Payment under a construction contract and the right to adjudicate
We continue to receive a number of enquiries from contractors and sub-contractors unaware of their right to adjudicate under a construction contract for non-payment, despite the fact statutory adjudication was introduced 25 years ago.
Many clients have come to us after being advised by previous solicitors to commence County Court proceedings, which can be a lengthy and costly process, by which time the paying party may be insolvent.
Alternatively, clients have commenced insolvency proceedings and fall at the first hurdle if there is a genuine dispute. A client will be subject to a costs order if the debtor has been successful in setting aside a statutory demand, which is a precursor to liquidation of a company or the bankruptcy of an individual.
Adjudication is a way of resolving disputes in construction contracts. The right to adjudicate is governed by S.108 of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”). The Act sets out certain procedural requirements which enable either party to a dispute, to refer the matter to an adjudicator, who is then required to reach a decision within 28 days of being served with the Referral Notice.
If a construction contract does not comply with these requirements, a statutory default scheme known as the Scheme for Construction Contracts will apply. If the construction contract contains adjudication provisions, but does not comply with the requirements of S.108, the Scheme will again apply.
The Referring Party of a dispute who appoints an adjudicator, has the added advantage that, its solicitors have spent weeks/months preparing for the adjudication, putting the other party (the Responding Party) on the back foot, with little time to prepare a Response. This may result in payment being made before an adjudicator has reached his/her decision.
In the event that the losing party does not comply with the adjudicator’s decision, enforcement proceedings can be commenced in the Technology & Construction Court (“the TCC”) and you would normally apply for Summary Judgment. The TCC will enforce adjudication decisions without enquiring as to the correctness, subject to two exceptions.
The purpose of adjudication is to expedite cash flow during the construction contract and it is not uncommon to have multiple adjudications, throughout the duration of a project, but not adjudicated at the same time.
The payment terms of a construction contract are also regulated by Part II of the Act. So, before you decide to commence an adjudication, do you have a construction contract?
A construction contract
A construction contract is defined by the Act and are agreements for any of the following:
- carrying out of construction operations.
- providing one’s own labour, or the labour of others, for the carrying out of construction operations.
- arranging for the carrying out of construction operations by others e.g. under a sub-contract.
- It extends to architectural, design, advice on building, interior or exterior decoration, engineering, demolitions, surveying work and on the laying-out of landscape.
- Installation of mechanical, electrical and heating works. to include maintenance of the works.
- A collateral warranty as to the carrying out of construction work. Parkwood Leisure Ltd v Laing O’ Rourke Wales and West Ltd  EWHC 2665 (TCC).Whether you can adjudicate will depend upon the timing and the wording of the warranty. Timing is paramount: Toppan Holdings Ltd & Anor v Simply Construct (UK) LLP  EWHC 2110 (TCC).
- Government contracts are construction contracts under the Act.
The following are excluded from being a construction contract:
- Agreements which primarily relate to the financing of works
- Development agreements containing provision for the disposal of an interest in land
- Contracts between employers and employees.
- Supply only contracts: manufacture and delivery of building/engineering, unless the contract also provides for their installation on site
- Oil and gas exploration, mining and industries plants
- Contracts with residential occupiers that occupy or intend to occupy the property
All construction contracts, except those with a duration of less than 45 days, must contain a right to instalments, stage payments or other periodic payments.
The Act prohibits withholding or reduction of payments, except after proper notice and prohibits pay-when-paid clauses, except in circumstances of insolvency. The Act provides a right to suspend performance for non-payment.
Payment under the Act
The Act has the following provisions regarding payment:
- It requires a construction contract to provide for interim payments.
- It requires the contract to provide a mechanism for determining what sums became due and when is the due date.
- It requires the contract to provide a final date for payment which would be later than the due date
- The contract must require the employer to serve a payment notice within five days of the due date
- If an Employer wishes to resist paying a contractor’s final account, it is obliged to serve a pay less notice
Payment notices and pay less notices
A valid payment notice confirms the sum to be paid by way of an interim or final payment or any other payment provided for in the contract, unless a valid pay less notice is served. S&T (UK) Ltd v Grove Developments Ltd  EWCA Civ 2448 at –.
If an employer (owner/developer) fails to serve a valid pay less notice and fails to pay the amount claimed, the contractor will be able to recover the amount claimed by bringing an adjudication, without the adjudicator having to decide the substantive merits of the payment application.
These are known as ‘smash and grab’ adjudications. If you fail to serve a valid pay less notice and wish to obtain a reduction in the amount due or pursue a counterclaim or cross-claim, you will have to pay the full amount first and then pursue the reduction or other claim, by bringing proceedings or by set-off against a subsequent payment. This is known as a true value adjudication.
The notice requirements apply to all payments provided for by the contract: liquidated damages or repayment of overpaid instalments. It also applies to payments due following completion of the works or termination of a contract.
When deciding if a payment notice (or a pay less notice) is valid and complies with the relevant statutory and contractual requirements, it has to be construed objectively – how a reasonable recipient would have understood the notice.
A payment notice (and a pay less notice) has to make plain that it is a payment notice (or a pay less notice). Each has to set out clearly the sum which is said to be due and/or to be deducted and the basis on which that sum is calculated. This can be zero. Beyond that, the question of whether or not it is a valid notice in accordance with the contract is a matter of fact.
What happens if the payer does not serve a payment notice?
Section 110B deals with situations where there is a default in service of the payer’s payment notice. There are two situations:
- Where the contract requires the payer to give the payment notice, and a valid notice is not given, the payee may serve a payment notice instead.
- Where a contract provides for the payee to make a payment application before the time for the payer’s payment notice, default in service of the payer’s payment notice, makes the application count as the payment notice. The application must be one which states the amount which the payee considers will become due and the basis on which it is calculated, and it must be given in accordance with the contract..
If you have been provided with a construction contract for execution by an employer, it is likely to be a JCT or NEC contract. They have a suite of standard form contracts for use in the construction industry in the UK to help deliver projects.
It sets out the responsibilities of all the parties within the process and their obligations to each other. The intention of these contracts was to give a balanced allocation of risk between the parties. These contracts are prepared by an employer’s construction solicitor, who will have appended to it, the employer’s schedule of contract amendments, with the objective of increasing the liability of the contractor under a contract and reducing the employer’s risk. It will often have amendments to the payment clauses contained in these contracts. For this reason, it is imperative that you obtain legal advice, so you are aware of all pitfalls, and if it is commercially viable for you to enter into the contact. Upon obtaining legal advice, you may be able to re-negotiate certain terms of the contract.
Whether you are an employer, main contractor or sub-contractor. and you require advice in relation to payment notices and pay less notices, under a construction contract, or wish to obtain our Guide to Adjudication, please contact Teresa Johnston on 0207 481 2422, 07584 229 373 or via email at Teresa.Johnston@wellerslawgroup.com