Pay now, argue later: why it pays to keep on top of the payment regime
As lockdown begins to lift and we start looking forward to a future with fewer restrictions, we are reminded of the impact that the past year as had on cash flow for many in the construction industry.
It is undeniable that Covid restrictions have had a tangible impact on businesses' ability to pay, yet recent court decisions indicate that the "pay now, argue later" principle adopted in relation to service of payment and/or pay less notices in construction contracts is not going away any time soon.
In Grove Developments v S&T (2018) EWCA Civ 2448, the Court of Appeal established that where a paying party has failed to serve a valid payment and/or pay less notice, while it is possible for that party to commence a "true value" adjudication to determine the value of the works claimed, it can only do so once it has complied with its statutory obligation and paid the "notified" sum (or otherwise complied with its payment obligation). While there was, at the time, some uncertainty as to how this decision would be implemented going forward, this principle has been re-confirmed in the following recent cases in the lower courts, some of which have been heard since the start of the pandemic:
- M Davenport Builders Ltd v Greer and another (2019) EWHC 318 was an application to enforce a smash and grab adjudicator's decision relating to the final account. The defendants argued they had a set-off or counterclaim because they could rely on the "true value" decision from a second adjudication, started before the first adjudicator's award had been paid. The court held that while a second adjudication could be commenced, the defendants could not rely on the second decision until payment had been made, reapplying the Grove principle stated above in relation to paying prior to commencing a true value adjudication and confirming that the principle applies equally to final accounts.
- In Broseley London Ltd v Prime Asset Management Ltd (2020) EWHC 944 Broseley applied for summary judgment to enforce the decision of a smash and grab adjudicator. Prime sought a stay of execution to allow it to determine the "true value" of the account. Though Prime could have started Part 7 proceedings to assess the "true value", it had not done so. The court ordered Prime to pay the sum notified and held that its failure to pay prevented it from starting a "true value" adjudication; allowing a "true value" adjudication without payment would have permitted the adjudication system to trump the prompt payment regime.
- In Kew Holdings Ltd v Donald Insall Associates Ltd (2020) EWHC 1862, KH had failed to pay to DIA the sum awarded at adjudication and an ensuing summary judgment. KH commenced proceedings against DIA for professional negligence, amounting to an equitable set-off. The Court ordered a stay of proceedings “unless and until” payment was made.
On the subject of stays of execution, a further 2020 judgment worth mentioning is JRT Developments Ltd vs TW Dixon (Developments) Ltd (HT-2020-BHM-00010), in which TWD refused to pay the sum awarded in JRT's successful smash and grab adjudication. While the general rule is that adjudication awards will be enforced, the court may depart from this rule where enforcement would be manifestly unjust. However, it is worth noting that this exception is rare and this particular case turned on a set of "exceptional" circumstances, being that the parties were linked by family connections and were operating more like a JV than at arms' length, neither party had served a payment notice before and payment of the adjudication sum would likely render TWD insolvent and unable to commence a "true value" assessment. In the circumstances, the Court found that were the judgment not stayed, there would be manifest injustice to TWD.
Despite Covid-related solvency issues and the unusual circumstances of JRT, the overarching "pay now, argue later" theme emerging from these decisions signals the courts' intention to keep cash flowing on projects and to keep honouring adjudicators' decisions and the principles underpinning the Construction Act.
Ultimately, in the times we find ourselves in, these cases reinforce the importance of parties paying close attention to and keeping on top of the payment obligations in their contracts, being mindful that a failure to serve a payment notice or pay less notice will likely result in a full liability to pay.