Pay now adjudicate later….

Under a construction contract, a party to that contract has the statutory right under the Construction Contracts (Northern Ireland) Order 1997 (the “Order”) to refer a dispute to adjudication at any time.

There has been some debate as to the circumstances in which the Court may decide to restrain a true value adjudication commenced before the paying party has complied with its immediate payment obligation under Article 10 of the Order, once a ‘notified sum’ has arisen. However, the English Technology and Construction Court has now provided a decision in the recent case of BexHeat Ltd v Essex Services Group Ltd [2022] EWHC 936 (TCC) which serves as clarification that the right to adjudicate to obtain a true valuation is subjugated to the payment obligation of the paying party to pay the ‘notified sum’ immediately.

Background

Essex Services Group Limited (“ESG”) entered into a sub-subcontract with BexHeat Limited (“BHL”) for BHL to provide plumbing works on a project for the construction of a residential and care facility. The contract between ESG and BHL made provision for interim payments to be made by ESG on specified dates.

On 19 July 2021, BHL submitted its interim application for payment no. 22 (“Payment Application 22”) for the period up to 31 July 2021 seeking a net payment of £678,885.78. On 13 August 2021, ESG issued a Pay Less Notice in respect of Payment Application 22, by which it calculated a net sum due to BHL of £4,808.44. On 18 August 2021, this was then adjudicated on by BHL (“Adjudication 1”), seeking a true value of Payment Application 22. The adjudicator decided that £141,646.35 was due to BHL. ESG complied with that decision, making payment in full to BHL.

On 17 August 2021 (one day prior to BHL commencing Adjudication 1) BHL issued its interim application for payment no. 23 (“Payment Application 23”) seeking a net payment of £847,675.97. ESG served a Pay Less Notice, but it was one day late.

No payment was made by ESG, so BHL commenced a ‘smash-and-grab” adjudication on 18 October 2021 (“Adjudication 2”). The adjudicator decided that the Pay Less Notice was invalid and that the sum claimed by BHL (£847,675.97) was the ‘notified sum’ and fell due to being paid by ESG.

Enforcement proceedings

BHL made an application to the TCC for summary judgement to enforce the decision of the adjudicator in Adjudication 2.

ESG resisted enforcement on a number of grounds, including arguing that the second adjudicator lacked jurisdiction because the dispute he had been asked to determine was the same or substantially the same as that which had already been decided by the first adjudicator.

The Court held that the disputes were not the same or substantially the same, in that there was a difference between a dispute regarding the true value of an interim application and a dispute whether a notified sum had arisen.

The Court concluded that Section 111 of Housing Grants, Construction and Regeneration Act 1996 (the “Act”) (the GB equivalent of Article 10 of the Order) creates an immediate obligation to pay the notified sum where a valid payment or pay less notice has not been issued. Whilst there is a right to refer a true value dispute to adjudication “at any time” under the Act and the Order, that right is subjugated to the immediate payment obligation under Section 111/Article 10 and the true value of an application therefore cannot be used by way of set off to avoid paying the full amount of a notified sum.

Conclusion

This judgement provides a key reminder that in circumstances where a notified sum is due to be paid by a paying party under a construction contract, whilst the legislation creates an entitlement of the paying party to commence a true value adjudication, this is superseded by the immediate payment obligation in relation to any notified sum.

As such, until such time as the paying party has complied with its immediate payment obligation under the legislation, the paying party is not entitled to commence (nor to seek to rely on) a true value adjudication in respect of the amounts due to be paid.

For further information about this or any other construction matter please contact Gavin Kerr or a member of Carson McDowell’s Construction Law team.