In October 2011, the amendments to the Housing Grants, Construction and Regeneration Act ("HGCRA") came into force. They were specifically designed to give the payment provisions in the HGCRA more "teeth". If an employer failed to serve a timely payment or payless notice in response to a contractor's payment application, then the employer would become obliged to pay the amount of the application by default. This was because, in those circumstances, the amount of the application would become the "notified sum" which the employer would have to pay to the contractor.

Regarding payment disputes, the intention of the HGCRA was very much that, if an adjudicator decided that an employer owed a contractor a sum of money, the adjudicator's decision would be temporarily binding on the parties, and would be quickly enforced by the Courts, so that the money actually changed hands. The Courts have described this as the "pay now, litigate later" approach, which is obviously important to the construction industry, where cash-flow is vital.

However, in the recent Technology and Construction Court ("TCC") case of Caledonian Modular Ltd v Mar City Development Ltd, Mr Justice Coulson, bucked these trends.  He ruled that an adjudicator's decision, which decided that an employer had to pay the amount of an interim payment application to a contractor because it had failed to serve a timely payment or payless notice in response to the application, would not be enforced. He did so, stressing that the case turned on its own facts. Nevertheless, the judgment in Caledonian may provide some comfort to employers faced with adjudicators' decisions, which require them to pay contractors sums which they had applied for.

In Caledonian, Mr Justice Coulson noted that one of the more "baleful effects" of the amendments to the HGCRA had been a large increase in the number of cases before adjudicators and the TCC, in which a contractor argued that its employer had failed to serve notices on time, with the result that the contractor acquired an automatic right to be paid the sum that it claimed. In these circumstances, there is of course no examination of the underlying merits of the contractor's claim. Importantly for employers, Mr Justice Coulson commented that if contractors wished to have the benefit of these provisions, then they should be obliged, in return, to furnish their interim payment claims to their employers "with proper clarity".

The relevant facts in Caledonian were as follows:

  • The contractor submitted the first fifteen of its (monthly) interim payment applications to the employer at the end of each month. The fifteenth interim payment application was met by a timely payless notice from the employer, meaning that the employer had to pay very little in response to it;
  • By the time this payless notice was issued, there were on-going final account negotiations between the parties;
  • About a week after the payless notice was issued, the contractor submitted further payment documents to the employer. This was in the middle of the sixteenth month, and the contractor asked the employer to amend its payless notice. Crucially, the contractor did not present these documents as a new (sixteenth) application for interim payment;
  • Shortly after the employer received the further documents, it wrote to the contractor, querying their status. The contractor replied four days later, explaining that they were an "update of the account";
  • The employer did not serve any payment or payless notice in response to the further documents. Consequently, in the middle of the seventeenth month, the contractor sent the employer an invoice for the net sum which could be gleaned from the further documents, i.e. approximately GBP 1.5million. A breakdown was attached to this invoice, which was entitled "Final Account Application Summary";
  • A week later, i.e. towards the end of the seventeenth month, the employer responded to the invoice and breakdown, with a further payless notice, which maintained that no further sum was due to the contractor;
  • The contractor then commenced an adjudication, and asserted that further documents delivered in the middle of month sixteen comprised its sixteenth application for interim payment, and that, as the employer did not issue any timely payment or payless notice in relation to it, the net amount of the application became the notified sum due from the employer;
  • The adjudicator found, in his decision, that the further documents comprised an "early" application for a sixteenth interim payment, and that they had to be treated as a valid application, as the employer had issued a payless notice in relation to them, albeit out of time. As the payless notice was late, the adjudicator decided that the employer had to pay the GBP 1.5 million sum claimed to the contractor.

The contractor brought a court action to enforce the adjudicator's decision. Mr Justice Coulson stated that he had "no hesitation" in rejecting the claim. Although an adjudicator's decision would generally be enforced by the Courts, there would be an exception, where the merits of the claim underlying the adjudicator's decision could be determined as a short, self-contained point, requiring no oral evidence, at a short hearing.

Reviewing the further documents, Mr Justice Coulson held that, on the facts and the law, they did not constitute a sixteenth interim payment application. The contractor was not entitled to submit an interim payment application "early" in the middle of a month. They were not marked as an interim payment application, and when the employer queried their status, the contractor did not say that they comprised an interim payment application. Accordingly, the claim for enforcement of the adjudicator's decision was rejected.

Employers confronted with adjudicators' decisions requiring them to pay the amounts of payment applications made by their contractors will now consider whether the applications were valid and made with proper clarity, and whether enforcement of them can be successfully resisted by raising arguments as to the underlying merits, if the point in issue is a short and self-contained one, requiring no oral evidence.