Construction: ‘Pay Now, Argue Later’

Needless to say, payments and when they are due are a crucial factor in any construction project but do you know what rights and remedies are available if the paying party has failed to pay on time or either party has failed to follow the correct process for payment notices?

Construction Law Barrister, Robert Fenwick Elliott, developed the expression ‘Pay now, argue later’ to describe the adjudication process in 1996.

It was previously considered that if a paying party failed to issue the correct pay less notice in response to a contractor’s interim payment application, then they would be required to pay the value of that application and would have no rights to bring an adjudication claim to ascertain the true value of the works.

This lead to the unenviable position whereby employers could be forced to make payment on interim applications without the ability to dispute the amount as a result of failing to supply a valid pay less notice, despite that application exceeding the true value of the works.

More recently however, this position has seemingly been reversed and a recent case has clarified when a party may be able to raise a substantive defence to adjudication enforcement. An employer can now refer a dispute as to the true value of a contractor’s works to separate adjudication, even it has not served a valid pay less notice.  The outcome of this case has been keenly awaited because of its importance for the construction profession and industry.

This was a high value case involving two key issues, particularly – whether the employer was entitled to adjudicate as to the true value of the works involved where an interim application had been made and whether a pay less notice had actually been served.

What did the Court of Appeal decide?
The Court agreed wholly with the earlier ruling that an employer is entitled to refer a dispute over the true value of a contractor’s interim payment application to separate adjudication, even though it had not served a valid pay less notice or payment notice.  However, an employer cannot commence an adjudication for the true value of the works if it has not yet complied with its immediate payment obligation under section 111 of the Housing Grants, Construction and Regeneration Act 1996.

This means therefore that if an employer fails to serve a pay less notice, they will be required to pay the amount set out in the contractor’s application, however they will then be able to issue a further adjudication to ascertain the correct value of the works.

Adjudication or s111?
Critically, the Court made clear that the adjudication provisions are subordinate to the s111 payment provisions.  The 1996 Act created both the prompt payment regime and the adjudication regime, and the Act cannot be construed as permitting the adjudication regime to trump the prompt payment regime. This means that the employer is prohibited from embarking upon an adjudication to obtain a re-valuation of the work before he has complied with his s111 obligations.

As prompt payment must come first, how are overpayments or other financial adjustments to be dealt with?  The Court said that the appropriate mechanism for an employer to recover any overpayment made at the interim stage, resulting from the failure to serve a payment notice or pay less notice, can often conveniently be done by way of adjustment at the next interim payment.  Where this is not practical, the adjudicator can order re-payment of the excess following their re-evaluation.

What does this mean?
Those in the construction sector now have clarity on prompt payment, and when the matter can be referred to arbitration – even if no valid payment or pay less notice has been served. Yet it does mean that where an employer disagrees with the amount claimed by a contractor, it’s likely a case of ‘pay now argue it later’.  The employer cannot take proceedings and hang onto the cash in the meantime.

Therefore, it remains imperative that a paying party fully understands the payment notice requirements under its contract and complies with those requirements in order to avoid the need for costly adjudication.

How can we help?
We advise employers and contractors in the construction industry on their statutory and contractual rights and obligations.  For strategic advice on your legal obligations to other contractual parties, please contact our construction team.

Our insights are accurate at the date of publication – they are not intended to contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.

Cesare McArdle
Partner, Commercial & Construction
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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