately’[2] and that ‘the courts should have a role to support the adjudication system in such circumstances.’ [3] Therefore Pay-Now, Argue later.’

The first case of adjudication enforcement by the TCC was in the case of Macob, where the claimant (C) applied to the court to enforce an adjudicator’s ‘decision’. The defendant (D) contended the Adjudicator’s ‘decision’ on the grounds of natural justice and applied for a stay under s.59 of AA96.[4] Dyson J, however, adopted a purposive approach to the word ‘decision’ and refused the D’s qualification of the wording. Dyson J enforced the Adjudicator’s decision under s.42 of AA 96[5] and declared that the defendant was required by the decision to pay the sums identified by the Adjudicator forthwith in accordance with the Scheme and is now in default.’[6]

Then, from 2001 to 2007, several reviews were conducted by the UK Department of Trade and Industry on Adjudication case law over the past four years.

The DTI’s recommendations culminated in the Local Democracy, Economic Development and Construction Act 2009. The LDEDCA introduced a raft of statutory changes to adjudication, such as the outlawing of tolent clauses,[7] a statutory slip rule[8], changes to payment such as suspension for non-payment and a transition between the period between the HGCRA (for projects pre-2011) and LDEDCA (for projects post-2011) taken together as the ‘Construction Acts’. Part II of the HGCRA (as amended by LDEDCA) imposed new terms for payment on commercial contracts, also known as the principle of ‘Pay-Now, Argue later.’

Coulson LJ more accurately describes this principle as  ‘argue now at speed, pay now if the Adjudicator decides you must, and have any more full, detailed, final and forensic argument later if you wish’.[9]

Under English law, the Technology and Construction Court of England and Wales (TCC) enforces Adjudicators’ decisions and this principle. The TCC[10] is ordinarily the court in which the enforcement of an Adjudicator’s decision and any other business connected with Adjudication is undertaken’[11]. The role of the TCC is to enforce Adjudicators’ decisions and ‘act as guarantors of the integrity and fairness of the system.’[12]

S.108 of the Act implies the ‘Right to refer disputes to Adjudication’ and The parties may agree to accept the decision of the Adjudicator as finally determining the dispute’[13]. This is the starting point of ‘pay now if the Adjudicator decides you must’.[14]

S.108(3) of the Act implies that an adjudicator’s decision is binding on the parties until the dispute is finally determined by litigation, arbitration, or agreement between the parties. Even if there is an error of fact or law, challenges to Adjudicators’ decisions rarely succeed due to the court’s robust approach to enforcement. Some case law examples of unsuccessful challenges to Adjudication enforcement are Adjudicators’ breaches of natural justice.[15] The Courts will not enforce an Adjudicator’s decision where the rules of natural justice have been breached. The same judicial approach was adopted in the case of SEF[16] in Singapore.

The TCC has also held that contract terms[17] and set-off[18] are contrary to s.108(3) and have not been enforced by the courts as “the intended purpose of s.108 is plain” and “The contract must be construed so as to give effect to the intention of Parliament rather than to defeat it”.[19]

Notwithstanding challenges to Adjudicator decisions, Judges in the TCC have consistently given effect to the Construction Act over AA 96[20] as it supports the ‘pay now, argue later’ principle as in the recent case of Northumbrian,[21] where O’Farrell J in the TCC enforced an Adjudicator’s decision, rejecting an application for a stay for arbitration under section 9 of AA 96.

Section 109 (1) of the Act covers stage payments. It implies ‘A party to a construction contract is entitled to payments by instalments, stage payments or other periodic payments for any works under the contract unless (a) it is specified in the contract that the duration of the work is to be less than 45 days or (b) less than 45 days.’[22] Section 109 (1) ‘is a clear mechanism by which stage payments become due and finally payable’[23]

Early case law has given effect to contract formation and contract terms under s.109.  In Tim,[24] D issued an ‘order’ to C. C did not issue a contract programme to D. The 3-week project took less than 45 days to undertake by C. D contended that it did not have to make interim payments under s.109(1). The Adjudicator decided that the ‘order’ was a contract. D contended the Adjudicator’s jurisdiction on the dispute. The question arose in the TCC as to whether a contract term regarding the programme formed part of a contract. The TCC also considered the Adjudicator’s decision that a contract came into formation. The courts also considered if an Adjudicator had jurisdiction to decide upon contract formation and relevant contract terms concerning the contractor’s programme. The TCC held that an Adjudicator can adjudicate such a dispute, and it is within their jurisdiction to decide upon it. This case enforced the Adjudicator’s jurisdiction at the early stages of case law and gave effect to s.109 (1).

S. 110 of the Act states ‘Dates for Payment’ and associated definitions. S.110 (1) of the Act implies that every construction contract provides a ‘mechanism’ for the timing (both interim and final) and description of payments. It also confers flexibility to parties on dates that sums are due from payer to payee. In the recent Court of Appeal case of Bennett[25], the Court of Appeal held that the ‘sign-off process’ for agreeing on a payment mechanism under s.110 (1) had been satisfied. Coulson LJ held that the meaning of “sign-off” was to be approached objectively and it was noted that there was “nothing in the contract which sought to tie in sign-off to the production of a certificate or record of any sort”.’[26] Coulson LJ noted that s.110(1) was to ‘provide minimum, mandatory standards.’ In light of his comments, s.110(1) was to achieve ‘certainty and a regular cash flow’[27] for the Contractor. This case law defines clear principles regarding minimum standards in ‘pay-now, argue later’.

Case law concerning the timing of payments has also been confronted by the TCC, as in the case of Caledonian.[28]  Coulson J (as he was then) held that the claimant could not apply for payment early as it would have been earlier than the 28-day cycle that the parties had agreed. He also noted that it would defy “common sense” under the notice provisions in the Act.

In Hutton[29], Coulson J considered the Caledonian case in his judgment regarding the jurisdiction of an Adjudicator and their decision under s,108(3), stating, ‘If the decision was within the Adjudicator’s jurisdiction, and the Adjudicator broadly acted by the rules of natural justice, such defendants must pay now and argue later.’ [30] Judge Coulson’s comments regarding an Adjudicator’s jurisdiction in Hutton were later reiterated by Fraser J in Trant[31] regarding the ‘correction principle.’[32]

The timing of an application of an interim payment application by a subcontractor that a main contractor rejected because it was overdue by one day came before the Court of Appeal and Coulson LJ in the 2023 case of A&V[33]. The claimant subcontractor argued that the TCC judge should not have invalidated the interim payment if it was out by one day and that the payment schedule was ‘flexible’. The appeal was allowed. Coulson LJ held “On any view, those paragraphs are designed to allow for flexibility in the interim valuation/payment timetable. The first of those paragraphs expressly talks about payments becoming due “beyond the dates set out in the schedule”[34].

S.110 has policy strengths where no contract exists. Where no contract has come into existence, and a contractor’s works are performed pursuant to a letter of intent, case law and policy state that contractors are to be paid under s.110 in any event, as per Lloyd J’s remarks in Brunel[35](although in the absence of such agreement, some term will usually be implied), on the method by and time within which payment is to be made (although here again, quite apart from statute, such as the Housing Grants etc Act 1996, the common law may imply terms), on the time within which the work or services are to be performed (although a reasonable time will be implied if there is no agreement))..

With regard to the final date for payment, S.110 (1)(b) of the Act states provide for a final date for payment in relation to any sum which becomes due’. The final date for payment acts as a long stop date, and if the payer does not issue a Pay Less notice or does not pay, then the payee will have a statutory right to suspend its performance under the contract. In the past, payers have tried to circumvent paying a payee when a payee has not submitted a VAT invoice as part of the last payment. Case law was unclear up until recently as to whether a valid VAT invoice was required as part of a final payment certificate application. In Lidl,[36] HHJ Stephen Davies held There is no basis for construing this requirement as an additional condition precedent to the obligation to pay the due sum above and beyond the provision of the valid VAT invoice.’[37] The NEC 4 suite of contracts has responded to this industry final payment issue with a ‘final date for payment’ – Option (Y) UK 2 inserted as a standard clause.

S.111 of the Act has come under a perceived abuse of system process, nonetheless, in the case of ‘Smash and Grab’ (S&G) Adjudications. ‘Smash and grab’ tactics stem from the 2011 amendments to the Construction Act.[38] S&G is a term used where a contractor or subcontractor claims payment for work done under a construction contract but based on the absence or validity of a payment notice or a pay less notice from the employer or main contractor. The ‘abuse’ of this process is that the value applied for during the contract by the payee must be paid by the payer, regardless of the actual value of the work. The courts have ruled that employers or contractors must ‘pay now and argue later’ as in the case of Grove,[39] where the employer initiated a ‘true value’ cross-adjudication. This approach by the courts means that the S&G is not a final determination of the parties’ rights and obligations but rather a provisional, temporary, binding mechanism to ensure the continuity of cash flow. However, S&G has ‘brought Adjudication into a certain amount of disrepute’.[40]

With a twist, however, in Davenport,[41] C were obligated to be paid monies from D due under s.111 as in Grove. D could commence a ‘true value’ cross-Adjudication against C, but only when the initial payment was made under s.111. Commentators have voiced opinions stating that Davenport will lead to an increase in ‘true value’ Adjudications commencing shortly after default payment notice Adjudications. This begs the question[42] of whether a claimant will accept such a payment, knowing that it will have to enter into a subsequent Adjudication to defend the payment. In our opinion, this is an area where the payment system should be improved in such material respect to facilitate contractor cash flow. My view aligns with the Latham Report[43] and the KCCLA report mentioning a ‘solution in statutory reform’.[44]

S.111 of the Act requires the payer to pay the payee by the final date for payment. As Coulson J puts it, this default provision is for “clarity”. S.111 also covers part of a hybrid ‘construction operation’ under s.105, such as Severfield.[45] As stated by Coulson J in his conclusion in Severfield: the power generation and some other industries should be exempt, because ‘they had managed their affairs reasonably well in the past’.[46]

Also, the HGCRA ‘residential occupier exception under section 106 should be removed[47] as this would suit small builders and residential occupiers in ‘pay-now, argue later’ disputes. In material respects, the TECSA low-value dispute Adjudication service[48] should be considered as part of the legal reform of the HGCRA.

Oral contracts are, however, a problem for Adjudicators, as in the case of RCS[49] where such contracts are the opposite of the quick, cheap dispute resolution service that Adjudication was intended to provide”.[50] I concur with Coulson J that  Section 107 of the Act was  ‘unthinkingly repealed causing uncertainty and contention[51] under LDEDCA. Oral contracts under the Act need to be reviewed in light of RCS.

Article 6 of the European Convention on Human Rights (ECHR) stipulates the right to a fair trial. However, because of ‘pay now, argue later’, Adjudication does not meet the requirement of equality of arms because the referring party can prepare at leisure. In contrast, the responding party has only days to respond. Furthermore, this inequality is compounded by the fact that the referring party has a one-sided veto over whether the 14 days may be added to the timetable.[52]

Final thoughts…

In our opinion, the Construction Act system needs reform in material respect of oral contracts, hybrid contracts, true-value adjudications, and payment flexibility.

If you are involved or affected by Construction Claims or Construction Disputes, Contact Us to see how we can help.

[1] Constructing the Team: Final Report of the Government/Industry Review of Procurement and Contractual Arrangements in the UK Construction Industry, chaired by Sir Michael Latham, HMSO, 1994
[2] Constructing the Team: Final Report of the Government/Industry Review of Procurement and Contractual Arrangements in the UK Construction Industry, chaired by Sir Michael Latham, HMSO, 1994 P.91
[3] Constructing the Team: Final Report of the Government/Industry Review of Procurement and Contractual Arrangements in the UK Construction Industry, chaired by Sir Michael Latham, HMSO, 1994 P.91
[4] Arbitration Act 1996
[5] [1999] EWHC Technology 254 per Dyson J [32].
[6] [1999] EWHC Technology 254 per Dyson J [40].
[7] Bridgeway Construction v Tolent Construction (2000) CILL 1662
[8] Bloor Construction (UK) Ltd v Bowmer & Kirland (London) Ltd ([2000] BLR 314)
[9] Coulson on Adjudication, P.275
[10] Technology and Construction Court
[11] The Technology and Construction Court Guide. P.64 October 2022
[12] 2022 Construction Adjudication in the United Kingdom: Tracing trends and guiding reform Professor Renato Nazzini & Aleksander Kalisz
[13] HGCRA Part II, S.108(3)
[14] Coulson on Adjudication, P.275
[15] [2004] EWHC 393 (TCC)
[16] [2009]SGHC 257
[17] [2022] EWHC 936 (TCC)
[18] [2013] EWHC 2071 (TCC)
[19] [2003] EWCA Civ 11 per Mantell LJ [30].
[20] English Arbitration Act 1996
[21] [2022] EWHC 2881 (TCC)
[22] HGCRA 109(1)
[23] Coulson on Adjudication, P.69
[24] [2000] TCC 10/00
[25] [2019] EWCA Civ 1515
[26] Building Law Monthly 16 October 2019
[27] Building Law Monthly 16 October 2019, Conclusion
[28] Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855
[29] [2017] EWHC 517 (TCC)
[30] [2017] EWHC 517 (TCC) per Coulson J at [14].
[31] [2020] EWHC 1305 (TCC)
[32] Building Law Report [2020] Part 7, P.534 [2020] at [1].
[33] [2023] EWCA Civ 54
[34] [2023] EWCA Civ 54 at para. [49].
[35] [2006] EWHC 687 (TCC), per Lloyd J at [28].
[36] [2023] EWHC 2243 TCC
[37] [2023] EWHC 2243 TCC per HHJ Davies at [129].
[38] LDEDCA 2009, s 144(1).
[39] [2018] EWCA Civ 2448
[40] Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) [143].
[41] [2019] EWHC 318 (TCC)
[42] The TCC applies S&T v Grove (with a twist), (Blog post: The TCC applies S&T v Grove (with a twist) | Practical Law (thomsonreuters.com)
[43] ‘Constructing the Team’
[44] P.40
[45] [2015] EWHC 3352 (TCC) per Coulson J [32].
[46] [2015] EWHC 3352 (TCC) per Coulson J [62].
[47] 2022 Construction Adjudication in the United Kingdom | Tracing trends and guiding reform P.75
[48] TECSA Low Value Dispute (LVD) Adjudication Service becomes part of TECSA Adjudication offering with effect from 1 January 2020 following a successful pilot | TECSA
[49] [2017] EWHC 715
[50] [2017] EWHC 715 per Coulson J [22].
[51] 2017] EWHC 715 per Coulson J [22].
[52] Emdens Construction Law (Issue 156, August 2014), paras [24.28].

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