You might be surprised how often we lawyers are presented with disputes that have come about due to the smallest thing (then again, if you’ve ever been involved in construction dispute, you may not be surprised at all!). Anyway, one of the most common causes of problems for clients comes from simply not getting the correct payment notices out on time. Serving a notice late, or not at all, can have disastrous consequences, as highlighted by the following recent cases.
The importance of strict compliance with contractual payment terms was highlighted in ISG Retail Limited v FK Construction Limited (2023).
To give a little context, the provisions governing payments under construction contracts are set out in Part 2 of the Construction Act, which, amongst other things, state that a payment application made by a contractor can, in certain circumstances, be deemed to be a “default payment notice”. That means in the absence of an effective Payment or Pay Less Notice issued by the Employer in response to the application, the full value of the application becomes the amount properly due to the Contractor (even if that value is disputed/inaccurate).
In such circumstances, it is open to the contractor to pursue what has become known as a “smash and grab” adjudication, and, in the short term at least, be awarded sums to which it may not otherwise be entitled. That is precisely what happened in this case, and as a result of a number of “smash and grabs” by FK, they ended up securing payment from ISG of £1.75m.
Unfortunately for FK, the Construction Act also states that in order to be deemed a “default payment notice”, a payment application has to be “issued in accordance with the contract.” FK’s applications were one day later than required under their contract. When this lateness was subsequently considered by the courts, they held FK’s applications to be invalid, and therefore the adjudicator’s decision to award payment of the applications in full to be wrong. As a result FK had to repay the £1.75m.
Whilst that may seem harsh on the contractor, given the applications were only one day late, it’s worth remembering it is consistent with the approach taken by the courts with regard to the issuing of Payment and Pay Less Notices, which impose equally stringent consequences if they are issued even slightly late.
An invalid notice (this time a Pay Less Notice) and a resultant “smash and grab” adjudication were also key elements of the case of Henry Construction Projects Limited v Alu-Fix (UK) Limited (2023). Alu-Fix were engaged by Henry Construction as a sub-contractor on the development of a boutique hotel in central London. Following termination of the sub-contract Alu-Fix submitted a payment application for around £250,000.
Henry Construction failed to pay by the final date for payment (13 December 2022), so Alu-Fix commenced their “smash and grab” claim for the full sum. Henry Construction sought to defend the adjudication on the ground that they had in fact issued 2 potentially valid Pay Less Notices and, whilst the “smash and grab” was still ongoing, commenced their own adjudication to determine the true value of Alu-Fix’s application. Those of you familiar with adjudication case law will now no doubt be thinking, hang on, haven’t the courts confirmed that a party is prevented from commencing a “true value” adjudication until it has complied with its “immediate obligation” to pay the sum due. (i.e. they have to pay the amount being “grabbed” before they can ask an adjudicator to decide what they should have actually paid). Well, your thinking would be correct, there are a number of cases that say just that.
In response to Alu-Fix pointing this out, Henry Construction argued that because the validity of at least one of the Pay Less Notices was in dispute, and was to be decided in the “smash and grab” adjudication, no “immediate obligation” to pay had arisen and wouldn’t arise unless and until the adjudicator so decided. This all played out as follows:
The key consideration for the court was whether the “immediate obligation” to make payment arose before or after commencement of the “true value” adjudication. Their decision did not go Henry Construction’s way. The court held that there was no reason to conclude any differently to the “smash and grab” adjudicator, namely that the final date for payment was 13 December and that no valid Pay Less Notice had been issued. Hence, Henry Construction were not entitled to commence their “true value” adjudication without first discharging its “immediate obligation” to make payment. Having failed to do so, the “true value” adjudicator did not have jurisdiction and his decision was unenforceable. Henry Construction could not therefore recover the £191,000 they would otherwise have been awarded.
Of course, and this is easy to say in hindsight, had Henry Construction issued a valid Pay Less Notice, the whole situation might have been avoided.
For advise on payment notices or any construction law matters please contact Simon Franklin on 01223 791008 or by email [javascript protected email address]. You can also find further information on the services offered by our construction team here.
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