How can paying parties challenge an adjudicator’s decision based on a palpably wrong interim application for payment where it has not issued any payment notices, or pay less notices in time?
A significant feature of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act) when it came into force was the interrelationship between a periodic payment mechanism and a party’s right to adjudicate at any time (both of which are provided for in the Construction Act).
The “Smash and Grab” Adjudication
The story is familiar: where a paying party (typically an employer under a main contract or the contractor under a sub-contract) has failed to submit a certificate or a withholding/pay less notice in response to an application for payment in time, the receiving party (typically the contractor under a main contract or a sub-contractor under a sub-contract) would frequently argue that it was entitled to the sum claimed in its application for payment in full – regardless of whether that application was right or wrong on its merits.
Unless the paying party could rely on limited grounds of set-off and abatement, adjudicators (and the courts) would grant the technical smash and grab relief sought by the receiving party. If a paying party did not want to part with its money and otherwise wished to challenge the adjudicator’s decision (typically where a receiving party is experiencing financial difficulties), then the paying party would often seek to “cross-adjudicate”.
Cross-adjudication as anticipated above requires the paying party to immediately launch a second adjudication against the receiving party, essentially asking the adjudicator to value the works comprised within the disputed application for payment.
If the paying party received a decision in the second adjudication in its favour around the same time that the decision was received in the first adjudication then, on the face of it, the paying party would be able to set-off the decision reached in the second decision against any sums awarded to the receiving party in the first decision. In this way, the paying party was safe – so long as it acted quickly, it could overcome the problems associated with its (or its agent’s) failure to serve notices in time so long as it was successful in its own cross- adjudication.
The Amendments to the Construction Act
When the amendments to the Construction Act came into force in October 2011, it seemed that cross-adjudication became even more important for any paying party who failed to serve notices in time. This was because the revised payment mechanism under the amended Construction Act removed the paying party’s limited right of set-off and abatement. In short, the amendments provided that unless the sum “notified” in the receiving party’s payment notice (application for payment) was challenged by the paying party’s payment notice (certificate) or in a pay less notice, then the sum due would be that notified in the receiving party’s payment notice.
The End of Cross-adjudication?
Amendments to the Construction Act aside, there was still a widespread assumption that a receiving party could remedy its failure to serve notices in time by cross-adjudicating. However, in light of the decision in ISG Construction Ltd v Seevic College  EWHC 4007 (TCC) that appeared to change. In summary, Edwards-Stuart J held that:
- If a paying party fails to serve its notice(s) in time, this must be taken to mean that the paying party agrees to the value stated in the receiving party’s payment notice, regardless of whether the value stated in that notice is right or wrong; and
- Because the adjudicator decided what sum was due to the receiving party pursuant to its payment notice during the adjudication (albeit on a technical basis), the same adjudicator (in a second cross-adjudication between the parties) lacked the jurisdiction to decide the matters referred in that adjudication because he had been asked to decide the same or substantially the same dispute that was decided in the first adjudication (i.e., what sum was due to the receiving party under the receiving party’s payment notice).
The judgment was therefore alarming for any paying party who had failed to serve its notices in time. Instead of having cross- adjudication available as a fall-back, the paying party would seemingly have to “pay now and argue later” and either (i) correct the valuation in the next payment cycle and/or at final account stage or (ii) have the dispute finally determined in litigation or arbitration proceedings.
This was not good news for the paying party who failed to issue notices in time, especially if the receiving party was experiencing financial difficulties. Indeed, due to the receiving party’s parlous financial state the paying party might not be able to recover any sums paid to the receiving party on an interim basis even if it was subsequently decided (in litigation/arbitration proceedings) that the receiving party had been overpaid.
CPR Part 8 Proceedings the Panacea?
In the recent case of Galliford Try Building Ltd v Estura Ltd  EWHC 412 (TCC), Edwards-Stuart J reminded us that it could be open to a paying party who failed to give notices in time to issue CPR Part 8 proceedings for declaratory relief, essentially asking the Court to decide the true value of the interim payment notice on its merits.
Provided the paying party moved “swiftly”, the CPR Part 8 hearing could be heard at the same time as the receiving party’s summary judgment application (i.e., to enforce the adjudicator’s decision) meaning that the smash and grab adjudication would be defeated provided the paying party can make out its case. “Swiftly” might mean within 70 days – i.e., the 35 day period for the adjudication to play out, plus roughly an equivalent period for the summary judgment enforcement hearing to be listed at court.
Accordingly, unless paying parties are relaxed about paying now and arguing later, CPR Part 8 proceedings might become necessary to challenge any decisions arising out of such smash and grab adjudications. That said, CPR Part 8 proceedings are not of universal application. Indeed, CPR rule 8.1(2)(a) provides that such proceedings are suitable in cases “where there is unlikely to be a substantial dispute of fact.” This is echoed by paragraph 9.2.1 of the Technology and Construction Court Guide, which also provides that CPR Part 8 proceedings may not be appropriate where a money judgment is sought.
Furthermore, short of agreement between the parties on the point, CPR Part 8 proceedings will not be available where the contract provides for arbitration (as opposed to litigation) as the final form of dispute resolution. Given the significant increase to UK Court fees which took effect from 9 March 2015, query whether more contracts will provide for arbitration (as the final form of dispute resolution) going forward.
On that basis CPR Part 8 is a consideration but not a panacea.
With the above issues in mind, perhaps the best way of defeating any would be smash and grab adjudication is by avoiding it altogether by (i) ensuring that the underlying contract is adequately procured, drafted and is “workable” and (ii) making sure any notice obligations dealing with payment are timeously and satisfactorily complied with. Prevention is often better (and cheaper) than cure!