Pay now, argue later! How far does that concept go under the Construction Act?
‘Pay now, argue later’. It is often said that is the nature of the payment and adjudication procedures in the Housing Grants, Construction and Regeneration Act 1996 (often known as the Construction Act). Over the years parties have probed and the courts have considered how far that concept goes. They have taken another look at it in November’s decision in Lidl Great Britain Ltd v Closed Circuit Cooling Ltd t/a 3CL.
At times the courts have had to draw boundaries that are not set out in the Construction Act. S&T (UK) Limited v Grove Developments Limited was a case in point. In that case, the court said that where a sum is due under a payment application (‘notified sum’) that is not met with a valid payment notice or pay less notice, that sum must be paid before a fresh adjudication can be started (the Grove Principle). Did that mean that an adjudication could not be started about the true value of the payment in question or that no adjudication could be started on any issue – or somewhere in between those positions? That was the issue for the court in the Lidl case.
Lidl and 3CL entered into a framework agreement relating to refrigeration works. The dispute arose from the first order issued under the framework.
3CL made an application for interim payment, to which Lidl responded with a payment notice stating nothing was payable, owing to incomplete/defective works and a deduction of liquidated damages. 3CL referred the matter to adjudication. The adjudicator decided that Lidl’s payment notice was invalid and Lidl was required to pay the sum applied for, with interest.
Lidl subsequently paid the amount to 3CL but, before the payment was made, Lidl commenced two further adjudications. One sought to recover the cost of defect rectification and the other sought a decision that 3CL was not entitled to an extension of time. Lidl succeeded in both.
When Lidl sought enforcement of the award for defect rectification costs, 3CL countered that the decisions were unenforceable because they breached the Grove Principle (they were started before the notified sum had been paid).
Lidl argued that the Grove Principle only prohibited commencing an adjudication where it is a true value adjudication in respect of the same payment cycle as the unpaid notified sum. Neither of the adjudications they had brought was a true value adjudication.
The Court decided that whilst the Grove Principle did not prohibit the commencement of any adjudication whatsoever before the notified sum is paid, it is wider than Lidl contended. The principle extends to attempts to adjudicate matters that could have been included in a payless/payment notice served in respect of the notified sum in question. In such a case, the adjudication cannot be started until the notified sum has been paid.
The Courts continue to robustly support the policy behind the Construction Act, including the pay now, argue later concept. Failure to give a payment notice or pay less notice can have significant adverse consequences and that is how it is meant to be. Attempts to mitigate those consequences by holding back payment and starting an adjudication to reverse the position look set to fail.
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This article first appeared in Construction Index on 20 December 2023
